As filed with the Securities and Exchange Commission on May 15, 2000
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Securities And Exchange Commission
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934 For The Three-Month Period Ended March 31, 2000; Or
[_] Act Of 1934 For The Transition Period From ________ To _______
Commission File No. 0-24027
PINNACLE OIL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Nevada 61-1126904
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 750 Phoenix Place, 840-7th Avenue, S.W., Calgary, Alberta, Canada T2P 3G2
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (403) 264-7020
Indicate by check mark whether the registrant (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 registration was
required to file such Reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
13,070,016 shares of common stock, par value $0.001 per share,
as of May 12, 2000
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PINNACLE OIL INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10--Q
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION............................................ 1
ITEM 1. FINANCIAL STATEMENTS............................................. 1
Consolidated Balance sheets...................................... 1
Consolidated Statements Of Loss.................................. 2
Consolidated Statements Of Shareholders' Equity(Deficit)......... 3
Consolidated Statements Of Cash Flows............................ 5
Notes To Financial Statements.................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 16
General.......................................................... 16
Overview......................................................... 16
Capital Requirements............................................. 18
Results Of Operations............................................ 19
Liquidity And Capital Resources.................................. 21
Other Matters.................................................... 22
Uncertainties And Other Factors That May Affect Our Future
Results And Financial Condition.................................. 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 34
Oil And Gas Price Fluctuations................................... 34
Currency Fluctuations............................................ 34
Interest Rate Fluctuations....................................... 35
ITEM II OTHER INFORMATION................................................ 35
ITEM 1. LEGAL PROCEEDINGS................................................ 35
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 35
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................. 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 35
ITEM 5. OTHER INFORMATION................................................ 35
ITEM 6. EXHIBITS......................................................... 35
Exhibits......................................................... 35
Reports on Form 8--K............................................. 35
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Balance sheets
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
At March 31,
-------------------------
Assets 2000 1999
----------- -----------
Current assets:
Cash and cash equivalents......................... $ 9,375,858 $ 4,410,835
Accounts receivable............................... 161,581 126,577
Due from officers and employees................... 176,611 --
Prepaid expenses and other........................ 60,440 116,041
----------- -----------
Total current assets............................. 9,774,490 4,653,453
Note receivable from officer [note 4].............. 33,709 34,507
Unproved oil and natural gas properties
[notes 2(g) and 5]................................ 1,106,687 --
Other property and equipment, net of
accumulated depreciation and amortization
of $365,959 and $133,357, respectively
[notes 2(h) and 6]............................... 692,676 600,280
----------- -----------
Total assets................................... $11,607,562 $ 5,288,240
=========== ===========
Liabilities And Shareholders' Equity
Current liabilities:
Trade payables.................................... $ 52,617 $ 97,151
Wages and employee benefits payable............... 105,844 23,767
Accrued oil and natural gas property costs........ 188,840 --
Other accrued liabilities......................... 116 18,904
----------- -----------
Total current liabilities........................ 347,417 139,822
Shareholders' equity:
Series "A" convertible preferred stock;
par value $0.001 per share, liquidation
preference $7.50 per share:
800,000 shares authorized; and 800,000
shares issued as of March 31, 2000 and
March 31, 1999 [note 8]........................ 800 800
Common stock, par value $0.001 per share:
50,000,000 shares authorized;
13,070,016 shares issued as of March 31, 2000;
12,431,983 shares issued as of March 31, 1999
[note 7]........................................ 13,070 12,432
Warrants [notes 8 and 9].......................... -- 1,132,000
Additional paid-in capital........................ 19,094,619 10,086,877
Deficit accumulated during the development stage.. (7,810,239) (6,083,691)
Accumulated other comprehensive loss.............. (38,105) --
----------- -----------
Total shareholders' equity....................... 11,260,145 5,148,418
----------- -----------
Total liabilities and shareholders' equity..... $11,607,562 $ 5,288,240
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets
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PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Loss
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
October 20,
1995
(inception) to
Three Months Ended March 31,
March 31, 2000
2000 1999 (cumulative)
----------- ----------- --------------
Operating expenses:
Administrative.............................................. $ 327,684 $ 196,870 $ 3,590,046
Amortization and depreciation [note 2(h)]................... 74,021 45,426 368,015
Research and development [note 2(i)]........................ 64,641 49,114 599,042
Survey support [note 2(j)].................................. 84,049 44,589 686,028
Survey operations and data analysis, net of amounts
reimbursable by joint-venture partners of $20,278 and
$24,447, respectively [note 2(k)].......................... 53,333 19,865 113,713
Write-down of assets........................................ -- -- 17,662
----------- ----------- -----------
Total operating expenses.................................. (603,728) (355,864) (5,374,506)
Operating loss............................................... (603,728) (355,864) (5,374,506)
Other income (expense):
Interest cost on promissory notes........................... -- -- (124,299)
Interest income............................................. 112,830 50,856 736,260
Other income................................................ -- -- 19,231
Settlement of damages....................................... -- -- 157,500
----------- ----------- -----------
Total other income (expenses)............................. 112,830 50,856 788,692
Net loss for the period...................................... (490,898) (305,008) (4,585,814)
Other comprehensive income (loss):
Foreign currency translation adjustments.................... (8,702) 17,720 (38,105)
----------- ----------- -----------
Comprehensive loss for the period............................ $ (499,600) $ (287,288) $(4,623,919)
=========== =========== ===========
Basic and diluted loss per share [note 2(m)]................. $ (0.04) $ (0.02)
=========== ===========
Weighted average shares outstanding.......................... 12,863,050 12,430,761
=========== ===========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements of loss
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PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Shareholders' Equity(Deficit)
(Unaudited)
(Expressed in U.S. Dollars)
Accumulated Series "A" Deficit
Other Convertible Common Stock Accumulated
Compre- Common Stock Preferred Stock Warrants Additional During the
hensive ------------------ --------------- ----------------- Paid-in Development
Income Shares Amount Shares Amount Number Amount Capital Stage
---------- ---------- ------- ------- ------ ------- --------- ---------- ------------
1995:
Issued at inception for cash
at $0.001 per share on
October 20, 1995................. $ -- 5,000,000 $ 5,000 -- $ -- -- $ -- $ -- $ --
Net loss for fiscal 1995.......... -- -- -- -- -- -- -- -- (53,696)
Net other comprehensive
loss for fiscal 1995............. -- -- -- -- -- -- -- -- --
---------- ---------- ------- ------- ------ ------- --------- ---------- ------------
Balance -- December 31, 1995... -- 5,000,000 5,000 -- -- -- -- -- (53,696)
1996:
Issued on reverse acquisition
on January 30, 1996.............. -- 5,968,281 5,968 -- -- -- -- (5,968) --
Issued for cash at $1 per share
on May 29, 1996.................. -- 975,000 975 -- -- -- -- 967,775 --
Net loss for fiscal 1996.......... -- -- -- -- -- -- -- -- (475,578)
Net other comprehensive loss for
fiscal 1996...................... -- -- -- -- -- -- -- -- --
---------- ---------- ------- ------- ------ ------- --------- ---------- ------------
Balance -- December 31, 1996... -- 11,943,281 11,943 -- -- -- -- 961,807 (529,274)
1997:
Issued for services at $2.31 1/2
per share on July 1, 1997........ -- 71,938 72 -- -- -- -- 166,469 --
Net loss for fiscal 1997.......... -- -- -- -- -- -- -- -- (913,321)
Net other comprehensive loss for
fiscal 1997...................... -- -- -- -- -- -- -- -- --
---------- ---------- ------- ------- ------ ------- --------- ---------- ------------
Balance -- December 31, 1997... -- 12,015,219 12,015 -- -- -- -- 1,128,276 (1,442,595)
1998:
Issued on conversion of
promissory notes at $2.72 per
share on February 1, 1998 (1),
net of issuance costs............ -- 411,764 412 -- -- -- -- 1,119,586 --
Issued for cash at $7.50 per
share on April 3, 1998........... -- -- -- 800,000 800 -- -- 7,792,167 (2,104,000)
Issued with series "A" preferred
stock on April 3, 1998........... -- -- -- -- -- 200,000 1,132,000 -- (1,132,000)
Net loss for fiscal 1998.......... -- -- -- -- -- -- -- -- (1,117,808)
Net other comprehensive loss
for fiscal 1998.................. -- -- -- -- -- -- -- -- --
---------- ---------- ------- ------- ------ ------- ---------- ----------- -----------
Balance -- December 31, 1998... $ -- 12,426,983 $12,427 800,000 $ 800 200,000 $1,132,000 $10,040,031 $(5,796,403)
[continued on next page]
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PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Shareholders' Equity (Deficit)
(Unaudited)
(Expressed in U.S. Dollars)
Accumulated Series "A" Deficit
Other Convertible Common Stock Accumulated
Compre- Common Stock Preferred Stock Warrants Additional During the
hensive ------------------ --------------- ----------------- Paid-in Development
Income Shares Amount Shares Amount Number Amount Capital Stage
---------- ---------- ------- ------- ------ ------- --------- ---------- -----------
1999:
Issued for cash at $15 per share
on May 17, 1999, net of
issuance costs................. $ -- 400,000 $ 400 -- $ -- -- $ -- 5,998,252 --
Options exercised for cash at
prices between $8.12 1/2 and
$9.50 per share during 1999..... -- 35,000 35 -- -- -- -- 303,979 --
Cancelled on October 14, 1999.... -- (5,167) (5) -- -- -- -- (11,570) 11,575
Net loss for fiscal 1999......... -- -- -- -- -- -- -- -- (1,534,513)
Net other comprehensive loss for
fiscal 1999..................... (29,403) -- -- -- -- -- -- --
---------- ---------- ------- ------- ------ ------- --------- ----------- -----------
Balance -- December 31, 1999..... (29,403) 12,856,816 12,857 800,000 800 200,000 1,132,000 16,330,692 (7,319,341)
2000:
Warrants exercised for cash at
$7.50 per share on March 31,
2000............................ -- 200,000 200 -- -- (200,000) (1,132,000) 2,631,800 --
Options exercised for cash at
prices between $8.25 and
$14.06 per share for the
three-months ended March 31,
2000............................ -- 13,200 13 -- -- -- -- 132,127 --
Net loss for the three-months
ended March 31, 2000............ -- -- -- -- -- -- -- -- (490,898)
Net other comprehensive loss for
the three-months ended
March 31, 2000.................. (8,702) -- -- -- -- -- -- -- --
---------- ---------- ------- ------- ------ ------- --------- ----------- -----------
Balance -- March 31, 2000..... $ (38,105) 13,070,016 $13,070 800,000 $ 800 -- -- $19,094,619 $(7,810,239)
========== ========== ======= ======= ====== ======= ========= =========== ===========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements of shareholders' equity
(deficit)
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PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Cash Flows
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
Three Months Ended October 20,
March 31, 1995
------------------------- (inception) to
March 31, 2000
2000 1999 (cumulative)
---------- ---------- --------------
Operating activities:
Net loss for the period.............................................. $ (490,898) $ (305,008) $(4,585,814)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of property and equipment.............................. 74,021 45,426 368,015
Write-down of property and equipment................................ -- -- 17,662
Amortization of deferred costs...................................... -- 93,014 154,287
Changes in non-cash working capital:
Accounts receivable................................................ (59,850) (6,477) (161,581)
Due from officers and employees.................................... (173,392) 1,335 (176,611)
Prepaid expenses................................................... 24,903 (88,710) (60,440)
Trade payables..................................................... 19,901 (44,275) 52,617
Wages and employee benefits........................................ (26,841) 6,477 105,844
Accrued oil and natural gas property costs......................... (193,546) -- 188,840
Accrued liabilities................................................ (54,418) 270 116
Deferred financing for insurance premium........................... -- -- 7,766
Consulting costs settled by issuance of common stock............... -- -- 166,541
Interest costs settled by issuance of common stock................. -- -- 120,000
---------- ---------- -----------
Net cash used in operating activities............................ (880,120) (297,948) (3,802,758)
Financing activities:
Funds borrowed from affiliates....................................... -- -- 1,100,000
Repayment of funds borrowed from affiliates.......................... -- -- (100,000)
Funds raised through the sale of common stock,
net of issuance costs............................................... -- -- 6,972,402
Funds raised through the sale of preferred stock and warrants, net
of issuance costs................................................... -- -- 5,688,967
Funds raised through the exercise of options,
net of issuance costs............................................... 132,140 46,851 436,119
Funds raised through the exercise of warrants,
net of issuance costs............................................... 1,500,000 -- 1,500,000
Repayment of deferred financing for insurance premium................ -- -- (146,520)
---------- ---------- -----------
Net cash generated by financing activities....................... 1,632,140 46,851 15,450,968
Investing activities:
Funds invested in property and equipment............................. (105,496) (70,516) (1,093,851)
Funds Invested in oil and natural gas properties..................... (331,528) -- (1,106,687)
Funds borrowed by an employee........................................ -- -- (35,760)
Repayment of funds borrowed by an employee........................... 841 906 2,051
---------- ---------- -----------
Net cash used in investing activities............................ (436,183) (69,610) (2,234,247)
Effect of net other comprehensive income (loss)....................... (8,702) 17,720 (38,105)
Net cash inflow (outflow)............................................. 307,135 (302,987) 9,375,858
Cash position, beginning of period.................................... 9,068,723 4,713,822 --
---------- ---------- -----------
Cash position, end of period.......................................... $9,375,858 $4,410,835 $ 9,375,858
========== ========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements of cash flows
-5-
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Financial Statements
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
1. Organization And Operations
(a) Our Company
Pinnacle Oil International, Inc. ("we," "our company" or "Pinnacle"), a
development stage enterprise, was incorporated under the laws of the
State of Nevada on September 27, 1994, under the name "Auric Mining
Corporation," and subsequently changed its name to Pinnacle Oil
International, Inc. on February 23, 1996. We have two wholly owned
subsidiaries, Pinnacle Oil Inc. ("Pinnacle U.S."), which was incorporated
under the laws of the State of Nevada on October 20, 1995, and Pinnacle
Oil Canada, Inc. ("Pinnacle Canada"), which was incorporated under the
federal laws of Canada on April 1, 1997.
