<PAGE>
As filed with the Securities and Exchange Commission on May 17, 1999
================================================================================
Securities And Exchange Commission
Washington, D.C. 20549
_________________
FORM 10-Q
_________________
(Mark One)
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934 For The Quarterly Period Ended March 31, 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)
<TABLE>
<S> <C>
Nevada 61-1126904
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
Suite 750 Phoenix Place, 840-7/th/ 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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
12,431,983 shares of Common Stock, par value $0.001 per share
================================================================================
<PAGE>
PINNACLE OIL INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10--Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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......................................... 12
General........................................................... 12
Overview.......................................................... 12
Results Of Operations............................................. 14
Liquidity And Capital Resources................................... 15
Outlook And Prospective Capital Requirements...................... 15
Other Matters..................................................... 16
Uncertainties And Other Factors That May Affect The
Company's Future Results And Financial Condition.................. 17
Item 3. Quantitative And Qualitative Disclosures About Market Risk........ 23
PART II OTHER INFORMATION................................................. 24
Item 1. Legal Proceedings................................................. 24
Item 2. Changes In Securities And Use Of Proceeds......................... 24
Item 3. Defaults Upon Senior Securities................................... 24
Item 4. Submission Of Matters To A Vote Of Security Holders............... 24
Item 5. Other Information................................................. 24
Item 6. Exhibits.......................................................... 25
Exhibits.......................................................... 25
Reports on Form 8--K.............................................. 25
</TABLE>
-ii-
<PAGE>
Advisement
This Quarterly 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.
These forward-looking statements generally reflect the current expectations or
beliefs of the Company and its management, based on currently available
information, regarding the future results of operations, performance and
achievements of the Company, or industry results. The Company has tried,
wherever possible, to identify these forward-looking statements by, among other
things, using words as "believe," "anticipate," "expect," predict," "intend,"
"may," "will" and other similar expressions and variations. However, these
words are not the exclusive means of identifying such statements. In addition,
any statements in this Quarterly Report which refer to expectations, projections
or other characterizations of future events or circumstances also constitute
forward-looking statements.
Any forward-looking statements contained in this Quarterly Report are inherently
subject to known and unknown uncertainties, risks and other factors, which may
cause the actual results, performance or achievements of the Company 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 Quarterly Report captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Uncertainties And
Other Factors That May Affect The Company's Future Results And Financial
Condition," and "Quantitative And Qualitative Disclosures About Market Risk,"
respectively, as well as those generally contained in the Company's 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.
The Company undertakes no obligation to publicly release the results of any
revision to any forward-looking statement contained in this Quarterly Report
which may be made to reflect events or circumstances occurring subsequent to the
filing of this Quarterly Report with the Securities and Exchange Commission
("SEC"). Readers are urged to carefully review and consider the various
disclosures made by the Company in this Quarterly Report and in the Company's
other reports filed with the SEC that attempt to advise interested parties of
the risks and factors that may affect the Company's business, including the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, Quarterly Reports on Form 10-Q filed by the Company during the remainder
of fiscal 1999, and any Current Reports on Form 8-K filed by the Company.
