U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _______
________________________________________________________________________________
Commission file number 0-25455
MORGAN CREEK ENERGY CORP.
________________________________________________________________________________
(Exact name of small business issuer as specified in its charter)
NEVADA 201777817
_______________________________ ____________________
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
10120 S. Eastern Avenue
Suite 200
Henderson, Nevada 89052
________________________________________________________________________________
(Address of Principal Executive Offices)
(702) 566-1307
_____________________________________________
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
NONE
________________
(Title of class)
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.001
______________________________
(Title of class)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
______ _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of issuer's knowledge, in definitive
proxy of information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ X ]
Indicate by checkmark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
State issuer's revenues for its most recent fiscal year (ending December
31, 2006): $-0-.
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of a specified date within the past 60 days: February 28, 2007:
$11,050,413.30.
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed fiscal
quarter: December 31, 2005: Not applicable.
Applicable Only to issuers Involved in Bankruptcy Proceedings
During the Preceding Five Years.
N/A
Indicate by check mark whether the issuer has filed all documents and
reports required to be filed by Section 12, 13 and 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
_______ ______
Applicable Only to Corporate Registrants
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding as of April 1, 2007
Common Stock, $.001 par value 29,814,905
Documents Incorporated By Reference
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the
document is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual report to security
holders for fiscal year ended December 24, 1980).
Not Applicable
Transitional Small Business Disclosure Format (Check one:)
Yes [ } No [ X ]
INDEX PAGE
ITEM 1. DESCRIPTION OF BUSINESS 2
ITEM 2. DESCRIPTION OF PROPERTY 25
ITEM 3. LEGAL PROCEEDINGS 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 25
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION 29
ITEM 7. FINANCIAL STATEMENTS 37
CONSOLIDATED BALANCE SHEET F2
CONSOLIDATED STATEMENTS OF OPERATIONS F3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F4
CONSOLIDATED STATEMENTS OF CASH FLOWS F5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 38
ITEM 8A. CONTROLS AND PROCEDURES 38
ITEM 8B. OTHER INFORMATION 38
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS CONTROL
PERSONS AND CORPRATE GOVERNANCE; COMPLIANCE
WITH SECIOTN 16(a) OF THE EXCHANGE ACT 39
ITEM 10. EXECUTIVE COMPENSATION 42
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 44
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR COMPENSATION 46
ITEM 13. EXHIBITS 47
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 48
SIGNATURES 48
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-KSB that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the
Securities Exchange Act of 1934. These statements often can be identified by the
use of terms such as "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate" or "continue," or the negative thereof. We intend that
such forward-looking statements be subject to the safe harbors for such
statements. We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. We disclaim any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
AVAILABLE INFORMATION
Morgan Creek Energy Corp. files annual, quarterly, current reports, proxy
statements, and other information with the Securities and Exchange Commission
(the "Commission"). You may read and copy documents referred to in this Annual
Report on Form 10-KSB that have been filed with the Commission at the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You
may obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. You can also obtain copies of our Commission
filings by going to the Commission's website at http://www.sec.gov
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Morgan Creek Energy Corp. was incorporated under the laws of the State of Nevada
on October 19, 2004 and has been engaged in the business of exploration of oil
and gas bearing properties in the United States since its inception. After the
effective date of our registration statement filed with the Securities and
Exchange Commission (February 14, 2006), we commenced trading on the
Over-the-Counter Bulletin Board under the symbol "MCRE:OB". Our shares are also
traded on the Frankfurt Stock Exchange in Germany under the symbol "M6C".
Please note that throughout this Annual Report, and unless otherwise noted, the
words "we," "our," "us," the "Company," or "Morgan Creek," refers to Morgan
Creek Energy Corp.
AUGUST 2006 FORWARD STOCK SPLIT
On July 26, 2006, our Board of Directors pursuant to minutes of written consent
in lieu of a special meeting authorized and approved a forward stock split of
two for one of our total issued and outstanding shares of common stock (the
"August 2006 Forward Stock Split").
The August 2006 Forward Stock Split was effectuated based on market conditions
and upon a determination by our Board of Directors that the August 2006 Forward
Stock Split was in our best interests and of the shareholders. In our judgment
the August 2006 Forward Stock Split will result in an increase in our trading
float of shares of common stock available for sale resulting in facilitation of
investor liquidity and trading volume potential. The intent of the August 2006
Forward Stock Split is to increase the marketability of our common stock.
The August 2006 Forward Stock Split was effectuated with a record date of August
8, 2006 upon filing the appropriate documentation with NASDAQ. The August 2006
Forward Stock Split increased our issued and outstanding shares of common stock
from 20,335,400 to approximately 40,670,800 shares of common stock. The common
stock continued to be $0.001 par value.
MAY 2006 FORWARD STOCK SPLIT
On May 10, 2006, our Board of Directors pursuant to minutes of written consent
in lieu of a special meeting authorized and approved a forward stock split of
two for one of our total issued and outstanding shares of common stock (the "May
2006 Forward Stock Split").
The May 2006 Forward Stock Split was effectuated based on market conditions and
upon a determination by our Board of Directors that the May 2006 Forward Stock
Split was in our best interests and of the shareholders. In our judgment the May
2006 Forward Stock Split resulted in an increase in our trading float of shares
of common stock available for sale resulting in facilitation of investor
liquidity and trading volume potential. The intent of the May 2006 Forward Stock
Split was to increase the marketability of our common stock.
2
The May 2006 Forward Stock Split was effectuated with a record date of May 22,
2006 upon filing the appropriate documentation with NASDAQ. The May 2006 Forward
Stock Split increased our issued and outstanding shares of common stock from
10,167,700 to approximately 22,452,338 shares of common stock before the August
2006 stock split, as described above. The common stock will continue to be
$0.001 par value.
CANCELLATION OF SHARES
On December 19, 2006, Geneva Energy Corp. agreed to the cancellation and return
to treasury of 12,000,000 shares of our restricted common stock held of record.
Thus, as of the date of this Annual Report, our total issued and outstanding
shares of common stock is 29,814,905.
The current authorized share capital as provided for in our Articles of
Incorporation is 100,000,000 shares of common stock with a par value of $0.001
per share.
TRANSFER AGENT
Our transfer agent is Transfer Online, Inc., 317 S.W. Alder Street, Portland,
Oregon 97204.
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. The primary activity and focus of the
Company is its leases in Texas ("Quachita Prospect"). To date the Company has
acquired approximately 2,035 gross acres. We acquired a 100% working interest
and a 77% net revenue interest in natural gas targeted Quachita Prospect leases.
The leases are unproven and were acquired for $310,071.
OIL AND GAS PROPERTIES
The acreage and location of our oil and gas properties is summarized as follows:
GROSS ACRES NET ACRES(*)
Oklahoma 560 315
Texas 2,035 1,569
Total: 2,595 1,882
(*) Certain of our interests in our oil and gas properties are less than 100%.
Accordingly, we have presented the acreage of our oil and gas properties on
a net acre basis.
CHAPMAN LEASE
The Chapman Lease encompasses approximately 240 acres in Okfuskee County, State
of Oklahoma. The original owners and lessors of the Chapman Lease are the
Home-Stake Royalty Corporation and the Home-Stake Oil and Gas Company
(collectively, the "Chapman Lessors"). We have acquired a 75% working interest
and a 56.25% net revenue interest. The term of the Chapman Lease was originally
3
for three years, and is currently held indefinitely by production. The Chapman
lease is currently producing minor quantities of oil from existing wells. So
long as the Chapman Lease produces any oil or gas as demonstrated by any
marketed quantities of oil or gas, the Chapman Lease will be deemed to be valid
and thus, "held by production" and no further costs will be incurred by us as
lessee. The Chapman Lease includes all potential oil or gas producing zones
extending from the surface to and including the Senora Sand zones.
In the event that demonstrated marketed production ceases for a twelve-month
consecutive period, the Chapman Lease will lapse as it would no longer be
classified as held by production. Under these circumstances, the Chapman Lease
may be retained by us for an additional cost of $12,000 per annum ($25 per acre
x 2 Chapman Lessors x 240 acres). The two $6,000 payments ($25 per acre x 240
acres = $6,000) would be made to each of the Chapman Lessors. To maintain the
Chapman Lease in good standing in the event of ceased production for a twelve-
month consecutive period, it will cost $12,000 per annum. If production as
demonstrated by the sales of any oil or gas in any twelve-month period is
restored, the Chapman Lease would once again be deemed to be "held by
production" and the $25 per acre annual shut in charge to each of the Chapman
Lessors would cease. As of the date of this Annual Report, the Chapman Lease is
in good standing.
The unitization of the Chapman Lease is the spacing of wells in any 640 acre
section of land. The unitization of the Chapman Lease is currently one gas well
for each 640 acres and one oil well for each 80 acres. The Chapman Lease
includes all potential oil or gas producing zones extending from the surface to
and including the Senora Sand zones.
We obtained a Reserve and Economic Evaluation letter dated December 21, 2004
prepared by Fletcher Lewis Engineering, Inc. (the "Reserve and Economic
Evaluation"), which provides information relating to work to be conducted on the
Chapman Lease and the fact that the Chapman Lease has had no proved developed
producing reserves. As a result, our future revenues may be limited or
non-existent. Below is a summary of the key points addressed in the Reserve and
Economic Evaluation:
o Henryetta Coal located throughout the leases at approximately 1701
feet deep and a thickness of approximately 2 to 3 feet;
o Henryetta Coal is stratigraphically equivalent to the Croweburg Coal;
o Croweburg Coal successfully completed 60 miles northeast of this
location;
o Croweburg Coal is typically 1.5 to 3 feet thick with initial test
rates of 30 to 50 mcf per day;
o No tests available to confirm whether the Henryetta Coal will be
productive;
o Recompletion cost of $50,000 without frac makes Chapman Lease ideal to
test productive capability of Henryetta Coal; and
o Insufficient data exists regarding potential of deeper rights.
HURLEY LEASE
The Hurley Lease encompasses approximately 320 acres in Okfuskee County, State
of Oklahoma. The original owners and lessors of the Hurley Lease are Lynn
McEvers, Rick Hurley, Robert A. Dolton and Pearl E. Dolton, and Mary K. Hurley
(collectively, the "Hurley Lessors"). We have acquired a 75% working interest
and a 56.25% net revenue interest. The term of the Hurley Lease was originally
4
for one year, and is currently held indefinitely by production. The Hurley Lease
is currently producing minor quantities of oil from existing wells. As long as
the lease produces any oil or gas as demonstrated by marketed quantities of oil
or gas, the Hurley Lease will be deemed to be valid and thus "held by
production" and no further costs will be incurred by us. The Hurley Lease
includes all potential oil or gas producing zones extending from the surface to
and including the Senora Sand zones.
In the event that demonstrated marketed production ceases for a twelve-month
consecutive period, the Hurley Lease will lapse as it would no longer be
classified as held by production. Under these circumstances, the Hurley Lease
may be retained by us for an additional cost of $1,280 per annum ($1 per acre x
4 Hurley Lessors x 320 acres). The four $320 payments ($1 per acre x 320 acres =
$320) would be made to each of the Hurley Lessors. To maintain the Hurley Lease
in good standing in the event of ceased production for a twelve-month
consecutive period, it will cost $1,280 per annum. If production as demonstrated
by the sales of any oil or gas in any twelve-month period is restored, the
Hurley Lease would once again be deemed to be "held by production" and the $1
per acre annual shut in charge to each of the Hurley Lessors would cease. As of
the date of this Annual Report, the Hurley Lease is in good standing.
The unitization of the Hurley Lease is the spacing of wells in any 640 acre
section of land. The unitization of the Hurley Lease is currently one gas well
for each 640 acres and one oil well for each 80 acres. The Hurley Lease includes
all potential oil or gas producing zones extending from the surface to and
including the Senora Sand zones.
By Agreement dated December 17, 2006,the Company purchased the Hurley and
Chapman leases from its founding shareholder and was acquired for a cash payment
of $300,000 and the issuance of 6,000,000 common shares (pre May and August 2006
stock splits) valued at $600,000. For accounting purposes the Company has
recorded the acquisition of the oil and gas interest at the related party
vendor's cost of $300,000 and the issuance of the 6,000,000 shares valued at
$600,000 has been recorded as a capital distribution.
After an internal review of the property, we have decided not to proceed with
the development of the Hurley and Chapman leases. Consequently, we have recorded
a $300,000 charge to earnings. As of the date of this Annual Report, we intend
to attempt to sell our interest in the property.
VAMOOSA LEASE
On approximately May 10, 2006, we entered into an agreement to acquire a 100%
working interest and a 78% net revenue interest in an approximate 520 acre oil
and gas prospect located in Seminole County, Oklahoma (the "Vamoosa Lease").
After further evaluation of the property, we have decided not to proceed with
the purchase of the property.
BAYOU CHOCTAW LEASE
On approximately July 10, 2006, we entered into a letter of intent with Texhoma
Energy, Inc., to acquire a 25% working interest and an 18.25% net revenue
interest in the Bayou Choctaw oil and gas project located in Iberville Parish in
the State of Louisiana (the "Bayou Choctaw Lease"). According to the terms and
provisions of the letter of intent, we are to: (i) pay an aggregate of $250,000,
of which $125,000 was paid on July 19, 2006 and $125,000 on October 17, 2006;
(ii) issue an aggregate of 200,000 post August Forward Stock Split shares of our
restricted common stock with piggyback registration rights, which 200,000 shares
valued at $350,000 were issued on October 17, 2006; (iii) reimburse initial
5
costs estimated at $162,500 for our pro-rata portion, payable upon signing the
lease participation documents to be provided by the operator upon drilling; and
(iv) participate in a 3D-seismic survey by August,2006 which is estimated to
cost approximately $425,000 for our prorata portion. To date the 3D-seismic
survey has not been initiated. We have the option to participate in the first
two wells and carry the promoting parties through the drilling of those wells to
`casing point' on the basis of paying for 33.33% of the cost to earn our 25%
working interest. Subsequent to the drilling of the first two wells, costs will
be shared in direct proportion to working interest participation without any
further carried working interest.
As of the date of the Annual Report, the Company has reviewed this lease option
and has determined that until further information previously requested is
obtained it will not proceed with any further development or expenditures on
this lease. Under the terms of the letter of intent the Company was to obtain
certain information regarding the property and was to sign a lease participation
document. To date the Company has not received the required information and has
not signed the lease participation document and as a consequence management has
determined that there are no further financial liabilities to the Company under
this agreement. As a result of the uncertainty of realization the Company has
recorded the costs incurred to date of $600,000 as an impairment charge to
operations.
BROWDER BARNETT SHALE LEASE
On approximately July 24, 2006, we acquired a 100% working interest and 74% net
revenue interest in the Browder Barnett shale oil and gas prospect in Cooke
County in the State of Texas (the "Browder Lease"). The Browder Lease is
unproven and was acquired for $146,820. As of the date of this Annual Report we
have ceased activity relating to the site preparation.
We have sold on November 6, 2006 to Pierco Petroleum Inc. ("Pierco") 50% of our
working interest in the Browder Lease for $73,410 (the "Pierco Agreement"). In
accordance with the terms and provisions of the Pierco Agreement: (i) Pierco
will participate in the Browder Lease and drilling with up to a 50% working
interest and a 37% net revenue interest; and (ii) we will retain a minimum 50%
working interest and a 37% net revenue interest.
As of the date of this Annual Report, we have determined that after an internal
review by our senior geologist and a review of wells recently completed in the
area, we will not proceed with the development of this lease. Consequently, we
have recorded a $73,410 charge to earnings
LITTLE CEDAR CREEK LEASE
On August 11, 2006, we entered into an agreement with U.S. Gas Systems Inc. ("US
Gas Systems") to acquire an aggregate of 103 acres of oil and gas targeted
development leases for $1,000,000 in the Cedar Creek field located in Conecuh
County, Alabama and, on September 18, 2006, we entered into another agreement
with US Gas Systems to acquire an additional 385 acres inconsideration for
$385,000 plus approximately 171,000 shares of the Company's restricted common
stock in Conecuh County, Alabama (collectively, the "Cedar Creek Lease
Agreement"). The five-year leases are located primarily in two 160-acre sections
which we believed would allow us to benefit from near term cash flow from
non-operated drilling initiatives in two separate well bores scheduled to have
begun December 2006. The additional 385 acres under lease will be subject to a
royalty of 20% and an additional over-riding royalty interest of 2.50%.
6
In accordance with the terms and provisions of the Cedar Creek Lease Agreement,
we: (i) will pay an aggregate consideration of $1,000,000, of which $250,000 as
a non-refundable deposit was paid on August 11, 2006; (ii) paid an additional
$50,000 as a non-refundable deposit on September 28, 2006 for the 385 acres;
(iii) pay the remaining balance of funds due and owing and issue shares by
November 30, 2006, which payment and issuance was subject to completion of our
due diligence; (iv) own a 36.25% working interest and a 27.18% net revenue
interest before well capital cost payout in the first well, and a 20.39% net
revenue interest after well capital cost payout; and (v) a 25.0% working
interest and an 18.75% net revenue interest before well capital cost payout in
the second well to be drilled, and a 14.06% net revenue interest after well
capital cost payout.
After completing due diligence on each of the 103 acres of oil and gas targeted
development leases in the Cedar Creek Field located in Conecuh County and the
further 385 acres of additional leases, the Company decided not to complete the
acquisition of any Cedar Creek Field acreage. As a result, the additional
consideration payable under the agreements was not payable and the aggregate
$300,000 non- refundable deposit paid has been recorded as an impairment charge
to operations.
QUACHITA PROSPECT
As of December 31, 2006, we leased approximately 2,035 acres within the Ouachita
Trend in the State of Texas for a three-year term in consideration of $310,071,
which was paid during 2006 (the "Ouachita Lease"). We had previously identified
seven separate potential areas of exploration interest and have carried out wide
scale leasing on the first of these targets. As of the date of this Annual
Report, we intend to secure all immediate rights relating to oil and gas in the
areas providing control over any potential major structural play that develops
as a result of this in-depth exploration.
As of the date of this Annual Report, we have received a permit for drilling of
the twin well on the Quachita Prospect. The site has been cleared and the
rathhole has been drilled. We anticipate further drilling will resume by May
2007.