(b) Our Business
We are a technology-based reconnaissance exploration company which
utilizes our proprietary stress field detection or "SFD" remote-sensing
airborne survey technology, which we refer to as our "SFD Survey System,"
to quickly and inexpensively identify and high-grade oil and natural gas
prospects. We conduct our reconnaissance exploration activities, as well
as land acquisition, drilling, completion and production activities to
exploit prospects identified using our SFD technology, through our two
subsidiaries, Pinnacle U.S., which focuses on United States-based
exploration, and Pinnacle Canada, which focuses on Canadian-based
exploration. Pinnacle, in turn, focuses on research and development
efforts to improve the efficacy of our SFD Survey System.
Since we have not generated operating revenues to date, we should be
considered a development stage enterprise. Although we have sufficient
working capital as of March 31, 2000 to fund our current level of
operations for several years assuming we make minimal investments in
petroleum properties, our ability to continue as a going concern in the
longer term will nevertheless be dependent upon our ability, either
through our joint venture arrangements or for our own account, to
successfully identify hydrocarbon bearing prospects, and to finance,
develop, extract and market oil and natural gas from these prospects for
a profit. We anticipate that we will continue to incur further operating
losses until such time as we receive revenues from our joint venture
partners with respect to prospects currently in the development stage, or
through prospects we identify and exploit for our own account.
2. Significant Accounting Policies
(a) Basis of Presentation
We have prepared these consolidated financial statements in accordance
with accounting principles generally accepted in the United States for
interim financial reporting. While these financial statements reflect all
normal recurring adjustments which are, in the opinion of management,
necessary for fair presentation of the results of the interim period,
they do not include all of the information and notes required by
accounting principles generally accepted in the United States for
complete financial statements. For further information, refer to the
financial statements included in our annual report on Form 10-K for the
fiscal year ended December 31, 1999, as filed with the United States
Securities and Exchange Commission on April 17, 2000.
(b) Consolidation
We have consolidated the accounts of our wholly owned subsidiaries with
those of Pinnacle in the course of preparing these consolidated financial
statements. All significant intercompany balances and transactions
amongst Pinnacle and its subsidiaries have been eliminated as a
-6-
consequence of the consolidation process, and are therefore not reflected
in these consolidated financial statements.
(c) Reclassifications
We have changed the manner of presentation in these consolidated
financial statements and, as a consequence, have reclassified certain
accounts and amounts reflected in our prior annual consolidated financial
statements to conform to this change in presentation.
(d) Estimates and assumptions
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles in the United States
requires our 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 these consolidated financial
statements and the reported amount of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
(e) Cash and Cash Equivalents
For purposes of preparing the consolidated balance sheets and statements
of cash flows contained in these consolidated financial statements, we
consider all investments with original maturities of ninety days or less
to constitute "cash and cash equivalents."
(f) Fair Value of Financial Instruments
Our financial instruments consist of cash, accounts receivable, notes
receivable, accounts payable and accrued liabilities. The fair value of
these financial instruments approximates their carrying values on our
consolidated financial statements due to their short-term to maturity and
similarity to current market rates. It is the opinion of our management
that we are not exposed to significant interest, currency or credit risks
arising from these financial instruments.
(g) Oil and Natural Gas Properties
We follow the full cost method of accounting for oil and natural gas
properties and equipment whereby we capitalize all costs relating to our
acquisition of, exploration for and development of oil and natural gas
reserves. These capitalized costs include:
. land acquisition costs;
. geological and geophysical costs;
. costs of drilling both productive and non-productive wells,
production equipment and related facilities; and
. various costs associated with evaluating petroleum and natural gas
properties for potential acquisition.
Commencing upon production, these capitalized costs will also include SFD
survey support and SFD survey operations and data analysis costs. See
notes 2(j) and 2(k).
We only capitalize overhead that is directly identified with acquisition,
exploration or development activities. All costs related to production,
general corporate overhead and similar activities are expensed as
incurred.
-7-
Under the full cost method of accounting, capitalized costs are
accumulated into cost centers on a country-by-country basis. These
costs, plus a provision for future development costs (including estimated
dismantlement, restoration and abandonment costs) of proved undeveloped
reserves, are then depleted and depreciated using the unit-of-production
method, based on estimated proved oil and gas reserves as determined by
independent engineers where significant. For purposes of the depletion
and depreciation calculation, proved oil and gas reserves are converted
to a common unit of measure on the basis of their approximate relative
energy content.
In applying the full cost method of accounting, capital costs in each
cost center less accumulated depletion and depreciation and related
deferred income taxes are restricted from exceeding an amount equal to
the sum of the present value of their related estimated future net
revenues discounted at 10% less estimated future expenditures, and the
lower of cost or estimated fair value of unproved properties included in
the costs being amortized, net of related tax effects. Should this
comparison indicate an excess carrying value, a write-down would be
recorded.
The carrying values of unproved properties, which are excluded from the
depletion calculation, are assessed on a quarterly basis to ascertain
whether any impairment in value has occurred. This assessment typically
includes a determination of the anticipated future net cash flows based
upon reserve potential and independent appraisal where warranted.
Impairment is recorded if this assessment indicates the future potential
net cash flows are less than the capitalized costs.
All recoveries of costs through the sale or other disposition of oil and
gas properties and equipment are accounted for as adjustments to
capitalized costs, with no gain or loss recorded, unless the sale or
disposition involves a significant change in the relationship between
costs and the value of proved reserves or the underlying value of
unproved property, in which case the gain or loss is computed and
recognized.
Our company conducts oil and natural gas exploration, drilling,
development and production activities through our joint venture partners.
These consolidated financial statements reflect only our proportionate
interest in these activities.
(h) Other Property and Equipment
We carry our other capitalized property and equipment at cost. We
depreciate or amortize our other capitalized property and equipment over
their estimated service lives using the declining balance method as
follows:
Airplane.................................................... 15%
Computer equipment.......................................... 30%
Computer software........................................... 100%
Equipment................................................... 20%
Furniture and fixtures...................................... 20%
Leasehold improvements...................................... 20%
Tools....................................................... 20%
Vehicles.................................................... 30%
When we retire or otherwise dispose of our other capitalized property and
equipment, we remove their cost and related accumulated depreciation or
amortization from our accounts, and record any resulting gain or loss in
the results of operations for the period. Our management periodically
reviews the carrying value of our property and equipment to ensure that
any permanent impairment in value is recognized and reflected in our
results of operations.
-8-
(i) Research And Development Expenditures
We expense all research and development expenditures we incur to develop,
improve and test our SFD Survey System and related components, including
allocable salaries.
(j) Survey Support Expenditures
We expense all survey support expenditures we incur, after netting costs
which are reimbursable by our joint venture partners. Survey support
expenditures consist primarily of the cost, including allocable salaries,
to:
. conduct field evaluations designed by our joint venture partners to
evaluate the SFD Survey System (after netting costs which are
reimbursable by our joint venture partners); and
. develop, organize, staff and train our survey and interpretation
operational functions.
Although we currently expense our survey support expenditures, we will,
in the future, commencing on the earliest date that any of our initial
exploration wells commence production, capitalize and amortize these
costs using the units of production method as a component of petroleum
properties in accordance with the full cost method of accounting for oil
and gas.
(k) Survey Operations And Data Analysis Expenditures
We expense all survey and data analysis costs we incur, after netting
costs which are reimbursable by our joint venture partners. Survey and
data analysis expenditures consist primarily of:
. aircraft operating costs, travel expenses and allocable salaries of
our personnel while on survey assignment (after netting costs which
are reimbursable by our joint venture partners); and
. allocable salaries of our personnel while interpreting SFD Data.
Although we currently expense our survey and data analysis costs, we
will, in the future, commencing on the earliest date that any of our
initial exploration wells commence production, capitalize and amortize
these costs using the units of production method as a component of
petroleum properties in accordance with the full cost method of
accounting for oil and gas.
(l) Foreign Currency Translation
We use the United States dollar as our reporting currency. With respect
to our subsidiaries whose functional currency is in Canadian dollars, we
use the following methodology to convert their Canadian dollar
denominated accounts and transactions into U.S. dollars for consolidation
purposes:
. all asset and liability accounts are translated into U.S. dollars at
the rate of exchange in effect as of the end of the applicable
fiscal period;
. all shareholders' equity accounts are translated into U.S. dollars
using historical exchange rates; and
. all revenue and expense accounts are translated into U.S. dollars at
the average rate of exchange for the applicable fiscal period.
-9-
We record the cumulative gain or loss arising from the conversion of the
noted Canadian dollar denominated accounts and transactions into U.S.
dollars as a foreign currency translation adjustment as a component of
accumulated other comprehensive income or loss for that period.
(m) Basic And Diluted Loss Per Common Share
Our basic loss per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS No.