-1-
<PAGE>
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)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At March 31,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................ $ 4,410,835 $ 385,180
Accounts receivable............................................................. 126,577 139,506
Prepaid expenses and other...................................................... 116,041 31,426
----------- -----------
Total current assets........................................................... 4,653,453 556,112
Note receivable (note 5)......................................................... 34,507 --
Deferred costs (note 6).......................................................... -- 139,635
Property and equipment, net of accumulated depreciation and
amortization of $133,357 and $56,163, respectively (note 2(e))................. 600,280 269,410
----------- -----------
Total assets................................................................... $ 5,288,240 $ 965,157
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........................................ $ 139,822 $ 322,757
Current portion long-term liabilities (note 5).................................. -- 43,956
----------- -----------
Total current liabilities...................................................... 139,822 366,713
Long-term liabilities (note 6)................................................... -- 83,028
----------- -----------
Total liabilities.............................................................. 139,822 449,741
Shareholders' equity (note 7):
Series "A" convertible preferred stock, par value $0.001 per share:
800,000 shares authorized; 800,000 shares issued as of
March 31, 1999; no shares issued as of March 31, 1998.......................... 800 --
Common stock, par value $0.001 per share:
50,000,000 shares authorized; 12,431,983 shares issued as of
March 31, 1999; 12,426,983 shares issued as of March 31, 1998.................. 12,432 12,427
Warrants........................................................................ 1,132,000 --
Additional paid-in capital...................................................... 10,086,877 2,247,864
Accumulated deficit during the development stage................................ (6,083,691) (1,744,875)
----------- -----------
Total shareholders' equity..................................................... 5,148,418 515,416
----------- -----------
Total liabilities and shareholders' equity..................................... $ 5,288,240 $ 965,157
=========== ===========
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets
-2-
<PAGE>
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Loss
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 20,
1995
Three Months Ended (inception) to
March 31, March 31,
------------------------------- 1999
1999 1998 (cumulative)
----------- ----------- -----------
<S> <C> <C> <C>
Operating expenses:
Administrative.................................................. $ 196,870 $ 255,942 $ 2,309,733
Amortization and depreciation (note 2(e))....................... 45,426 7,612 167,926
Survey operation support and development (note 2(f))............ 93,703 10,633 669,962
Survey and data analysis, net of reimbursements by
Joint-venture partners of $24,447 and $36,583,
respectively (note 2(g))....................................... 19,865 22,678 49,891
Write-down of assets............................................ -- -- 17,074
----------- ----------- -----------
Total operating expenses...................................... (355,864) (296,865) (3,214,586)
Operating loss................................................... (355,864) (296,865) (3,214,586)
Other income (expenses):
Interest cost on promissory notes............................... -- (10,000) (124,299)
Interest income................................................. 50,856 6,988 313,852
Other income.................................................... -- -- 19,231
Foreign currency gain (loss) (note 2(h))........................ 17,720 (2,403) (1,553)
Settlement of damages........................................... -- -- 157,500
----------- ----------- -----------
Total other income (expenses)................................. 68,576 (5,414) 364,731
Net loss for the period.......................................... $ (287,288) $ (302,280) $(2,849,855)
=========== =========== ===========
Basic and diluted loss per share (note 2(i))..................... $ (0.02) $ (0.02)
=========== ===========
Weighted average shares outstanding.............................. 12,430,761 12,285,153
=========== ===========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements
-3-
<PAGE>
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Shareholders' Equity
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A Deficit
Convertible Common Stock Accumulated
Common Stock Preferred Stock Warrants Additional During the
--------------------- ---------------- -------------------- Paid-in Development
Shares Amount Shares Amount Number Amount Capital Stage
---------- ------- ------- ------ ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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. 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... 5,000 5 -- -- -- -- 46,846 --
Net loss --
Three months ended
March 31, 1999...... -- -- -- -- -- -- -- (287,288)
---------- ------- ------- ---- ------- ---------- ----------- -----------
Balance --
March 31, 1999...... 12,431,983 $12,432 800,000 $800 200,000 $1,132,000 $10,086,877 $(6,083,691)
========== ======= ======= ==== ======= ========== =========== ===========
</TABLE>
Supplement Of Disclosure Of Non-Cash Investing And Financing Activities
In February 1998, the Company issued 411,764 shares of common stock upon the
conversion of promissory notes with an aggregate face value of $1,000,000 and
aggregate accrued interest of $120,000. (See note 7).
The accompanying notes to financial statements are
an integral part of these statements
-4-
<PAGE>
PINNACLE OIL INTERNATIONAL, INC.
(A Development Stage Enterprise)
Consolidated Statements Of Cash Flow
(Unaudited)
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 20,
1995
Three Months Ended (inception) to
March 30, March 30,
------------------------------ 1999
1999 1998 (cumulative)
---------- --------- -----------
<S> <C> <C> <C>
Operating activities: $ (287,288) $(302,280) $(2,847,690)
Net loss for the period.......................................