SOUTH TEXAS PROSPECT
On approximately January 30, 2007, we acquired a 100% working interest in two
fully equipped oil leases located in the State of Texas for aggregate
consideration of $55,000. The Mata lease is located in Webb County and the
Peters Ranch lease is located in Duval County (collectively, the "South Texas
Lease"). As of the date of this Annual Report, we anticipate that the South
Texas Leases will be productive after completion of the rework program and the
addition of extra equipment.
PROPOSED FUTURE BUSINESS OPERATIONS
Our strategy is to complete the further acquisition of additional coal bed
methane prospects and other oil and gas opportunities that fall within the
criteria of providing a geological basis for development of drilling initiatives
that can provide near term revenue potential and fast drilling capital
repatriation from production cash flows to create expanding reserves. We
7
anticipate that our ongoing efforts, subject to adequate funding being
available, will continue to be focused on successfully concluding negotiations
for additional tracts of prime acreage in the coal bed methane and other gas
producing domains, and to implement the drilling of new wells to develop
reserves and to provide revenues. We plan to build a strategic base of proven
reserves and production.
As of the date of this Annual Report, our operating plans are to enter certain
well bores on our Leases to test certain target zones thought to contain coal
bed methane ("CBM") gas, and conduct further geological and engineering studies
of our properties to provide evidence of gas quality.
Our ability to continue to complete planned exploration activities and expand
land acquisitions and explore drilling opportunities is dependent on adequate
capital resources being available and further sources of debt and equity being
obtained. The two following alternatives provide the basis for business
development options:
DEVELOPMENT OF CURRENT LEASES
The requirement to raise further funding for oil and gas exploration beyond that
obtained for the next six month period depends on the outcome of geological and
engineering testing occurring over this interval. Subsequent to the completion
of current property evaluations, and if the results provide the basis to
continue to develop the properties, and geological studies indicate high
probabilities of sufficient production quantities, we will attempt to raise
capital to undertake a drilling program to establish up to six wells on leases
in hand, and build production infrastructure and pipeline, and to further raise
additional capital to allow this drilling and further land acquisitions.
--------------------------------------------------------------------------------
Activity
--------------------------------------------------------------------------------
Site preparation for entry into current wellbores including roadway upgrade and
operations site, design, review, and finalize testing procedures, book zone
fracture and testing consultants, arrange equipment required
--------------------------------------------------------------------------------
Pull old well tubing tubing, run test tools in wellbore, cut well casing, test
target gas zones with acid and water
--------------------------------------------------------------------------------
If gas content conducive to production, complete well by inserting downhole pump
and rods, set pumping unit, wellhead, and gas line
--------------------------------------------------------------------------------
Complete pipeline
--------------------------------------------------------------------------------
Create well development model and investment documents to develop wells on
subject leases including funding plan
--------------------------------------------------------------------------------
Create investor communications materials, corporate identity
--------------------------------------------------------------------------------
Raise funding for well development,
--------------------------------------------------------------------------------
Drill, complete, and produce from well drilling program and selective re-entry
programs
--------------------------------------------------------------------------------
Target further leases for exploration potential and obtain further funding to
acquire new development targets
--------------------------------------------------------------------------------
8
NEW LEASE ACQUISITION AND DEVELOPMENT
If gas quality and quantities are not deemed sufficient from work to be
conducted on our current leases during the first six months of operation,
additional land acquisitions will be assessed and obtained subject to adequate
capital resources being available and further sources of debt and equity being
obtained. The following outlines anticipated activities pursuant to this
business option.
--------------------------------------------------------------------------------
Site preparation for entry into current wellbores including roadway upgrade and
operations site, design, review, and finalize testing procedures, book zone
fracture and testing consultants, arrange equipment required
--------------------------------------------------------------------------------
Pull old well tubing tubing, run test tools in wellbore, cut well casing, test
target gas zones with acid and water,
--------------------------------------------------------------------------------
If gas content not deemed conducive to production, target further leases for
exploration potential and obtain further funding to acquire new development
targets
--------------------------------------------------------------------------------
We will require additional funding to implement our proposed future business
activities. See "Item 6. Management's Discussion and Analysis or Plan of
Operation."
We do not expect to purchase any significant equipment or increase significantly
the number of our employees during the next twelve months. Our current business
strategy is to obtain resources under contract where possible because management
believes that this strategy, at its current level of development, provides the
best services available in the circumstances, leads to lower overall costs, and
provides the best flexibility for our business operations.
COAL BED METHANE GAS
Natural gas consists primarily of methane, which is produced when organic
material is physically turned into coal under extreme geologic conditions. When
the coal and methane conversion process occurs such that the resultant coal is
saturated with water and methane is trapped within the coal, the result is "coal
bed methane." Water permeates coal beds and the water pressure traps the gas
within the coal. Because coal has a large and complex internal surface area, it
can store volumes of gas six or seven time as much as a conventional nature gas
reservoir of equal rock volume. Coal bed methane is kept in place usually by the
presence of water. Thus the production of coal bed methane in many cases
requires the dewatering of the coal gas to be extracted. Therefore, in a coal
bed gas well, water can be produced in large volumes especially in the early
stages of production. As the amount of water in the coal decreases, gas
production increases.
COMPETITION
We operate in a highly competitive industry, competing with major oil and gas
companies, independent producers and institutional and individual investors,
9
which are actively seeking oil and gas properties throughout the world together
with the equipment, labor and materials required to operate properties. Most of
our competitors have financial resources, staffs and facilities substantially
greater than ours. The principal area of competition is encountered in the
financial ability to acquire good acreage positions and drill wells to explore
for oil and gas, then, if warranted, drill production wells and install
production equipment. Competition for the acquisition of oil and gas wells is
intense with many oil and gas properties and or leases or concessions available
in a competitive bidding process in which we may lack technological information
or expertise available to other bidders. Therefore, we may not be successful in
acquiring and developing profitable properties in the face of this competition.
No assurance can be given that a sufficient number of suitable oil and gas wells
will be available for acquisition and development.
GOVERNMENT REGULATION
The production and sale of oil and gas are subject to various federal, state and
local governmental regulations, which may be changed from time to time in
response to economic or political conditions and can have a significant impact
upon overall operations. Matters subject to regulation include discharge permits
for drilling operations, drilling bonds, reports concerning operations, the
spacing of wells, unitization and pooling of properties, taxation, abandonment
and restoration and environmental protection. These laws and regulations are
under constant review for amendment or expansion. From time to time, regulatory
agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and gas wells below actual production
capacity in order to conserve supplies of oil and gas. Changes in these
regulations could require us to expend significant resources to comply with new
laws or regulations or changes to current requirements and could have a material
adverse effect our business operations.
REGULATION OF OIL AND NATURAL GAS PRODUCTION
Our oil and natural gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal, state and
local authorities and agencies. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and natural gas industry increases our cost of doing business and affects
our profitability. Although we believe we are in substantial compliance with all
applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, we are unable to predict the future cost or
impact of complying with such laws.
Many states require permits for drilling operations, drilling bonds and reports
concerning operations and impose other requirements relating to the exploration
and production of oil and natural gas. Such states also have statutes or
regulations addressing conservation matters, including provisions for the
unitization or pooling of oil and natural gas properties, the establishment of
maximum rates of production from wells, and the regulation of spacing, plugging
and abandonment of such wells.
FEDERAL REGULATION OF NATURAL GAS
The Federal Energy Regulatory Commission ("FERC") regulates interstate natural
gas transportation rates and service conditions, which affect the marketing of
natural gas produced by us, as well as the revenues received by us for sales of
such production. Since the mid-1980's, FERC has issued a series of orders that
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have significantly altered the marketing and transportation of natural gas.
These orders mandate a fundamental restructuring of interstate pipeline sales
and transportation service, including the unbundling by interstate pipelines of
the sale, transportation, storage and other components of the city-gate sales
services such pipelines previously performed. One of FERC's purposes in issuing
the orders was to increase competition within all phases of the natural gas
industry. Certain aspects of these orders may be modified as a result of various
appeals and related proceedings and it is difficult to predict the ultimate
impact of the orders on us and others. Generally, the orders eliminate or
substantially reduce the interstate pipelines' traditional role as wholesalers
of natural gas in favor of providing only storage and transportation service,
and have substantially increased competition and volatility in natural gas
markets.
The price, which we may receive for the sale of oil and natural gas liquids,
would be affected by the cost of transporting products to markets. FERC has
implemented regulations establishing an indexing system for transportation rates
for oil pipelines, which, generally, would index such rates to inflation,
subject to certain conditions and limitations. We are not able to predict with
certainty the effect, if any, of these regulations on any future operations.
However, the regulations may increase transportation costs or reduce wellhead
prices for oil and natural gas liquids.
ENVIRONMENTAL MATTERS
Our operations and properties will be subject to extensive and changing federal,
state and local laws and regulations relating to environmental protection,
including the generation, storage, handling, emission, transportation and
discharge of materials into the environment, and relating to safety and health.
The recent trend in environmental legislation and regulation generally is toward
stricter standards, and this trend will likely continue. These laws and
regulations may (i) require the acquisition of a permit or other authorization
before construction or drilling commences and for certain other activities; (ii)
limit or prohibit construction, drilling and other activities on certain lands
lying within wilderness and other protected areas; and (iii) impose substantial
liabilities for pollution resulting from our operations. The permits required
for several of our operations are subject to revocation, modification and
renewal by issuing authorities. Governmental authorities have the power to
enforce their regulations, and violations are subject to fines or injunctions,
or both. In the opinion of management, we are in substantial compliance with
current applicable environmental law and regulations, and we have no material
commitments for capital expenditures to comply with existing environmental
requirements. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on our
business operations, as well as the oil and natural gas industry in general.
The Comprehensive Environmental, Response, Compensation, and Liability Act
("CERCL ") and comparable state statutes impose strict, joint and several
liability on owners and operators of sites and on persons who disposed of or
arranged for the disposal of "hazardous substances" found at such sites. It is
not uncommon for the neighboring landowners and other third parties to file
claims for personal injury and property damage allegedly caused by the hazardous
substances released into the environment. The Federal Resource Conservation and
Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize the imposition of substantial
fines and penalties for noncompliance. Although CERCLA currently excludes
petroleum from its definition of "hazardous substance," state laws affecting our
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operations impose clean-up liability relating to petroleum and petroleum related
products. In addition, although RCRA classifies certain oil field wastes as
"non-hazardous," such exploration and production wastes could be reclassified as
A hazardous wastes, thereby making such wastes subject to more stringent
handling and disposal requirements.
We intend to acquire leasehold interests in properties that for many years have
produced oil and natural gas. Although the previous owners of these interests
may have used operating and disposal practices that were standard in the
industry at the time, hydrocarbons or other wastes may have been disposed of or
released on or under the properties. In addition, some of our properties may be
operated in the future by third parties over which we have no control.
Notwithstanding our lack of control over properties operated by others, the
failure of the operator to comply with applicable environmental regulations may,
in certain circumstances, adversely impact our business operations.
The National Environmental Policy Act ("NEPA") is applicable to many of our
planned activities and operations. NEPA is a broad procedural statute intended
to ensure that federal agencies consider the environmental impact of their
actions by requiring such agencies to prepare environmental impact statements
("EIS") in connection with all federal activities that significantly affect the
environment. Although NEPA is a procedural statute only applicable to the
federal government, a portion of our properties may be acreage located on
federal land. The Bureau of Land Management's issuance of drilling permits and
the Secretary of the Interior's approval of plans of operation and lease
agreements all constitute federal action within the scope of NEPA. Consequently,
unless the responsible agency determines that our drilling activities will not
materially impact the environment, the responsible agency will be required to
prepare an EIS in conjunction with the issuance of any permit or approval.
The Endangered Species Act ("ESA") seeks to ensure that activities do not
jeopardize endangered or threatened animal, fish and plant species, nor destroy
or modify the critical habitat of such species. Under ESA, exploration and
production operation, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or their habitat. ESA provides
for criminal penalties for willful violations of the Act. Other statutes that
provide protection to animal and plant species and that may apply to our
operations include, but are not necessarily limited to, the Fish and Wildlife
Coordination Act, the Fishery Conservation and Management Act, the Migratory
Bird Treaty Act and the National Historic Preservation Act. Although we believe
teat our operations are in substantial compliance with such statutes, any change
in these statutes or any reclassification of a species as endangered could
subject us to significant expense to modify our operations or could force to
discontinue certain operations altogether.
Management believes that we are in substantial compliance with current
applicable environmental laws and regulations.
RESEARCH AND DEVELOPMENT ACTIVITIES
No research and development expenditures have been incurred, either on our
account or sponsored by customers, to the date of our inception.
EMPLOYEES
We do not employ any persons on a full-time or on a part-time basis. Marcus
Johnson is our President and Chief Executive Officer, and D. Bruce Horton is our
Chief Financial Officer and Treasurer. These individuals are primarily
responsible for all of our day-to-day operations. Other services are provided by
outsourcing and consultant and special purpose contracts.
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MATERIAL AGREEMENTS
MARKHAM CONSULTING SERVICES AGREEMENT
On approximately August 1, 2006, we entered into a month-to-month consulting
services agreement with Thomas Markham, our Chief Geologist (the "Markham
Consulting Services Agreement"). In accordance with the verbal terms and
provisions of the Markham Consulting Services Agreement: (i) Mr. Markham shall
provide to us all necessary services and perform all duties associated with his
executive position as Chief Geologist; (ii) we shall pay to Mr. Markham a
monthly fee of $10,000; and (iii) Mr. Markham shall receive a 1.5% royalty
interest in all properties Mr. Markham introduces to us which are subsequently
acquired by us. During fiscal year ended December 31, 2006, we paid an aggregate
of $60,000 to Mr. Markham in accordance with the monthly fee and an additional
$4,794.91 in accordance with the amounts earned under the royalty interest. See
"Item 10. Executive Compensation" and "Item 12. Certain Relationships and
Related Transactions and Director Compensation."
We anticipate memoralizing the terms and provisions of the Markham Consulting
Services Agreement in a written agreement.
BEGLEY SERVICES AGREEMENT
On approximately August 1, 2006, we entered into a month-to-month services
agreement with William Begley, our Operations Manager (the "Begley Services
Agreement"). In accordance with the terms and provisions of the Begley Services
Agreement: (i) Mr. Begley shall provide to us all necessary services and perform
all duties associated with his position as Operations Manager; (ii) we shall pay
to Mr. Begley a monthly fee of $10,000; and (iii) Mr. Begley shall receive a
1.5% royalty interest in all properties Mr. Begley introduces to us which are
subsequently acquired by us. During fiscal year ended December 31, 2006, we paid
an aggregate of $50,000 to Mr. Begley in accordance with the monthly fee and an
additional $4,794.91 in accordance with the amounts earned under the royalty
interest.
We anticipate memoralizing the terms and provisions of the Begley Services
Agreement in a written agreement.
RISK FACTORS
An investment in our common stock involves a number of very significant risks.
You should carefully consider the following risks and uncertainties in addition
to other information in evaluating our company and its business before
purchasing shares of our common stock. Our business, operating results and
financial condition could be seriously harmed due to any of the following risks.
The risks described below are all of the material risks that we are currently
aware of that are facing our company. Additional risks not presently known to us
may also impair our business operations. You could lose all or part of your
investment due to any of these risks.
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RISKS RELATED TO OUR BUSINESS
WE WILL NEED TO RAISE ADDITIONAL FINANCING TO COMPLETE FURTHER
EXPLORATION.
We will require significant additional financing in order to continue our
exploration activities and our assessment of the commercial viability of our oil
and gas properties. Furthermore, if the costs of our planned exploration
programs are greater than anticipated, we may have to seek additional funds
through public or private share offerings or arrangements with corporate
partners. There can be no assurance that we will be successful in our efforts to
raise these require funds, or on terms satisfactory to us. The continued
exploration of our oil and gas properties and the development of our business
will depend upon our ability to establish the commercial viability of our oil
and gas properties and to ultimately develop cash flow from operations and reach
profitable operations. We currently are in the exploration stage and we have no
revenue from operations and we are experiencing significant negative cash flow.
Accordingly, the only other sources of funds presently available to us are
through the sale of equity. We presently believe that debt financing will not be
an alternative to us as all of our properties are in the exploration stage.
Alternatively, we may finance our business by offering an interest in our oil
and gas properties to be earned by another party or parties carrying out further
exploration and development thereof or to obtain project or operating financing
from financial institutions, neither of which is presently intended. If we are
unable to obtain this additional financing, we will not be able to continue our
exploration activities and our assessment of the commercial viability of our oil
and properties. Further, if we are able to establish that development of our oil
and gas properties is commercially viable, our inability to raise additional
financing at this stage would result in our inability to place our oil and gas
properties into production and recover our investment.
As our oil and gas properties do not contain any reserves, we may not discover
commercially exploitable quantities of oil or gas on our properties that would
enable us to enter into commercial production, achieve revenues and recover the
money we spend on exploration.
Our properties do not contain reserves in accordance with the definitions
adopted by the SEC and there is no assurance that any exploration programs that
we carry out will establish reserves. All of our oil and gas properties are in
the exploration stage as opposed to the development stage and have no known body
of reserves. The known reserves at these projects have not yet been determined
to be economic, and may never be determined to be economic. We plan to conduct
further exploration activities on our oil and gas properties, which future
exploration may include the completion of feasibility studies necessary to
evaluate whether commercial reserves exist on any of our mineral properties.
There is a substantial risk that these exploration activities will not result in
discoveries of commercially recoverable reserves of oil or gas. Any
determination that our properties contain commercially recoverable quantities of
oil or gas may not be reached until such time that final comprehensive
feasibility studies have been concluded that establish that a potential reserve
is likely to be economic. There is a substantial risk that any preliminary or
final feasibility studies carried out by us will not result in a positive
determination that our oil and gas properties can be commercially developed.
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OUR EXPLORATION ACTIVITIES ON OUR OIL AND GAS PROPERTIES MAY NOT BE
COMMERCIALLY SUCCESSFUL, WHICH COULD LEAD US TO ABANDON OUR PLANS TO
DEVELOP THE PROPERTY AND OUR INVESTMENTS IN EXPLORATION.