128"), by dividing the net loss for the period attributable to holders of
our common stock by the weighted average number of shares of our common
stock outstanding for the period. Our diluted loss per share is
computed, also in accordance with SFAS No. 128, by including the
potential dilution that could occur if holders of our dilutive securities
were to exercise or convert these securities into our common stock.
In calculating our diluted loss per share, we take into consideration
deemed distributions analogous to the declaration of a dividend
attributable to the beneficial conversion features affording a discount
or benefit to the holders of our securities. See note 8.
(n) Stock-based compensation
In accounting for our employee and director stock options, we have
elected to follow Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees," ("APB 25"), and related interpretations.
Pursuant to APB 25, we have not recorded any compensation expense for any
period in these consolidated financial statements insofar as the exercise
price for all options we have granted to date to our employees and
directors have equaled the market price of the underlying common shares
on the effective date of grant. See note 10.
(o) Recent pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as subsequently amended by SFAS No.
137,which established accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either
an asset or liability measured at its fair value for fiscal quarters of
fiscal years beginning after June 15, 2000. Our management has not had
the opportunity to evaluate the impact of SFAS Nos. 133 and 137 on our
consolidated financial position, results of operations or cash flows.
3. Reverse Acquisition
We acquired what is now our wholly-owned subsidiary, Pinnacle U.S., on
January 20, 1996, in a transaction accounted for as a "reverse acquisition."
This acquisition was effected through the issuance of 10,090,675 common
shares of our company (then known as Auric Mining Corporation), constituting
approximately 92% of its outstanding shares at that date, in exchange for all
of the outstanding shares of Pinnacle U.S. As a result of the application of
the noted accounting principles governing reverse acquisitions, Pinnacle U.S.
(and not Auric Mining Corporation) was treated as the "acquiring" or
"continuing" entity for financial accounting purposes.
We have accounted for the Pinnacle U.S. acquisition as an issuance of stock
by Pinnacle U.S. in exchange for the tangible net assets of Auric Mining
Corporation, valued at fair value, which approximate historical costs. As a
result, our consolidated statements of loss and shareholders' equity
(deficit) included in these consolidated financial statements are deemed to
be a continuation of Pinnacle U.S.'s financial statements, and therefore
reflect:
. Pinnacle U.S.'s operations from the date of its formation (October 20,
1995) through the effective date of the reverse acquisition (January 20,
1996); and
-10-
. our consolidated operations after the effective date of the reverse
acquisition (January 20, 1996).
4. Note Receivable From Officer
In September 1998, we loaned the sum of Cdn. $54,756 (U.S. $35,760 as of that
date) to one of our officers in connection with his relocation to Calgary,
Alberta. Pursuant to the terms of an underlying promissory note, the officer
is required to repay the loan on a monthly basis, with a balloon payment due
on October 3, 2003. The amount of the monthly payments is calculated on the
basis of a 300-month amortization rate, principal plus interest, using a
variable interest rate computed at our cost of funds, which we define as our
floating interest rate for liquid investments (presently 5 1/2%).
5. Oil And Natural Gas Properties
Summarized below are the oil and natural gas property costs we capitalized
for our three-month interim periods ended March 31, 2000 and March 31, 1999
and as of March 31, 2000:
Three Months Ended
March 31, As of
------------------------ March 31,
2000 1999 2000
--------- --------- ----------
Acquisition costs......... $ 6,263 $ -- $ 410,848
Exploration costs......... 325,265 -- 695,839
Development costs......... -- --
Capitalized interest...... -- --
-------- --------- ----------
$331,528 $ -- $1,106,687
======== ========= ==========
Since all of our oil and gas properties as of March 31, 2000 were either not
yet producing or still in the drilling stage, we have classified all of these
properties as unproved properties. Consequently, we did not record any
depletion to date for these properties for the three-month interim period
ended March 31, 2000.
Following the close of our three-month interim period ended March 31, 2000,
our management performed a property assessment with respect to each of our
unproved properties as of March 31, 2000 to determine if any of these
properties had been subject to any impairment in value, and concluded that no
impairment had occurred. This assessment included a determination of the
future production potential based upon SFD data, seismic data and exploration
results. Our company is currently conducting active exploration and
development programs with respect to each of these unproved oil and gas
properties, and we anticipate that all of these properties will be evaluated
and the associated costs transferred into the amortization base or impaired
over the next five years.
6. Other Property And Equipment
Summarized below are our capitalized costs for other property and equipment
as of March 31, 2000 and March 31, 1999:
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March 31,
-------------------------
2000 1999
----------- ---------
Airplane........................................ $ 269,724 $ 238,653
Computer equipment.............................. 200,158 91,981
Computer software............................... 85,366 14,695
Equipment....................................... 74,860 40,888
Furniture and fixtures.......................... 165,568 122,381
Leasehold improvements.......................... 103,048 105,376
SFD Survey System (including software).......... 95,721 54,710
Tools........................................... 1,696 2,459
Vehicle......................................... 62,494 62,494
----------- ---------
Property and equipment........................ 1,058,635 733,637
Less accumulated depreciation and amortization.. (365,959) (133,357)
----------- ---------
Net property and equipment.................... $ 692,676 $ 600,280
=========== =========
7. Common Stock
On January 31, 1997, two of our executive officer-directors at that time each
loaned our company the sum of $500,000, for total loan proceeds of
$1,000,000. These loans were extended by these officer-directors pursuant to
unsecured, convertible promissory notes due January 31, 1998, together with
interest accrued at a rate of 12% per annum. Each promissory note contained
identical conversion provisions pursuant to which:
. each officer-director could elect to convert any or all of the
outstanding balance of his loan into common stock based upon a ratio of
one share per $4.07 in converted principal and interest at any time; and
. our company could convert any or all of the outstanding balance of
either loan into common stock based upon a ratio of one share per $2.72
in converted principal and interest should we be unable to repay that
amount by the January 31, 1998 due date.
We exercised our right to convert the notes into 411,764 shares of common
stock on February 1, 1998, in satisfaction of $1,200,000 in aggregate
principal and accrued interest which became due on January 31, 1998.
On May 17, 1999, we raised $6,000,000 in gross proceeds through a private
placement of 400,000 shares of our common stock at $15 per share. Net
proceeds to our company from this offering were $5,998,652, after deducting
$1,348 in offering expenses.
During 1999, we raised $303,979 in gross proceeds through our employees'
exercise of incentive stock options entitling them to purchase 35,000 shares
of our common stock at exercise prices between $8.12 1/2 and $9.50 per share.
On March 31, 2000, the holder of warrants to purchase 200,000 shares of our
common stock at an exercise price of $7.50 per share exercised these
warrants, resulting in gross proceeds to our company of $1,500,000. See note
8.
During the three-month interim period ended March 31, 2000, we raised
$138,740 in gross proceeds through our employees' exercise of incentive stock
options entitling them to purchase 13,200 shares of our common stock at
exercise prices between $8.25 and $14.06 per share.
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8. Preferred Stock And Warrants
On April 3, 1998, we completed a series of transactions pursuant to which:
. Pinnacle U.S. entered into a joint venture agreement, and
. we concurrently raised $6,000,000 in gross proceeds from an affiliate of
the joint venture partner through the private placement to that party of
800,000 shares of our series "A" convertible preferred stock, and
warrants to purchase 200,000 shares of our common stock at an exercise
price of $7.50 per share.
The net proceeds of this private placement were $5,688,867, after deducting
$311,833 in offering expenses, including the cost of becoming a reporting
company with the Securities and Exchange Commission.
Each share of preferred stock is convertible into one common share at the
election of the holder, and carries a $7.50 liquidation preference should our
company wind-up and dissolve. We have reserved the right to redeem the
preferred stock at a price of $7.50 per share if it has not been converted
into common stock by April 3, 2000, and the holder forgoes a final
opportunity to exercise his conversion rights to avoid redemption. The
preferred shares are not entitled to payment of any dividends, although they
are entitled under certain circumstances to participate in dividends on the
same basis as if converted into common shares. Each warrant carried a $7.50
per share exercise price, and lapsed to the extent not exercised by April 3,
2000. All of the warrants were exercised on March 31, 2000. See note 7.
Insofar as the preferred shares and warrants contained beneficial conversion
features affording a discount or benefit to the purchaser of these
securities, we recorded a deemed distribution analogous to the declaration of
a dividend to that purchaser. This deemed distribution resulted in:
. An increase in additional paid-in capital in the amount of $2,104,000 to
record the intrinsic value of the beneficial conversion feature of the
preferred shares, i.e., the discount in the purchase price of these
securities relative to the public trading price as of the date of
issuance of the underlying common shares into which these preferred
shares could be converted, without adjustment for discounts or
restrictions.
. A newly created warrant capital account to record the fair value of the
warrants in the amount of $1,132,000, including the value of their
beneficial conversion feature, as determined by the Black-Scholes method
of valuation. This amount was subsequently reclassified to additional
paid-in capital upon the exercise of the warrants.
. A counterbalancing charge against our accumulated deficit capital
account in the amount of $3,236,000.
We also made appropriate adjustment for the deemed distribution in
calculating our basic loss per common share. See note 2(m).
9. Performance Warrants
On August 1, 1996, we granted a performance-based contractual right to be
granted warrants to the licensor of our SFD technology, Momentum Resources
Corporation, in connection with the amendment of our exclusive SFD technology
license with Momentum to use the SFD technology for hydrocarbon exploration.
The primary purpose of the amendment was to indefinitely extend the
termination date of the license. Pursuant to this contractual right, Momentum
is entitled to a separate grant of warrants entitling it to purchase 16,000
shares of our common stock at the then current trading price for each month
after December 31, 2000 in which production from SFD-identified prospects
during that month exceeds 20,000 barrels of hydrocarbons. Momentum has not
earned any warrants under the SFD technology license as of March 31, 2000.
-13-
10. Options
Through March 31, 2000, we have granted options to selected employees and
directors of our company pursuant to the following separate arrangements or
plans (the "Plans"):
. Separate free-standing directors options which we granted to selected
directors as compensation for serving on our Board of Directors;
. The 1997 Pinnacle Oil International, Inc. Stock Plan, pursuant to which
1,000,000 shares of our common stock were reserved for issuance to
employees, directors and consultants in the form of stock options or
outright stock grants;
. The 1999 Pinnacle Oil International, Inc. Executive Option Plan, pursuant
to which 1,000,000 shares of our common stock were reserved for issuance
to executive officers in the form of stock options; and
. The 2000 Pinnacle Oil International, Inc. Directors' Option Plan,
pursuant to which 400,000 shares of our common stock were reserved for
issuance to executive officers in the form of stock options.
During the three-month interim period ended March 31, 2000, 95,000 options
with an average weighted exercise price of $29.96 were granted under the
Plans, 13,200 previously-granted options under the Plans with an average
weighted exercise price of $10.01 were exercised, and 16,000 previously-
granted options under the Plans with an average weighted exercise price of
$14.06 lapsed.