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization property and equipment......................... 45,426 7,612 167,740
Amortization of deferred costs.............................. 93,014 154,287
Accounts receivable......................................... (5,142) (51,402) (121,745)
Prepaid expenses and other.................................. (88,710) 2,088 (116,043)
Due from (to) officers...................................... (4,832)
Accounts payable............................................ (37,529) 97,112 139,822
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..................... (280,229) (236,870) (2,313,843)
Financing activities:
Proceeds of promissory notes.................................. -- -- 1,100,000
Repayment of promissory notes................................. 906 -- (99,094)
Issuance of common stock...................................... 47,500 -- 1,027,500
Issuance of preferred stock and warrants...................... -- -- 6,000,000
Share issuance costs.......................................... (649) -- (317,931)
Repayment of long-term debt................................... -- -- (146,520)
---------- --------- -----------
Net cash generated by financing activities................ 47,758 -- 7,563,954
Investing activities:
Deferred financing............................................ -- (4,884) (7,766)
Promissory note receivable.................................... -- -- (35,413)
Acquisition of property and equipment......................... (70,516) (221,405) (796,098)
---------- --------- -----------
Net cash generated by (used in) investing activities...... (70,516) (226,289) (839,277)
Net cash inflow (outflow)...................................... (302,987) (463,159) 4,410,834
Cash position, beginning of period............................. 4,713,835 848,339 --
---------- --------- -----------
Cash position, end of period................................... $4,410,835 $ 385,180 $ 4,410,834
========== ========= ===========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements
-5-
<PAGE>
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. ("Pinnacle International"), together with
its wholly-owned subsidiaries, Pinnacle Oil Inc. and Pinnacle Oil Canada,
Inc ("Pinnacle U.S." and "Pinnacle Canada," respectively), is a remote-
sensing technology company engaged in the business of wide-area hydrocarbon
(oil and natural gas) reconnaissance exploration. Pinnacle International,
Pinnacle U.S. and Pinnacle Canada are collectively referred to as the
"Company."
2. Significant Accounting Policies
These financial statements have been prepared without audit in accordance
with accounting principles generally accepted in the United States for
interim financial reporting and reflect the following significant
accounting policies:
(a) Basis of presentation
These consolidated financial statements include the accounts of
Pinnacle International and its wholly owned subsidiaries, Pinnacle
U.S. and Pinnacle Canada. All significant intercompany balances and
transactions have been eliminated on consolidation.
These financial statements have been prepared in accordance with 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 Pinnacle International'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) Reclassifications
Certain prior fiscal quarterly amounts have been reclassified to
conform to the current fiscal quarter's presentation.
(c) 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.
-6-
<PAGE>
(d) 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.
(e) Property, Equipment and Computer Software
Property, equipment and computer software are stated at cost.
Depreciation or amortization (as the case may be) is derived from the
applicable declining balance method for such assets over their
estimated service lives as follows:
<TABLE>
<CAPTION>
<S> <C>
Airplane...................................................... 25%
Computer equipment............................................ 30%
Computer software............................................. 100%
Equipment..................................................... 20%
Furniture and fixtures........................................ 20%
Leasehold improvements........................................ 20%
Tools......................................................... 20%
Vehicles...................................................... 30%
</TABLE>
Management periodically reviews the carrying value of property,
equipment and computer software to ensure that any permanent
impairment in value is recognized and reflected in the results from
operations.
(f) 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: (i) develop, improve and
test the SFD Survey System and SFD Data interpretation functions; (ii)
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 (iii) develop, organize,
staff and train the Company's research and development, survey and
interpretation operational functions.
(g) 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: (i) aircraft operating
costs, travel expenses and allocable salaries of Company personnel
while on survey assignment; and (ii) 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.
Should the Company elect to participate on a working-interest basis
with respect to any SFD Prospect, all contributions by the Company for
drilling and development with respect to such SFD Prospect will be
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 will be capitalized on a country
by country basis, and will be amortized on the unit of production
method based on estimated proven developed reserves of each country.