Our long-term success depends on our ability to establish commercially
recoverable quantities of oil and natural gas on our properties that can then be
developed into commercially viable operations. Oil and gas exploration is highly
speculative in nature, involves many risks and is frequently non-productive.
These risks include unusual or unexpected geologic formations, and the inability
to obtain suitable or adequate machinery, equipment or labor. The success of oil
and gas exploration is determined in part by the following factors:
o identification of potential oil and natural gas reserves based on
superficial analysis;
o availability of government-granted exploration permits;
o the quality of management and geological and technical expertise; and
o the capital available for exploration.
Substantial expenditures are required to establish proven and probable reserves
through drilling and analysis, to develop processes to extract oil and gas, and
to develop the drilling and processing facilities and infrastructure at any
chosen site. Whether an oil and gas reserve will be commercially viable depends
on a number of factors, which include, without limitation, the particular
attributes of the reserve; oil and natural gas prices, which fluctuate widely;
and government regulations, including, without limitation, regulations relating
to prices, taxes, royalties, land tenure, land use, importing and exporting of
oil and gas and environmental protection. We may invest significant capital and
resources in exploration activities and abandon such investments if we are
unable to identify commercially exploitable reserves. The decision to abandon a
project may reduce the trading price of our common stock and impair our ability
to raise future financing. We cannot provide any assurance to investors that we
will discover or acquire any oil or gas reserves in sufficient quantities on any
of our properties to justify commercial operations. Further, we will not be able
to recover the funds that we spend on exploration if we are not able to
establish commercially recoverable reserves of oil or natural gas on our
properties.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED
OPERATING HISTORY.
In considering whether to invest in our common stock, you should consider that
there is only limited historical financial and operating information available
on which to base your evaluation of our performance. Our inception was October
19, 2004 and, as a result, we have a limited operating history.
WE HAVE A HISTORY OF OPERATING LOSSES AND THERE CAN BE NO ASSURANCE WE
WILL BE PROFITABLE IN THE FUTURE.
We have a history of operating losses, expect to continue to incur losses, and
may never be profitable, and we must be considered to be in the exploration
stage. Further, we have been dependent on sales of our equity securities and
15
debt financing to meet our cash requirements. We have incurred losses totaling
approximately $4,145,757 from October 19, 2004 (inception) to December 31, 2006.
As of December 31, 2006, we had an accumulated deficit of $4,145,757, and had
incurred losses of approximately $3,918,002 during fiscal year ended December
31, 2006. Further, we do not expect positive cash flow from operations in the
near term. There is no assurance that actual cash requirements will not exceed
our estimates. In particular, additional capital may be required in the event
that: (i) the costs to acquire additional leases are more than we currently
anticipate; (ii) drilling and completion costs for additional wells increase
beyond our expectations; or (iii) we encounter greater costs associated with
general and administrative expenses or offering costs.
Our development of and participation in what could evolve into an increasing
number of oil and gas prospects may require substantial capital expenditures.
The uncertainty and factors described throughout this section may impede our
ability to economically find, develop, produce, and acquire natural gas and oil
reserves. As a result, we may not be able to achieve or sustain profitability or
positive cash flows from operating activities in the future.
WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS
REPORT ACCOMPANYING OUR DECEMBER 31, 2006 AND DECEMBER 31, 2005
FINANCIAL STATEMENTS.
The independent auditor's report accompanying our December 31, 2006 and 2005
audited financial statements contains an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements have been prepared "assuming that the Company
will continue as a going concern." Our ability to continue as a going concern is
dependent on raising additional capital to fund our operations and ultimately on
generating future profitable operations. There can be no assurance that we will
be able to raise sufficient additional capital or eventually have positive cash
flow from operations to address all of our cash flow needs. If we are not able
to find alternative sources of cash or generate positive cash flow from
operations, our business and shareholders will be materially and adversely
affected.
WE WILL REQUIRE ADDITIONAL FUNDING IN THE FUTURE.
Based upon our historical losses from operations, we will require additional
funding in the future. If we cannot obtain capital through financings or
otherwise, our ability to execute our development plans and achieve production
levels will be greatly limited. Our current development plans require us to make
capital expenditures for the exploration and development of our oil and natural
gas properties. Historically, we have funded our operations through the issuance
of equity. We may not be able to obtain additional financing on favorable terms,
if at all. Our future cash flows and the availability of financing will be
subject to a number of variables, including potential production and the market
prices of oil and natural gas. Further, debt financing, if utilized, could lead
to a diversion of cash flow to satisfy debt-servicing obligations and create
restrictions on business operations. If we are unable to raise additional funds,
it would have a material adverse effect upon our operations.
AS PART OF OUR GROWTH STRATEGY, WE INTEND TO ACQUIRE ADDITIONAL OIL AND
GAS PROPERTIES.
As part of our growth strategy, we intend to acquire additional oil and gas
production properties. Current and subsequent acquisitions may pose substantial
16
risks to our business, financial condition, and results of operations. In
pursuing acquisitions, we will compete with other companies, many of which have
greater financial and other resources to acquire attractive properties. Even if
we are successful in acquiring additional properties, some of the properties may
not produce revenues at anticipated levels or failure to conduct drilling on
prospects within specified time periods may cause the forfeiture of the lease in
that prospect. There can be no assurance that we will be able to successfully
integrate acquired properties, which could result in substantial costs and
delays or other operational, technical, or financial problems. Further,
acquisitions could disrupt ongoing business operations. If any of these events
occur, it would have a material adverse effect upon our operations and results
from operations.
WE ARE A NEW ENTRANT INTO THE OIL AND GAS EXPLORATION AND DEVELOPMENT
INDUSTRY WITHOUT PROFITABLE OPERATING HISTORY.
Since inception, our activities have been limited to organizational efforts,
obtaining working capital and acquiring and developing a very limited number of
properties. As a result, there is limited information regarding property related
production potential or revenue generation potential. Further, our Leases have
no probable, proved or developed producing reserves. As a result, our future
revenues may be limited or non-existent.
The business of oil and gas exploration and development is subject to many risks
and if oil and natural gas is found in economic production quantities, the
potential profitability of future possible oil and gas ventures depends upon
factors beyond our control. The potential profitability of oil and natural gas
properties if economic quantities are found is dependent upon many factors and
risks beyond our control, including, but not limited to: (i) unanticipated
ground conditions; (ii) geological problems; (iii) drilling and other processing
problems; (iv) the occurrence of unusual weather or operating conditions and
other force majeure events; (v) lower than expected reserve quantities; (vi)
accidents; (vii) delays in the receipt of or failure to receive necessary
government permits; (viii) delays in transportation; (ix) labor disputes; (x)
government permit restrictions and regulation restrictions; (xi) unavailability
of materials and equipment; and (xii) the failure of equipment or drilling to
operate in accordance with specifications or expectations.
OUR DRILLING OPERATIONS MAY NOT BE SUCCESSFUL.
We intend to test certain zones in wellbores already drilled on certain of the
properties and if results are positive and capital is available, drill
additional wells and begin production operations from existing and new wells.
There can be no assurance that our current well re-completion activities or
future drilling activities will be successful, and we cannot be sure that our
overall drilling success rate or our production operations within a particular
area will ever come to fruition, and if it does, will not decline over time. We
may not recover all or any portion of our capital investment in the wells or the
underlying leaseholds. Unsuccessful drilling activities would have a material
adverse effect upon our results of operations and financial condition. The cost
of drilling, completing, and operating wells is often uncertain, and a number of
factors can delay or prevent drilling operations including: (i) unexpected
drilling conditions; (ii) pressure or irregularities in geological formations;
(iii) equipment failures or accidents; (iv) adverse weather conditions; and (iv)
shortages or delays in availability of drilling rigs and delivery of equipment.
17
OUR PRODUCTION INITIATIVES MAY NOT PROVE SUCCESSFUL.
The coal beds from which we intend to produce natural gas frequently contain
water, which may hamper our ability to produce gas in commercial quantities. The
amount of natural gas that can be commercially produced depends upon the coal
quality, the original gas content of the coal seam, the thickness of the seam,
the reservoir pressure, the rate at which gas is released from the coal, and the
existence of any natural fractures through which the gas can flow to the well
bore. However, coal beds frequently contain water that must be removed in order
for the gas to detach from the coal and flow to the well bore. The average life
of a coal bed well is only five to six years. Our ability to remove and dispose
of sufficient quantities of water from the coal seam will determine whether or
not we can produce coal bed methane in commercial quantities.
There is no guarantee that the potential drilling locations we have or acquire
in the future will ever produce natural gas or oil, which could have a material
adverse effect upon our results of operations.
PROSPECTS THAT WE DECIDE TO DRILL MAY NOT YIELD NATURAL GAS OR OIL IN
COMMERCIALLY VIABLE QUANTITIES.
We describe some of our current prospects in this Annual Report. Our prospects
are in various stages of preliminary evaluation and assessment and we have not
reached the point where we will decide to drill at all on the subject prospects.
However, the use of seismic data, historical drilling logs, offsetting well
information, and other technologies and the study of producing fields in the
same area will not enable us to know conclusively prior to drilling and testing
whether natural gas or oil will be present or, if present, whether natural gas
or oil will be present in sufficient quantities or quality to recover drilling
or completion costs or to be economically viable. In sum, the cost of drilling,
completing and operating any wells is often uncertain and new wells may not be
productive.
WE MAY BE UNABLE TO IDENTIFY LIABILITIES ASSOCIATED WITH THE PROPERTIES
OR OBTAIN PROTECTION FROM SELLERS AGAINST THEM.
One of our growth strategies is to capitalize on opportunistic acquisitions of
oil and natural gas reserves. However, our reviews of acquired properties are
inherently incomplete because it generally is not feasible to review in depth
every individual property involved in each acquisition. A detailed review of
records and properties may not necessarily reveal existing or potential
problems, nor will it permit a buyer to become sufficiently familiar with the
properties to assess fully their deficiencies and potential. Further,
environmental problems, such as ground water contamination, are not necessarily
observable even when an inspection is undertaken. We may not be able to obtain
indemnification or other protections from the sellers against such potential
liabilities, which would have a material adverse effect upon our results of
operations.
THE POTENTIAL PROFITABILITY OF OIL AND GAS VENTURES DEPENDS UPON GLOBAL
POLITICAL AND MARKET RELATED FACTORS BEYOND OUR CONTROL.
World prices and markets for oil and gas are unpredictable, highly volatile,
potentially subject to governmental fixing, pegging, controls, or any
combination of these and other factors, and respond to changes in domestic,
international, political, social, and economic environments. Additionally, due
to worldwide economic uncertainty, the availability and cost of funds for
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production and other expenses have become increasingly difficult, if not
impossible, to project. These and other changes and events may materially affect
our financial performance. The potential profitability of oil and gas properties
is dependent on these and other factors beyond our control.
PRODUCTION OR OIL AND GAS RESOURCES IF FOUND ARE DEPENDENT ON NUMEROUS
OPERATIONAL UNCERTAINTIES SPECIFIC TO THE AREA OF THE RESOURCE THAT
AFFECTS ITS PROFITABILITY.
Production area specifics affect profitability. Adverse weather conditions can
hinder drilling operations and ongoing production work. A productive well may
become uneconomic in the event water or other deleterious substances are
encountered which impair or prevent the production of oil and/or gas from the
well. Production and treatments on other wells in the area can have either
appositive or negative effect on our production and wells. In addition,
production from any well may be unmarketable if it is impregnated with water or
other deleterious substances. The content of hydrocarbons is subject to change
over the life of producing wells. The marketability of oil and gas from any
specific reserve which may be acquired or discovered will be affected by
numerous factors beyond our control. These factors include, but are not limited
to, the proximity and capacity of oil and gas pipelines, availability of room in
the pipelines to accommodate additional production, processing and production
equipment operating costs and equipment efficiency, market fluctuations of
prices and oil and gas marketing relationships, local and state taxes, mineral
owner and other royalties, land tenure, lease bonus costs and lease damage
costs, allowable production, and environmental protection. These factors cannot
be accurately predicted and the combination of these factors may result in us
not receiving an adequate return on our invested capital.
IF PRODUCTION RESULTS FROM OPERATIONS, WE ARE DEPENDENT UPON
TRANSPORTATION AND STORAGE SERVICES PROVIDED BY THIRD PARTIES.
We will be dependent on the transportation and storage services offered by
various interstate and intrastate pipeline companies for the delivery and sale
of our gas supplies. Both the performance of transportation and storage services
by interstate pipelines and the rates charged for such services are subject to
the jurisdiction of the Federal Energy Regulatory Commission or state regulatory
agencies. An inability to obtain transportation and/or storage services at
competitive rates could hinder our processing and marketing operations and/or
affect our sales margins.
OUR RESULTS OF OPERATIONS ARE DEPENDENT UPON MARKET PRICES FOR OIL AND
GAS, WHICH FLUCTUATE WIDELY AND ARE BEYOND OUR CONTROL.
If and when production from oil and gas properties is reached, our revenue,
profitability, and cash flow depend upon the prices and demand for oil and
natural gas. The markets for these commodities are very volatile and even
relatively modest drops in prices can significantly affect our financial results
and impede our growth. Prices received also will affect the amount of future
cash flow available for capital expenditures and may affect our ability to raise
additional capital. Lower prices may also affect the amount of natural gas and
oil that can be economically produced from reserves either discovered or
acquired. Factors that can cause price fluctuations include: (i) the level of
consumer product demand; (ii) domestic and foreign governmental regulations;
(iii) the price and availability of alternative fuels; (iv) technical advances
affecting energy consumption; (v) proximity and capacity of oil and gas
pipelines and other transportation facilities; (vi) political conditions in
19
natural gas and oil producing regions; (vii) the domestic and foreign supply of
natural gas and oil; (viii) the ability of members of Organization of Petroleum
Exporting Countries to agree to and maintain oil price and production controls;
(ix) the price of foreign imports; and (x) overall domestic and global economic
conditions.
The availability of a ready market for our oil and gas depends upon numerous
factors beyond our control, including the extent of domestic production and
importation of oil and gas, the relative status of the domestic and
international economies, the proximity of our properties to gas gathering
systems, the capacity of those systems, the marketing of other competitive
fuels, fluctuations in seasonal demand and governmental regulation of
production, refining, transportation and pricing of oil, natural gas and other
fuels.
THE OIL AND GAS INDUSTRY IN WHICH WE OPERATE INVOLVED MANY INDUSTRY
RELATED OPERATING AND IMPLEMENTATION RISKS THAT CAN CAUSE SUBSTANTIAL
LOSSES, INCLUDING, BUT NOT LIMITED TO, UNPRODUCTIVE WELLS, NATURAL
DISASTERS, FACILITY AND EQUIPMENT PROBLEMS AND ENVIRONMENTAL HAZARDS.
Our drilling activities are subject to many risks, including the risk that we
will not discover commercially productive reservoirs. Drilling for oil and
natural gas can be unprofitable, not only from dry holes, but from productive
wells that do not produce sufficient revenues to return a profit. In addition,
our drilling and producing operations may be curtailed, delayed or canceled as a
result of other drilling and production, weather and natural disaster, equipment
and service failure, environmental and regulatory, and site specific related
factors, including but not limited to: (i) fires; (ii) explosions; (iii)
blow-outs and surface cratering; (iv) uncontrollable flows of underground
natural gas, oil, or formation water; (v) natural disasters; (vi) facility and
equipment failures; (vii) title problems; (viii) shortages or delivery delays of
equipment and services; (ix) abnormal pressure formations; and (x) environmental
hazards such as natural gas leaks, oil spills, pipeline ruptures and discharges
of toxic gases.
If any of these events occur, we could incur substantial losses as a result of:
(i) injury or loss of life; (ii) severe damage to and destruction of property,
natural resources or equipment; (iii) pollution and other environmental damage;
(iv) clean-up responsibilities; (v) regulatory investigation and penalties; (vi)
suspension of our operations; or (vii) repairs necessary to resume operations.
If we were to experience any of these problems, it could affect well bores,
gathering systems and processing facilities, any one of which could adversely
affect our ability to conduct operations. We may be affected by any of these
events more than larger companies, since we have limited working capital.
THE OIL AND GAS INDUSTRY IS HIGHLY COMPETITIVE AND THERE IS NO
ASSURANCE THAT WE WILL BE SUCCESSFUL IN ACQUIRING LEASES.
The oil and natural gas industry is intensely competitive, and we compete with
other companies that have greater resources. Many of these companies not only
explore for and produce oil and natural gas, but also carry on refining
operations and market petroleum and other products on a regional, national or
worldwide basis. These companies may be able to pay more for productive oil and
natural gas properties and exploratory prospects or define, evaluate, bid for
and purchase a greater number of properties and prospects than our financial or
human resources permit. In addition, these companies may have a greater ability
20
to continue exploration activities during periods of low oil and natural gas
market prices. Our larger competitors may be able to absorb the burden of
present and future federal, state, local and other laws and regulations more
easily than we can, which would adversely affect our competitive position. Our
ability to acquire additional properties and to discover reserves in the future
will be dependent upon our ability to evaluate and select suitable properties
and to consummate transactions in a highly competitive environment. In addition,
because we have fewer financial and human resources than many companies in our
industry, we may be at a disadvantage in bidding for exploratory prospects and
producing oil and natural gas properties.
THE MARKETABILITY OF NATURAL RESOURCES WILL BE AFFECTED BY NUMEROUS
FACTORS BEYOND OUR CONTROL, WHICH MAY RESULT IN US NOT RECEIVING AN
ADEQUATE RETURN ON INVESTED CAPITAL TO BE PROFITABLE OR VIABLE.
The marketability of natural resources which may be acquired or discovered by us
will be affected by numerous factors beyond our control. These factors include
market fluctuations in oil and gas pricing and demand, the proximity and
capacity of natural resource markets and processing equipment, governmental
regulations, land tenure, land use, regulation concerning the importing and
exporting of oil and gas and environmental protection regulations. The exact
effect of these factors cannot be accurately predicted, but the combination of
these factors may result in us not receiving an adequate return on invested
capital to be profitable or viable.
OIL AND GAS OPERATIONS ARE SUBJECT TO COMPREHENSIVE REGULATION WHICH
MAY CAUSE SUBSTANTIAL DELAYS OR REQUIRE CAPITAL OUTLAYS IN EXCESS OF
THOSE ANTICIPATED CAUSING AN ADVERSE EFFECT ON OUR BUSINESS OPERATIONS.
