As filed with the Securities and Exchange Commission on November 15, 1999
================================================================================
Securities And Exchange Commission
Washington, D.C. 20549
_________________
FORM 10--Q
_________________
(Mark One)
[_] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934 For The Nine-Month Period Ended September 30, 1999; 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:
12,836,983 shares of common stock, par value $0.001 per share
================================================================================
PINNACLE OIL INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10--Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION................................................................. 2
ITEM 1. Financial Statements.................................................................. 2
Consolidated Balance sheets........................................................... 2
Consolidated Statements Of Loss....................................................... 3
Consolidated Statements Of Shareholders' Equity....................................... 4
Consolidated Statements Of Cash Flow.................................................. 5
Notes To Financial Statements......................................................... 6
ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations. 13
General............................................................................... 13
Overview.............................................................................. 13
Outlook And Prospective Capital Requirements.......................................... 14
Results Of Operations................................................................. 15
Liquidity And Capital Resources....................................................... 16
Other Matters......................................................................... 17
Uncertainties And Other Factors That May Affect Our Future Results And Financial
Condition............................................................................ 18
ITEM 3. Quantitative And Qualitative Disclosures About Market Risk............................ 25
Oil And Gas Price Fluctuations........................................................ 25
Currency Fluctuations................................................................. 26
Interest Rate Fluctuations............................................................ 26
PART II OTHER INFORMATION..................................................................... 26
ITEM 1. Legal Proceedings..................................................................... 26
ITEM 2. Changes In Securities And Use Of Proceeds............................................. 26
ITEM 3. Defaults Upon Senior Securities....................................................... 27
ITEM 4. Submission Of Matters To A Vote Of Security Holders................................... 27
ITEM 5. Other Information..................................................................... 27
ITEM 6. Exhibits.............................................................................. 27
Exhibits.............................................................................. 27
Reports on Form 8--K.................................................................. 27
-ii-
Advisement
This report contains "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and is subject to the safe harbors created by those sections. Generally
speaking, any statements in this report which refer to characterizations of
future events or circumstances constitute forward-looking statements. You may
generally identify the forward-looking statements contained in this report by
the words "anticipate," "expect," "predict," "project," "estimate," "plan,"
"intend," "believe," "may," "will" and other similar expressions and variations,
although these words are not the exclusive means of identifying such statements.
The forward-looking statements contained in this report generally reflect our
current expectations or beliefs, based on currently available information,
regarding our future results of operations, performance and achievements, or
industry results, and are inherently subject to known and unknown uncertainties,
risks and other factors which may cause our actual results, performance or
achievements to differ materially from those expressed in, or implied by, such
forward-looking statements. These uncertainties, risks and other factors may
include, but are not necessarily limited to, those uncertainties and factors
identified in Part I, Items 2 and 3, of this report 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," and "Quantitative And Qualitative Disclosures About Market Risk,"
respectively, as well as those generally contained in our Annual Report on Form
10-K for the fiscal year ended December 31, 1998. Readers are cautioned not to
put undue reliance on any such forward-looking statement.
Readers are urged to carefully review and consider the various forward-looking
statements and other disclosures we make in this report and in our other reports
filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect our business and an
investment in our securities, including the following:
. Our Annual Report on Form 10-K for the fiscal year ended December 31,
1998,
. Any Quarterly Reports on Form 10-Q we may filed during the remainder of
fiscal 1999, and
. Any Current Reports on Form 8-K we may file.
-1-
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 September 30,
-----------------------------------
1999 1998
--------------- -------------
ASSETS
Current assets:
Cash........................................................................... $ 6,644,054 $ 5,302,646
Accounts receivable............................................................ 60,819 107,347
Prepaid expenses and other..................................................... 64,094 139,021
------------- ------------
Total current assets.......................................................... 9,768,967 5,549,014
Note receivable [note 4]........................................................ 34,197 35,860
Property and equipment:
Petroleum properties, net of accumulated depletion, depreciation and
amortization of $0 [notes 2(g) and 5].......................................... 28,125 --
Other property and equipment, net of accumulated depreciation and
amortization of $251,015 and $55,108, respectively [notes 2(h) and 6].......... 567,695 321,419
------------- ------------
Total property and equipment, net............................................. 595,820 321,419
Total assets................................................................ $ 10,398,984 $ 5,906,293
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................................... $ 149,496 $ 161,928
------------- ------------
Total current liabilities..................................................... 149,496 161,928
Shareholders' equity:
Series "A" convertible preferred stock; par value $0.001 per share,
liquidation preference $6.50 per share:
800,000 shares authorized; and 800,000 shares issued as of
September 30, 1999 and September 30, 1998 [note 8]............................ 800 800
Common stock, par value $0.001 per share:
50,000,000 shares authorized;
12,836,983 shares issued as of September 30, 1999;
12,426,983 shares issued as of September 30, 1998 [note 7)]................... 12,837 12,427
Warrants [notes 8 and 9]....................................................... 1,132,000 1,132,000
Additional paid-in capital..................................................... 16,133,273 10,013,021
Accumulated deficit during the development stage............................... (7,029,423) (5,413,883)
------------- ------------
Total shareholders' equity.................................................... 10,249,487 5,744,365
------------- ------------
Total liabilities and shareholders' equity.................................. $ 10,398,983 $ 5,906,293
============= ============
The accompanying notes to financial statements are an integral part of these
consolidated balance sheets
-2-
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Loss
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
October 20,
1995
(inception) to
Nine Months Ended September 30,
September 30, 1999
----------------------------------
1999 1998 (cumulative)
--------------- ------------- --------------
Operating expenses:
Administrative.............................................. $ 895,048 $ 747,158 $ 3,007,911
Amortization and depreciation [note 2(h)]................... 142,612 36,353 265,112
Survey operation support and development [note 2(i)]........ 255,858 17,417 832,117
Survey and data analysis, net of reimbursements by
joint-venture partners of $95,432 and $67,670,
respectively [note 2(j)]................................... 88,675 74,226 118,701
Write-down of assets........................................ 588 -- 17,662
--------------- ------------- --------------
Total operating expenses.................................. (1,382,781) (875,154) (4,241,503)
Operating loss............................................... (1,382,781) (875,154) (4,241,503)
Other income (expenses):
Interest cost on promissory notes........................... -- (14,298) (124,299)
Interest income............................................. 244,336 150,836 507,332
Other income................................................ -- 10,396 19,231
Foreign currency gain (loss) [note 2(k)].................... (94,575) (7,068) (113,848)
Settlement of damages....................................... -- -- 157,500
--------------- ------------- --------------
Total other income (expenses)............................. 149,761 139,866 445,916
Net loss for the period...................................... $ (1,233,020) $ (735,288) $ (3,795,587)
=============== ============= ==============
Basic and diluted loss per share [note 2(l)] (1)............. $ (0.10) $ (0.32)
=============== =============
Weighted average shares outstanding.......................... 12,590,793 12,286,678
=============== =============
(1) Basic and diluted loss per share for the nine-month period ended September
30, 1998 includes an adjustment for a deemed distribution attributable to a
beneficial conversion feature for certain of the Company's securities. The
basic and diluted loss per share for this period would be $0.06 without this
adjustment. See notes 2(l) and 8.