If a particular country does not prove to be commercially viable, the
associated drilling and development costs will be expensed at such
time. The Company has not elected to participate on a working
interest basis with respect to any SFD Prospect as of March 31, 1999,
and has therefore not capitalized any drilling and development costs
as of such date.
(h) 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.
-7-
<PAGE>
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:
<TABLE>
<CAPTION>
Balance
Sheet Date
(March 31) Average
---------- -------
<S> <C> <C>
1999...................... 1.53 1.51
1998...................... 1.44 1.43
</TABLE>
(i) Basic 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).
(j) 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 ended December 31, 1998.
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.
-8-
<PAGE>
3. Reverse Acquisition
Pinnacle International acquired 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
Pinnacle International (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 (i) 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 (ii) the consolidated operations of Pinnacle International thereafter.
4. Property and Equipment
<TABLE>
<CAPTION>
March 31,
---------------------
1999 1998
--------- --------
<S> <C> <C>
Airplane........................................... $ 238,653 $ --
Computer equipment................................. 91,981 27,555
Computer software.................................. 14,695 3,950
Equipment.......................................... 40,888 2,687
Furniture and fixtures............................. 122,381 121,361
Leasehold improvements............................. 105,376 85,019
SFD Survey System (including software)............. 54,710 11,538
Tools.............................................. 2,459 --
Vechicle........................................... 62,494 43,668
--------- --------
Property and equipment........................... 733,637 295,778
Less accumulated depreciation and amortization..... (133,357) (26,368)
--------- --------
Net property and equipment....................... $ 600,280 $269,410
========= ========
</TABLE>
5. 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%).
6. Long-Term Liability and Deferred Costs
The Company purchased an insurance policy in November 1997 to facilitate
operations for the next three years, and financed the premium pursuant to a
loan agreement in the original principal amount of $150,000, bearing
interest at 6.44% per annum. The Company was obligated to make monthly
payments of principal and interest in the amount of $4,884 to a maturity
date in May, 1999. The Company elected to pay the outstanding balance in
full in June 1998.
7. Share Capital And Options And Warrants
During the year ended December 31, 1997, two officers-directors of the
Company loaned the Company $500,000 each pursuant to unsecured, convertible
promissory notes. These loans, which accrued interest at the rate of 12%
per annum, were payable on or before January 31, 1998. Pursuant to the
terms of the promissory notes evidencing the loans, each officer-director
each had the right to convert the outstanding balance into the Company's
common stock based upon a ratio of one share per $4.07 in converted
principal and interest, and the Company had the right to convert the
outstanding balance into the Company's common stock based upon a ratio of
one share per $2.72 in converted principal and interest. The Company
elected in February 1998, after the notes became due, to convert the notes
into 411,764 shares of common stock in settlement of $1,200,000 in
aggregate principal and accrued interest.
In April 1998, in connection with entering into a joint venture agreement,
the Company raised $6,000,000 through a private placement to an affiliate
of the joint-venture partner of: (i) 800,000 shares of series A convertible
preferred stock, par value $0.001 (which preferred stock was authorized by
the Company on April 1, 1998); and (ii) two-year warrants to purchase
200,000 shares of the Company's common stock at $7.50 per share in the
event of the dissolution and winding-up of the Company. Each share of
preferred stock (1) is convertible into one common share; (2) commencing
April 3, 2000, may be redeemed by the Company at $7.50 per share; and (3)
has a $7.50 liquidation preference should the Company wind-up and
-9-
<PAGE>
dissolve. The preferred shares are not entitled to payment of any
dividends, although such shares may, under certain circumstances,
participate in dividends on the same basis as if such shares had been
converted into common shares.
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: (i) increasing its accumulated deficit by
$3,236,000 to recognize the intrinsic value of such beneficial conversion
features; (ii) increasing its additional paid-up capital by $2,104,000 in
connection with the issuance of the preferred shares; and (iii) 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.
No options were granted by the Company during the three-month interim
fiscal period ended March 31, 1999. During the three-month interim fiscal
period ended March 31, 1998, the Company granted options to purchase 45,000
shares of its common stock to one director. The exercise price for these
options was fixed at the trading price for the common stock as of the
effective date of grant. No outstanding options were exercised or cancelled
during the three-month interim fiscal periods ended March 31, 1999 or 1998,
respectively.