Oil and gas operations are subject to federal, state, and local laws relating to
the protection of the environment, including laws regulating removal of natural
resources from the ground and the discharge of materials into the environment.
Oil and gas operations are also subject to federal, state, and local laws and
regulations which seek to maintain health and safety standards by regulating the
design and use of drilling methods and equipment. Various permits from
government bodies are required for drilling operations to be conducted; no
assurance can be given that such permits will be received. Environmental
standards imposed by federal, provincial, or local authorities may be changed
and any such changes may have material adverse effects on our activities.
Moreover, compliance with such laws may cause substantial delays or require
capital outlays in excess of those anticipated, thus causing an adverse effect
on us. Additionally, we may be subject to liability for pollution or other
environmental damages which we may elect not to insure against due to
prohibitive premium costs and other reasons. To date we have not been required
to spend material amounts on compliance with environmental regulations. However,
we may be required to do so in future and this may affect our ability to expand
or maintain our operations.
In general, our exploration and production activities are subject to certain
federal, state and local laws and regulations relating to environmental quality
and pollution control. Such laws and regulations increase the costs of these
activities and may prevent or delay the commencement or continuance of a given
operation. Compliance with these laws and regulations has not had a material
effect on our operations or financial condition to date. Specifically, we are
subject to legislation regarding emissions into the environment, water
discharges and storage and disposition of hazardous wastes. In addition,
legislation has been enacted which requires well and facility sites to be
21
abandoned and reclaimed to the satisfaction of state authorities. However, such
laws and regulations are frequently changed and we are unable to predict the
ultimate cost of compliance. Generally, environmental requirements do not appear
to affect us any differently or to any greater or lesser extent than other
companies in the industry.
We believe that our operations comply, in all material respects, with all
applicable environmental regulations. We need insurance to protect our self
against risks associated with the leases obtained. The leases allow for entry
onto the properties for the purposes of oil and gas exploration. The insurance
we require relates solely to developments on the properties for the purposes of
oil and gas exploration.
When and if we are convinced that our current leases or those subsequently
acquired are capable of hydrocarbon production and sales, and we plan to drill
more than one well, we intend to maintain a $2,000,000 per year limit policy on
bodily injury and general liability with regard to risks incurred for the
drilling of up to 25 wells. This will allow for our growth to contain non
contract labor that would require us to carry such additional insurance for
risks pertaining to oil and gas exploration conducted directly by us. Such a
policy would include coverage for numerous locations for pollution,
environmental damage, chemical spills and commercial general liability, fire,
and personal injury. Such a policy will not be required until such time and date
as we believe that we will begin a sustained drilling and operating program, and
that at least one well has been drilled and is producing to justify and warrant
further drilling and a sustained drilling and operating program.
ANY CHANGE TO GOVERNMENT REGULATION/ADMINISTRATIVE PRACTICES MAY HAVE A
NEGATIVE IMPACT ON OUR ABILITY TO OPERATE AND OUR PROFITABILITY.
The laws, regulations, policies or current administrative practices of any
government body, organization or regulatory agency in the United States or any
other jurisdiction, may be changed, applied or interpreted in a manner which
will fundamentally alter our ability to carry on business. The actions, policies
or regulations, or changes thereto, of any government body or regulatory agency,
or other special interest groups, may have a detrimental effect on us. Any or
all of these situations may have a negative impact on our ability to operate
and/or our profitably.
WE MAY BE UNABLE TO RETAIN KEY EMPLOYEES OR CONSULTANTS OR RECRUIT
ADDITIONAL QUALIFIED PERSONNEL.
Our extremely limited personnel means that we would be required to spend
significant sums of money to locate and train new employees in the event any of
our employees resign or terminate their employment with us for any reason. Due
to our limited operating history and financial resources, we are entirely
dependent on the continued service of Marcus Johnson, our Chief Executive
Officer, and D. Bruce Horton, our Chief Financial Officer. Further, we do not
have key man life insurance on either of these individuals. We may not have the
financial resources to hire a replacement if one or both of our officers were to
die. The loss of service of either of these employees could therefore
significantly and adversely affect our operations.
OUR OFFICERS AND DIRECTORS MAY BE SUBJECT TO CONFLICTS OF INTEREST.
Our officers and directors serve only part time and are subject to conflicts of
interest. Each devotes part of his working time to other business endeavors,
22
including consulting relationships with other entities, and has responsibilities
to these other entities. Marcus Johnson is the chief executive officer and a
director of Geneva Resources Inc. and D. Bruce Horton is an accountant and
financial management consultant.
Such conflicts include deciding how much time to devote to our affairs, as well
as what business opportunities should be presented to us. Because of these
relationships, our officers and directors will be subject to conflicts of
interest. Currently, we have no policy in place to address such conflicts of
interest.
NEVADA LAW AND OUR ARTICLES OF INCORPORATION MAY PROTECT OUR DIRECTORS
FROM CERTAIN TYPES OF LAWSUITS.
Nevada law provides that our officers and directors will not be liable to us or
our stockholders for monetary damages for all but certain types of conduct as
officers and directors. Our Bylaws permit us broad indemnification powers to all
persons against all damages incurred in connection with our business to the
fullest extent provided or allowed by law. The exculpation provisions may have
the effect of preventing stockholders from recovering damages against our
officers and directors caused by their negligence, poor judgment or other
circumstances. The indemnification provisions may require us to use our limited
assets to defend our officers and directors against claims, including claims
arising out of their negligence, poor judgment, or other circumstances.
RISKS RELATED TO OUR COMMON STOCK
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK INTO THE
PUBLIC MARKET BY CERTAIN STOCKHOLDERS MAY RESULT IN SIGNIFICANT
DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK AND COULD AFFECT
YOUR ABILITY TO REALIZE THE CURRENT TRADING PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock in the public market
by certain stockholders could cause a reduction in the market price of our
common stock. As of the date of this Annual Report, we have 29,814,905 shares of
common stock issued and outstanding. Of the total number of issued and
outstanding shares of common stock, certain stockholders are able to resell up
to 4,167,700 shares of our common stock pursuant to the Registration Statement
declared effective on February 14, 2006. As a result of the Registration
Statement, 4,167,700 shares of our common stock were issued and are available
for immediate resale which could have an adverse effect on the price of our
common stock.
As of the date of this Annual Report, there are 12,944,045 outstanding shares of
our common stock that are restricted securities as that term is defined in Rule
144 under the Securities Act of 1933, as amended (the "Securities Act").
Although the Securities Act and Rule 144 place certain prohibitions on the sale
of restricted securities, restricted securities may be sold into the public
market under certain conditions. Further, as of the date of this Annual Report,
there are an aggregate of 1,850,000 stock options outstanding and an aggregate
of 944,105 Warrants outstanding. See "Item 5. Market for Common Equity and
Related Stockholder Matters."
Any significant downward pressure on the price of our common stock as the
selling stockholders sell their shares of our common stock could encourage short
23
sales by the selling stockholders or others. Any such short sales could place
further downward pressure on the price of our common stock.
THE TRADING PRICE OF OUR COMMON STOCK ON THE OTC BULLETIN BOARD WILL
FLUCTUATE SIGNIFICANTLY AND STOCKHOLDERS MAY HAVE DIFFICULTY RESELLING
THEIR SHARES.
As of the date of this Annual Report, our common stock trades on the
Over-the-Counter Bulletin Board. There is a volatility associated with Bulletin
Board securities in general and the value of your investment could decline due
to the impact of any of the following factors upon the market price of our
common stock: (i) disappointing results from our discovery or development
efforts; (ii) failure to meet our revenue or profit goals or operating budget;
(iii) decline in demand for our common stock; (iv) downward revisions in
securities analysts' estimates or changes in general market conditions; (v)
technological innovations by competitors or in competing technologies; (vi) lack
of funding generated for operations; (vii) investor perception of our industry
or our prospects; and (viii) general economic trends.
In addition, stock markets have experienced price and volume fluctuations and
the market prices of securities have been highly volatile. These fluctuations
are often unrelated to operating performance and may adversely affect the market
price of our common stock. As a result, investors may be unable to sell their
shares at a fair price and you may lose all or part of your investment.
ADDITIONAL ISSUANCE OF EQUITY SECURITIES MAY RESULT IN DILUTION TO OUR
EXISTING STOCKHOLDERS.
Our Articles of Incorporation authorize the issuance of 100,000,000 shares of
common stock. Common stock is our only authorized class of stock. The board of
directors has the authority to issue additional shares of our capital stock to
provide additional financing in the future and the issuance of any such shares
may result in a reduction of the book value or market price of the outstanding
shares of our common stock. If we do issue any such additional shares, such
issuance also will cause a reduction in the proportionate ownership and voting
power of all other stockholders. As a result of such dilution, your
proportionate ownership interest and voting power will be decreased accordingly.
Further, any such issuance could result in a change of control.
OUR COMMON STOCK IS CLASSIFIED AS A "PENNY STOCK" UNDER SEC RULES WHICH
LIMITS THE MARKET FOR OUR COMMON STOCK.
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stocks." Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ system, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). Penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
those rules, to deliver a standardized risk disclosure document prepared by the
SEC, which specifies information about penny stocks and the nature and
significance of risks of the penny stock market. A broker-dealer must also
provide the customer with bid and offer quotations for the penny stock, the
compensation of the broker-dealer, and sales person in the transaction, and
monthly account statements indicating the market value of each penny stock held
in the customer's account. In addition, the penny stock rules require that,
prior to a transaction in a penny stock not otherwise exempt from those rules,
24
the broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the trading activity in the secondary market for stock that becomes
subject to those penny stock rules. If a trading market for our common stock
develops, our common stock will probably become subject to the penny stock
rules, and shareholders may have difficulty in selling their shares.
A MAJORITY OF OUR DIRECTORS AND OFFICERS ARE OUTSIDE THE UNITED STATES,
WITH THE RESULT THAT IT MAY BE DIFFICULT FOR INVESTORS TO ENFORCE
WITHIN THE UNITED STATES ANY JUDGMENTS OBTAINED AGAINST US OR ANY OF
OUR DIRECTORS OR OFFICERS.
A majority of our directors and officers are nationals and/or residents of
countries other than the United States, and all or a substantial portion of such
persons' assets are located outside the United States. As a result, it may be
difficult for investors to effect service of process on our directors or
officers, or enforce within the United States or Canada any judgments obtained
against us or our officers or directors, including judgments predicated upon the
civil liability provisions of the securities laws of the United States or any
state thereof. Consequently, you may be effectively prevented from pursuing
remedies under U.S. federal securities laws against them. In addition, investors
may not be able to commence an action in a Canadian court predicated upon the
civil liability provisions of the securities laws of the United States.
ITEM 2. DESCRIPTION OF PROPERTIES
We lease our principal office space located at 10120 S. Eastern Avenue, Suite
200, Henderson, Nevada 89052. The office space is for corporate identification,
mailing, and courier purposes only and costs us approximately $225 monthly. The
office and services related thereto may be cancelled at any time with a thirty
day notice.
ITEM 3. 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 Annual Report, no director, officer or affiliate is (i) a party
adverse to us in any legal proceeding, or (ii) has an adverse interest to us in
any legal proceedings. Management is not aware of any other legal proceedings
pending or that have been threatened against us or our properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During fiscal year ended December 31, 2006, no matters were submitted to our
stockholders for approval.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON EQUITY
Shares of our common stock commenced trading on the OTC Bulletin Board under the
symbol "MCRE:OB" on approximately May 24, 2006. The market for our common stock
is limited, and can be volatile. The following table sets forth the high and low
bid prices relating to our common stock on a quarterly basis for the periods
25
indicated as quoted by the NASDAQ stock market. These quotations reflect
inter-dealer prices without retail mark-up, mark-down, or commissions, and may
not reflect actual transactions.
MONTH ENDED HIGH BID LOW BID
December 31, 2006 $3.16 $1.30
September 30, 2006 $4.93 $2.83
June 30, 2006 $2.55* $2.70*
March 31, 2006 n/a n/a
*Represents an average based upon months of May and June 2006.
As of March 1, 2007, we had 25 shareholders of record, which does not include
shareholders whose shares are held in street or nominee names.
DIVIDEND POLICY
No dividends have ever been declared by the Board of Directors on our common
stock. Our losses do not currently indicate the ability to pay any cash
dividends, and we do not indicate the intention of paying cash dividends either
on our common stock in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
We have one equity compensation plan, the Uranium Energy 2006 Stock Option Plan
(the "2006 Plan"). The table set forth below presents information relating to
our equity compensation plans as of the date of this Annual Report:
NUMBER OF SECURITIES
NUMBER OF SECURITIES TO BE REMAINING AVAILABLE FOR
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS (EXCLUDING COLUMN
PLAN CATEGORY (A) (B) (A))
__________________________________________________________________________________________________________________________
Equity Compensation Plans
Approved by Security Holders
(2006 Stock Option Plan) 1,850,000 $1.10 3,150,000
Equity Compensation Plans Not
Approved by Security Holders 944,105 $3.00 -0-
2006 STOCK OPTION PLAN
On April 3, 2006, our Board of Directors authorized and approved the adoption of
the 2006 Plan effective April 3, 2006, under which an aggregate of 5,000,000 of
our shares may be issued.
26
The purpose of the 2006 Plan is to enhance our long-term stockholder value by
offering opportunities to our directors, officers, employees and eligible
consultants to acquire and maintain stock ownership in order to give these
persons the opportunity to participate in our growth and success, and to
encourage them to remain in our service.
The 2006 Plan is to be administered by our Board of Directors or a committee
appointed by and consisting of one or more members of the Board of Directors,
which shall determine (i) the persons to be granted Stock Options under the 2006
Plan; (ii) the number of shares subject to each option, the exercise price of
each Stock Option; and (iii) whether the Stock Option shall be exercisable at
any time during the option period up to ten (10) years or whether the Stock
Option shall be exercisable in installments or by vesting only. 2006 Plan
provides authorization to the Board of Directors to grant Stock Options to
purchase a total number of shares of Common Stock of the Company, not to exceed
5,000,000 shares as at the date of adoption by the Board of Directors of the
2006 Plan. At the time a Stock Option is granted under the 2006 Plan, the Board
of Directors shall fix and determine the exercise price at which shares of our
common stock may be acquired.
In the event an optionee ceases to be employed by or to provide services to us
for reasons other than cause, retirement, disability or death, any Stock Option
that is vested and held by such optionee generally may be exercisable within up
to ninety (90) calendar days after the effective date that his position ceases,
and after such 90-day period any unexercised Stock Option shall expire. In the
event an optionee ceases to be employed by or to provide services to us for
reasons of retirement, disability or death, any Stock Option that is vested and
held by such optionee generally may be exercisable within up to one-year after
the effective date that his position ceases, and after such one-year period any
unexercised Stock Option shall expire.
No Stock Options granted under the Stock Option Plan will be transferable by the
optionee, and each Stock Option will be exercisable during the lifetime of the
optionee subject to the option period up to ten (10) years or limitations
described above. Any Stock Option held by an optionee at the time of his death
may be exercised by his estate within one (1) year of his death or such longer
period as the Board of Directors may determine.
The exercise price of a Stock Option granted pursuant to the 2006 Plan shall be
paid in full to us by delivery of consideration equal to the product of the
Stock Option in accordance with the requirements of the Nevada Revised Statutes.
Any Stock Option settlement, including payment deferrals or payments deemed made
by way of settlement of pre-existing indebtedness from we may be subject to such
conditions, restrictions and contingencies as may be determined.
INCENTIVE STOCK OPTIONS
The 2006 Plan further provides that, subject to the provisions of the Stock
Option Plan and prior shareholder approval, the Board of Directors may grant to
any key individuals who are our employees eligible to receive options one or
more incentive stock options to purchase the number of shares of common stock
allotted by the Board of Directors (the "Incentive Stock Options"). The option
price per share of common stock deliverable upon the exercise of an Incentive
Stock Option shall be at least 100% of the fair market value of the common
shares of the Company, and in the case of an Incentive Stock Option granted to
an optionee who owns more than 10% of the total combined voting power of all
classes of our stock, shall not be less than 100% of the fair market value of
27
our common shares. The option term of each Incentive Stock Option shall be
determined by the Board of Directors, which shall not commence sooner than from
the date of grant and shall terminate no later than ten (10) years from the date
of grant of the Incentive Stock Option, subject to possible early termination as
described above.
COMMON STOCK PURCHASE WARRANTS
As of the date of this Annual Report, there are an aggregate of 944,105 common
stock purchase warrants issued and outstanding. During fiscal year ended
December 31, 2006, we issued an aggregate 944,105 common stock purchase warrants
(the "Warrants"). The Warrants to purchase shares of common stock and the shares
of common stock underlying the Warrants were issued in a private placement by us
during fiscal year 2006 at an exercise price of $3.00 per share during the
period commencing on October 16, 2006 and ending on the day which is earlier of
(a) twenty-four months from the date of issuance of the Warrants or eighteen
months from the effective date of a proposed registration statement. See " --
Recent Sales of Unregistered Securities."
As of the date of this Annual Report, none of the Warrants have been exercised.
RECENT SALES OF UNREGISTERED SECURITIES
As of the date of this Annual Report and during fiscal year ended December 31,
2006, to provide capital, we sold stock in private placement offerings, issued
stock in exchange for our debts or pursuant to contractual agreements as set
forth below.
OCTOBER 2006 PRIVATE PLACEMENT OFFERING
On October 16, 2006, we closed a private placement offering (the "October 2006
Private Placement Offering"), whereby we issued an aggregate of 944,105 units at
a subscription price of $1.50 per unit (the "Units"). Each was comprised of one
share of common stock and one non-transferable warrant (the "Warrant"),
representing the issuance of an aggregate of 944,105 shares of our restricted
common stock and 944,105 Warrants with piggyback registration rights for all
securities underlying the Units issued. We agreed to file a registration
statement with the SEC in accordance with the requirements of the Securities Act
in order to register the resale by the investors of the shares issued and the
share issuable upon exercise of the Warrants. Each Warrant is exercisable at
$3.00 per share during the period commencing on October 16, 2006 and ending on
the day which is earlier of (a) twenty-four months from the date of issuance of
the Warrants or eighteen months from the effective date of a proposed
registration statement.