We have summarized below all outstanding options under the Plans as of March
31, 2000:
Grant Exercise March 31, 2000
--------------------------------
Type of Option Date Price Outstanding Vested
------------------------------- -------------- --------------- -------------- -------------
Director Non-qualified......... 5-12-97 $ 5.81 75,000 75,000
Director Non-qualified......... 5-20-97 5.25 90,000 90,000
Employee Incentive............. 11-24-97 9.50 37,500 7,500
Director Non-qualified......... 3-10-98 8.31 45,000 45,000
Employee Incentive............. 5-12-98 8.25 30,800 10,800
Employee Incentive............. 8-24-98 8.25 132,500 10,000
Employee Incentive............. 10-1-98 8.12 1/2 20,000 --
Employee Non-qualified......... 5-1-99 14.00 1,016,670 --
Employee Incentive............. 5-1-99 15.00 33,330 --
Employee Incentive............. 5-12-99 17.00 20,000 --
Employee Incentive............. 9-21-99 13.62 1/2 100,000 --
Employee Incentive............. 11-16-99 14.12 1/2 85,000 --
Director Non-qualified......... 2-15-00 28.75 75,000 --
Employee Incentive............. 3-20-00 34.50 20,000 --
-------------- -------------
1,780,800 238,300
============== =============
The director options granted before December 31, 1999 that are outstanding as
of March 31, 2000 vest one-third on date of grant, and an additional one-third
each on the first anniversary and second anniversaries of the grant date,
respectively, based upon the continued provision of services as a director.
The director options granted after December 31, 1999 that are outstanding as
of March 31, 2000 vest one-third each on the first through third anniversaries
of the grant date, respectively, based upon the continued provision of
services as a director. The employee options outstanding as of March 31, 2000
vest over three to five years from the grant date, depending upon the
recipient, based upon the continued provision of services as an employee.
Both the director and employee options generally lapse, if unexercised, five
years from the date of vesting.
-14-
11. Commitments
At March 31, 2000, we had entered into joint venture agreements with two
separate oil and gas exploration companies. We are required under these
joint venture agreements to conduct SFD surveys to identify oil and natural
gas prospective prospects on selected exploration areas of up to 2,400
square miles, and our joint venture partners are required to drill each
SFD-identified prospect they accept under their respective agreement. We
may elect under each of these joint venture agreements to receive one of
the two following payment streams for each SFD-identified prospect accepted
and drilled by the joint venture partner:
. A capital investment and generally risk-free overriding royalty of 5% to
8% of oil or natural gas revenues received by the joint venture partner
with respect to the prospect; or
. A working interest of up to 45% of the joint venture partner's revenues
with respect to the prospect.
In any situation where we elect to participate on a working interest basis,
we must bear our share of mineral and drilling right acquisition (if
necessary), drilling, completion and production costs incurred with respect
to the prospect based upon our elected working interest percentage.
Although we will bear our share of these costs, our joint venture partner
will nevertheless remain responsible for conducting and managing all
drilling, production and marketing activities to exploit the prospect.
On November 25, 1997, we entered into a five-year non-cancelable operating
lease for our principal executive offices. This lease, which consists
13,325 rentable square feet as of March 31, 2000, expires on January 21,
2003. Our combined obligations for base lease payments and building
operating cost and other pass-through items as of March 31, 2000 was Cdn.
$21,418 per month, which translates into U.S. $14,777 per month based upon
the closing conversion rate as of March 31, 2000.
12. Subsequent Events
(a) Other Property and Equipment (see note 6)
On May 4, 2000, we completed our acquisition of a Piaggio P180 Avanti
aircraft for a purchase price of $2,790,000.
(b) Options (see note 10)
On April 17, 2000, we granted 30,000 non-qualified options under the
2000 Pinnacle Oil International, Inc. Directors' Stock Plan to each of
our five outside independent directors as additional compensation for
their services as members of our Board of Directors for the next three
years. The purchase price for these options were fixed at $26.25 per
share, reflecting the closing trading price of our common stock as of
the date of grant. These options vest in equal increments on the first
through third anniversary dates of the date of grant, respectively,
based upon continued provision of services as a director, and lapse,
if unexercised, five years after the vesting date, unless the
optionee's status as a director is terminated, in which case they
lapse two years from date of vesting.
-15-
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
General
The following discussion of our consolidated financial condition and the results
of operations should be read in conjunction with our consolidated financial
statements and the notes to our consolidated financial statements included in
Part I, Item 1, of this report. The information set forth below in this report
is current as of the date of this report, May 12, 2000, unless an earlier or
later date is indicated. All references to "dollars" in this report refer to
United States, or U.S., dollars unless specific reference is made to Canadian,
or Cdn., dollars. For information relative to currency conversion, see note
2(l) to our consolidated financial statements. The rate of exchange of Canadian
dollars to United States dollars as of March 31, 2000, was Cdn. $1.4494 to U.S.
$1.
Overview
Pinnacle Oil International, Inc. ("we," "our company" or "Pinnacle") is a
technology-based reconnaissance exploration company which utilizes our
proprietary, quantum physics-based, stress field detection or "SFD" remote-
sensing airborne survey technology, which we refer to as our "SFD Survey
System," to quickly and inexpensively identify and high-grade oil and natural
gas prospects. We are a publicly traded company whose common stock trades over-
the-counter on the NASD Electronic Bulletin Board under the symbol "PSFD." Our
principal executive offices are located at Suite 750, Phoenix Place, 840 7th
Avenue S.W., Calgary, Alberta, Canada T2P 3G2, and our telephone number is (403)
264-7020.
We use our SFD technology to survey or reconnoiter large exploration areas from
our survey aircraft at speeds in excess of 150 mph to identify and "high-grade"
leads for further evaluation and potential drilling. Our SFD technology is a
recently developed technology which we adapted for airborne survey operations,
and field tested for independent geologists and our joint venture partners, in
1996 and 1997. We commenced SFD survey activities on a full commercial basis
for our joint venture partners in early 1998.
Our SFD technology affords us the relatively inexpensive ability to obtain near
real-time analysis and interpretation of potential hydrocarbon accumulations in
a matter of days or weeks, as compared to months and in some cases years in the
case of the seismic methods currently employed by the oil and gas exploration
industry for wide area exploration or reconnaissance. These cost and time
advantages will ultimately enable us to effectuate potentially significant
reductions in oil and gas exploration "finding costs." Finding costs include
the cumulative costs of acquiring seismic, purchasing mineral rights, and
drilling and completing exploration wells. The ability to reduce finding costs
is an extremely important financial factor in the oil and gas industry, insofar
as low finding costs represent a measure of an oil and gas company's ability to
effectively and efficiently find new reserves, as well as generate cash flow.
We conduct our reconnaissance exploration activities, as well as land
acquisition, drilling, completion and production activities to exploit prospects
identified using our SFD technology, through our two wholly-owned operating
subsidiaries. Our first subsidiary, Pinnacle U.S., focuses on United States-
based exploration. Our second subsidiary, Pinnacle Oil Canada, Inc., whom we
refer to as "Pinnacle Canada," focuses on Canadian-based exploration. Pinnacle,
in turn, concentrates on research and development efforts to improve the
efficacy of our SFD Survey System.
Our United States exploration efforts to date have been focused on the Greater
Green River Basin in Wyoming and the Williston Basin in North Dakota. These
exploration activities have been conducted under a joint exploration and
development agreement with CamWest Exploration LLC, a Colorado-based exploration
company. Under this agreement we conduct aerial surveys to identify prospects
in exploration areas in the United States selected by CamWest.
Our Canadian exploration efforts to date have been focused on southern Alberta,
northeastern British Columbia, southwestern Saskatchewan and Newfoundland. The
majority of these exploration activities
-16-
have been conducted under an exploration joint venture agreement with Encal
Energy Ltd., a Calgary-based exploration and production company. Under this
agreement we conduct aerial surveys to identify prospects in exploration areas
in Canada selected by Encal. We have also recently commenced conducting
exploration activities in western Canada for our own account. We anticipate
developing these prospects through a joint venture with either Encal or another
Canadian exploration company.
The joint venture agreements we have entered into with our joint venture
partners generally entitle us to elect to receive one of the two following
payment streams for each SFD-identified prospect accepted and drilled under the
applicable agreement:
. a capital investment and generally risk-free overriding royalty of 5% to 8%
of oil or natural gas revenues received by the joint venture partner with
respect to the prospect. In any situation where we elect to receive this
royalty, our joint venture partner will be responsible, at its own cost and
risk, to acquire the necessary drilling rights for the prospect if it has
not already done so, and to conduct all drilling, production and marketing
activities necessary to exploit the prospect.
. a working interest of up to 45% of the joint venture partner's revenues
with respect to the prospect. In any situation where we elect to
participate on a working interest basis, we must bear our share of the
mineral rights and drilling acquisition (if necessary), drilling and
production costs incurred with respect to the prospect based upon our
working interest percentage. Although we will bear our share of these
costs, our joint venture partner will nevertheless remain responsible for
conducting and managing all drilling, production and marketing activities
to exploit the prospect.
Our U.S. joint venture partner is also required under the terms of its joint
venture agreement to reimburse us for 100% of the expenses we incur in
conducting aerial surveys for that partner, while our Canadian joint venture
partner is required under the terms of its joint venture agreement to reimburse
us for 50% of the expenses we incur in conducting aerial surveys for that
partner.
Our recent practice with our joint venture partners has been to participate in
selected prospects on a combination working interest/overriding royalty interest
basis, typically a 22 1/2% working interest and a 4% overriding royalty.
The status of our current activities as of March 31, 2000 and the date of this
report is as follows:
. One exploration well spudded in September 1999 by at third-party operator
at our Leucite Hills South prospect in Wyoming, was drilled, cased and
completed in September 1999 as a natural gas discovery. This well will not
be placed into production by the operator, however, until a sufficient
number of additional wells are drilled on the exploratory block and can be
tied into a gathering system. Pinnacle U.S. elected a combination working
interest and overriding royalty interest with respect to this prospect.
Pinnacle U.S. anticipates that CamWest, as operator, will spud a step-out
exploratory well on this prospect by the end of June 2000.
. One exploration well spudded by CamWest in October 1999 at our Poblano
prospect in Wyoming, was drilled, cased and completed in January 2000 as a
natural gas discovery, and production will commence upon completion of a
twelve-mile pipeline that will tie the well into a sales system. CamWest
spudded a step-out exploratory well on this prospect in March 2000, which
is in the process of being logged in anticipation of completion activities
as of the date of this report. Pinnacle U.S. elected a combination working
interest and overriding royalty interest with respect to this prospect.
Pinnacle U.S. anticipates that CamWest will spud a second step-out
exploratory well on this prospect by the end of June 2000,
-17-
. One exploration well spudded by at third-party operator in October 1999 at
our Poblano South prospect in Wyoming, was drilled, cased and completed in
January 2000. This well has been shut-in by the operator pending further
evaluation of its completion program. Pinnacle U.S. elected a combination
working interest and overriding royalty interest with respect to this
prospect.
. One exploration well spudded in December 1999 in southern Alberta by Encal
at our Carbon prospect in southern Alberta, was drilled, cased and
completed in January 2000 as a natural gas discovery. This well is
currently suspended pending completion activities by the operator. Pinnacle
Canada elected an overriding royalty interest with respect to this
prospect.
. One exploration well spudded in March 2000 by Encal at our Monarch prospect
in southern Alberta. This well is cased and is in the process of being
completed. Pinnacle Canada elected a combination working interest and
overriding royalty interest with respect to this prospect.
In addition to the two wells scheduled for spudding note above, we anticipate
that at least one additional exploration well will be spudded on other prospects
by our joint venture partners or third-party operators by the end of June 30,
2000.
Our rights to use our SFD technology arises from an SFD technology license which
we acquired from the owner and licensor of that technology, Momentum Resources
Corporation, pursuant to which we received the exclusive world-wide right to use
the SFD technology for hydrocarbon exploration purposes. We are obligated under
the terms of that license to pay Momentum Resources Corporation a fee equal to
1% of any "prospect profits" (as that term is defined in the license) which we
may receive on or before December 31, 2000, and 5% of any prospect profits which
we may receive after December 31, 2000. Momentum is controlled and indirectly
owned by our two largest stockholders, Messrs. George Liszicasz and R. Dirk
Stinson. Each of these stockholders currently serve as our directors, and Mr.