As of March 31, 1999, there were outstanding options to purchase 500,000
shares of the Company's common stock, of which 165,000 options were vested,
as set forth below:
<TABLE>
<CAPTION>
Options
Out- Options
Standing Vested
Effective Excercise Mar. 31, Mar. 31,
Type of Option Grant Date Price 1999(3) 1999(4)
------------------------------------- ---------- --------- --------- --------
<S> <C> <C> <C> <C>
Director Non-qualified............... 5-12-97 $ 5.81(1) 75,000 65,000
Director Non-qualified............... 5-20-97 $ 5.25(1) 90,000 60,000
Employee Incentive................... 11-24-97 $ 9.50(1) 50,000 10,000
Director Non-qualified............... 3-10-98 $ 8.31(1) 45,000 30,000
Employee Incentive................... 5-12-98 $ 8.25(2) 70,000 0
Employee Incentive................... 8-24-98 $ 8.25(1) 145,000 0
Employee Incentive................... 10-1-98 $8.12 1/2(1) 25,000 0
--------- --------
500,000 165,000
</TABLE>
---------------------------------------------------
(1) The exercise price for these options was the trading price as of the
effective date of grant.
(2) The exercise price for these options was the trading price as of the
effective date of approval by the Compensation Committee of the Board.
(3) As of March 31, 1998, 165,000 director non-qualified options and
50,000 employee incentive options were outstanding.
(4) As of March 31, 1998, 55,000 director non-qualified options and no
employee incentive options were vested.
The director non-qualified 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 incentive
options vest over three to five years from the grant date, depending upon
recipient, based upon the continued provision of services as an employee.
Both the director non-qualified and employee incentive options generally
lapse, if unexercised, five years from the date of vesting.
-10-
<PAGE>
In August 1996, in connection with the amendment of the License by Momentum
for the purpose, among other things, of indefinitely extending the
termination date of the License, the Company agreed it would grant to
Momentum, commencing on January 1, 2001, Performance Options entitling
Momentum to purchase 16,000 shares of the Company's 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 Options have been granted to Momentum as of March 31, 1999.
8. Commitments
In January 1998, the Company entered into a five-year non-cancelable
operating lease for office space. As of March 31, 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):
<TABLE>
<S> <C>
1999 (9 months)...................................... $51,452
2000 (12 months)..................................... 68,604
2001 (12 months)..................................... 68,604
2002 (12 months)..................................... 68,604
2003 (1 month)....................................... 5,717
</TABLE>
9. Subsequent Events
In May 1999, Pinnacle International raised $6 million through the sale in a
private placement of 400,000 unregistered shares of its common stock at a
price of $15 per share.
Also in May 1999, Pinnacle International agreed to grant stock options to
each of two newly hired executive officers entitling each such employee to
purchase 500,000 unregistered shares of common stock. The first 300,000
options granted to each of such 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 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 purchase price per share for these options is
$14 per share, which reflects the trading price for Pinnacle
International's common stock as of the date negotiations were entered into
(although each executive officer reserves the right to stipulate a $15 per
share exercise price based upon the noted private placement if advantageous
for income tax purposes). The remaining 200,000 options granted to each of
such 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 purchase price
per share for these options will be the closing price for Pinnacle
International's common stock on April 30, 2001. 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.
Further in May 1999, Pinnacle International agreed to grant incentive stock
options to each of two newly hired employees entitling such employees to
purchase 50,000 and 20,000 unregistered shares of common stock at $14 per
share and $17 per share, respectively. 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.
-11-
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
General
The following discussion of the consolidated financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto included in Part I,
Item 1, of this Quarterly Report.
Overview
Pinnacle Oil International, Inc. ("Pinnacle International"), together with its
wholly-owned subsidiaries, Pinnacle Oil Inc. and Pinnacle Oil Canada, Inc
("Pinnacle U.S." and "Pinnacle Canada," respectively), is a remote-sensing
technology company engaged in the business of wide-area hydrocarbon (oil and
natural gas) reconnaissance exploration. Pinnacle International, Pinnacle U.S.
and Pinnacle Canada are collectively referred to as the "Company."