The October 2006 Private Placement Offering was completed in reliance on
Regulation S and/or Rule 506 of Regulation D of the Securities Act. Sales to
United States investors pursuant to Rule 506 of Regulation D were limited to
investors who qualified as "accredited investors" within the meaning of Rule
501(a) of Regulation D. The per share price of the October 2006 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.
Of this October 2006 Private Placement Offering, 563,333 of the Units were
issued in exchange for $845,000 previously advanced to us by one of our
28
shareholders. We issued the remaining Units to investors who are either non-U.S.
residents under Regulation S or U.S. residents under Regulation D. 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
SHARES ELIGIBLE FOR FUTURE SALE
We filed a registration statement on Form SB-2 under the Securities Act with the
Securities and Exchange Commission (the "Registration Statement"). The
Securities and Exchange Commission declared the Registration Statement effective
on February 14, 2006, pursuant to which certain purchasers of shares, other than
affiliates, may resell their shares of common stock aggregating 4,167,700 shares
immediately. A current shareholder who is an "affiliate" of us, defined in Rule
144 as a person who directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, us, will be
required to comply with the resale limitations of Rule 144. Sales by affiliates
will be subject to the volume and other limitations of Rule 144, including
certain restrictions regarding the manner of sale, notice requirements, and the
availability of current public information about us. The volume limitations
generally permit an affiliate to sell, within any three month period, a number
of shares that does not exceed the greater of one percent of the outstanding
shares of common stock or the average weekly trading volume during the four
calendar weeks preceding his sale. A person who ceases to be an affiliate at
least three months before the sale of restricted securities beneficially owned
for at least two years may sell the restricted securities under Rule 144 without
regard to any of the Rule 144 limitations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The summarized financial data set forth in the table below is derived from and
should be read in conjunction with our audited financial statements for the
period from inception (October 19, 2004) to year ended December 31, 2006,
including the notes to those financial statements which are included in this
Annual Report. The following discussion should be read in conjunction with our
audited financial statements and the related notes that appear elsewhere in this
Annual Report. The following discussion contains forward-looking statements that
reflect our plans, estimates and beliefs. Our actual results could differ
materially from those discussed in the forward looking statements. Factors that
could cause or contribute to such differences include, but are not limited to
those discussed below and elsewhere in this Annual Report, particularly in the
section entitled "Risk Factors". Our audited financial statements are stated in
United States Dollars and are prepared in accordance with United States
Generally Accepted Accounting Principles.
We are an exploration stage company and have not generated any revenue to date.
The following table sets forth selected financial information for the periods
indicated.
29
RESULTS OF OPERATION
FOR THE PERIOD FROM
FISCAL YEAR ENDED OCTOBER 19, 2004
DECEMBER 31 (INCEPTION) TO
2006 AND 2005 DECEMBER 31, 2006
__________________________ ____________________
General and $3,918,002 $204,026 $4,145,757
Administrative Expenses
Investor relations 112,744 50,000 152,954
expenses
Consulting expenses 346,992 90,000 438,467
Management fees 311,707 -0- 311,707
Impairment property 1,273,410 -0- 1,273,410
expense
Management -Stock 1,527,170 -0- 1,527,170
based compensation
Office and general 176,883 12,954 200,104
Professional 169,095 51,072 241,944
Fees
Net Loss ($3,918,002) ($204,026) ($4,145,757)
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.
FISCAL YEAR ENDED DECEMBER 31, 2006 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2005
Our net loss for fiscal year ended December 31, 2006 was approximately
($3,918,002) compared to a net loss of ($204,026) during fiscal year ended
December 31, 2005 (an increase of $3,713,976). During fiscal years ended
December 31, 2006 and 2005, we did not generate any revenue.
During fiscal year ended December 31, 2006, we incurred general and
administrative expenses of approximately $3,918,002 compared to $204,026
incurred during fiscal year ended December 31, 2005 (an increase of $3,713,976).
These general and administrative expenses incurred during fiscal year ended
December 31, 2006 consisted of: (i) investor relations expenses of $112,744
(2005: $50,000); (ii) consulting expenses of $346,992 (2005: $90,000); (iii)
management fees of $311,707 (2005: $-0-); (iv) impairment oil and gas property
expense of $1,273,410 (2005: $-0-); (v) management stock based compensation
relating to the valuation of stock options granted to our officers and directors
of $1,527,170 (2005: $-0-); (vi) office and general of $176,883 (2005: $12,954);
and (vii) professional fees of $169,095 (2005: $51,072).
30
General and administrative expenses incurred during fiscal year ended December
31, 2006 increased primarily due to the increase in operating costs associated
with the increased acquisition and development of our oil and gas properties and
related infrastructure and overall corporate activity and our decision to record
the impairment of several of our properties totaling $1,273,410. Investor
relations expenses incurred during fiscal year ended December 31, 2006 primarily
increased relating to corporate marketing and increased business operations
pertaining to investor awareness. Consulting expenses and management fees
incurred during fiscal year ended December 31, 2006 increased substantially
pertaining to the increase in acquisition and development of our oil and gas
properties and related contracted services. Stock based compensation relating to
management fees, consulting fees and wages and benefits incurred during fiscal
year ended December 31, 2006 substantially increased due to the recording of the
non-cash expense of $1,527,170 in connection with the grant of stock options to
our officers/directors, employees and consultants. General and administrative
expenses generally include corporate overhead, financial and administrative
contracted services, marketing, and consulting costs.
Of the $3,918,002 incurred as general and administrative expenses during fiscal
year ended December 31, 2006, we incurred certain amounts payable to
International Market Trend, Inc. ("IMT") as follows: (i) an aggregate of
$167,500 in consulting fees; (ii) $42,500 for assisting us in obtaining a
listing on the Frankfurt Exchange; (iii) $125,000 for administration fees in
accordance with contractual provisions; (iv) $75,000 for implementation of an
investor awareness mailing program in Germany; (v) $7,500 for updating our
website and other identity related items; (vi) $8,275 for telephone, printing
and office expenses. As of December 31, 2006, we owed IMT $16,326, which is
unsecured and non-interest bearing and has no definite repayment terms. An
officer and director of IMT is also one of our shareholders.
An aggregate of $200,000 was incurred to American News Publishing, Inc. ("ANP"),
for the development of an investor communications package and as a deposit on
shareholder communications materials and direct mail distribution costs. Such
image advertising services were to include the creation of 16 page newsletter
with color photo content about us, printing, posting, and mailing of such
newsletter to approximately 150,000 intended readers interested in a new company
in the oil and gas industry. A formal written contract was never executed for
these services, and such services were to be performed at a date after we were
public based upon a verbal agreement. We abandoned our initiative regarding the
development of the above referenced investor communications package and
shareholder communications materials and implementation of the direct mail
communication program with ANP and have rescinded previously contracted services
with ANP. On January 20, 2006, ANP repaid to us the entire $200,000 fee in
connection with the rescission of the verbal agreement.
Of the $3,918,002 incurred as operating expenses during fiscal year ended
December 31, 2006, an aggregate of $274,207.33 was incurred payable to certain
officers and directors in management and consulting fees. Of the $274,207.33:
(i) we incurred to our prior Chief Executive Officer, William Bolles, an
aggregate of $22,500 in connection with services rendered to us in his capacity
as Chief Executive Officer; (ii) we incurred to our Chief Geologist an aggregate
of $60,000 and an additional $4,794.91 in connection with the terms and
provisions of the Markham Consulting Services Agreement; (iii) we incurred to
our Operations Manager an aggregate of $50,000 and an additional $4,794.91 in
connection with the terms and provisions of the Begley Services Agreement; (iv)
we incurred to one of our directors, Erik Essiger, an aggregate of $97,117.51 in
connection with performance of exploration related services; (v) we incurred to
31
our prior Chief Financial Officer, Grant Atkins, an aggregate of $35,000 in
connection with performance of administrative and financial services; and (vi)
we incurred to Robert MacLean an aggregate of $37,500 in connection with
services rendered to us. As at December 31, 2006, there were no amounts due and
owing to our directors and officers. See "Item 10. Executive Compensation" and
"Item 12. Certain Relationships and Related Transactions and Director
Independence."
Our net loss during fiscal year ended December 31, 2006 was ($3,918,002) or
($0.13) per share compared to a net loss of ($204,026) or ($0.00) per share
during fiscal year ended December 31, 2005. The weighted average number of
shares outstanding was 28,811,306 for fiscal year ended December 31, 2006
compared to 40,620,060 for fiscal year ended December 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
AS AT AS AT
DECEMBER 31, 2006 DECEMBER 31, 2005
Cash $5,824 $7,110
Prepaid $13,755 -
Working capital (deficiency) (453,649) 181,095
Total assets 329,649 507,110
Total liabilities (473,228) (26,015)
Stockholders' equity (deficiency) 143,579 481,095
FISCAL YEAR ENDED DECEMBER 31, 2006
As at fiscal year ended December 31, 2006, our current assets were $19,579 and
our current liabilities were $473,228, which resulted in a working capital
deficiency of ($453,649). As at fiscal year ended December 31, 2006, current
assets were comprised of: (i) $5,824 in cash; and (ii) $13,755 in prepaid. As at
fiscal year ended December 31, 2006, current liabilities were comprised of: (i)
$119,735 in accounts payable and accrued liabilities; (ii) $353,493 due to
related parties.
As at fiscal year ended December 31, 2006, our total assets were $329,649
comprised of: (i) $19,579 in current assets; and (ii) $310,070 in unproved oil
and gas properties. The increase in total assets during fiscal year ended
December 31, 2006 from fiscal year ended December 31, 2005 was primarily due to
the increase in valuation of the recently acquired unproved oil and gas
properties.
As at fiscal year ended December 31, 2006, our total liabilities were $473,228
comprised entirely of, current liabilities. The increase in liabilities during
fiscal year ended December 31, 2006 from fiscal year ended December 31, 2005 was
primarily due to the increase in amounts due to related parties.
Stockholders' equity decreased from $481,095 for fiscal year ended December 31,
2005 to $143,579 for fiscal year ended December 31, 2006.
32
CASH FLOWS FROM OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. For fiscal
year ended December 31, 2006, net cash flows used in operating activities was
($839,051), consisting primarily of a net loss of ($3,918,002). Net cash flows
used in operating activities was adjusted by $1,527,170 to reconcile the
non-cash expense of stock options granted and by $1,273,410 to reconcile
impairment of oil and gas properties and $200,000 to reconcile costs from
related parties and by ($13,755) to reconcile prepaid expenses and $28,083 to
reconcile costs to related parties and $64,043 to reconcile accounts payable and
accrued liabilities.
For fiscal year ended December 31, 2005, net cash flow used in operating
activities was $(398,389), consisting primarily of a net loss of $(204,026). The
change in net cash flows used in operating activities during fiscal year ended
December 31, 2006 from fiscal year ended December 31, 2005 related primarily to
the increase in the non-cash expense of stock options granted of $1,527,170
(2005: $-0-)and impairment of oil and gas properties of $1,273,410 (2005:
$-0-0). In fiscal year ended December 31, 2006, there was also an increase in
Due to related parties of $28,083 compared to $10,000 in the fiscal year ended
December 31, 2005 and accounts payable and accrued liabilities of $64,043
compared to ($4,363) in fiscal year ended December 31, 2005.
CASH FLOWS FROM INVESTING ACTIVITIES
For fiscal year ended December 31, 2006, net cash flows used in investing
activities was ($903,393) consisting of the acquisition of the oil and gas
properties. There were no cash flows used in investing activities in fiscal year
ended December 31, 2005.
CASH FLOWS FROM FINANCING ACTIVITIES
We have financed our operations primarily from the issuance of equity and debt
instruments. For fiscal year ended December 31, 2006, net cash flows from
financing activities was $1,741,158 compared to $35,000 for fiscal year ended
December 31, 2005, pertaining primarily to proceeds received from the sale of
our common stock and advances received from related parties. We completed a
private placement financing in October 2006 whereby we sold an aggregate of
944,105 Units at a price of $1.50 per Unit for gross proceeds of $1,416,158.
However, of this amount, $845,000 consisted of settlement of debt relating to
amounts previously advanced to us by one of our shareholders.
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
33
and capital expenditures relating to: (i) oil and gas operating properties; (ii)
possible drilling initiatives on current properties and future properties; and
(iii) future property acquisitions. We intend to finance these expenses with
further issuances of securities, and debt issuances. Thereafter, we expect we
will need to raise additional capital and generate revenues to meet long-term
operating requirements. Additional issuances of equity or convertible debt
securities will result in dilution to our current shareholders. Further, such
securities might have rights, preferences or privileges senior to our common
stock. Additional financing may not be available upon acceptable terms, or at
all. If adequate funds are not available or are not available on acceptable
terms, we may not be able to take advantage of prospective new business
endeavors or opportunities, which could significantly and materially restrict
our business operations.
During fiscal year ended December 31, 2006, we engaged in private placement
offerings under Regulation D and Regulation S of the Securities Act. Pursuant to
the terms of the private placements, we issued aggregate amounts of our
restricted common stock at subscription prices and under terms as follows:
o On October 16, 2006, we closed the October Private Placement Offering
whereby we issued an aggregate of 944,105 Units at a subscription
price of $1.50 per Unit for aggregate gross proceeds gross proceeds of
$1,416,157. However, of this amount, $845,000 consisted of settlement
of debt relating to amounts previously advanced to us by one of our
shareholders. The Warrants are exercisable at $3.00 per share
commencing from October 16, 2006 and ending on the day which is
earlier of: (i) twenty-four months from the date of issuance; or (ii)
eighteen months from the effective date of a proposed registration
statement. As of the date of this Annual Report, we have not filed any
registration statement under the Securities Act.
GOING CONCERN
The independent auditors' report accompanying our December 31, 2006 and December
31, 2005 financial statements contains an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern. The
financial statements have been prepared "assuming that we will continue as a
going concern," which contemplates that we will realize our assets and satisfy
our liabilities and commitments in the ordinary course of business.
MATERIAL COMMITMENTS
As of the date of this Annual Report, we do not have any material commitments
for fiscal year ended December 31, 2007.
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve
months.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Annual Report, we do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
34
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140", TO
SIMPLIFY and make more consistent the accounting for certain financial
instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", to permit fair value re-measurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on a
fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for the
Impairment or Disposal of Long-Lived Assets", to allow a qualifying
special-purpose entity to hold a derivative financial instrument that pertains
to a beneficial interest other than another derivative financial instrument.
SFAS No. 155 applies to all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006,
with earlier application allowed. The adoption of this statement is not expected
to have a material effect on our future reported financial position or results
of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
This statement requires all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable, and permits for
subsequent measurement using either fair value measurement with changes in fair
value reflected in earnings or the amortization and impairment requirements of
Statement No. 140. The subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value eliminates the necessity for
entities that manage the risks inherent in servicing assets and servicing
liabilities with derivatives to qualify for hedge accounting treatment and
eliminates the characterization of declines in fair value as impairments or
direct write-downs. SFAS No. 156 is effective for an entity's first fiscal year
beginning after September 15, 2006. The adoption of this statement is not
expected to have a material effect on our future reported financial position or
results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". The
objective of SFAS 157 is to increase consistency and comparability in fair value
measurements and to expand disclosures about fair value measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on our
future reported financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R)". This statement requires employers to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. This statement also requires an employer to measure the funded
35
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. The provisions of SFAS No. 158 are effective for
employers with publicly traded equity securities as of the end of the fiscal
year ending after December 15, 2006. The adoption of this statement is not
expected to have a material effect on our future reported financial position or
results of operations
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB No. 108 addresses how
the effects of prior year uncorrected misstatements should be considered when
quantifying misstatements in current year financial statements. SAB No. 108
requires companies to quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. SAB No. 108 is effective for periods ending after November
15, 2006. We are currently evaluating the impact of adopting SAB No. 108 but do
not expect that it will have a material effect on our financial position and
results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We are currently assessing the impact of SFAS
No. 159 on our financial position and results of operations.
ACCOUNTING FOR NATURAL GAS AND OIL PRODUCING ACTIVITIES
We use the full cost method to account for our natural gas and oil producing
activities. Under this accounting method, we capitalize substantially all of the
costs incurred in connection with the acquisition, development, and exploration
of natural gas and oil reserves in full cost pools maintained by geographic
areas, regardless of whether reserves are actually discovered and apply a
quarterly full cost ceiling test. Adverse changes in conditions (primarily gas
price declines) could result in permanent write-downs in the carrying value of
oil and gas properties as well as non-cash charges to operations, but would not
affect cash flows.
We have 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. As of December 31, 2006 management has determined that there are no
material asset retirement obligations.
PROPERTY, EQUIPMENT AND DEPRECIATION
We follow the full cost method of accounting for our 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
nonproductive 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
36
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. We currently operate solely in the U.S.A.
Depreciation and depletion of proved oil and gas properties is computed on the
units-of-production method based upon estimates of proved reserves, as
determined by independent consultants, with oil and gas being converted to a
common unit of measure based on their relative energy content.
The costs of acquisition and exploration of unproved oil and gas properties,
including any related capitalized interest expense, are not subject to
depletion, but are assessed for impairment either individually or on an
aggregated basis. The costs of certain unevaluated leasehold acreage are also
not subject to depletion. Costs not subject to depletion are periodically
assessed for possible impairment or reductions in value. If a reduction in value
has occurred, costs subject to depletion are increased or a charge is made
against earnings for those operations where a reserve base is not yet
established.
Estimated future removal and site restoration costs are provided over the life
of proven reserves on a units-of-production basis. Costs, which include
production equipment removal and environmental remediation, are estimated each
period by management based on current regulations, actual expenses incurred, and
technology and industry standards. The charge is included in the provision for
depletion and depreciation and the actual restoration expenditures are charged
to the accumulated provision amounts as incurred.
We apply 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.
ITEM 7. FINANCIAL STATEMENTS
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
FINANCIAL STATEMENTS
DECEMBER 31, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BALANCE SHEETS
STATEMENTS OF OPERATIONS
STATEMENT OF STOCKHOLDER'S EQUITY
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
37
DALE MATHESON
CARR-HILTON LABONTE LLP
DMCL CHARTERED ACCOUNTANTS
PARTNERSHIP OF:
VANCOUVER
Robert J. Burkart, Inc. James F. Carr-Hilton Ltd. Kenneth P. Chong Inc.