Liszicasz currently serves as one of our executive officers.
Since we have not generated operating revenues to date, we should be considered
a development stage enterprise.
Capital Requirements
We have not generated operating revenues to date, although we have one completed
well at our Poblano Prospect which we anticipate will commence production as
soon as a twelve-mile pipeline is completed which will connect the prospect to a
sales system. We anticipate the pipeline will be laid upon completion of our
second step-out exploration well in our Poblano prospects. Assuming no
unforeseen delays or changes in production plans, we anticipate that production
will commence in our third quarter in fiscal 2000. We are also drilling several
additional exploratory wells in fiscal 2000, including the noted step-out
exploratory wells, which should add to any revenues we generate.
Absent revenues, our sole source of cash to fund our operational and capital
investment needs are monies we have raised through the private placement of our
securities and exercise of employee options. For further information regarding
these transactions, see "--Liquidity And Capital Resources--Sources Of Cash"
below.
We have budgeted the following level of expenditures over the twelve-month
period ended March 31, 2001:
. Approximately $2,500,000 for continuing operations including SFD research
and development activities; and
. Up to $3,000,000 in capital expenditures to invest in working interests
with our joint venture partners or acquire drilling interests for our own
account, although the overall amount of these capital
-18-
expenditures may be significantly reduced or increased depending upon the
success of drilling efforts over the next six to twelve months.
After taking into consideration the $9,427,073 in working capital we had
available as of March 31, 2000, we have sufficient working capital on hand to
fund our current level of operations, including research and development but
excluding capital investments in working interests beyond that amount budgeted
for the next twelve months as described above, through early--2002. Our ability
in the longer term to continue as a going concern will be dependent upon our
ability to either:
. raise additional capital through private or public placements of our
securities, or
. our receipt of meaningful amounts of revenues from our joint venture
partners or through our own exploration efforts, which, in either case,
will be dependent upon successful exploration and production activities.
We cannot give you any assurance that any SFD Prospect that is drilled will
ultimately produce commercially viable quantities of oil or gas. We also cannot
give you any assurance that our strategic partners will drill any planned
exploratory well on any accepted SFD Prospects at all or by projected drilling
dates due to the various factors that may affect the drilling process, including
the perceived economics of drilling at any time, the ability of the strategic
partner to obtain drilling rights (where necessary) on favorable terms or at
all, and the ability of the strategic partner to timely schedule a drilling rig
and other drilling services. See "Uncertainties And Other Factors That May
Affect Our Future Results And Financial Condition--Uncertainties And Risk
Factors Generally Relating To Our Company And Our Business," generally, and "--
We Are Reliant Upon Our Joint Venture Partners For Opportunities To Participate
In Exploration Projects" and "--Our Revenues And Cash Flow Will Be Principally
Dependent Upon The Success Of Drilling And Production From Prospects In Which We
Participate Through Agreements With Our Joint Venture Partners," particularly.
For additional and more detailed information relating to our company and our
business, please see our annual report on Form 10--K for our fiscal year ended
December 31, 1999.
Results Of Operations
Operating Revenues
We had no oil and gas working interest or royalty revenues for our three-month
interim fiscal periods ended March 31, 2000 and March 31, 1999.
Operating Loss
We incurred an operating loss of $603,728 for the first three months of fiscal
2000, as compared to $355,864 for the first three months of fiscal 1999,
representing a $247,864, or 69.7%, overall increase.
The 69.7% increase in our operating loss for the first three months of fiscal
2000 over the first three months of fiscal 1999 was primarily attributable to
the following changes in costs and expenses:
. a $130,814, or 66.5%, increase in administrative expense from $196,870 to
$327,684;
. a $39,460, or 88.5%, increase in survey support expense from $44,589 to
$84,049;
. a $33,468, or 168.5%, increase in survey operations and data analysis
expense from $19,865 to $53,333;.
. a $28,595, or 63.0%, increase in amortization and depreciation from $45,426
to $74,021; and
-19-
. a $15,527, or 31.6%, increase in research and development expense from
$49,114 to $64,641.
Relative Changes In Administrative Expense
The $130,814 increase in administrative expense for the first three months of
fiscal 2000 over the first three months of fiscal 1999 was primarily
attributable to across-the-board net increases in costs to support our increased
level of business activities for the first three months of fiscal 2000, the most
significant of which were increases of $73,773 in wages and benefits and
payments to consultants.
Relative Changes In Survey Support Expense
Survey support expense generally relates to the cost--including allocable
salaries--to:
. conduct field evaluations designed by our joint venture partners to
evaluate our SFD technology (after netting any costs which our joint
venture partners are required to reimburse us for); and
. develop, organize, staff and train our survey and interpretation
operational functions.
The $39,460 increase in survey support expense for the first three months of
fiscal 2000 over the first three months of fiscal 1999 was primarily
attributable to across-the-board net increases in costs to support our increased
level of survey operations and data analysis, the most significant of which were
$34,944 in increased salaries associated with additional support staffing,
partially offset by a decrease of $18,372 in additional aircraft improvement
expenses.
Relative Changes In Survey Operations And Data Analysis Expense
Survey and data analysis expenditures consist primarily of any costs we incur
conducting commercial SFD survey activities. These costs can be generally
broken down into the following two components:
. aircraft operating costs, travel expenses and allocable salaries of our
personnel while on survey assignment (after netting any costs our joint
venture partners are required to reimburse us for); and
. allocable salaries incurred by our personnel interpreting SFD Data.
Our total survey and data analysis expense, before taking any joint venture
partner reimbursement into account, was $73,611 for the first three months of
fiscal 2000, as compared to $44,312 for the first three months of fiscal 1999.
The increase in total survey and data analysis expense was primarily
attributable increased salaries associated with additional support staffing.
Our net survey and data analysis expense--after taking into consideration joint
venture partner reimbursements of $20,278 and $24,447 for the first three months
of fiscal 2000 and 1999, respectively--was $53,333 for the first three months of
fiscal 2000 as compared to $19,865 for the first three months of fiscal 1999.
Relative Changes In Amortization and Depreciation
The $28,595 increase in amortization and depreciation for the first three months
of fiscal 2000 over the first three months of fiscal 1999 was primarily
attributable to addition depreciation and amortization arising in connection
with our acquisition of additional computer equipment and software.
Relative Changes In Research and Development Expense
Research and development expense generally relates to the cost--including
allocable salaries--to develop, improve and test our SFD Survey System and
related components. The $15,527 increase in research and development expense
for the first three months of fiscal 2000 over the first three months of
-20-
fiscal 1999 was principally attributable to salaries associated with additional
research and development staffing as we focused increased efforts to improve the
operation and efficacy of our SFD Survey System.
Expectations Relative To Future Expense Levels
We effectively doubled our company staff for the first three months of fiscal
2000 as compared to the first three months of fiscal 1999 through the hiring of
key professionals, including executive, geological, geophysical, scientific,
information technology and aviation personnel, and we anticipate that we will
continue to hire similar personnel over the pending fiscal year. We anticipate
that our total operating expenses will continue to significantly increase on a
quarterly basis through the end of fiscal 2000 as a result of the additional
wages and employee benefits to be paid to any additional personnel we may hire
as well as an increased level of operations which will be facilitated by recent
and anticipated hirings.
Other Income And Expense
. Interest Income
We earned $112,830 in interest income for the first three months of fiscal
2000, as compared to $50,856 for the first three months of fiscal 1999. The
increase in interest income for fiscal 2000 was attributable to higher cash
balances in our accounts as a result of a $6,000,000 private placement of
our common stock in May 1999.
Liquidity And Capital Resources
. Sources of Cash
Our cash flow requirements from our inception as Pinnacle U.S. (October 20,
1995) through March 31, 2000 were funded principally from:
o a private placement in May 1996 of 975,000 shares of our common stock
for total gross proceeds of $975,000,
o loans to our company by Messrs. Liszicasz and Stinson in the amount of
$1,000,000 in January 1997, and the subsequent conversion of the
outstanding balance of principal and accrued interest of these loans
in the amount of $1,120,000 into 411,764 shares of our common stock in
February 1998;
o a private placement in April 1998 of 800,000 shares of our convertible
series "A" preferred stock and 200,000 common stock purchase warrants
for total gross proceeds of $6,000,000;
o a private placement in May 1999 of 400,000 shares of our common stock
for total gross proceeds of $6,000,000;
o the exercise of employee stock options during fiscal 1999 and the
first three months of fiscal 2000, resulting in gross proceeds to our
company of $442,754; and
o the exercise on March 31, 2000 on warrants to purchase 200,000 shares
of our common stock at an exercise price of $7.50 per share, resulting
in gross proceeds to our company of $1,500,000.
. Cash Position and Sources And Uses Of Cash
Our cash position as of March 31, 2000 was $9,375,858, as compared to
$9,068,723 as of December 31, 1999. Our cash position as of March 31, 1999
was $4,410,835, as compared to
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$4,713,822 as of December 31, 1998. The bulk of our cash is maintained in a
United States government and government-backed securities money-market
account.
The $307,135 increase in our cash position as of March 31, 2000 as compared
to December 31, 1999 was attributable to $1,632,140 in cash raised through
financing activities, partially offset by $880,120 in cash used in
operating activities, $436,183 in cash used in investing activities, and a
$8,702 comprehensive loss due to the effect of exchange rate changes. The
$302,987 decrease in our cash position as of March 31, 1999 as compared to
December 31, 1998 was attributable to $297,948 in cash used in operating
activities and $69,610 in cash used in investing activities, partially
offset by $46,851 in cash raised through financing activities and a $17,720
comprehensive gain due to the effect of exchange rate changes.
Our operating activities required cash in the amount of $880,120 for the
first three months of fiscal 2000, as compared to cash requirements of
$297,948 for the first three months of fiscal 1999. The $880,120 in cash
used in operating activities for the first three months of fiscal 2000
reflected our net loss of $490,898 for that period, as decreased for non-
cash deductions and a net increase in non-cash working capital balances.
The $297,948 in cash used in operating activities for the first three
months of fiscal 1999 reflected our net loss of $305,008 for that period,
as decreased for non-cash deductions and a net increase in non-cash working
capital balances.
We raised $1,632,140 in cash from financing activities for the first three
months of fiscal 2000, as compared to $46,851 in cash raised from financing
activities for the first three months of fiscal 1999. The $1,632,140 in
cash raised through financing activities for the first three months of
fiscal 2000 was comprised of $1,500,000 in gross proceeds from the exercise
of warrants and $132,140 in gross proceeds from the exercise of employee
stock options. The $46,851 in cash raised through financing activities for
the first three months of fiscal 2000 consisted of the gross proceeds from
the exercise of employee stock options
We used cash in the amount of $436,183 for investing activities for the
first three months of fiscal 2000, as compared to $69,610 in cash used for
investing activities for the first three months of fiscal 1999. The
principal use of cash for the first three months of fiscal 2000 was to
acquire drilling rights in exploratory blocks pursuant to working interest
elections ($331,528) and to acquire property, equipment and computer
software ($105,496). The principal use of cash for the first three months
of fiscal 1999 was to acquire property, equipment and computer software
($70,516).