The accompanying notes to financial statements are an integral part of these
consolidated statements of loss
-3-
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Shareholders' Equity
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
Deficit
Series A Accumulated
Convertible Common Stock Additional During the
Common Stock Preferred Stock Warrants Paid-in Development
--------------------- ------------------- -------------------
Shares Amount Shares Amount Number Amount Capital Stage
---------- -------- --------- -------- -------- ---------- ------------ -----------
Issued at inception --
October 20, 1995.......... 5,000,000 $ 5,000 -- $ -- $ -- $ -- $ -- $ --
Net loss --
Fiscal 1995............... -- -- -- -- -- -- -- (53,696)
---------- -------- --------- -------- -------- ---------- ------------ -----------
Balance --
December 31, 1995......... 5,000,000 5,000 -- -- -- -- -- (53,696)
Issued on reverse
acquisition --
January 30, 1996.......... 5,968,281 5,968 -- -- -- -- (5,968) --
Issued for cash --
May 29, 1996.............. 975,000 975 -- -- -- -- 967,775 --
Net loss --
Fiscal 1996............... -- -- -- -- -- -- -- (475,578)
---------- -------- --------- -------- -------- ---------- ------------ -----------
Balance --
December 31, 1996......... 11,943,281 11,943 -- -- -- -- 961,807 (529,274)
Issued for services --
July 1, 1997.............. 71,938 72 -- -- -- -- 166,469 --
Net loss --
Fiscal 1997............... -- -- -- -- -- -- -- (913,321)
---------- -------- --------- -------- -------- ---------- ------------ -----------
Balance --
December 31, 1997......... 12,015,219 12,015 -- -- -- -- 1,128,276 (1,442,595)
Issued on conversion
of promissory notes --
February 1, 1998 (1)...... 411,764 412 -- -- -- -- 1,119,588 --
Issued for cash --
April 3, 1998............. -- -- 800,000 800 -- -- 7,792,167 (2,104,000)
Issued for cash --
April 3, 1998............. -- -- -- -- 200,000 1,132,000 -- (1,132,000)
Net loss --
Fiscal 1998............... -- -- -- -- -- -- -- (1,117,808)
---------- -------- --------- -------- -------- ---------- ------------ -----------
Balance --
December 31, 1998......... 12,426,983 12,427 800,000 800 200,000 1,132,000 10,040,031 (5,796,403)
Issued for cash --
February 22, 1999......... 10,000 10 -- -- -- -- 94,990 --
Issued for cash --
May 17, 1999.............. 400,000 400 -- -- -- -- 5,998,252 --
Net loss --
Nine months ended
September 30, 1999....... -- -- -- -- -- -- -- (1,233,020)
---------- -------- --------- -------- -------- ---------- ------------ -----------
Balance --
September 30, 1999........ 12,836,983 $ 12,837 800,000 $ 800 200,000 $1,132,000 $ 16,133,273 $(7,029,423)
========== ======== ========= ======== ======== ========== ============ ===========
The accompanying notes to financial statements are
an integral part of these consolidated statements of shareholders' equity
-4-
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Cash Flow
(Unaudited)
(Expressed in U.S. Dollars)
October 20,
1995
(inception) to
Nine Months Ended September 30,
September 30, 1999
--------------------------------
1999 1998 (cumulative)
------------- ------------ ------------------
Operating activities:
Net loss for the period....................................... $(1,233,020) $ (735,288) $(3,793,422)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization property and equipment......................... 142,613 36,353 264,927
Amortization of deferred costs.............................. 93,014 -- 154,287
Accounts receivable......................................... 60,616 (19,243) (55,987)
Prepaid expenses and other.................................. (36,763) (105,507) (64,095)
Due from (to) officers...................................... -- -- (4,832)
Accounts payable............................................ (27,854) (63,717) 149,496
Costs settled by issuance of common stock................... -- -- 166,541
Write-down of property and equipment........................ -- -- 28,077
Accrued interest on promissory notes........................ -- 10,000 120,000
------------- ------------ ------------------
Net cash used in operating activities..................... (1,001,394) (877,402) (3,035,008)
Financing activities:
Proceeds of promissory notes.................................. -- -- 1,100,000
Repayment of promissory notes................................. 1,216 -- (98,784)
Issuance of common stock...................................... 6,095,000 -- 7,075,000
Issuance of preferred stock and warrants...................... -- 6,000,000 6,000,000
Share issuance costs.......................................... (1,348) (333,158) (318,631)
Repayment of long-term debt................................... -- (146,520) (146,520)
------------- ------------ ------------------
Net cash generated by financing activities................ 6,094,868 5,520,322 13,611,065
Investing activities:
Deferred financing............................................ -- 149,403 (7,766)
Promissory note receivable.................................... -- (35,861) (35,413)
Acquisition of property and equipment......................... (135,117) (302,155) (860,699)
Investment in petroleum properties............................ (28,125) -- (28,125)
------------- ------------ ------------------
Net cash used in investing activities..................... (163,242) (188,613) (932,003)
Net cash inflow................................................ 4,930,232 4,454,307 9,644,054
Cash position, beginning of period............................. 4,713,822 848,339 --
------------- ------------ ------------------
Cash position, end of period................................... $ 9,644,054 $5,302,646 $ 9,644,054
============= ============ ==================
The accompanying notes to financial statements are an integral part of these
consolidated statements of cash flow
-5-
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes To Financial Statements
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
1. The Company
Pinnacle Oil International, Inc., a Nevada corporation (the "Company"), is
a technology-based reconnaissance exploration company which uses its
proprietary stress field detector (SFD) remote-sensing airborne survey
system to quickly and inexpensively identify and high-grade oil and natural
gas prospects. The Company has two wholly-owned subsidiaries, Pinnacle Oil
Inc., a Nevada corporation ("Pinnacle U.S.") and Pinnacle Oil Canada, Inc.,
a Canadian federal corporation ("Pinnacle Canada").
2. Basis of presentation
(a) Significant Accounting Policies
These financial statements have been prepared without audit in
accordance with: (1) accounting principles generally accepted in the
United States for interim financial reporting; and (2) the rules and
regulations of the United States Securities and Exchange Commission
relating to the preparation of quarterly reports and Article 10 of
Regulation S--X.
While these financial statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for
fair presentation of the result 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 the Company's Annual Report on Form 10--K for
its fiscal year ended December 31, 1998, as filed with the United
States Securities and Exchange Commission on March 31, 1999.
(b) Consolidation
The accounts of the Company's two wholly owned subsidiaries have been
consolidated with those of the Company in preparing these financial
statements. All significant intercompany balances and transactions
have been eliminated on consolidation.
(c) Interim Reporting
These interim financial statements report the results of the Company's
operations for the nine-month interim periods ended September 30, 1999
and 1998. These interim results are not necessarily indicative of the
results for an entire year, and also do not present all of the
information normally presented in audited statements for an entire
year. These interim financial statements should be read in
conjunction with the financial statements included in the Company's
Annual Report on Form 10--K for its fiscal year ended December 31,
1998, as filed with the United States Securities and Exchange
Commission on March 31, 1999.
(d) Reclassifications
Certain prior fiscal quarterly amounts have been reclassified to
conform to the current fiscal quarter's presentation.
-6-
(e) Estimates and assumptions
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
(f) Cash and Cash Equivalents
For purposes of the consolidated balance sheets and statements of cash
flow, the Company considers all investments with original maturities
of ninety days or less to be cash and cash equivalents.
(g) Petroleum Properties
All contributions by the Company for land acquisition, drilling,
completion and production with respect to any SFD Prospect in which
the Company elects to participate on a working interest basis are
recorded under the full cost method of accounting for oil and gas.