Alvin F. Dale Ltd. Barry S. Hartley, Inc. Reginald J. LaBonte Ltd.
Robert J. Matheson, Inc. Rakesh I. Patel Inc.
SOUTH SURREY
Michael K. Braun Inc. Peter J. Donaldson, Inc.
PORT COQUITLAM
Wilfred A. Jacobson Inc. Fraser G. Ross, Ltd. Brian A. Shaw Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
To the Stockholders and Board of Directors of Morgan Creek Energy Corp.:
We have audited the balance sheets of Morgan Creek Energy Corp. (an exploration
stage company) as at December 31, 2006 and 2005 and the statements of
operations, stockholders' equity and cash flows for the years then ended and for
the period from inception on October 19, 2004 to December 31, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2006 and 2005
and the statements of operations, stockholders' equity and cash flows for the
years then ended and for the period from inception on October 19, 2004 to
December 31, 2006 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, to date the Company has not generated revenues since
inception, has incurred losses in developing its business, and further losses
are anticipated. The Company requires additional funds to meet its obligations
and finance its operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in this
regard are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
DALE MATHESON CARR-HILTON LABONTE LLP
CHARTERED ACCOUNTANTS
March 30, 2007
Vancouver, B.C.
VANCOUVER SUITE 1500 - 1140 WEST PENDER STREET, VANCOUVER, B.C., CANADA
V6E 4G1, TEL: 604 687 4747 FAX: 604 689 2778 MAIN RECEPTION
SOUTH SURREY Suite 301 - 1656 Martin Drive, White Rock, B.C., Canada V4A 6E7,
Tel: 604 531 1154 Fax: 604 538 2613
PORT COQUITLAM Suite 700 2755 Lougheed Highway, Port Coquitlam, B.C., Canada
V3B 5V9, Tel: 604 941 8266 Fax: 604 941 0971
F1
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
BALANCE SHEETS
December 31, December 31,
2006 2005
_________________________________________________________________________________________________________________________________
ASSETS
CURRENT ASSETS
Cash $ 5,824 $ 7,110
Prepaid 13,755 -
Due from related party (Note 5) - 200,000
_________________________________________________________________________________________________________________________________
19,579 207,110
OIL AND GAS PROPERTIES, unproven (Note 3) 310,070 300,000
_________________________________________________________________________________________________________________________________
$ 329,649 $ 507,110
=================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 119,735 $ 16,015
Due to related parties (Note 6) 353,493 10,000
_________________________________________________________________________________________________________________________________
473,228 26,015
_________________________________________________________________________________________________________________________________
GOING CONCERN (Note 1)
STOCKHOLDERS' EQUITY (Note 4)
Common stock, 100,000,000 shares authorized with $0.001 par value
Issued and outstanding
29,814,905 common shares (December 31, 2005 - 40,670,800) 29,815 10,168
Additional paid-in-capital 3,972,363 698,682
Deficit accumulated during exploration stage (4,145,757) (227,755)
_________________________________________________________________________________________________________________________________
143,579 481,095
_________________________________________________________________________________________________________________________________
$ 329,649 $ 507,110
=================================================================================================================================
The accompanying notes are an integral part of these financial statements.
F2
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
Year ended Year ended October 19, 2004
December 31, December 31, (inception) to
2006 2005 December 31, 2006
_________________________________________________________________________________________________________________________________
GENERAL AND ADMINISTRATIVE EXPENSES
Investor relations $ 112,744 $ 50,000 $ 152,954
Consulting fees 346,992 90,000 438,467
Management fees 311,707 - 311,707
Management fees - stock based compensation 1,527,170 - 1,527,170
Impairment of oil and gas properties (Note 3(a), (b), (c) and (d)) 1,273,410 - 1,273,410
Office and general 176,884 12,954 200,105
Professional fees 169,095 51,072 241,944
_________________________________________________________________________________________________________________________________
NET LOSS $ (3,918,002) $ (204,026) $ (4,145,757)
======================================================================== ================= ================== ===================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.14) $ (0.01)
======================================================================== ================= ==================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING-BASIC AND DILUTED 28,811,306 40,620,060
======================================================================== ================= ==================
The accompanying notes are an integral part of these financial statements.
F3
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM OCTOBER 19, 2004 (INCEPTION) TO DECEMBER 31, 2006
Common Stock Deficit
accumulated
Additional during
Number Paid in exploration Stockholders'
of Shares Amount Capital stage Equity
________________________________________________________________________________________________________________________________
Balance, October 19, 2004 - $ - $ - $ - $ -
Common stock issued for oil and gas property at $0.025
per share - November 19, 2004 24,000,000 6,000 594,000 - 600,000
Capital distribution to founding share holder on
acquisition of oil and gas property (Note 3) - - (600,000) - (600,000)
Common stock issued for cash at $0.025 per share
-November 26, 2004 and December 15, 2004 13,750,000 3,438 340,312 - 343,750
Common stock issued for cash at $0.125 per share
-December 15, 2004 2,640,800 660 329,440 - 330,100
Net loss for the period (23,729) (23,729)
________________________________________________________________________________________________________________________________
Balance, December 31, 2004 40,390,800 650,121
10,098 663,752 (23,729)
Common stock issued for cash at $0.125 per share -
March 9, 2005 280,000 70 34,930 - 35,000
Net loss for the year - - - (204,026) (204,026)
________________________________________________________________________________________________________________________________
Balance, December 31, 2005 40,670,800 10,168 698,682 (227,755) 481,095
Forward stock split 2:1, May 10, 2006 - 10,168 (10,168) - -
Forward stock split 2:1, August 8, 2006 - 20,335 (20,335) - -
Common stock issued for cash at $1.50 per share
October 16, 2006 944,105 944 1,415,214 - 1,416,158
Common stock issued for oil and gas property at $1.75
per share - October 17, 2006 (Note 3) 200,000 200 349,800 - 350,000
Stock-based compensation - - 1,527,170 - 1,527,170
Restricted common shares cancelled - December 19, 2006 (12,000,000) (12,000) 12,000 - -
Net loss for the year - - - (3,918,002) (3,918,002)
________________________________________________________________________________________________________________________________
Balance, December 31, 2006 29,814,905 $ 29,815 $3,972,363 $(4,145,757) $ 143,579
================================================================================================================================
The accompanying notes are an integral part of these financial statements.
F4
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
October 19, 2004
Year ended Year ended (inception) to
December 31, December 31, December 31,
2006 2005 2006
_______________________________________________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year $ (3,918,002) $ (204,026) $ (4,145,757)
Adjustments to reconcile net loss to net cash used in operating
activities:
- Stock based compensation 1,527,170 - 1,527,170
- Impairment of oil and gas properties (Note 3(e)) 1,273,410 - 1,273,410
- Due from related party 200,000 - -
- Prepaid expenses (13,755) - (13,755)
- Due to related parties 10,000 38,083
28,083
- Accounts payable and accrued liabilities 64,043 (4,363) 80,058
_______________________________________________________________________________________________________________________________
NET CASH USED IN OPERATING ACTIVITIES (839,051) (398,389) (1,240,791)
_______________________________________________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of oil and gas properties, net of recovery (903,393) - (1,203,393)
_______________________________________________________________________________________________________________________________
NET CASH FLOWS USED IN INVESTING ACTIVITIES (903,393) - (1,203,393)
_______________________________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on sale of common stock 1,416,158 35,000 2,125,008
Advances from related parties 325,000 - 325,000
_______________________________________________________________________________________________________________________________
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,741,158 35,000 2,450,008
_______________________________________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH (1,286) (363,389) 5,824
CASH, BEGINNING OF YEAR 7,110 370,499 -
_______________________________________________________________________________________________________________________________
CASH, END OF YEAR $ 5,824 $ 7,110 $ 5,284
===============================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION AND
NONCASH INVESTING AND FINANCING ACTIVITIES:
Cash paid for interest $ - $ - $ -
Cash paid for income taxes $ - $ - $ -
Common stock issued for acquisition of oil and gas property (Note 3) $ 350,000 $ - $ 950,000
The accompanying notes are an integral part of these financial statements.
F5
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
________________________________________________________________________________
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.
During fiscal 2004, the Company completed the acquisition of prospects in the
Arkoma Basin in the State of Oklahoma, including a 75% working interest and a
56.25% net revenue interest in approximately 560 gross acres of two petroleum
and natural gas leases (the "Hurley Lease" and the "Chapman Lease"). Effective
December 31, 2006 the Company decided not to proceed with the development of the
Hurley/Chapman lease... During fiscal, 2006 the Company reached agreements to
acquire additional oil and gas prospects in Alabama ("Little Cedar Creek
Prospect") and in Louisiana ("Bayou Choctaw Project") which the Company
subsequently has determined not to proceed with further development. The Company
is preparing to drill its first well on the Quachita Prospect in Texas, the
Boggs 1 in May, 2007.
Effective May 10, 2006 the Company completed a common stock share forward split
by the issuance of 2 new shares for each 1 outstanding share of the Company's
common stock. Effective August 8, 2006, the Company completed a further common
stock share forward split by the issuance of 2 new shares for each 1 outstanding
share of the Company's common stock. All references in these financial
statements to number of common shares, price per share and weighted average
number of common shares outstanding have been adjusted to reflect these stock
splits on a retroactive basis, unless otherwise noted. On December 19, 2006 a
founding shareholder returned 12,000,000 restricted common shares back to the
Company's treasury, which were subsequently cancelled.
GOING CONCERN
The Company commenced operations on October 19, 2004 and has not realized any
revenues since inception. As of December 31, 2006 the Company has a total
deficit of $4,145,757 and a working capital deficit of $453,649. The ability of
the Company to continue as a going concern is dependent on raising capital to
fund ongoing losses 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
________________________________________________________________________________
ORGANIZATION
The Company was incorporated on October 19, 2004 in the State of Nevada. The
Company's fiscal year end is December 31. The Company's financial statements are
presented in US dollars.
BASIS OF PRESENTATION
These financial statements are presented in United States dollars and have been
prepared in accordance with United States generally accepted accounting
principles.
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for its oil and gas
operations whereby all costs related to the acquisition of methane, petroleum,
and natural gas interests are capitalized. Under this method, all productive and
non-productive costs incurred in connection with the exploration for and
development of oil and gas reserves are capitalized. Such costs include land and
lease acquisition costs, annual carrying charges of non-producing properties,
geological and geophysical costs, costs of drilling and equipping productive and
non-productive wells, and direct exploration salaries and related benefits.
Proceeds from the disposal of oil and gas properties are recorded as a reduction
of the related capitalized costs without recognition of a gain or loss unless
the disposal would result in a change of 20 percent or more in the depletion
rate. The Company currently operates solely in the U.S.A.
F6
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
________________________________________________________________________________
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 value. If a reduction in value
has occurred, costs subject to depletion are increased or a charge is made
against earnings for those operations where a reserve base is not yet
established.
Estimated future removal and site restoration costs are provided over the life
of proven reserves on a units-of-production basis. Costs, which include
production equipment removal and environmental remediation, are estimated each
period by management based on current regulations, actual expenses incurred, and
technology and industry standards. The charge is included in the provision for
depletion and depreciation and the actual restoration expenditures are charged
to the accumulated provision amounts as incurred.
The Company applies a ceiling test to capitalized costs which limits such costs
to the aggregate of the estimated present value, using a ten percent discount
rate of the estimated future net revenues from production of proven reserves at
year end at market prices less future production, administrative, financing,
site restoration, and income tax costs plus the lower of cost or estimated
market value of unproved properties. If capitalized costs are determined to
exceed estimated future net revenues, a write-down of carrying value is charged
to depletion in the period.
ASSET RETIREMENT OBLIGATIONS
The Company has adopted the provisions of SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
related oil and gas properties
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates. Significant areas requiring management's
estimates and assumptions are the determination of the fair value of
transactions involving common stock and financial instruments. Other areas
requiring estimates include deferred tax balances and asset impairment tests.
FINANCIAL INSTRUMENTS
The fair value of the Company's financial assets and financial liabilities
approximate their carrying values due to the immediate or short-term maturity of
these financial instruments.
LOSS PER COMMON SHARE
Basic earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Dilutive earnings per share reflects the potential
dilution of securities that could share in the earnings of the Company. Because
the Company does not have any potentially dilutive securities, diluted loss per
share is equal to basic loss per share.
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
F7
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
________________________________________________________________________________
INCOME TAXES (CONTINUED)
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the date
of enactment or substantive enactment. As at December 31, 2006 the Company had
net operating loss carryforwards, however, due to the uncertainty of
realization, the Company has provided a full valuation allowance for the
deferred tax assets resulting from these loss carryforwards.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS No.
123R), SHARE-BASED PAYMENT, which addresses the accounting for stock-based
payment transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments. In January 2005, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB)
No. 107, which provides supplemental implementation guidance for SFAS No. 123R.
SFAS No. 123R eliminates the ability to account for stock-based compensation
transactions using the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and instead
generally requires that such transactions be accounted for using a
fair-value-based method. The Company uses the Black-Scholes-Merton ("BSM")
option-pricing model to determine the fair-value of stock-based awards under
SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company has elected the
modified prospective transition method as permitted by SFAS No. 123R and
accordingly prior periods have not been restated to reflect the impact of SFAS
No. 123R. The modified prospective transition method requires that stock-based
compensation expense be recorded for all new and unvested stock options,
restricted stock, restricted stock units, and employee stock purchase plan
shares that are ultimately expected to vest as the requisite service is rendered
beginning on January 1, 2006 the first day of the Company's fiscal year 2006.
Stock-based compensation expense for awards granted prior to January 1, 2006 is
based on the grant date fair-value as determined under the pro forma provisions
of SFAS No. 123.
Prior to the adoption of SFAS No. 123R, the Company measured compensation
expense for its employee stock-based compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25. The Company applied the
disclosure provisions of SFAS No. 123 as amended by SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, as if the fair-value-based
method had been applied in measuring compensation expense. Under APB Opinion No.
25, when the exercise price of the Company's employee stock options was equal to
the market price of the underlying stock on the date of the grant, no
compensation expense was recognized.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS No. 155, "ACCOUNTING FOR CERTAIN HYBRID
FINANCIAL INSTRUMENTS-AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140", to
simplify and make more consistent the accounting for certain financial
instruments. SFAS No. 155 amends SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES", to permit fair value re-measurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on a
fair value basis. SFAS No. 155 amends SFAS No. 140, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS", to allow a qualifying
special-purpose entity to hold a derivative financial instrument that pertains
to a beneficial interest other than another derivative financial instrument.
SFAS No. 155 applies to all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006,
with earlier application allowed. The adoption of this statement is not expected
to have a material effect on the Company's future reported financial position or
results of operations.
In March 2006, the FASB issued SFAS No. 156, "ACCOUNTING FOR SERVICING OF
FINANCIAL ASSETS, AN AMENDMENT OF FASB STATEMENT NO. 140, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES".
This statement requires all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable, and permits for
subsequent measurement using either fair value measurement with changes in fair
value reflected in earnings or the amortization and impairment requirements of
Statement No. 140. The subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value eliminates the necessity for
entities that manage the risks inherent in servicing assets and servicing
liabilities with derivatives to qualify for hedge accounting treatment and
eliminates the characterization of declines in fair value as impairments or
direct write-downs. SFAS No. 156 is effective for an entity's first
F8
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
________________________________________________________________________________
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
________________________________________________________________________________
fiscal year beginning after September 15, 2006. The adoption of this statement
is not expected to have a material effect on the Company's future reported
financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS". The
objective of SFAS 157 is to increase consistency and comparability in fair value
measurements and to expand disclosures about fair value measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on the
Company's future reported financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, "EMPLOYERS' ACCOUNTING FOR
DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS - AN AMENDMENT OF FASB
STATEMENTS NO. 87, 88, 106, AND 132(R)". This statement requires employers to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. This statement also requires an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. The provisions of SFAS No. 158 are effective for
employers with publicly traded equity securities as of the end of the fiscal
year ending after December 15, 2006. The adoption of this statement is not
expected to have a material effect on the Company's future reported financial
position or results of operations
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of SFAS No. 159 on its financial position and results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS." SAB No. 108 addresses how
the effects of prior year uncorrected misstatements should be considered when
quantifying misstatements in current year financial statements. SAB No. 108
requires companies to quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. SAB No. 108 is effective for periods ending after November
15, 2006. The Company is currently evaluating the impact of adopting SAB No. 108
but does not expect that it will have a material effect on its financial
position and results of operations.
NOTE 3 - OIL AND GAS PROPERTIES
________________________________________________________________________________
(A) HURLEY-CHAPMAN PROSPECT
By agreement dated December 17, 2004, the Company acquired a 75% working
interest, 56.25% net revenue interest from its founding shareholder, in two
sections (560 acres) production held acreage in Okfuskee County, Oklahoma (the
"Hurley-Chapman Prospect") with the intention to develop coal bed methane gas
producing wells. The lease is unproved and was acquired for a cash payment of
$300,000 and the issuance of 6,000,000 common shares (pre May and August 2006
stock splits) valued at $600,000. For accounting purposes the Company recorded
the acquisition of the oil and gas interests at the related party vendor's cost
of $300,000 and the issuance of the 6,000,000 shares valued at $600,000 were
recorded as a capital distribution. After an internal review of the property the
Company has decided not to proceed with the development of this lease.
Consequently, the Company has recorded a $300,000 impairment charge to
operations in 2006
F9
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
________________________________________________________________________________
NOTE 3 - OIL AND GAS PROPERTIES (CONTINUED)
________________________________________________________________________________
(B) BAYOU CHOCTAW PROJECT - AGREEMENT PAYABLE
On July 10, 2006 the Company entered into a letter of intent to acquire a 25%
Working interest, 18.25% Net Revenue Interest, in two wells to be drilled in the
"Bayou Choctaw" oil and gas project in Iberville Parish, in the State of
Louisiana for:
(i) $250,000 ($125,000 paid on July 19, 2006 and $125,000 paid on
October 17, 2006) and 200,000 restricted common shares which will
have piggy back registration rights valued at $350,000 (issued); and
(ii) reimbursement of initial costs estimated at $162,500, payable
upon signing lease participation documents to be provided by the
operator upon drilling ; and
(iii) participation in a 3D-seismic survey which is estimated to cost
approximately $425,000. To date the 3D-seismic survey has not been
initiated.