Other Matters
Foreign Exchange Fluctuations
We recorded a $8,702 foreign currency translation loss for the first three
months of fiscal 2000 as a comprehensive loss item on our statements of loss and
stockholders' equity (deficit) in consolidating our books for financial
reporting purposes as a result of the fluctuation in United States--Canadian
currency exchange rates during that period. We anticipate that our exposure to
significant foreign currency gains or losses on our books will increase as we
invest a greater portion of our United States-dollar denominated cash reserves
into our Canadian operations and properties through intercompany advancements.
We cannot give you any assurance that our future operating results will not be
similarly adversely affected by currency exchange rate fluctuations. See Part
I, Item 3, of this report captioned "Quantitative and Qualitative Disclosure
About Market Risk," for a description of other aspects of our company that may
be potentially affected by foreign exchange fluctuations.
Effect Of Inflation
We do not believe that our operating results were adversely affected during the
first three months of fiscal 2000 or fiscal 1999 by inflation or changing
prices.
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Year 2000 Compliance
During fiscal 1999 we reviewed our internal computer systems and software
products for Year 2000 problems, and found them to be generally Year 2000
compliant, and have had no Year 2000 complications as of the date of this
report.
Uncertainties And Other Factors That May Affect Our Future Results And Financial
Condition
Readers are urged to carefully review and consider the various uncertainties and
risks which, in addition to uncertainties and risks presented elsewhere in this
report, may affect our future results of operations or financial condition and
an investment in our securities. These uncertainties and risks should also be
considered in context with the various disclosures concerning our company and
our business and uncertainties and risks that may affect our future results of
operations or financial condition made in other reports we periodically file
with the Securities and Exchange Commission, including the following fillings
which we incorporate by reference into this report:
. our annual report on Form 10-K for the fiscal year ended December 31, 1999,
. any quarterly reports on Form 10-Q we may filed during the remainder of
fiscal 2000, and
. any current reports on Form 8-K we may file.
Uncertainties and Risk Factors Generally Relating To Our Company And Our
Business
. We Are A Development Stage Enterprise Which Has Accumulated Losses Since
Our Inception, And We Anticipate That We Will Continue To Incur Operating
Losses For The Near Future
We are a developmental stage enterprise since we have not received any oil
or gas revenues to date, and have, as a consequence of our lack of
revenues, incurred a cumulative net loss (before comprehensive losses) in
the amount of $4,585,814 from our inception in October 1995 through March
31, 2000. Our ability to generate revenues and profits will depend
primarily upon the successful implementation of our business plan, which is
dependent at this point in time upon one or more of our joint venture
partners successfully drilling and producing commercially viable quantities
of oil or natural gas from SFD Prospects we identify. We do not anticipate
that we will receive any oil or gas revenues until the third quarter of
fiscal 2000, at the earliest, assuming our current contemplated drilling
program is successful and there are no complications in drilling or
completing the wells or tying them into a sales or gathering system. We
anticipate that we will continue to incur significant losses on a month-to-
month basis for at least twelve to eighteen months going forward from the
date of this report, notwithstanding our receipt of oil and gas revenues
based upon our internal projections, due to our significant monthly
operating and research and development costs.
. Our Limited Operating History Could Adversely Affect Our Business
We are a recently organized development stage enterprise with an unproven
technology and a limited operating history. Our activities through the date
of this report have encompassed:
o developing our business plan;
o obtaining license rights to our SFD technologies;
o establishing administrative offices and laboratory facilities, and
engaging executive, administrative, scientific, geological,
geophysical, scientific, information technology and aviation
personnel;
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o developing our SFD technology to a commercial stage;
o acquiring joint venture partners;
o conducting commercial SFD surveys on behalf of our joint venture
partners; and
o successfully drilling oil and gas wells identified through our SFD
technology.
We are subject to all the risks and issues inherent in the establishment
and expansion of a new business enterprise including, among others,
problems of using new and unproven technologies, hiring and training
personnel, acquiring reliable facilities and equipment, and implementing
operational controls. In general, startup businesses are subject to risks
and or levels of risk that are often greater than those encountered by
companies with established operations and relationships. Startups often
require significant capital from sources other than operations. The
management and employees of startup business shoulder the burdens of the
business operations and a workload associated with company growth and
capitalization that is disproportionately greater than that for an
established business. Our limited operating history makes it difficult,
if not impossible, to predict future operating results. We cannot give
you any assurance that we will successfully address these risks. Our
failure to successfully address these risks could have a material,
adverse effect on our business, financial condition and operating
results.
. Our Future Success Is Dependent Upon Our Ability, Through Utilization Of
Our SFD Technology, To Locate Commercially Viable Hydrocarbon Accumulations
For Development By Our Joint Venture Partners.
Our future success is dependent upon our ability, through utilization of
our SFD technology, to locate commercially viable hydrocarbon accumulations
for development by our joint venture partners. Based on our business plan,
we will be dependent on:
o the efficacy of our SFD technology in locating SFD Prospects; and
o the cooperation of, and capital investment by, of our joint venture
partners in exploiting these prospects.
Although the results of our SFD technology as a geologic structural
identification tool have been satisfactorily tested by our joint venture
partners, we cannot give you any assurances that our SFD technology will be
able to consistently locate hydrocarbons or oil and gas prospects, or that
these prospects will be commercially exploitable. We also cannot give you
any assurances that we will be able to discover commercial quantities of
oil and gas, or that our joint venture partners will successfully acquire
and drill properties at low finding costs.
. We Are Reliant Upon Our Joint Venture Partners For Opportunities To
Participate In Exploration Prospects
We will be reliant, at least in the near-term, upon our joint venture
partners for opportunities to participate in exploration prospects, through
overriding royalties or equity participation on a working interest basis
from producing SFD Prospects. We exclusively focus on exploration and the
review and identification of viable prospects through our SFD technology,
and rely upon our joint venture partners to provide and complete all other
project operations and responsibilities, including land acquisition,
drilling, marketing and project administration. As a result, we have only a
limited ability to exercise control over the selection of prospects for
development, drilling or production operations, or the associated costs of
such operations. The success of each project will be dependent upon a
number of factors which are outside our control, or controlled by our joint
venture partners as the project operator, in accordance with the applicable
agreements between our company and the joint venture partners. These
factors include:
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o the selection and approval of prospects for lease/acquisition and
exploratory drilling;
o obtaining favorable leases and required permitting for projects;
o the availability of capital resources of the joint venture partner for
land acquisition and drilling expenditures;
o the timing of drilling activity, and the economic conditions at such
time, including then prevailing prices for oil and gas; and
o the timing and amount of distributions from the production.
Our reliance on our joint venture partners, and our limited ability to
directly control project operations, costs and distributions could have a
material adverse effect on the realization of return from our interest in
projects, and on our overall financial condition.
. Our Revenues And Cash Flow Will Be Principally Dependent Upon The Success
Of Drilling And Production From Prospects In Which We Participate Through
Agreements With Our Joint venture partners
Pursuant to our business plan, our revenues and cash flow will, at least in
the near-term, be principally dependent upon the success of drilling and
production from prospects in which we participate through agreements with
our joint venture partners in the form of an overriding royalty or a
working interest or other participation right. The success of these
prospects will be determined by the location, development and production of
commercial quantities of hydrocarbons. Exploratory drilling is subject to
numerous risks, including the risk that no commercially productive oil and
gas reservoirs will be encountered. The cost to our joint venture partners
to drill, complete and operate wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety
of factors including unexpected formation and drilling conditions, pressure
or other irregularities in formations, equipment failures or accidents, as
well as weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment. Our partners' inability
to successfully locate and drill wells that produce commercial quantities
of oil and gas would have a material adverse effect on our business,
financial position and results of operations.
. Our Future Operating Results May In The Future Fluctuate Significantly
Our operating results may in the future fluctuate significantly depending
upon a number of factors including industry conditions, prices of oil and
gas, rate of drilling success, rates of production from completed wells and
the timing of capital expenditures. This variability could have a material
adverse effect on our business, financial condition and results of
operations. In addition, any failure or delay in the realization of
expected cash flows from initial operating activities could limit our
future ability to continue exploration and to participate in economically
attractive projects.
. Volatility Of Oil And Natural Gas Prices Could Have A Material Adverse
Effect On Our Business
It is impossible to predict future oil and natural gas price movements with
any certainty, as they have historically been subject to wide fluctuations
in response to a variety of market conditions, including:
o relatively minor changes in the supply and demand for oil and natural
gas,
o economic, political and regulatory developments, and
-25-
o competition from other sources of energy.
Any extended or substantial decline in oil and gas prices would have a
material adverse effect on:
o our ability to negotiate favorable joint ventures with viable industry
participants;
o the volume of oil and gas that could be economically produced by the
joint ventures in which we participate;
o our cash flow; and
o our access to capital.
We do not currently intend to engage in hedging activities, and may be more
adversely affected by fluctuations in oil and gas prices than other
industry participants that do engage in such activities. Our business,
results of operations and financial condition would be materially and
adversely affected by adverse changes in prevailing oil and gas prices. See
Part I, Item 3, of this report captioned "Quantitative And Qualitative
Disclosures About Market Risk," for additional discussion of market risks
relating to oil and gas price fluctuations.
. The Intense Competition That Is Prevalent In The Oil And Gas Industry Could
Have A Material Adverse Effect On Our Business
We compete directly with independent, technology-driven exploration and
service companies, and indirectly (through our joint venture partnerships)
with major and independent oil and gas companies in our exploration for and
development of commercial oil and gas properties. We will experience
competition from numerous oil and gas exploration competitors offering a
wide variety of geological and geophysical services. Many of these
competitors have substantially greater financial, technical, sales,
marketing and other resources than we do, and may be able to devote greater
resources to the development, promotion and sales of their services than
our company. We cannot give you any assurance that our competitors will not
develop exploration services that are superior to our SFD technology, or
that these technologies will not achieve greater market acceptance than our
SFD technology. Increased competition could impair our ability to attract
viable industry participants, and to negotiate favorable participations and
joint ventures with such parties, which could materially and adversely
affect our business, operating results and financial condition.
The oil and gas industry is highly competitive. Many companies and
individuals are engaged in the business of acquiring interests in and
developing oil and gas properties in the United States and Canada, and the
industry is not dominated by any single competitor or a small number of
competitors. Our joint venture partners will compete with numerous industry
participants for the acquisition of land and rights to prospects, and for
the equipment and labor required to operate and develop such prospects.
Many of these competitors have financial, technical and other resources
substantially in excess of those available to us or our joint venture
partners. These competitive disadvantages could adversely affect our or our
joint venture partners' ability to participate in projects with favorable
rates of return.
. There Is Limited Market Acceptance For Our SFD Technology, And It Must
Compete With Established Geological And Geophysical Technologies Which Have
Already Achieved Market Acceptance.
There is limited market acceptance for our SFD technology, and it must
compete with established geological and geophysical technologies which have
already achieved market acceptance. As is typical in the case of any new
technology, demand and market acceptance for our SFD technology is subject
to a high level of uncertainty and risk. Because the market for exploration
services using our SFD technology is new and evolving, it is difficult to
predict the future growth rate, and the size
-26-
of the potential market. We cannot give you any assurance that a market for
our exploration services will develop, or be sustainable. If the market
fails to develop, or if our exploration services do not achieve or sustain
market acceptance, our business, results of operations and financial
condition would be materially and adversely affected.