Under the full cost method of accounting, all costs associated with
drilling and development activities are capitalized on a country by
country basis, and amortized on the unit of production method based on
the Company's estimated proven developed reserves for that country.
If a particular exploration area does not prove to be commercially
viable, the associated drilling and development costs for that area
will be expensed at such time.
(h) Other Property and Equipment
Property and equipment, including computer software, are stated at
cost, and are depreciated or amortized over their estimated service
lives using the declining balance method as follows:
Airplane................................................................................ 25%
Computer equipment...................................................................... 30%
Computer software....................................................................... 100%
Equipment............................................................................... 20%
Furniture and fixtures.................................................................. 20%
Leasehold improvements.................................................................. 20%
Tools................................................................................... 20%
Vehicles................................................................................ 30%
Management periodically reviews the carrying value of property and
equipment to ensure that any permanent impairment in value is
recognized and reflected in the results from operations.
(i) Survey Operation Support and Development Expenditures
The Company expenses all survey operation support and development
expenditures as a research and development cost, with the exception of
hardware and software expenditures, which are capitalized. Survey
operation support and development expenditures consist primarily of
the cost, including allocable salaries, to: (1) develop, improve and
test the SFD Survey System and SFD Data interpretation functions; (2)
conduct field evaluations designed by the Company's strategic partners
to evaluate the SFD Survey System (after netting costs reimbursed to
the Company by its strategic partners); and (3) develop, organize,
staff and train the Company's research and development, survey and
interpretation operational functions.
-7-
(j) Survey and Data Analysis Expenditures
The Company expenses all survey and data analysis costs (after netting
costs reimbursed to the Company by its strategic partners). Survey
and data analysis costs consist primarily of: (1) aircraft operating
costs, travel expenses and allocable salaries of Company personnel
while on survey assignment; and (2) allocable salaries of Company
personnel while interpreting SFD Data for the Company's strategic
partners. Since survey and data analysis costs are incurred before
drilling commences and estimated reserves are proven, they are
capitalized under the full cost method of accounting, even if the
Company elects to participate on a working-interest basis with respect
to any SFD Prospect identified as a result of the associated SFD
survey activity.
(k) Foreign currency translation
The Company's current activities result in transactions denominated in
both U.S. and Canadian dollars, and management has determined that the
United States dollar is the appropriate functional currency for
measurement and reporting purposes.
Assets and liabilities denominated in Canadian dollars are translated
at the rate of exchange in effect at the balance sheet date.
Transaction gains and losses relating to the conversion into U.S.
dollars of year end balances denominated in Canadian dollars, and
revenue and expenses denominated in Canadian dollars, are classified
as foreign currency gains or losses.
The exchange rates between the Canadian and U.S. dollar were:
Balance Sheet
Date
(September 30) Average
-------------- ---------
1999...................................... 1.4895 1.4900
1998...................................... 1.4639 1.5312
(l) Basic And Diluted Loss Per Common Share
The Company's 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 common stock by the weighted average number
of shares outstanding for the period. The Company's diluted loss per
share is computed, also in accordance with SFAS No. 128, by including
the potential dilution that could occur if dilutive securities were
exercised or converted into common stock (the calculation of diluted
loss per share does not include the conversion or exercise of
securities if their effect is anti-dilutive).
The calculation of diluted loss per share also takes 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 the Company's securities.
(See note 8).
(m) Recent pronouncements
The implementation of SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a
full set of general-purpose financial statements, is required for all
for fiscal years beginning after December 15, 1997. The Company had
no items that would be included in a Comprehensive Income Statement
for any of the periods presented.
-8-
In September 1997, the FASB issued SFAS No. 132, "Employer's
Disclosures about Pensions and Other Post-Retirement Benefits" which
revises existing rules for employers' disclosures about pensions and
other post-retirement benefit plans. SFAS No. 132 does not change the
measurement or recognition of those plans. SFAS No. 132 is effective
for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 will not effect the Company's consolidated financial
position, results of operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standard for
accounting and reporting derivative instruments. SFAS No. 133 is
effective for periods beginning after June 15, 1999; however, earlier
application is permitted. Management is not currently planning on
early adoption of SFAS No. 133, and has not had an opportunity to
evaluate the impact of the provisions of SFAS No. 133 on the Company's
consolidated financial position.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-
Up Activities," which requires costs of start-up activities and
organization costs to be expensed as incurred. The effects of
adoption must be reported as a cumulative change in accounting
principle. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The Company expects that the impact of adoption of
SOP 98-5 will not materially effect the Company's consolidated
financial position, results of operations or cash flows.
3. Reverse Acquisition
The Company acquired what is now its wholly-owned subsidiary, Pinnacle
U.S., on January 20, 1996 in a transaction accounted for as a "Reverse
Acquisition" in accordance with United States Generally Accepted Accounting
Principles. The Reverse Acquisition was effected by the issuance of
10,090,675 common shares of the Company (then known as Auric Mining
Corporation), constituting approximately 92% of its outstanding shares, 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. The business combination has been accounted for 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. Accordingly, the consolidated statements of loss and shareholders'
equity (deficit) of the Company are deemed to be a continuation of Pinnacle
U.S.'s financial statements, and therefore reflect (1) the operations of
Pinnacle U.S. from the date of its formation (October 20, 1995) through to
the date the effective date of the Reverse Acquisition (January 20, 1996),
and (2) the consolidated operations of the Company thereafter.
4. Note Receivable
In September 1998, the Company loaned an employee the sum of Cdn. $54,756
(U.S. $35,760) for the purchase of a residence in connection with the
employee's relocation to Calgary, Alberta. The terms of the underlying
promissory note provide for principal and accrued interest on the loan to
be repaid on a monthly basis, with payment of principal determined on the
basis of a 300-month amortization rate, and with a variable interest rate
computed at the Company's floating interest rate for liquid investments
(presently 5 1/2%).
-9-
5. PETROLEUM PROPERTIES
On September 22, 1999, Pinnacle U.S. elected to participate on a working
interest basis with one of the Company's strategic partners in drilling an
exploration well in Wyoming pursuant to the terms of Pinnacle U.S.'s joint
exploration and development agreement with that partner. As a consequence
of its election, Pinnacle U.S. acquired a combination 11.25% overall
working interest and a 1.6% overall net overriding royalty interest in the
exploration block. This exploratory well was in the process of being
drilled as of September 30, 1999.
6. Other Property And Equipment
September 30,
-----------------------
1999 1998
---------- ----------
Airplane.................................................. $ 238,653 $ --
Computer equipment........................................ 137,918 65,822
Computer software......................................... 42,165 6,765
Equipment................................................. 59,437 37,246
Furniture and fixtures.................................... 148,102 132,424
Leasehold improvements.................................... 76,399 72,517
SFD Survey System (including software).................... 51,890 18,087
Tools..................................................... 1,651 --
Vehicle................................................... 62,495 43,668
---------- ----------
Property and equipment................................... 818,710 376,526
Less accumulated depreciation and amortization............ (251,015) (55,108)
---------- ----------
Net property and equipment............................... $ 567,695 $321,418
========== ==========
7. Common Stock
Two officers-directors each loaned $500,000 to the Company on January 31,
1997, for total loan proceeds of $1,000,000. These loans were extended
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: (1) 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 (2) the 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 the Company be unable to repay that amount by
the January 31, 1998 due date. The Company exercised its 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.