The Company has reviewed this lease option and has determined that until further
information previously requested is obtained it will not proceed with any
further development on this lease. Under the terms of the letter of intent the
Company was to obtain certain information regarding the property and was to sign
a lease participation document. To date the Company has not received the
required information and has not signed the lease participation document and as
a consequence management has determined that there are no further financial
liabilities to the Company under the Agreement. As a result of the uncertainty
of realization, the Company has recorded the costs incurred to date of $600,000
as an impairment charge to operations.
(C) BROWDER BARNETT SHALE LEASE
On July 24, 2006 the Company acquired a 100% Working Interest, 74% Net Revenue
Interest, in the "Browder" Barnett Shale oil and gas project in Cooke County, in
the State of Texas. The lease is unproven and was acquired for $146,820. On
November 6, 2006 the Company sold a 50% working interest in this lease for
$73,410 which has been recorded as a recovery of oil and gas property costs.
The Company has determined after an internal review by its senior geologist and
a review of wells recently completed in the area that it will not proceed with
the development of this lease. Consequently, the Company has recorded a $73,410
impairment charge to operations.
(D) LITTLE CEDAR CREEK PROSPECT
On August 11, 2006 the Company entered into an agreement to acquire an aggregate
of 103 acres of oil and gas development leases in Conecuh County, Alabama for a
five year term, in consideration for $1,000,000. On August 11, 2006 the Company
paid a non-refundable deposit of $250,000. The balance of $750,000 was subject
to due diligence by the Company however, pursuant to the terms of the agreement
it was due no later than October 15, 2006.
On September 18, 2006 the Company entered into an agreement to acquire an
additional 385 acres of development leases in Conecuh County, Alabama for a five
year term, in consideration for $385,000 plus approximately 171,000 shares of
the Company's restricted common stock. The agreement stipulated a non-refundable
cash deposit of $150,000 payable on or before September 22, 2006. On September
28, 2006 the Company paid a non-refundable deposit of $50,000. The balance of
the funds and shares payable were subject to due diligence. The leases are
subject to a royalty of 20% and an additional over-riding royalty interest of
2.50%.
After completing due diligence on each of the 103 acres of oil and gas targeted
development leases in the Cedar Creek Field located in Conecuh County and the
further 385 acres of additional leases, the Company decided not to complete the
acquisition of any Cedar Creek Field acreage. As a result, the additional
consideration payable under the agreements was not payable and the aggregate
$300,000 non- refundable deposit paid has been recorded as an impairment charge
to operations.
(E ) QUACHITA PROSPECT
During the year ended December 31, 2006 the Company leased various properties
totalling approximately 2,035 acres within the Quachita Trend within the state
of Texas for a five year term in consideration for $310,071.
F10
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
________________________________________________________________________________
NOTE 4 - STOCKHOLDERS' EQUITY
________________________________________________________________________________
(A) SHARE CAPITAL
The Company's capitalization is 100,000,000 common shares with a par value of
$0.001 per share.
On May 10, 2006, the directors of the Company approved a special resolution to
undertake a forward split of the common stock of the Company on a 2 new shares
for 1 old share basis whereby 10,167,700 common shares were issued pro-rata to
shareholders of the Company as of the record date on May 10, 2006.
On July 26, 2006, the directors of the Company approved a special resolution to
undertake a further forward split of the common stock of the Company on a 2 new
shares for 1 old share basis whereby 20,335,400 common shares were issued
pro-rata to shareholders of the Company as of the record date on August 8, 2006.
All references in these financial statements to number of common shares, price
per share and weighted average number of common shares outstanding prior to the
2:1 forward stock split on May 10, 2006 and the 2:1 forward split on August 8,
2006 have been adjusted to reflect these stock splits on a retroactive basis,
unless otherwise noted.
On December 19, 2006 a founding shareholder of the Company returned 12,000,000
restricted shares of common stock to treasury and the shares were subsequently
cancelled by the Company. The shares were returned to treasury for no
consideration to the shareholder
(B) PRIVATE PLACEMENTS
On November 26, 2004 the Company issued 1,550,000 shares of common stock at
$0.10 per share for proceeds of $155,000.
On December 15, 2004 the Company issued 1,887,500 shares of common stock at
$0.10 per share for proceeds of $188,750 and 660,200 shares of common stock at
$0.50 per share for proceeds of $330,100.
On March 9, 2005 the Company issued 70,000 shares of common stock at a price of
$0.50 per share for proceeds of $35,000.
On October 16, 2006 the Company completed a private placement consisting of
944,105 units with each unit comprised of one common share at $1.50 per share
for proceeds of $1,416,158. The units consist of one common share and one
non-transferable share purchase warrant exercisable at $3.00 per share for the
period commencing on October 16, 2006 and ending on the day which is earlier of
24 months from the date of issuance of the units or 18 months from the effective
date of a planned registration statement. Of this private placement, 563,333 of
the units issued were in exchange for $845,000 previously advanced to the
Company by a shareholder. The estimated fair value of the warrants at the date
of grant of $592,210 was determined using the Black-Scholes option pricing model
with an expected life of 2 years, risk free interest rate of 4.49%, a dividend
yield of 0% and an expected volatility of 153%.
(C) SHARE PURCHASE WARRANTS
There were no share purchase warrants issued or outstanding in 2005. Share
purchase warrants outstanding as of December 31, 2006 are:
____________________________________________________________________________________________________________________
Weighted average remaining
Exercise Weighted average price Number of warrants to purchase shares In contractual life (in years)
____________________________________________________________________________________________________________________
$3.00 $3.00 944,105 1.80
____________________________________________________________________________________________________________________
F11
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
________________________________________________________________________________
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
________________________________________________________________________________
(C) SHARE PURCHASE WARRANTS (CONTINUED)
A summary of the Company's stock purchase warrants as of December 31, 2006 and
changes during the year is presented below:
________________________________________________________________________________________________________________________________
Weighted average exercise Weighted average remaining
Number of Warrants Price per share In contractual life (in years)
________________________________________________________________________________________________________________________________
Outstanding at December, 2005 - - -
________________________________________________________________________________________________________________________________
Issued 944,105 $ 3.00 1.80
________________________________________________________________________________________________________________________________
Expired - - -
________________________________________________________________________________________________________________________________
Exercised - - -
________________________________________________________________________________________________________________________________
BALANCE DECEMBER 31, 2006 944,105 $ 3.00 1.80
________________________________________________________________________________________________________________________________
NOTE 5 - STOCK OPTION PLAN
________________________________________________________________________________
On April 3, 2006 the Board of Directors of the Company ratified, approved and
adopted a Stock Option Plan for the Company in the amount of 5,000,000 shares
with an exercisable period up to 10 years. In the event an optionee ceases to be
employed by or to provide servies to the Company for reasons other than cause,
any Stock Option that is vested and held by such optionee maybe exercisable
within up to ninety calendar days after the effective date that his position
ceases. No Stock Option granted under the Stock Option Plan is transferable. Any
Stock Option held by an optionee at the time of his death may be exercised by
his estate within one year of his death or such longer period as the Board of
Directors may determine. On December 12, 2006 the Board of Directors of the
Company ratified and approved under the Company's existing Stock Option Plan the
issuance of 1,850,000 shares for five years at $1.10 per share.
On December 12, 2006, the Company granted 1,350,000 stock options to officers
and directors and 500,000 to management of the Company at $1.10 per share. The
term of these options are five years. The total fair value of these options at
the date of grant was $1,527,170 or $1,114,421 and $412,740 respectively, and
was estimated using the Black-Scholes option pricing model with an expected life
of 3 years, a risk free interest rate of 4.49%, a dividend yield of 0% and
expected volatility of 187% and has been recorded as a stock based compensation
expense in the year.
A summary of the Company's stock options as of December 31, 2006 and changes
during the year ended is presented below: There were no stock options granted or
exercised in fiscal 2005.
_______________________________________________________________________________________________________________________________
Number of Options Weighted average exercise Weighted average remaining
Price per share Contractual life (in years)
______________________________________________________________________________________________________________________________
Outstanding at December 31, 2005 - - -
_______________________________________________________________________________________________________________________________
Granted 1,850,000 $1.10 4.95
_______________________________________________________________________________________________________________________________
Exercised - - -
_______________________________________________________________________________________________________________________________
OUTSTANDING AT DECEMBER 31, 2006 1,850,000 $1.10 4.95
_______________________________________________________________________________________________________________________________
NOTE 6 - RELATED PARTY TRANSACTIONS
________________________________________________________________________________
INTERNATIONAL MARKET TREND, INC. ("IMT")
An officer and director of IMT, a private company, is a shareholder of the
Company. During the year ended December 31, 2006 the Company paid IMT consulting
expenses of $167,500 (2005 - $20,000), including $42,500 (2005 - $nil) for
assisting the Company to obtain a listing on the Frankfurt Exchange and $125,000
for administration fees as per contract., The Company also paid IMT another
$75,000 (2005 - $nil) for implementing an investor awareness mailing program in
Germany, $7,500 (2005 - $nil) for updating the Company's web site and other
identity related items as well as approximately $8,275 for related expenses. As
of December 31, 2006 the Company owed IMT $16,326 which amount is unsecured and
non-interest bearing, and has no definite repayment terms.
F12
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
________________________________________________________________________________
NOTE 6 - RELATED PARTY TRANSACTIONS (CONTINUED)
________________________________________________________________________________
During the year ended December 31, 2006 a shareholder of the Company who is also
an officer and director of IMT advanced $40,000 to the Company. These advances
are non-interest bearing, unsecured and have no definite repayment terms. On
October 18, 2006, the advances were repaid.
During 2006 a shareholder of the Company advanced $1,170,000 to the Company. On
October 16, 2006, $845,000 was converted to 563,333 restricted common shares of
the Company at $1.50 per share plus a two year warrant entitling the warrant
holder to purchase 563,333 additional common shares at $3.00 per share. The
balance of $325,000 is subject to interest at 8% per annum and has no definite
repayment terms. As of December 31, 2006 total accrued interest was $1,211.
Subsequent to the year end an additional $279,500 was advanced to the Company by
the same shareholder under the same terms and conditions.
MANAGEMENT FEES
During the year ended December 31, 2006, the Company paid officer(s) and
director(s) $302,117 for management fees (2005-$15,000). As of December 31, 2006
two management personnel of the Company were owed $10,956 for fees and expenses.
On January 4, 2007 the fees and expenses were paid.
As part of their compensation agreement the Company's chief Geologist and
Operations Manager (hereafter referred to as "Executives") each receives and is
assigned at time of acquisition up to a 1.5% overriding royalty interest in any
oil and gas properties which are directly introduced by the Executives to the
Company. During the year ended December 31, 2006 the Company recorded related
additional compensation to the Executives of the estimated fair value of $9,590
(December 2005 - $nil).
AMERICAN NEWS PUBLISHING INC. ("ANP")
During the year ended December 31, 2005 the Company advanced $200,000 to ANP for
Investor relations services. The services were subsequently cancelled and ANP
agreed to return the $200,000 to the Company. On January 20, 2006 the funds were
repaid to the Company in full. An officer and director of ANP, a private
company, is also an officer and director of a corporate shareholder of the
Company.
NOTE 7 - INCOME TAXES
________________________________________________________________________________
The Company has adopted the FASB No. 109 for reporting purposes. As of December
31, 2006, the Company had net operating loss carry forwards of approximately
$2,618,600 that may be available to reduce future years' taxable income through
2026. Future tax benefits which may arise as a result of these losses have not
been recognized in these financial statements, as their realization is
determined not likely to occur and accordingly, the Company has recorded a
valuation allowance for the deferred tax asset relating to these tax loss
carryforwards.
The Company reviews its valuation allowance requirements on an annual basis
based on projected future operations. When circumstances change and this causes
a change in management's judgment about the recoverability of future tax assets,
the impact of the change on the valuation allowance is generally reflected in
current income.
A reconciliation of income tax computed at the federal and state statutory tax
rates and the Company's effective tax rate is as follows:
Year ended Year ended
December 31, 2006 December 31, 2005
________________________________________________________________________________________________
Federal income tax provision at statutory rate 35.0% 35.0%
States income tax provision at statutory rates,
net of federal income tax effect 3.0% 7.0%
________________________________________________________________________________________________
Total income tax provision 38.0% 42.0%
________________________________________________________________________________________________
F13
MORGAN CREEK ENERGY CORP.
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
________________________________________________________________________________
NOTE 7 - INCOME TAXES (CONTINUED)
________________________________________________________________________________
The actual income tax provisions differ from the expected amounts calculated by
applying the combined federal and state corporate income tax rates to the
Company's loss before income taxes. The components of these differences are as
follows:
2006 2005
____________________________________________________________________________________
Loss before income taxes $(3,918,002) $ (204,026)
Corporate tax rate 38.00% 42.00%
____________________________________________________________________________________
Expected tax expense (recovery) (1,488,841) (85,690)
Increase (decrease) resulting from:
Non-deductible stock option expenses 580,325 -
Valuation allowance 908,516 85,690
____________________________________________________________________________________
Future income tax provision (recovery) $ - $ -
____________________________________________________________________________________
The Company's deferred tax asset is as follows:
2006 2005
____________________________________________________________________________________
Long-term deferred tax asset
Net operating loss carry forwards $ 995,063 $ 95,657
Valuation allowance (995,063) 95,657
____________________________________________________________________________________
$ - $ -
____________________________________________________________________________________
As the criteria for recognizing future income tax assets have not been met due
to the uncertainty of realization, a valuation allowance of 100% has been
recorded for the current and prior year.
NOTE 8 - SUBSEQUENT EVENTS
________________________________________________________________________________
On January 30, 2007 that Company acquired a 100% working interest, 77% net
revenue interest, in two fully equipped South Texas oil leases; the Mata lease
in Webb County and the Peters Ranch located in Duval County for $55,000. Each 40
acre lease is expected to be productive after completion of the rework program
and the addition of extra equipment.
(Refer to Note 6.)
F14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Our principal independent accountant from inception to current date is Dale
Matheson Carr-Hilton Labonte LLP, Chartered Accountants, 1500-1140 West Pender
Street, Vancouver, British Columbia V6E 4G1.
ITEM 8A. CONTROLS AND PROCEDURES
FINANCIAL DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was conducted under the supervision and with the participation of
our management, including Marcus Johnson, our Chief Executive Officer ("CEO")
and D. Bruce Horton, our Chief Financial Officer ("CFO"), of the effectiveness
of the design and operation of our disclosure controls and procedures as of
December 31, 2006. Based on that evaluation, Messrs. Johnson and Horton
concluded that our disclosure controls and procedures were effective as of such
date to ensure that information required to be disclosed in the reports that we
file or submit under the Exchange Act, is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms. Such officers
also confirm that there was no change in our internal control over financial
reporting during the year ended December 31, 2006 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
AUDIT COMMITTEE REPORT
The Board of Directors has established an audit committee. The members of the
audit committee are Mr. Marcus Johnson, Mr. Steven Jewett and Mr. D. Bruce
Horton and. One of the three members of the audit committee is "independent"
within the meaning of Rule 10A-3 under the Exchange Act. The audit committee was
organized in November 20, 2004 and operates under a written charter adopted by
our Board of Directors.
The audit committee has reviewed and discussed with management our audited
financial statements as of and for fiscal year ended December 31, 2006. The
audit committee has also discussed with Dale Matheson Carr-Hilton LaBonte LLP
the matters required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended, by the Auditing Standards Board
of the American Institute of Certified Public Accountants. The audit committee
has received and reviewed the written disclosures and the letter from Dale
Matheson Carr-Hilton LaBonte LLP required by Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees, as amended, and
has discussed with Dale Matheson Carr-Hilton LaBonte LLP their independence.
Based on the reviews and discussions referred to above, the audit committee has
recommended to the Board of Directors that the audited financial statements
referred to above be included in our Annual Report on Form 10-KSB for fiscal
year ended December 31, 2006 filed with the Securities and Exchange Commission.
ITEM 8B. OTHER INFORMATION
Not applicable.
38
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
All of our directors hold office until the next annual general meeting of the
shareholders or until their successors are elected and qualified. Our officers
are appointed by our board of directors and hold office until their earlier
death, retirement, resignation or removal.
Our directors and executive officers, their ages, positions held are as follows:
NAME AGE POSITION WITH THE COMPANY
Marcus M. Johnson 58 President, Chief Executive Officer/Principal
Executive Officer and a Director and Chairman of
the Board
D. Bruce Horton 62 Secretary/Treasurer, Chief Financial Officer,
Principal Accounting Officer, Stock Option Plan
Administrator and a Director
Thomas A. Markham II 56 Chief Geologist and a Director
Stephen Jewett 68 Director
Erik Essiger 41 Director
BUSINESS EXPERIENCE
The following is a brief account of the education and business experience of
each director, executive officer and key employee during at least the past five
years, indicating each person's principal occupation during the period, and the
name and principal business of the organization by which he or she was employed,
and including other directorships held in reporting companies.
MARCUS JOHNSON: Mr. Johnson has been our President and Chief Executive
Officer/Principal Executive Officer and a director and Chairman of our Board of
Directors since October 25, 2006. Mr. Johnson, AIA, has previously been active
in management in both the private and public sectors as a consultant to
management with an emphasis on investor relations and awareness. Mr. Johnson has
performed consulting services for Intergold Corporation, now known as Lexington
Resources, Inc., and Vega-Atlantic Corporation, now known as Transax
International Limited. Mr. Johnson is a professional architect and a member of
the American Institute of Architects. Mr. Johnson has been the professional
architectural consultant of record on various commercial projects and is a
consultant to Exterior Research & Design, LLC, where he is currently retained as
an expert for determining architectural management standards. Mr. Johnson is
also the chief executive officer and director to Geneva Resources, Inc. since
October 2006.
39
D. BRUCE HORTON has been one of our directors and our Secretary/Treasurer and
Chief Financial Officer and Principal Accounting Officer since August 21, 2006.