. Technological Advancements In The Oil And Gas Industry Could Have A
Material Adverse Effect On Our Business
The oil and gas industry is characterized by rapid technological
advancements and the frequent introduction of new products, services and
technologies. As new technologies develop, we may be placed at a
competitive disadvantage, and competitive pressures may force us to improve
or complement our SFD technology, or to implement additional technologies
at substantial cost. In addition, other oil and gas exploration companies
may implement new technologies before us, and these companies may be able
to provide enhanced capabilities and superior quality. We cannot give you
any assurance that we will be able to respond to these competitive
pressures and implement or enhance our SFD technology on a timely basis, or
at an acceptable cost. In such case, our business, financial condition and
results of operations could be materially adversely affected.
. Our Inability To Retain Our Key Managerial, Geological and Geophysical, and
Research and Development Personnel Could Have A Material Adverse Effect On
Our Business
Our success depends to a significant extent on the continued efforts of our
senior management team, which currently is composed of a small number of
individuals, including Mr. George Liszicasz, the inventor of our SFD
technology who is our Chief Executive Officer and who is responsible for
the continuing development of our SFD technology and the interpretation of
SFD Data, and Messrs. Daniel C. Topolinsky and James R. Ehrets, our
President/Chief Operations Officer and our Executive Vice President of
Operations, respectively.
The loss of Mr. Liszicasz's services would be extremely difficult to
replace since he is the inventor of, and has intimate knowledge of, the
theoretical basis of the SFD technology, and has also developed the
methodologies used to interpret SFD Data, and the loss of his services
would likely have a material adverse effect on our business, results of
operations and financial condition. While we are presently training
personnel to operate our SFD technology and to interpret SFD Data, we
cannot give you any assurance that these personnel could fully replace Mr.
Liszicasz with respect to these functions, at least in the short-term.
Moreover, we do not know if we would be able to successfully replicate the
SFD technology in the event of the loss of Mr. Liszicasz.
The loss of Messrs. Topolinsky's and Ehret's services would also be
extremely difficult to replace due to their management skills and their
core knowledge of our SFD technology and business as a result of their
association with our company over the past several years, and their loss
would also likely have a material adverse effect on our business, results
of operations and financial condition.
While we have entered into employment agreements with our senior management
team, Mr. Liszicasz is not obligated--and as a result of his relationships
with Momentum Resources Corporation may in the future be unable--to devote
his entire undivided time and effort to or for our benefit. While we
currently carry a key person life insurance on Mr. Liszicasz, we do not
carry any key person life insurance policies any of our other executive
officers.
Our success also depends, to a lesser extent, on the continued efforts of
our geological interpretive and research and development teams, which are
composed of a small number of individuals. While there are professionals
who could replace these individuals, none of these professionals have any
theoretical or working knowledge of how to interpret SFD Data or how our
SFD technology operates, and it would take a significant period of time to
train any replacement personnel. Until such time as we have a fully trained
complement of geological interpretive and research and
-27-
development and teams, the loss of any members of these teams could
adversely affect the pace at which we interpret SFD Data or effect
improvements to our SFD technology, which could adversely impact our
business and results of operations and financial condition.
. We May Be Unable To Attract The Qualified Managerial, Geological and
Geophysical, and Research and Development Personnel Required To Implement
Our Longer-Term Growth Strategies
Our ability to implement our longer-term growth strategies depends upon our
continuing ability to attract and retain highly qualified geological,
technical, scientific, information management and administrative personnel.
Competition for these types of personnel is intense and we cannot give you
any assurance that we will be able to retain our key managerial,
professional and/or technical employees, or that we will be able to attract
and retain additional highly qualified managerial, professional and/or
technical personnel in the future. Our inability to attract and retain the
necessary personnel could impede our growth.
. We May Be Unable To Effectively Manage Our Expected Growth
Our success will depend upon the rapid expansion of our business. Expansion
will place a significant strain on our financial, management and other
resources, and will require us, among other things, to:
o change, expand and improve our operating, managerial and financial
systems and controls; and
o improve coordination between our various corporate functions.
We cannot give you any assurance that we will be able to manage the
expansion of our business effectively. Our inability to effectively manage
our growth, including the failure of any new personnel we hire to achieve
anticipated performance levels, would have a material adverse effect on our
business, results of operations and financial position.
. Our Business May Be Adversely Affected By Currency Fluctuation, Regulatory,
Political And Other Risks Associated with International Transactions
We currently operate within the United States and Canada and anticipate we
will also operate outside of these countries in the foreseeable future.
These operations will subject us to several potential risks, including
risks associated with:
o fluctuating exchange rates,
o the regulation by the governments of the United States and Canada as
well as foreign governments of fund transfers and export and import
duties and tariffs; and
o political instability.
We cannot give you any assurance that any of these risks will not have a
material adverse effect upon our business. We do not currently engage in
activities to mitigate the effects of foreign currency fluctuations. If
earnings from international operations increase, our exposure to
fluctuations in foreign currencies may increase, and we may utilize forward
exchange rate contracts or engage in other efforts to mitigate foreign
currency risks. We can give no you assurance as to the effectiveness of
these efforts in limiting any adverse effects of foreign currency
fluctuations on our international operations and our overall results of
operations.
-28-
. Impact Of Governmental and Environmental Regulation On Our Business
o SFD Survey Flight Operations
The operation of our business, namely, conducting aerial SFD surveys
and interpreting SFD Data, is not subject to material governmental or
environmental regulation with the exception of flight rules
promulgated by the Federal Aviation Administration and Transport
Canada governing the use of private aircraft, including rules relating
to low altitude flights.
o Oil And Gas Exploration And Development Projects
The oil and natural gas industry in general is subject to extensive
controls and regulations imposed by various levels of the federal and
state governments in the United States and federal and provincial
governments in Canada. In particular, oil and gas exploration and
production is subject to laws and regulations governing environmental
quality and pollution control, limits on allowable rates of production
by well or proration unit, and other similar regulations. Laws and
regulations generally are intended to prevent waste of oil and natural
gas; protect rights to produce oil and natural gas between owners in a
common reservoir, control the amount of oil and natural gas produced
by assigning allowable rates of production, and control contamination
of the environment. Environmental regulations affect our operations on
a daily basis. Public interest in the protection of the environment
has increased dramatically in recent years. Drilling in certain areas
has been opposed by environmental groups and, in certain areas, has
been restricted. We believe that the trend of more expansive and
stricter environmental legislation and regulations will continue.
We do not expect that any of these government controls or regulations
will affect projects in which we participate in a manner materially
different than they would affect project of similar size or scope of
operations. All current legislation is a matter of public record and
we are not able to accurately predict what additional legislation or
amendments may be enacted. Governmental regulations may be changed
from time to time in response to economic or political conditions. Any
laws enacted or other governmental action taken which prohibit or
restrict onshore and offshore drilling or impose environmental
protection requirements that result in increased costs to the oil and
gas industry in general would have a material adverse effect on our
business, results of operations and financial position.
. Impact Of Operating Hazards On Our Business
o SFD Survey Flight Operations
The operation of our SFD survey aircraft is subject to the usual
hazards incident to general and low level flight operations. These
hazards can cause personal injury and loss of life, as well as severe
damage to and destruction of property. While we maintain insurance
coverage against some, but not all, operating risks associated with
the operation of our aircraft, we cannot predict the continued
availability of insurance coverage or the availability of insurance at
premium levels that justify its purchase, nor can we give any
assurance that any claim would not exceed our policy limits. If we
were unable to procure insurance for our flight operations at an
acceptable cost, the occurrence of significant adverse aircraft
accident not fully insured or indemnified against could have a
material, adverse effect on our business, financial condition and
operating results. Similarly, a judgment or settlement in excess of
our policy limits could also have a material, adverse effect on our
business, financial condition and operating results.
o Oil And Gas Exploration And Development Projects
-29-
The oil and gas exploration and development projects in which we
participate through our joint venture partners will also be subject to
the usual hazards incident to the drilling of oil and gas wells,
including the risk of fire, explosions, blow-out, pipe failure, casing
collapse, abnormally pressured formations and environmental hazards
such as oil spills, gas leaks, ruptures and discharges of toxic gases.
In addition to the foregoing, offshore operations are subject to the
additional hazards of marine operations, such as capsizing, collision
and adverse weather and sea conditions. These hazards can cause
personal or loss of life, severe damage to or destruction of property,
natural resources and equipment, pollution or other environmental
damage, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations.
The project operator will, in accordance with prevailing industry
practice, maintain insurance against some, but not all, of these
risks. The insurance maintained by the project operator generally
would not cover claims relating to failure of title to oil and gas
leases, trespass during survey acquisition or surface damage
attributable to seismic operations, or business interruption, nor
would it protect against loss of revenues due to well failure. There
can be no assurance that any insurance obtained by the project
operating covering claims related to worker's compensation,
comprehensive general liability for bodily injury and property damage,
comprehensive automobile liability and pollution, cleanup, underground
blowout and evacuation will be adequate to cover any losses or
liabilities which may be incurred within projects in which we
participate. We also cannot predict the continued availability of
insurance coverage or the availability of insurance at premium levels
that justify its purchase.
Since we do not act as operator on any projects in which we may
participate, we are dependent upon our partners to conduct operations
in a manner so as to minimize these operating risks.
In cases where we have direct liability as a result of our
participation on a working interest basis, the failure or inability of
the project operator to procure insurance at an acceptable cost or the
occurrence of a significant adverse event not fully insured or
indemnified against could have an direct material, adverse effect on
our business, financial condition and operating condition. In these
cases our exposure will be commensurate with our participation
percentage.
While we would have no direct liability in cases where our
participation is limited to an overriding royalty interest, the
failure or inability of the project operator to procure insurance at
an acceptable cost or the occurrence of a significant adverse event
not fully insured or indemnified against could have an indirect
material, adverse effect on our business, financial condition and
operating results to the extent it adversely affects our joint venture
partner's ability to complete current projects or explore for and
develop additional projects.
Matters Relating To Our Common Stock
. There Is Only A Limited Public Market For Our Common Stock
There is only a limited public market for our common stock on the NASD OTC
Electronic Bulletin, and we cannot give you any assurance that a broader or
more active public trading market for our common stock will develop or be
sustained. We are under no obligation to take any action to improve the
public market for our securities including, without limitation, filing an
application to list our common stock on any stock exchange or any over any
other counter market.
. Our Stock Price Is Extremely Volatile
The market price for our common stock is extremely volatile and subject to
significant price and volume fluctuations in response to a variety of
external and internal factors. This is especially true
-30-
with respect to emerging companies such as ours. Examples of external
factors, which can generally be described as factors that are unrelated to
the operating performance or financial condition of any particular company,
include changes in interest rates and worldwide economic and market
conditions, as well as changes in industry conditions, such as changes in
oil and gas prices, oil and gas inventory levels, regulatory and
environment rules, and announcements of technology innovations or new
products by other companies. Examples of internal factors, which can
generally be described as factors that are directly related to our
operating performance or financial condition, would include release of
reports by securities analysts and announcements we may make from time-to-
time relative to our operating performance, drilling results, advances in
technology or other business developments.
Because we are a development stage enterprise with a limited operating
history and no revenues or profits, the market price for our common stock
will be more volatile than that of a seasoned issuer. Changes in the market
price of our common stock may have no connection with our operating results
or prospects. No predictions or projections can be made as to what the
prevailing market price for our common stock will be at any time.
. You May Become Subject To The Penny Stock Rules If Our Stock Price Declines
To Less Than $5
Since our common stock is not listed on a national stock exchange or quoted
on the Nasdaq Market, it will become subject, in the event the market price
for these shares declines to less than $5 per share, to a number of
regulations known as the "penny stock rules." The penny stock rules require
a broker-dealer to deliver a standardized risk disclosure document prepared
by the Securities and Exchange Commission, to provide the customer with
additional information including current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in
the transaction, monthly account statements showing the market value of
each penny stock held in the customer's account, and to 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.