The Company raised $95,000 in gross proceeds on February 22, 1999 through
an employee's exercise of incentive stock options entitling him to purchase
10,000 shares of unregistered common stock at an exercise price of $9.50
per share.
The Company raised $6,000,000 in gross proceeds through a private placement
of 400,000 unregistered shares of its common stock at $15 per share on May
17, 1999. Net proceeds to the Company from this offering were $5,998,652,
after deducting $1,348 in offering expenses.
8. Preferred Stock
The Company completed a series of transactions on April 3, 1998, pursuant
to which it entered into a joint venture agreement and concurrently raised
$6,000,000 in gross proceeds through the private placement of 800,000
unregistered shares of series "A" convertible preferred stock, and warrants
to purchase 200,000 unregistered shares of common stock, to an affiliate of
the joint venture partner. Net proceeds to the Company from this offering
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 the Company wind-up and dissolve. The Company reserves
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
-10-
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 carries a $7.50 per share exercise price, and lapses
to the extent not exercised by April 3, 2001. (See note 9)
Insofar as the preferred shares and warrants contained beneficial
conversion features affording a discount or benefit to the holders of such
securities, the Company recorded a deemed distribution analogous to the
declaration of a dividend to the such holders. This deemed distribution
resulted in the Company: (1) increasing its accumulated deficit by
$3,236,000 to recognize the intrinsic value of such beneficial conversion
features; (2) increasing its additional paid-up capital by $2,104,000 in
connection with the issuance of the preferred shares; and (3) recording the
fair value of the warrants in the amount of $1,132,000. The intrinsic
value of the beneficial conversion feature of the preferred shares recorded
by the Company reflects the discount in the purchase price of such
securities relative to the public trading price as of the date of issuance
of the underlying common shares into which the preferred shares could be
converted, without adjustment for discounts or restrictions. The fair
value of the warrants recorded by the Company reflects the value of such
warrants (including the beneficial conversion feature) as determined by the
Black-Scholes method of valuation. Appropriate adjustment for the deemed
distribution was also taken into consideration in calculating the Company's
basic loss per common share, thereby increasing the basic loss per share
for the nine-month period ended September 30, 1998 from $0.06 to $0.32.
See note 2(l).
9. Warrants
The Company granted Performance Warrants on August 1, 1996 to the licensor
of the Company's technology, Momentum Resources Corporation, in connection
with the amendment of the SFD License by Momentum Resources Corporation for
the purpose, among other things, of indefinitely extending the termination
date of the SFD License. Momentum Resources Corporation is entitled under
the Performance Warrants to grant to purchase 16,000 shares of common stock
at the then current trading price for each month after December 31, 2000 in
which SFD Prospect production exceeds 20,000 barrels of hydrocarbons. No
Performance Warrants have been earned by Momentum Corporation as of
September 30, 1999.
There are currently outstanding warrants issued on April 3, 1998 entitling
the holder to purchase 200,00 shares of common stock at a $7.50 per share
exercise price. These warrants lapse to the extent not exercised by April
3, 2001. (See note 8)
10. Options
The Company granted 500,000 non-qualified options to a newly hired
executive officer on May 1, 1999, as an inducement for his employment.
These options entitle the executive officer to purchase: (1) 300,000
unregistered shares of common stock a price of $14 per share, reflecting
the trading price of the common stock as of the date employment
negotiations were originally entered into; and (2) 200,000 unregistered
shares of common stock at the closing price for the common stock on April
30, 2001.
The Company also granted 466,670 non-qualified and 33,330 incentive options
on May 1, 1999, to a second executive officer hired on that date as an
inducement for his prospective employment. These options entitle the
executive officer to purchase: (1) 273,336 unregistered shares of common
stock a price of $14 per share, reflecting the trading price of the common
stock as of the date employment negotiations were originally entered into;
(2) 26,664 unregistered shares of common stock at a price of $15 per share,
reflecting the trading price of the common stock as of the date of Board
approval; and (3) 200,000 unregistered shares of common stock at the
closing price for the common stock on April 30, 2001.
The first 300,000 options granted to each of these executive officers vest
incrementally over a period of 4 years of continuous employment, with the
first increment of 85,000 shares vesting one year from the date of
employment, the second increment of 90,000 shares vesting two years from
the date of employment; the
-11-
third increment of 95,000 shares vesting three years from the date of
employment, and the last increment of 30,000 shares vesting four years from
the date of employment. The remaining 200,000 options granted to each of
these executive officers vest incrementally over a period of 5 years of
continuous employment, with the first increment of 75,000 shares vesting
four years from the date of employment, and the last increment of 125,000
shares vesting five years from the date of employment. The noted options
generally lapse five years from date of vesting, unless the executive
officer's employment is terminated, in which case they lapse two years from
date of vesting.
The Company also granted 50,000 non-qualified options on May 1, 1999, to a
third employee hired on that date as an inducement for his prospective
employment. The purchase price for these options were fixed at $14 per
share, reflecting the trading price of the common stock as of the date
employment negotiations were originally entered into. These options vest
in equal increments on the first through fifth anniversary dates of the
effective date of employment, respectively, based upon continued provision
of services as an employee, and lapse, if unexercised, five years after the
vesting date, unless the employee's employment is terminated, in which case
they lapse two years from date of vesting.
The Company granted 20,000 incentive options on May 12, 1999, to a newly
hired employee as an inducement for her employment. The purchase price for
these options were fixed at $17 per share, reflecting the trading price of
the common stock as of the date of employment. These options vest in equal
increments on the first through fifth anniversary dates of the effective
date of employment, respectively, based upon continued provision of
services as an employee, and lapse, if unexercised, five years after the
vesting date, unless the employee's employment is terminated, in which case
they lapse two years from date of vesting.
The Company granted 20,000 incentive options on July 1, 1999, to an
employee as an inducement for his employment following the completion of a
probationary period. The purchase price for these options were fixed at
$14.06 per share, reflecting the trading price of the common stock as of
the date of original employment and agreement to grant the options. These
options vest in equal increments on the first through fifth anniversary
dates of the effective date of employment, respectively, based upon
continued provision of services as an employee, and lapse, if unexercised,
five years after the vesting date, unless the employee's employment is
terminated, in which case they lapse two years from date of vesting.
The Company granted 100,000 incentive options on September 21, 1999, to an
employee as an inducement for his employment. The purchase price for these
options were fixed at $13.62 1/2 per share, reflecting the trading price of
the common stock as of the date of grant. These options vest in equal
increments on the first through fifth anniversary dates of the date of
grant, respectively, based upon continued provision of services as an
employee, and lapse, if unexercised, five years after the vesting date,
unless the employee's employment is terminated, in which case they lapse
two years from date of vesting.
During the nine-month interim fiscal period ended September 30, 1998,
10,000 incentive stock options were exercised, from which the Company
received $95,000 in gross proceeds. Also during this period 20,000
unvested stock options granted to an employee lapsed upon termination of
employment.