During the past five years, Mr. Horton has been active in the financial arena in
both the private and public sectors as an accountant and financial management
consultant with an emphasis on corporate financial reporting, financing and tax
planning. Mr. Horton has specialized in corporate management, re-organization,
merger and acquisition, international tax structuring, and public and private
financing for over thirty years. From 1972 through 1986, Mr. Horton was a
partner in a public accounting firm. In 1986, Mr. Horton co-founded the Clearly
Canadian Beverage Corporation, of which he was a director and chief financial
officer from June 1986 to May 1997. He is a principal consultant in Calneva
Financial Services Ltd. that provides accounting and financial management
consulting services as well as investment banking services focusing on venture
capital opportunities in Asia.
THOMAS ALDEN MARKHAM II: Mr. Markham has been our Chief Geologist and one of our
directors since August 21, 2006. Mr. Markham is a professional geologist
specializing evaluations and management of oil and gas plays in the
mid-continental U.S. Since receiving his Masters of Geology, Mr. Markham has
focused on oil and gas plays. He began his career working with BEPCO, ARCO and
then TENNECO, acting as geologist on a wide range of projects spanning over 12
years of development on leading plays including the Pinon, Allen Hill, Brunson
Ranch, J.D. Shale, Brown Bassett Extension and NYY projects. During this period,
he directed 15 Ph D-level geologists and managed exploration budgets up to $21
million. Mr. Markham has recently acted as Chief Geologist in charge of the
supervision and generation of a 21,000 acre Pennsylvanian gas play in the
Permian Basin. Mr. Markham was instrumental in the play's development and
finalized negotiations with the Osage Tribe of Oklahoma for drilling rights on
57-quarter sections (9,120 acres). He has been an independent oil and gas
geologist managing project generation and evaluation for various industry and
non-industry groups primarily in the Mid Continent. Mr. Markham has successfully
drilled and completed proprietary prospects (while providing the supervision of
seismic, leasing, drilling, completion, and production activities) of 88 oil and
gas wells (to 10,500') in Texas, New Mexico, and Oklahoma. He was the generating
geologist of a 5 TCFG overthrust play in Central Texas, he Finalized a New
Mexico San Andres stratigraphic play (50 to 100 MMBO at 4,000') and a Permian
Basin Devonian structural play and managed the screening and evaluation of
Springer - Atoka sub-basin prospects of the Anadarko Basin (3-D). Mr. Markham's
work has been published in the American Gas Journal and he has been invited on a
technical tour of the former Soviet Union to review oil and gas assets. He was
also guest speaker at the American Association of Petroleum Landman's (AAPL)
"Buying Oil and Gas Properties" seminar. He continues to carry out Reserve
Evaluation for non-industry groups including the FDIC (Federal Deposit Insurance
Corp. - Wichita and Dallas Branches) and the IRS (Internal Revenue Service). Mr.
Markham is not a director or officer of any other U.S. reporting company.
STEVE JEWETT has been one of our directors and a member of our Audit Committee
since October 2004. From 1978 to the current date, Mr. Jewett has been the owner
and independent operator of Stephen Jewett - Chartered Accountant. During his
career, Mr. Jewett was auditor of several public companies, and currently
focuses on tax related engagements. Mr. Jewett received his degree as a
Chartered Accountant from the Institute of Chartered Accountants of British
Columbia and is our Audit Committee's financial expert. Mr. Jewett is also
currently a director and audit committee member of Lexington Resources, Inc.
since April 30, 2004. Mr. Jewett is also a director and audit committee member
to Geneva Resources, Inc., since May 2006.
40
ERIK ESSIGER has been one of our directors since August 21, 2006. Mr. Essiger
has more than fifteen years of experience in corporate finance and lead advisory
services relating to strategic and commercial development projects across a wide
variety of sectors and including, in particular, within the industrial,
automotive, business services, retail and consumer goods sectors. In this
respect Mr. Essiger has performed various commercial and strategy services as
both an external consultant and as a board member and managing director of a
number of companies, including a venture capital company. During the past five
years Mr. Essiger has been: (i) the Managing Director and the founder of
Precisetech GmbH, a corporate finance advisory company focused on international
M&A transactions (from October 2004 to present); (ii) a member of the
Supervisory Board of Corix Capital AG (from December 2003 to present); (iii) the
Senior Manager, Transaction Services Strategy Group, with PricewaterhouseCoopers
AG, heading up the commercial and due diligence practice of that group in
Germany which provided services mainly to private equity clients of the firm
(from April 2003 to September 2004); and (iv) a member of the Executive Board
(Vorstand) of MultiMedia Technologies AG, a producer of set-top-boxes and a
company operating in the fields of interactive digital television and the
streaming media market (from July 2000 to July 2002) Mr. Essiger also has
extensive international experience in corporate restructuring; especially in
Germany, Russia, Hong Kong and Switzerland; and he was a member of the
German-Russian co-operation council. Mr. Essiger is also a director of Uranium
Energy Corp., a publicly traded company.
FAMILY RELATIONSHIPS
There are no family relationships among our directors or officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, none of our directors, executive officers or persons
that may be deemed promoters is or have been involved in any legal proceeding
concerning: (i) any bankruptcy petition filed by or against any business of
which such person was a general partner or executive officer either at the time
of the bankruptcy or within two years prior to that time; (ii) any conviction in
a criminal proceeding or being subject to a pending criminal proceeding
(excluding traffic violations and other minor offenses); (iii) being subject to
any order, judgment or decree, not subsequently reversed, suspended or vacated,
of any court of competent jurisdiction permanently or temporarily enjoining,
barring, suspending or otherwise limiting involvement in any type of business,
securities or banking activity; or (iv) being found by a court, the Securities
and Exchange Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law (and the judgment has
not been reversed, suspended or vacated).
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
As of the date of this Annual Report, Messrs. Johnson, Markham and Jewett have
been appointed as members to our audit committee. Two of the three members are
"independent" within the meaning of Rule 10A-3 under the Exchange Act and are in
addition financial experts. The audit committee operates under a written charter
adopted by the Board of Directors on November 20, 2004.
41
The audit committee's primary function is to provide advice with respect to our
financial matters and to assist the Board of Directors in fulfilling its
oversight responsibilities regarding finance, accounting, and legal compliance.
The audit committee's primary duties and responsibilities will be to: (i) serve
as an independent and objective party to monitor our financial reporting process
and internal control system; (ii) review and appraise the audit efforts of our
independent accountants; (iii) evaluate our quarterly financial performance as
well as our compliance with laws and regulations; (iv) oversee management's
establishment and enforcement of financial policies and business practices; and
(v) provide an open avenue of communication among the independent accountants,
management and the Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our directors and officers, and the
persons who beneficially own more than ten percent of our common stock, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Copies of all filed reports are required to be furnished to us
pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the
reports received by us and on the representations of the reporting persons, we
believe that these persons have complied with all applicable filing requirements
during the fiscal year ended December 31, 2006.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our Chief Executive
Officer and those executive officers that earned in excess of $100,000 during
fiscal year ended December 31, 2006 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
__________________________________________________________________________________________________________________________________
NON-EQUITY NON-QUALIFIED ALL OTHER
INCENTIVE PLAN DEFERRED COMPENSATION
COMPENSATION COMPENSATION
NAME AND STOCK EARNINGS
PRINCIPAL SALARY BONUS AWARDS OPTION TOTAL
POSITION YEAR ($) ($) ($) AWARDS ($) ($) ($) ($) ($)
__________________________________________________________________________________________________________________________________
Douglas
Humphries,
previous
President and
CEO 2006 -0-(1) -0- -0- --- --- --- --- -0-
__________________________________________________________________________________________________________________________________
William Bolles,
previous
President and
CEO 2006 22,500(1) -0- -0- --- --- --- 5,000 $27,500
__________________________________________________________________________________________________________________________________
Marcus Johnson,
current
President and
CEO 2006 -0-(1) -0- --- 412,748 --- --- --- $412,748
__________________________________________________________________________________________________________________________________
(1) This amount represent fees paid by us to the Named Executive Officer
during the past year pursuant to consulting services provided in
connection with their respective position as Chief Executive Officer.
42
During fiscal year ended December 31, 2006, we also paid certain
executive officers the following amounts, which did not exceed
$100,000 and, therefore, not required to be disclosed in the Summary
Compensation Table: (i) $35,000 to Grant Atkins, our previous Chief
Financial Officer; and (ii) $60,000 and an additional $4,794.91 in
accordance with the 1.5% royalty interest to Thomas Markham, our Chief
Geologist.
(2) This amount represents the fair value of these options at the date of
grant which was estimated using the Black-Scholes option pricing
model.
STOCK OPTIONS/SAW GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2006
The following table sets forth information as at December 31, 2006 relating to
options that have been granted to the Named Executive Officers:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS
__________________________________________________________________________________ _______________________________________________
Equity
Incentive Equity
Plan Incentive
Awards: Plan Awards:
Number Market Number of Market or
Equity of Value of Unearned Payout Value
Number of Number of Incentive Plan Shares Shares Shares, of Unearned
Securities Securities Awards: Number or Units or Units Units or Shares,
Underlying Underlying of Securities of Stock of Stock Other Units or
Unexercised Unexercised Underlying Option That That Rights That Other Rights
Options Options Unexercised Exercise Option Have Not Have Not Have Not That Have
Exercisable Unexercisable Unearned Options Price Expiration Vested Vested Vested Not Vested
Name (#) (#) (#) ($) Date (#) ($) (#) (#)
___________________________________________________________________________________________________________________________________
Marcus Johnson December 15,
President/CEO 500,000 -0- -0- 1.10 2011 -0- -0- -0- -0-
___________________________________________________________________________________________________________________________________
The following table sets forth information relating to compensation paid to our
directors in 2006:
DIRECTOR COMPENSATION TABLE
Change in
Pension
Value and
Fees Non-Equity Nonqualified
Earned or Incentive Deferred All
Paid in Stock Option Plan Compensation Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
___________________________________________________________________________________________________________________________________
Marcus
Johnson, (3)
Chairman -0- -0- $412,748 -0- -0- -0- $412,748
___________________________________________________________________________________________________________________________________
43
Thomas (1) -0- (3) -0- -0- -0- $477,542.91
Markham $64,794.91 $412,748
___________________________________________________________________________________________________________________________________
Erik Essinger (2) (3) -0- -0- -0- $303,491.51
97,117.51 $206,374
___________________________________________________________________________________________________________________________________
Steve Jewett -0- -0- (3) -0- -0- -0- $41,275
$41,275
___________________________________________________________________________________________________________________________________
D. Bruce -0- -0- (3) -0- -0- -0- $41,275
Horton $41,275
___________________________________________________________________________________________________________________________________
(1) Thomas Markham received these fess as executive compensation in
connection with his role as our Chief Geologist.
(2) Erik Essiger received this compensation for services rendered to us in
connection with business related consulting and promotional services
performed in Europe on our behalf.
(3) This amount represents the fair value of these options at the date of
grant which was estimated using the Black-Scholes option pricing
model.
EMPLOYMENT AND CONSULTING AGREEMENTS
MARKHAM CONSULTING SERVICES AGREEMENT
On approximately August 1, 2006, we entered into a month-to-month consulting
services agreement with Thomas Markham, our Chief Geologist (the "Markham
Consulting Services Agreement"). In accordance with the verbal terms and
provisions of the Markham Consulting Services Agreement: (i) Mr. Markham shall
provide to us all necessary services and perform all duties associated with his
executive position as Chief Geologist; (ii) we shall pay to Mr. Markham a
monthly fee of $10,000; and (iii) Mr. Markham shall receive a 1.5% royalty
interest in all properties Mr. Markham introduces to us which are subsequently
acquired by us. We anticipate memoralizing the terms and provisions of the
Markham Consulting Services Agreement in a written agreement.
During fiscal year ended December 31, 2006, we paid an aggregate of $60,000 to
Mr. Markham in accordance with the monthly fee and an additional $4,794.91 in
accordance with the amounts earned under the royalty interest
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
As of the date of this Annual Report, the following table sets forth certain
information with respect to the beneficial ownership of our common stock by each
stockholder known by us to be the beneficial owner of more than 5% of our common
stock and by each of our current directors and executive officers. Each person
has sole voting and investment power with respect to the shares of common stock,
except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise indicated. As of the
date of this Annual Report, there are 29,814,905 shares of common stock issued
and outstanding.
44
AMOUNT AND NATURE OF PERCENTAGE OF BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(1) OWNERSHIP
DIRECTORS AND OFFICERS:
Marcus Johnson 3,518,100 (2) 11.79%
2020 Prospect Way
Bellingham, Washington 98229
D. Bruce Horton 387,500 (3) 1.30
2443 Alder Street
Vancouver, British Columbia
Canada, V6H 4A4
Thomas Markham 1,125,000 (4) 3.77%
8801 Christian Court
Plano, Texas 75025
Erik Essiger 250,000 (5) 0.83%
P.O. Box 37491
Dubai
United Arab Emeriates
Steve Jewett 50,000 (6) 0.16%
1201-1633 West 8th Avenue
Vancouver, British Columbia
Canada V6J 5H7
All executive officers and directors as a group (5 5,330,600 (7) 17.87%
persons)
* Less than one percent.
(1) Under Rule 13d-3, a beneficial owner of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or shares: (i) voting
power, which includes the power to vote, or to direct the voting of
shares; and (ii) investment power, which includes the power to dispose
or direct the disposition of shares. Certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons
share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise
of an option) within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the
amount of shares outstanding is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of
these acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in this table does not necessarily
reflect the person's actual ownership or voting power with respect to
the number of shares of common stock actually outstanding as of the
date of this Annual Report. As of the date of this Annual Report, there
are 40,670,800 shares issued and outstanding. Beneficial ownership
amounts reflect the forward stock splits effective May 2006 and August
2006.
45
(2) This figure includes: (i) 3,018,100 shares of common stock; and (ii)
500,000 stock options to purchase 500,000 shares of our common stock at
an exercise price of $1.10 per share expiring on December 15, 2011.
(3) This figure includes: (i) 337,500 shares of common stock; and (ii)
50,000 stock options to purchase 50,000 shares of our common stock at
an exercise price of $1.10 per share expiring on December 15, 2011.
(4) This figure includes: (i) 625,000 shares of common stock; and (ii)
500,000 stock options to purchase 500,000 shares of our common stock at
an exercise price of $1.10 per share expiring on December 15, 2011.
(5) This figure includes 250,000 stock options to purchase 250,000 shares
of our common stock at an exercise price of $1.10 per share expiring on
December 15, 2011.
(6) This figure includes 50,000 stock options to purchase 50,000 shares of
our common stock at an exercise price of $1.10 per share expiring on
December 15, 2011.
(7) This figure includes: (i) 3,980,600 shares of common stock; and (ii)
1,350,000 stock options to purchase 1,350,000 shares of our common
stock at $1.10 per share expiring on December 15, 2011.
(8) This figure includes 2,500,000 shares of common stock.
CHANGES IN CONTROL
We are unaware of any contract, or other arrangement or provision, the operation
of which may at a subsequent date result in a change of control of our company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Except for the transactions described below, none of our directors, officers or
principal stockholders, nor any associate or affiliate of the foregoing, have
any interest, direct or indirect, in any transaction or in any proposed
transactions, which has materially affected or will materially affect us during
fiscal years ended December 31, 2006 and 2005.
EMPLOYMENT AND CONSULTING AGREEMENTS
MARKHAM CONSULTING SERVICES AGREEMENT
On approximately August 1, 2006, we entered into a month-to-month consulting
services agreement with Thomas Markham, our Chief Geologist (the "Markham
Consulting Services Agreement"). In accordance with the verbal terms and
provisions of the Markham Consulting Services Agreement: (i) Mr. Markham shall
provide to us all necessary services and perform all duties associated with his
executive position as Chief Geologist; (ii) we shall pay to Mr. Markham a
monthly fee of $10,000; and (iii) Mr. Markham shall receive a 1.5% royalty
interest in all properties Mr. Markham introduces to us which are subsequently
acquired by us. We anticipate memoralizing the terms and provisions of the
Markham Consulting Services Agreement in a written agreement.
46
ITEM 13. EXHIBITS
The following exhibits are filed as part of this Annual Report.
EXHIBIT NO. DOCUMENT
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Chapman Oil and Gas Lease (2)
4.2 Hurley Oil and Gas Lease (2)
4.3 Lease Assignment between Geneva Energy Corp.
And Morgan Energy Corp. dated December 17,
2004 (2)
4.4 Fletcher Lewis Letter (3)
4.5 Fletcher Lewis Consent dated December 31,
2004 (3)
4.6 American News Publishing Letter dated
January 13, 2006 (3)
10.1 Asset Purchase Agreement between Morgan
Creek Energy Corp. and Geneva Energy Corp.
Dated December 15, 2004 (1)
10.1 Charter of Audit Committee (1)
14 Code of Business Conduct (1)
31.1 Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act.
31.2 Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities Exchange Act.
32.1 Certification of Chief Executive Officer and
Chief Financial Officer Under Section 1350
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act.
(1) Incorporated by reference from Form SB-2 filed with the Commission on April
11, 2005.
(2) Incorporated by reference from Form SB-2/A filed with the Commission on June
14, 2005.
(3) Incorporated by referenced from Form SB-2/A filed with the Commission on
January 13, 2006.
47
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
During fiscal year ended December 31, 2006, we incurred approximately $48,400 in
fees to our principal independent accountant for professional services rendered
in connection with the audit of our financial statements for fiscal year ended
December 31, 2006 and for the review of our financial statements for the
quarters ended March 31, 2006, June 30, 2006 and September 30, 2006.
During fiscal year ended December 31, 2005, we incurred approximately $17,500 in
fees to our principal independent accountant for professional services rendered
in connection with the audit of our financial statements for fiscal year ended
December 31, 2005 and for the review of our financial statements for the
quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.
During fiscal year ended December 31, 2006, we did not incur any other fees for
professional services rendered by our principal independent accountant for all
other non-audit services which may include, but is not limited to, tax-related
services, actuarial services or valuation services.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MORGAN CREEK ENERGY CORP.
Dated: April 13, 2007 By: /s/ MARCUS JOHNSON
__________________________________
Marcus Johnson, President/Chief
Executive Officer
Dated: April 13, 2007 By: /s/ D. BRUCE HORTON
__________________________________
D. Bruce Horton, Treasurer/Chief
Financial Officer
48