To the extent these requirements may be applicable they will reduce the
level of trading activity in the secondary market for our common stock and
may severely and adversely affect the ability of broker-dealers to sell our
common stock.
. Our Common Stockholders Should Not Expect To Receive A Liquidation
Distribution
If we were to wind-up or dissolve our company and liquidate and distribute
our assets, the holders of our common stock would share ratably in our
assets only after we satisfy any amounts we would owe to our creditors and
any amounts we would owe to our series "A" preferred stockholders as a
liquidation preference ($7.50 per share, or $6,000,000 in the aggregate).
If our liquidation or dissolution were attributable to our inability to
profitably operate our business, then it is likely that we would have
material liabilities at the time of liquidation or dissolution.
Accordingly, we cannot give you any assurance that sufficient assets will
remain available after the payment of our creditors and preferred
stockholders to enable you to receive any liquidation distribution with
respect to any shares of our common stock you may hold.
. Two Of Our Principal Stockholders Control Our Company
Messrs. George Liszicasz and R. Dirk Stinson, our two principal
stockholders and two of our directors, beneficially own over two-thirds of
our common stock, and will therefore have the power, as a group, to elect a
majority of our Board of Directors. Our Board, in turn, has the power to
appoint our officers and to determine, in accordance with their fiduciary
duties and the business judgment rule, our direction, objectives and
policies, such as:
o our business expansion or acquisition policies;
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o whether we should raise additional capital through financing or equity
sources, and in what amounts;
o whether we should retain cash reserves for future product development,
or distribute them as a dividend, and in what amounts;
o whether we should sell all or a substantial portion of our assets, our
should merge or consolidate with another corporation; and
o transactions which may cause or prevent a change in control or the
winding up and dissolution of our company.
An investment in our common stock will entail entrusting these and similar
decisions to our present management subject, of course, to their fiduciary
duties and the business judgment rule.
. There Is An Inherent Conflict In Interest Arising As a Result Of the
Relationship Between Our Two Principal Stockholders And The Licensor Of Our
SFD Technology
Messrs. George Liszicasz and R. Dirk Stinson indirectly own and control
both our company and Momentum Resources Corporation, which has granted us
an exclusive license to identifying oil and natural gas prospects using the
SFD Data while reserving the exclusive right to use the SFD technology for
purposes other than oil and natural gas exploration. Although Mr. Liszicasz
has entered into an employment agreement with us he is not obligated, and
as a result of his relationships with Momentum may in the future not be
able, to devote his entire undivided time and effort to or for our benefit.
As a result of the foregoing relationships, certain conflicts of interests
between our company and one or more of Momentum and Messrs. Liszicasz and
Stinson may directly or indirectly arise, including the following:
o Mr. Liszicasz's potential inability to devote his undivided time and
attention to our affairs; and
o the proper exercise by Messrs. Liszicasz or Stinson of their fiduciary
duties on our behalf as directors and controlling stockholders of our
company in connection with any matters concerning Momentum such as, by
way of example and not limitation:
. disputes regarding the validity, scope or duration of the SFD
Technology License;
. the exploitation of corporate opportunities;
. rights to proprietary property and information;
. maintenance of confidential information as between entities; and
. potential competition between our company and Momentum.
While Messrs. Liszicasz and Stinson and our company have each executed
certain disclosures and consents relating to these conflicts, these
disclosures and consents will not remediate these conflicts, but will
merely release Messrs. Liszicasz and Stinson from liability as a result of
the conflicts so long as they use reasonable efforts to minimize the
conflicts. In the event any of these conflicts prove to be irreconcilable,
Messrs. Liszicasz may be forced to resign his positions with our company.
Our Statements About Anticipated Events Or Future Trends May Prove To Be
Inaccurate
In this report we have made a number of statements, which we refer to as
"forward-looking statements," generally relating to our expectations or
speculations as to future events and our observations as to trends
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and factors that may impact our future operating results. You can generally
identify any forward-looking statements contained in this report through words
such as "anticipate," "believe," "estimate," "expect," "budget" and "project"
and similar expressions. Forward-looking statements that contained in this
report, for example, include statements relating to:
. the amount and character of future oil and gas revenues we may receive, the
timing of receipt of revenues, and the timing of break-even, including, by
way of example and not limitation, those statements contained in that
section in Part I, Item 2 of this report captioned "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations--Overview;"
and Part I, Item 2, of this report captioned "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations--Capital
Requirements;"
. the amount and character of expenses we may incur, and the timing of these
expenditures including, by way of example and not limitation, those
statements contained in those sections in Part I, Item 2, of this report
captioned "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations--Capital Requirements" and "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations--Results Of
Consolidated Operations--Expectations Relative To Future Expense Levels;"
and
. the amount and composition of our capital expense budget, and the timing of
these capital outlays including, by way of example and not limitation,
those statements contained in those sections in Part I, Item 2, of this
report captioned "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations--Capital Requirements" and
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations--Results Of Consolidated Operations--Expectations Relative To
Future Expense Levels."
Whenever you read any forward looking statement contained in this report, you
should be aware of and take into consideration that:
. the forward-looking statement merely reflects the current expectations and
speculation of our management as to anticipated events or observations
relating to future trends based, in part, upon currently available
information and our current business plan, and
. actual results from these future events may differ materially from the
results expected or speculated or trends observed as expressed in, or
implied by, the forward-looking statement, as a result of changes in
circumstances and events and other uncertainties and risks, including:
o changes in our business plan and corporate strategies or that of our
joint venture partners;
o delays in our ability to conduct and complete SFD surveys or interpret
SFD Data,
o delays on the part of our joint venture partners in planning SFD
survey activities, in conducting geologic and geophysical evaluations
of recommended anomalies, in acquiring drilling rights, in conducting
exploratory drilling activities and completing wells, and in
connecting producing wells to pipelines and other production
infrastructure; or
o the occurrence of the various types of uncertainties and risk factors
described above in this section as well as those described in Part I,
Item 3, of this report captioned "Quantitative and Qualitative
Disclosure About Market Risk;" and
. the forward-looking statement must, in any event, be considered in context
with the various disclosures concerning our company and our business made
in this report as well as other reports we periodically file with the
Securities and Exchange, including our annual report on Form 10-K for our
fiscal year ended December 31, 1999.
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As a consequence of the forgoing factors, you are cautioned not to put undue
reliance on any forward-looking statement contained in this report.
We are not obligated to update or revise any forward looking statement contained
in this report to reflect new events or circumstances except to the extent
required by law. You are also cautioned that we intend for all forward-looking
statements contained in this report to be construed as "forward-looking
statements" within the meaning Section 21E of the United States Securities
Exchange Act of 1934, which establishes a safe-harbor from private actions for
forward-looking statements as defined by Section 21E.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Oil And Gas Price Fluctuations
Our primary market risks will be related to market changes in oil and gas prices
(See Item I, Item 2, captioned "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations--Uncertainties And Other Factors
That May Affect Our Future Results And Financial Condition--Risks Relating To
The Company And Its Business--Volatility Of Oil And Natural Gas Prices"). Since
our prospective royalty revenues will be tied to the price at which our joint
venture partners sell oil and gas on the world market, any fluctuations in these
prices will directly and proportionately impact our royalty income base (i.e., a
1% increase or decrease in oil or gas prices would result in a corresponding 1%
increase or decrease in our oil or gas royalties). Should we elect a working
interest in lieu of a royalty interest, our working interest revenue base would
be similarly affected, except that this affect would not necessarily be
proportional since production and marketing costs would most likely remain the
same. For example, in the case of a decline in oil and gas prices where
production and marketing costs are unaffected, the decline in our working
interest revenues would most likely be greater, in percentage terms, than the
decline in oil and gas prices.
We do not anticipate that any decline in world oil and gas prices would
adversely affect our operations (i.e., force our company or our joint venture
partners to slow down or cut-back SFD survey or interpretation operations or our
staff) insofar as a primary benefit of the SFD technology is to reduce finding
costs, which benefit becomes more important as oil and gas prices decline. A
decline in oil and gas prices could, however, force our joint venture partners
to curtail exploration drilling operations since these operations are ordinarily
funded out of available cash flow which, in turn, is dependent upon oil and gas
prices. This eventuality would adversely affect our future cash flows since
these prospects would not be drilled until the joint venture partner obtained
sufficient capital. (Even if exploration activities are curtailed, however, a
decline in oil and gas prices raises opportunities to acquire and "bank" SFD-
qualified prospects at lower acquisition prices, which can then be drilled when
oil and gas prices increase).
A decline in oil and gas prices could also lead our joint venture partners to
"shut-in" an existing producing well (primarily "marginal producing wells") on
the basis that the decline in price no longer make the well economic to operate.
In such an event we would no longer receive royalty or working interest revenues
from the shut-in well.
Currency Fluctuations
An additional significant market risk relates to foreign currency fluctuations
between American and Canadian dollars. Since our royalty or working interest
revenues generated by our Canadian-based joint venture partners will be
denominated in Canadian currency, our financial position could be adversely
affected by American-Canadian currency fluctuations. We have not previously
engaged in activities to mitigate the effects of foreign currency fluctuations
due to the absence of Canadian revenues to date, and we anticipate that the
exchange rate between the American and Canadian dollar will remain fairly
stable.
If earnings from our Canadian operations increase, our exposure to fluctuations
in the American-Canadian exchange rate will increase, and we may utilize forward
exchange rate contracts or engage in other efforts to mitigate these foreign
currency risks. If entered into, there can be
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We cannot give you any assurance that the use of exchange rate contracts or
other mitigation efforts would effectively limit any adverse effects of foreign
currency fluctuations on our Company's international operations and our overall
results of operations.
Interest Rate Fluctuations
We currently maintain the bulk of our available cash in money-market accounts
maintained in U.S. dollars. Our interest income from these short-term
investments could be adversely affected by any material changes in interest
rates within the United States.
ITEM II OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this report, there are no material legal proceedings pending
or, to the knowledge of our management, contemplated or threatened, to which to
our company or properties are or may become a party. As of the date of this
report, there are, to the knowledge of our management, no material proceedings
to which any director, officer of affiliate of our company is a party adverse to
our company or has a material interest adverse to our company.
Item 2. Changes In Securities And Use Of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
Exhibits
4.1 2000 Pinnacle Oil International, Inc.
Directors' Stock Plan
4.2 Form of Stock Option Certificate for grants to directors under the 2001
Pinnacle Oil International, Inc. Stock Plan
4.3 Lease Amending Agreement - Expansion of Premises dated May 11, 2000
between Pinnacle Oil International, Inc. and O & Y Properties, Inc.
4.4 Aircraft Purchase Agreement dated March 20, 2000 between Pinnacle Oil Inc.
and Winair Winkler
27 - Financial Data Table
Reports on Form 8--K
None
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Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10--Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated at Calgary, Alberta, Canada, this 12th day of May, 2000.
Pinnacle Oil International, Inc.
By: /s/ George Liszicasz
---------------------------------------
George Liszicasz
Chief Executive Officer
(principal executive officer)
By: /s/ Daniel C. Topolinsky
---------------------------------------
Daniel C. Topolinsky
President and Chief Operating Officer
(principal executive officer)
By: /s/ John M. Woodbury, Jr.
---------------------------------------
John M. Woodbury, Jr.,
Chief Financial Officer
(principal accounting officer)
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