As of September 30, 1999, there were outstanding options to purchase
1,655,000 shares of common stock, of which 242,500 options were vested, as
set forth below:
-12-
September 30, 1999
------------------------------
Type of Option Grant Date Exercise 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 40,000 0
Director Non-qualified........................ 3-10-98 8.31 45,000 30,000
Employee Incentive............................ 5-12-98 8.25 45,000 25,000
Employee Incentive............................ 8-24-98 8.25 145,000 22,500
Employee Incentive............................ 10-1-98 8.12 1/2 25,000 0
Employee Non-qualified........................ 5-1-99 14.00 1,016,670 0
Employee Incentive............................ 5-1-99 15.00 33,330 0
Employee Incentive............................ 5-12-99 17.00 20,000 0
Employee Incentive............................ 7-2-99 14.06 20,000 0
Employee Incentive............................ 9-21-99 13.62 1/2 100,000 0
--------------- --------------
1,655,000 242,500
=============== ==============
The director options held by certain currently serving directors 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,
subject to the re-election of each such director at each annual meeting of
the Company or of its subsidiary. The employee options vest over three to
six years from the grant date, depending upon 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.
11. Commitments
Whenever the Company elects to participate on a working interest basis with
respect to any exploratory or development wells in any exploration block
under its joint venture agreements with its strategic partners, it will be
obligated to share in the land acquisition, drilling, completion and
production costs of the wells based upon the Company's participation
percentage for the exploration block.
In January 1998, the Company entered into a five-year non-cancelable
operating lease for office space. As of September 30, 1999, future annual
base rent payments based upon current square footage and commitments, but
exclusive of operating cost and other pass-through items, were as follows
(in Canadian dollars):
1999 (3 months)............................................................................ $ 19,651
2000 (12 months)........................................................................... 78,604
2001 (12 months)........................................................................... 78,604
2002 (12 months)........................................................................... 78,604
2003 (1 month)............................................................................. 6,550
On April 1, 1997, the Company entered into an employment agreement with an
executive officer which provides for the payment of an annual base salary,
annual profit bonus, annual performance bonus and various benefits. In the
event of termination of employment without "cause" or a "change in
control," the Company will continue to be obligated to pay the following to
the executive officer under this agreement: (1) base salary (currently
$240,000 per year, subject to 5% annual increases) and benefits for the
term of the agreement (March 31, 2002); (2) should the Company earn more
than $5 million in "net income" in any year through March 31, 2003, a bonus
equal to 5% of the "net income" for that year; and (3) in the event of the
"sale" of the Company's business on or before March 31, 2002, an amount
equal to 2% of the consideration received by the Company.
The Company entered into an employment agreement with a former executive
officer, the terms of which vested when the former executive officer became
a consultant to the Company in April 1999. As a result of the vesting of
the employment agreement and the entering into of a consulting agreement,
the Company is obligated to pay the following to the former executive
officer under these agreements: (1) $10,500 per month (subject to 5% annual
increases) in severance pay through March 31, 2002, (2) $1,000 per month in
consulting fees through December 31, 2002, (3) should the Company earn more
then $5 million in "net income" in any year through March 31, 2003, a bonus
equal to 5% of the "net income" for that year; and (4) in the event of the
"sale" of the Company's business on or before March 31, 2002, an amount
equal to 2% of the consideration received by the Company.
On May 1, 1999, the Company entered into a five-year employment agreements
with two executive officers which provide for the payment of annual base
salaries, annual performance bonus and various benefits. In the event of
the termination of employment without "cause" or a "change in control"
during the pending term, these agreements provide for the continuation of
salary (currently Cdn. $210,000 per year, subject to 5% annual increases)
and benefits for a period of eighteen months from the effective date of
termination.
12. SUBSEQUENT EVENTS
The exploration well in which Pinnacle U.S. elected to participate on
September 22, 1999 was cased and completed as a natural gas discovery. This
well will not be placed into production until a sufficient number of
additional wells are drilled on the exploratory block and can be tied into
a gathering system. The potential estimated or proven reserves of the
reservoir has not been ascertained.
On October 15, 1999, Pinnacle U.S. elected to participate on a working
interest basis with one of the Company's strategic partners in drilling two
exploration wells in Wyoming pursuant to the terms of Pinnacle U.S.'s joint
exploration and development agreement with that partner. As a consequence
of its election, Pinnacle U.S. acquired (1) a combination 16.875% overall
working interest and a 2.49% overall net overriding royalty interest on one
exploration block, and (2) a combination 5.625% overall working interest
and a 0.87% overall net overriding royalty interest in a second exploration
block. Drilling results from these exploratory wells are pending.
On November 3, 1999, Pinnacle Canada elected to participate on a working
interest basis with one of the Company' strategic partners in drilling an
exploration well in Alberta pursuant to the terms of Pinnacle Canada's
exploration joint venture agreement with that partner. As a consequence of
its election, Pinnacle Canada acquired a combination 22.5% working interest
and a 4% overriding royalty interest in the exploration block. Exploratory
drilling has not commenced.
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
General
The following discussion of our consolidated financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and explanatory notes included in Part I, Item 1, of this report.
Overview
We are a technology-based reconnaissance exploration company which uses our
proprietary stress field detector (SFD) remote-sensing airborne survey system to
quickly and inexpensively identify and high-grade oil and natural
-13-
gas prospects. The SFD is a recently developed technology which we adapted for
airborne survey operations and field tested for independent geologists and our
strategic partners in 1996 and 1997. Our SFD technology indicates oil and
natural gas accumulations by recognizing non-electromagnetic energy fields which
we believe result from subsurface mechanical and hydraulic stresses associated
with these hydrocarbon traps; hence, the name "stress field detector."
We have two industry joint venture partners, Encal Energy Ltd. and CamWest
Exploration, LLC, for whom we conduct airborne surveys and identify and qualify
"SFD Prospects" for exploratory drilling. Under our agreements with our
strategic partners, we earn a risk-free gross-overriding royalty (GORR) of 5% to
8% of all revenues they may earn on any accepted SFD Prospect, without having
any obligation to bear any drilling or production costs. We also have the
ability under our joint venture agreements to participate for up to a 45%
working interest in the development of each SFD Prospect accepted by our joint
venture partners.
We are obligated to pay a license fee to the licensor of our SFD technology,
Momentum Resources Corporation, in an amount equal to 1% of all "Prospect
Profits" we may receive on or before December 31, 2000, and 5% of all Prospect
Profits we may receive thereafter. Momentum Resources is controlled and
indirectly owned by our controlling shareholders--Mr. George Liszicasz, our
chief executive officer and the chairman of our board of directors, and Mr. R.
Dirk Stinson, one of our directors.
Outlook And Prospective Capital Requirements
We commenced SFD survey activities on a full commercial basis for our partners
in early 1999. Our strategic partners have recently completed drilling one
exploratory well, pursuant to which we hold an 11 1/4% working interest, and are
currently drilling two additional exploratory gas wells on a second exploration
block, pursuant to which we hold 16.87 1/2% and 5.62 1/2% working interests.
While the recently completed well has been cased and completed as a natural gas
discovery, this well will not be placed in production until a sufficient number
of additional wells are drilled on the general exploration block and can be tied
into a gathering system. Results from the two exploratory wells currently being
drilled are not anticipated until the end of the fourth quarter of 1999. We
anticipate that up to four additional exploration wells will be drilled on new
SFD Prospects through the first quarter of fiscal 2000. Should our current
contemplated drilling program be successful, the earliest date we would receive
meaningful revenues would be the first quarter of fiscal 2000, assuming no
complications in drilling or completing the wells or tying them into a gathering
system.
We should be considered to be a development stage entity since we have not
generated any operating revenues to date. Although we have sufficient working
capital ($9,619,471 as of September 30, 1999) to fund our current level of
operations for up to four and one-half years (assuming no major working interest
or other capital investments), our ability in the longer term to continue as a
going concern is dependent upon our receiving meaningful amounts of revenues
from our strategic partners or through our own exploration efforts which, in
either case, will be dependent upon successful exploration and production
activities. We have budgeted the following level of expenditures over the
twelve-month period ended September 30, 2000:
. Approximately $2.2 million for continuing operations; and
. Up to $3.5 million in capital expenditures to acquire and outfit an
additional survey aircraft, fund additional SFD research and development
activities, and invest in working interests with our strategic partners
or acquire drilling interests for our own account (although the overall
amount of these capital expenditures may be significantly reduced or
increased depending upon the success of our strategic partners' drilling
efforts over the next three to six months).
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 plethora of factors that may affect the drilling process, including
the perceived economics of drilling at any time, the ability of the strategic
-14-
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--Risks Relating to the Company
and its Business," generally, and "--Reliance on Joint Venture Partners--Non-
Operator Status" and "--Risk of Exploratory Drilling Activities" 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, 1998.
Results Of Operations
We had no oil and gas royalty or working interest revenues for its nine-month
interim fiscal periods ended September 30, 1999 and 1998.
We incurred total operating expenses of $1,382,781 for the first nine months of
1999, as compared to $875,164 for the first nine months of 1998, representing a
$507,627, or 58.0%, overall increase. This increase was primarily attributable
to:
. a $238,441, or 1364.2%, increase in survey operation support and
development expenditures from $17,417 to $255,858;
. a $147,890, or 19.8%, increase in administrative expense from $747,158
to $895,048;
. a $128,163, or 292.3%, increase in amortization and depreciation from
$36,353 to $142,612; and
. a $14,449,or 19.5%, increase in net (unreimbursed) survey and data
analysis expenditures from $74,226 to $88,675.
The $147,890 increase in administrative expense was primarily attributable to
across-the-board net increases in costs to support our increased level of
business activities in the first nine months of fiscal 1999, the most
significant of which were increases of $124,550 in wages and benefits; partially
offset by a $99,709 decrease in legal expense. Survey operation support and
development expenditures generally consist of any costs--including allocable
salaries--we incur to:
. develop, improve and test various SFD Survey System components;
. conduct field evaluations designed by our strategic partners to evaluate
the SFD Survey System (after netting any costs our strategic partners
are required to reimburse us for); and
. develop our research and development and survey functions.
The $238,441 increase in survey operation support and development was
attributable primarily to the cost of further developing and refining the SFD
Data interpretation functions of the SFD Survey System, and secondarily to
expenditures incurred in developing our research and development and survey
functions
Survey and data analysis expenditures generally consist of any costs we incur
conducting commercial SFD survey activities for our strategic partners. The
costs can be generally broken down into the two following components:
. aircraft operating costs, travel expenses and allocable salaries of our
personnel while on survey assignment (after netting any costs our
strategic partners are required to reimburse us for); and
. allocable salaries of our personnel incurred interpreting SFD Data for
our strategic partners.
-15-
Although we incurred total survey and data analysis expenditures of $184,104 and
$141,896 for the first nine months of 1999 and 1998, respectively, our net
survey and data analysis cost for these respective periods were only $88,675 and
$74,226 after taking into consideration $95,432 and $67,670 in costs for these
respective periods to which we were entitled to reimbursement by our strategic
partners.
We effectively doubled our survey operation and support staff during the second
quarter of 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 additional
geological, geophysical, scientific, information technology and support staff
over the next nine months. We therefore 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 increased level of operations
facilitated by these additions.
We earned $244,336 in interest income for the first nine months of 1999, as
compared to $150,836 for the first nine months of 1998. The increase in
interest income was attributable to higher cash balances in our accounts as a
result of a $6,000,000 private placement of our securities in May 1999.
We incurred a $94,575 foreign currency loss in the first nine months of 1999, as
compared to a $7,068 foreign currency loss for the first nine months of 1998.
Foreign currency gains or losses are amounts we record in the consolidation
process to balance our books for financial reporting purposes which result from
the conversion of our Canadian-dollar denominated balance sheet and revenue and
expense items into U.S. dollars. The overall amount of foreign currency gains
or losses in any period is the product of the fluctuation in United States--
Canadian currency exchange rates during that period. We will, as a general
rule, incur a foreign currency gain on our books in any period in which the
Canadian dollar becomes stronger in relation to the U.S. dollar, and incur a
foreign currency loss in any period in which the Canadian dollar becomes weaker.
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 through intercompany advancements.
Liquidity And Capital Resources
Our cash flow requirements from the inception of Pinnacle U.S. (October 20,
1995) through September 30, 1999 were funded principally from the following
capital activities:
. a private placement of our common stock for total gross proceeds of
$975,000 in February 1996;
. 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;
. a private placement of 800,000 unregistered shares of our convertible
series "A" preferred stock and 200,000 common stock purchase warrants
for total gross proceeds of $6 million in April of 1998; and
. a private placement of 400,000 unregistered shares of our common stock
for total gross proceeds of $6 million in May of 1999.
Our cash position as of September 30, 1999 and September 30, 1998 was $9,644,054
and $5,302,646, respectively, as compared to $4,713,822 and $848,339 as of the
beginning of each such respective nine-period. The bulk of our cash is
maintained in a United States government and government-backed securities money-
market account.
The $4,930,231 increase in our cash position for the first nine months of 1999
was attributable to $6,094,868 in cash raised in financing activities, partially
offset by $1,001,394 in cash used in operating activities and $163,343 in cash
used in investing activities. The $4,454,307 increase in our cash position for
the first nine months of 1998 was attributable to $5,520,322 in cash raised in
financing activities, partially offset by $877,402 in cash used in operating
activities and $188,613 in cash used in investing activities.
-16-
Our operating activities required cash in the amount of $1,001,394 for the first
nine months of 1999, as compared to cash requirements of $877,402 for the first
nine months of 1998. The $1,001,394 in cash used in operating activities for
the first nine months of 1999 reflected our net loss of $1,233,020 for such
period, as decreased for non-cash deductions for amortization ($235,627) and
increased for a net increase in non-cash working capital balances ($4,001). The
$877,402 in cash used in operating activities for the first nine months of 1998
reflected our net loss of $735,288 for such period, as decreased for non-cash
deductions for amortization and accrued interest ($46,353) and increased for a
net increase in non-cash working capital balances ($188,467).
We generated $6,094,413 in cash from financing activities for the first nine
months of 1999, as compared to $5,520,322 in cash for the first nine months of
1998. The $6,094,413 in cash generated in the first nine months of 1999 was
primarily comprised of $6,000,000 in gross proceeds from the private placement
of common stock and $95,000 in gross proceeds the exercise of employee options.
The $5,520,322 in cash generated in the first nine months of 1998 was primarily
comprised of $6,000,000 in gross proceeds from the private placement of series
"A" convertible preferred stock and common stock warrants, offset by $333,158 in
issuance costs and $146,520 for the repayment of long-term debt.
We used cash in the amount of $163,242 for investing activities for the first
nine months of 1999, as compared to $188,613 in cash used for investing
activities for the first nine months of 1998. The principal use of cash for the
first nine months of 1999 was to acquire property and equipment ($135,117) and
drilling rights in an exploratory block pursuant to a working interest election
($28,125), while the principal use of cash for the first nine months of 1998 was
to acquire property and equipment ($302,155), partially offset by deferred
financing ($149,403).
Other Matters
Foreign Exchange Fluctuations
As noted above in "Results of Operations," we incurred a $94,575 foreign
currency loss in the first nine months of 1999 in consolidating our books for
financial reporting purposes as a result of the fluctuation in United States--
Canadian currency exchange rates during that period, and 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 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, "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 have been adversely affected at any
time over the last three fiscal periods by inflation or changing prices.
Year 2000 Compliance
We have reviewed our internal computer systems and software products for Year
2000 problems, and believe they are generally Year 2000 compliant. We use two
types of computer software, proprietary software developed in-house by our
programming personnel, and industry software acquired for use with our computer
systems. Our proprietary software has been designed by our programming
personnel to be free of year 2000 problems, and the industry software we use are
recent versions which have been updated by their manufacturers to address year
2000 issues. We are not reliant upon third parties, and have sufficient back-up
documentation to recover any loss due to the failure of a third party's
computers as the result of Year 2000 problems. We do believe that any Year 2000
considerations that may arise will materially impact our internal operations or
future financial or operating results or future financial condition.
-17-
Uncertainties And Other Factors That May Affect Our Future Results And Financial
Condition
The following represent uncertainties, risks and other factors which, in
addition to information and financial data set forth elsewhere in this report,
may affect our future results of operations or financial condition, and which
should be considered carefully in evaluating our company and our business and
the value of our securities.
Matters Generally Relating To Our Company And Our Business
We Are A Developmental Stage Company With No Revenues
We should be considered to be a development stage entity since we have not
generated any operating revenues to date. Should our current contemplated
drilling program be successful, the earliest date we would receive meaningful
revenues would be the first quarter of fiscal 2000, assuming no complications in
drilling or completing the wells or tying them into a gathering system. We
cannot give you any assurance that our strategic partners will drill any of
these SFD Prospects at all or by projected drilling dates due to plethora of
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.
Moreover, we cannot give you any assurance that any SFD Prospect that is drilled
will ultimately produce commercially viable quantities of oil or gas. See
"Uncertainties And Other Factors That May Affect Our Future Results And
Financial Condition--Risks Relating to the Company and its Business," generally,
and "--Reliance on Joint Venture Partners--Non-Operator Status" and "--Risk of
Exploratory Drilling Activities" particularly.
We Expect To Incur Continuing Operating Losses For The Near-Future
We have incurred operating losses since our inception as a result of our lack of
revenues and, as noted above, do not anticipate that we will receive meaningful
revenues until the first 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 gathering
system. We anticipate that we will continue to incur substantial operating
losses for the near-future, even if we commence receiving revenues, due to our
significant monthly operating and research & development costs.
Limited Operating History
We have a limited operating history upon which any evaluation of our long-term
prospects might be based. We did not commence our business plan for the
exploitation of our SFD technology until December of 1995. Our ability to
generate revenues and profits will depend primarily upon the successful
implementation of our business plan, which is dependent upon one or more of our
strategic successfully drilling and producing commercially viable quantities of
oil or natural gas from SFD Prospects we identify.
We are subject to the risks inherent in a new business enterprise, as well as
the more general risks inherent to the operation of an established business.
Our prospects must be considered in light of the risks, expenses and
difficulties encountered by all companies engaged in the extremely volatile and
competitive oil and gas markets. Any future success we might achieve will depend
upon many factors, including factors which will be beyond our control or which
cannot be predicted at this time. These factors may include:
. changes in hydrocarbon and exploration technologies;
. price and product competition;
. developments and changes in the international oil and gas market;
. changes in our strategy and business plan;
-18-
. changes in expenses;
. the timing of research and development expenditures;
. the level of our international revenues;
. fluctuations in foreign exchange rates;
. general economic conditions, both in the United States and Canada; and
. economic and regulatory conditions specific to the areas in which we
compete.
To address these risks we must, among other things, continue to respond to
competitive developments; attract, retain and motivate qualified personnel;
implement and successfully execute our business plan; obtain additional joint
venture partners; negotiate additional working interests and participations; and
upgrade and perfect our SFD technology. We cannot give you any assurance that
we will successful address these risks, or that we will be able to achieve or
sustain profitable operations. Our limited operating history makes the
prediction of future results of operations difficult or impossible.
Uncertain Discovery Of Viable Commercial Prospects
Our future success is dependent upon our ability, through utilization of our SFD
technology, to locate commercially viable hydrocarbon accumulations for
development by our strategic partners. Based on our business plan, we will be
dependent on:
. the efficacy of our SFD technology in locating SFD Prospects; and
. the cooperation and capital of our strategic partners in exploiting
these prospects.
Although the results of our SFD technology as a geologic structural
identification tool have been satisfactorily tested by our strategic 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 strategic partners will successfully acquire and drill
properties at low finding costs.
Uncertain Market Acceptance Of The SFD Survey System And Strategic Partner
Participation
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 our exploration services is new
and evolving, it is difficult to predict the future growth rate, and the size 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.
Reliance On Strategic Partners; Non-Operator Status
We are reliant upon our strategic partners for opportunities to participate in
exploration prospects, through gross overriding royalties from producing SFD
Prospects and, in certain cases, 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 strategic 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
-19-
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 strategic partners as the project
operator, in accordance with the applicable agreements between our company and
the strategic partners. These factors include:
. the selection and approval of prospects for lease/acquisition and
exploratory drilling;
. obtaining favorable leases and required permitting for projects;
. the availability of capital resources of the strategic partner for land
acquisition and drilling expenditures;
. the timing of drilling activity, and the economic conditions at such
time, including then prevailing prices for oil and gas; and
. the timing and amount of distributions from the production.
Our reliance on our strategic 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.
Risk Of Exploratory Drilling Activities
Pursuant to our business plan, 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 strategic partners, in the form of a
gross overriding royalty or, in certain cases, 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 strategic partners to drill, complete and operating 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.
Volatility Of Oil And Natural Gas Prices
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:
. relatively minor changes in the supply and demand for oil and natural
gas,
. economic, political and regulatory developments, and
. competition from other sources of energy.
Any extended or substantial decline in oil and gas prices would have a material
adverse effect on:
. our ability to negotiate favorable joint ventures with viable industry
participants;
. the volume of oil and gas that could be economically produced by the
joint ventures in which we participate;
. our cash flow; and
-20-
. 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, captioned
"Quantitative And Qualitative Disclosures About Market Risk," for additional
discussion of market risks relating to oil and gas price fluctuations.
Competition
We compete directly with independent, technology-driven exploration and service
companies, and indirectly (through our strategic 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
hydrocarbon 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, any 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 onshore 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
strategic 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. These competitive disadvantages could adversely affect our
ability to participate in projects with favorable rates of return.
Technological Changes
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.
Operating Hazards
The exploration and development projects in which we will participate through
our strategic partners will be subject to the usual hazards incident to the
drilling of oil and gas wells, such as explosions, uncontrollable flows of oil,
gas or well fluids, fires, pollution and other environmental risks. These
hazards can cause personal injury and loss of life, severe damage to and
destruction of property and equipment, environmental damage and suspension of
operations. Our strategic partners or the project operator will, in accordance
with prevailing industry practice, maintain insurance against some, but not all,
of these risks. The occurrence of an uninsured casualty or claim would have an
adverse impact on the affected strategic partner, and indirectly on our
financial condition.
-21-
Variability Of Operating Results
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.
Dependence On Current Key Personnel
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 technology and business as a result of their association with our Company
over the past several years.
While we have entered into an employment agreement 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. We do not currently
carry key person life insurance on any of our executive officers, including Mr.
Liszicasz.
Ability to Attract Qualified Personnel
Our ability to implement our 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.
Management Of Growth
Our success is dependent upon the rapid expansion of our business. This
expansion will place a significant strain on our financial, management and other
resources and will require us to:
. change, expand and improve our operating, managerial and financial
systems and controls;
. improve coordination between our various corporate functions; and
. hire additional geophysical, geological, professional, administrative
and managerial personnel.
-22-
We cannot give you any assurance that we will successfully hire or retain these
personnel to the extent required, or that we will be able to manage the
expansion of our operations effectively. If we are not able to effectively
manage our growth, or if our new personnel are not able to achieve anticipated
performance levels, our business, financial position and results of operations
will be materially and adversely affected.
Importance Of Proprietary Rights To SFD Technology and Data
We interpret and utilize SFD Data to identify commercially viable oil and
natural gas accumulations. We have the exclusive right to utilize SFD Data for
hydrocarbon exploration pursuant to a Restated Technology Agreement with
Momentum Resources Corporation. Momentum claims common law ownership of the SFD
Technology, however, Momentum has not obtained patent or copyright protection
for the SFD Technology. Based in part on an opinion of patent counsel, Momentum
and our company each believe that the disclosure risks inherent in patent or
copyright registration far outweigh any legal protections which might be
afforded by such registration. In the absence of significant patent or
copyright protection, we may be vulnerable to competitors who attempt to imitate
our SFD technology, or to develop functionally similar technologies. Although
we believe that we have all rights necessary to market our services without
infringing upon any patents or copyrights held by others, we cannot give you any
assurance that conflicting patents or copyrights do not exist. We rely upon
trade secret protection and confidentiality and license agreements with our
employees, consultants, strategic partners and others to protect our proprietary
rights. Furthermore, we do believe, were Momentum were to apply for and receive
patent protection, that that patent protection would necessarily protect
Momentum or our company from competition. Momentum and our company therefore
anticipate continued reliance upon contractual rights and on common law
validating trade secrets. The steps taken our company and Momentum to protect
our respective rights may not be adequate to deter misappropriation, or to
preclude an independent third party from developing functionally similar
technology. We cannot give you any assurance that others will not independently
develop substantially equivalent proprietary information and techniques, or
otherwise gain access to the Momentum's or our trade secrets, or otherwise
disclose aspects of the SFD technology, or that we will be able to meaningfully
protect our trade secrets. Litigation to enforce or defend intellectual
property rights is costly, and our company and Momentum may not have sufficient
resources to pursue or defend litigation.
Impact Of Governmental and Environmental Regulation On Our Business
The oil and natural gas industry 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, including
environmental restrictions and prohibitions on releases or emissions of various
substances produced or utilized in association with certain oil and gas industry
operations. Public interest in the protection of the environment has increased
dramatically in recent years. Offshore 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.
It is not expected that any of these government controls or regulations will
affect our operations in a manner materially different than they would affect
other oil and gas companies 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. To the extent laws are enacted or other governmental
action is 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, our business and prospects could be
adversely affected.
Matters Relating To Our Common Stock
Limited Public Trading Market
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,
-23-
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 Volatility
The market price for our common stock is extremely volatile and subject to
significant fluctuations in response to a variety of internal and external
factors, including the liquidity of the market for our common stock, variations
in our quarterly operating results, regulatory or other changes in the oil and
gas industry generally, announcements of our business developments or those of
our competitors, changes in operating costs and variations in general market
conditions. Because we are a development stage entity 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.
You Should Not Expect To Receive Dividends In The Foreseeable Future
We have never paid any cash dividends on shares of our capital stock, and we do
not anticipate that we will pay any dividends in the foreseeable future. Our
current business plan is to retain any future earnings to finance the expansion
development of our business. Any future determination to pay cash dividends
will be at the discretion of our Board of Directors, and will be dependent upon
our financial condition, results of operations, capital requirements and other
factors as our Board may deem relevant at that time.
Common Stockholders Should Not Expect To Receive A Liquidation Distribution
If we were to liquidate or dissolve our company, 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 any assurance that sufficient assets will remain
available after the payment of our creditors and preferred stockholders to
enable any common stockholder to receive any liquidation distribution with
respect to our common stock.
Our Current Stockholders Will Continue To Control Our Company
Messrs. George Liszicasz and R. Dirk Stinson beneficially own over two-thirds of
our common stock and 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:
. our business expansion or acquisition policies;
-24-
. whether we should raise additional capital through financing or equity
sources, and in what amounts;
. whether we should retention of cash reserves for future product
development, or distribute them as a dividend, and in what amounts;
. whether we should sell all or a substantial portion of our assets, our
should merger or consolidate with another corporation;
. 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.
Conflicts Of Interest
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 technology
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:
. Mr. Liszicasz's potential inability to devote his undivided time and
attention to our affairs; and
. the proper exercise by Messrs. Liszicasz and/or Stinson of their
fiduciary duties on our behalf 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 the Company and
Momentum.
While Messrs. Liszicasz and Stinson and our company have 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.
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 Part 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
strategic 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
-25-
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 strategic
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 strategic 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 strategic 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 strategic 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 strategic 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
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 maintains 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this report, there are no material pending legal or
governmental proceedings or, to our knowledge, contemplated or threatened legal
or governmental proceedings, to which the we are or may become a party, or with
respect to our properties. As of the date of this report, there are, our
knowledge, no material proceedings to which any of our directors, executive
officers or affiliates are a party adverse to us or have a material interest
adverse to us.
Item 2. Changes In Securities And Use Of Proceeds
Not Applicable
-26-
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
Our Annual Meeting of Stockholders was held on September 30, 1999. At the
meeting the holders of our common stock elected Messers. George Liszicasz,
Daniel C. Topolinsky, R. Dirk Stinson, Lorne W. Carson and Dennis R. Hunter to
serve as our Non-Series A Directors, and the holders of our series "A" preferred
stock elected Messers. Jon E.M. Jacoby and K. Rick Turner to serve as our Series
A Directors. The tally of the votes are set forth below:
Vote
-------------------------------------- --------------------------------------
Name of Nominee For Withhold Abstain
-------------------------------------- ------------ ------------ ------------
Non-Series A Directors:
George Liszicasz.................... 11,480,153 0 0
Daniel C. Topolinsky................ 11,480,153 0 0
R. Dirk Stinson..................... 11,480,153 0 0
Lorne W. Carson..................... 11,480,153 0 0
Dennis R. Hunter.................... 11,480,153 0 0
Mandatory Series A Director:
Jon E.M. Jacoby..................... 800,000 0 0
Additional Series A Director:
K. Rick Turner...................... 800,000 0 0
The holders of our common stock also ratified the appointment of Deloitte &
Touche to serve as our independent auditors for our pending fiscal year which
will end December 31, 1999 by the following vote: 11,478,739 shares voting For,
0 shares Withheld, and 1,414 shares Abstaining. There were no broker non-votes
with respect to any matter presented for vote at our Annual Meeting of
Stockholders.
Item 5. Other Information
Not Applicable
Item 6. Exhibits
Exhibits
Exhibit 27 - Financial Data Table
Reports on Form 8-K
None
-27-
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 November, 1999.
Pinnacle Oil International, Inc.
By: /s/ John M. Woodbury, Jr.
------------------------------------
John M. Woodbury, Jr.,
Chief Financial Officer
(principal accounting officer)
-28-