The Company uses Stress Field Detector or "SFD" technology to survey or
reconnoiter large exploration areas from the Company's survey aircraft at speeds
in excess of 150 mph to identify and "high-grade" potential SFD Leads for
further evaluation and drilling by the Company's strategic partners, CamWest
Exploration LLC ("CamWest Exploration"), Encal Energy Ltd. ("Encal Energy") and
Renaissance Energy Ltd. ("Renaissance Energy"). The SFD is a recently developed
technology which the Company adapted for airborne survey operations and field
tested for independent geologists and the Company's strategic partners in 1996
and 1997, and commenced SFD survey activities on a full commercial basis for its
strategic partners in early 1999. No wells have been drilled to date using the
SFD Technology, although, as of March 31, 1999, the Company has tendered 37
Recommended SFD Leads to its strategic partners for geological and geophysical
evaluation since mid-1998, and one strategic partner (Encal Energy) has since
spudded one well with drilling results anticipated by mid-1999, and a second
strategic partner (CamWest Exploration) anticipates it will commence initial
drilling activities in June 1999. The Company will have no revenues until such
time as these or any other tendered SFD Leads are drilled and producing oil and
gas.
The SFD captures non-electromagnetic energy patterns (which the Company refers
to as "stress fields") which the Company believes result from subsurface
mechanical stress in rocks and subsurface fluid pressures. The Company
processes and interprets the waveforms associated with these energy patterns
through several different modes of operation and analysis wherein the Company
uses the SFD as both an inferential detection tool to identify geologic
structures and features and porosity levels from which the presence of
hydrocarbons may be deduced, as well as a direct detection tool which identifies
the actual presence of oil, gas and water and the relative amount of these
accumulations. The SFD affords the Company with the relatively inexpensive
ability to obtain near real-time analysis and interpretation of potential
hydrocarbon accumulations in a matter of days or weeks, as compared to months,
and in some cases years, in the case of the seismic methods currently employed
by the oil and gas exploration industry for wide area exploration or
reconnaissance. These cost and time advantages will ultimately enable the
Company's strategic partners to effectuate potentially significant reductions in
their "finding costs," i.e., the cost of wide-area seismic, the cost to acquire
land for exploration, and the cost to drill and complete exploratory wells.
The Company's current business strategy is to enter into joint venture and other
arrangements with a small and select number of reputable, experienced, well-
capitalized hydrocarbon exploration, drilling and production companies pursuant
to which the Company will identify SFD Prospects in geographically defined
exploration areas selected by these strategic partners in return for a revenue-
based royalty or working interest (as opposed to a fixed fee), and the strategic
partner will finance the acquisition and development of the SFD Prospects.
These strategic arrangements will ultimately encompass both domestic prospects
(located within the United States and Canada) and international prospects, as
well as off-shore prospects.
-12-
<PAGE>
As currently structured, Pinnacle U.S. will enter into arrangements with
strategic partners to exploit SFD Prospects principally located in the United
States, and Pinnacle Canada will enter into arrangements with strategic partners
to exploit to exploit SFD Prospects principally located in Canada. To
effectuate such structure, Pinnacle Canada and Pinnacle U.S. have each entered
into certain sublicensing arrangements with the Company pursuant to which each
of such subsidiaries receive SFD Data from the Company in payment of a royalty
to the Company based upon such subsidiary's respective revenues.
As of March 31, 1999, Pinnacle U.S. and Pinnacle Canada had entered into a joint
venture agreement with two such strategic partners, United States-based CamWest
Exploration and Canadian-based Encal Energy, respectively, and Pinnacle Canada
had entered into an SFD survey agreement with a third such strategic partner,
Canadian-based Renaissance Energy. Each of these agreements provide for the
payment of a royalty to the applicable subsidiary by the strategic partner,
currently in the range of 5% to 8%, based upon revenues resulting from the sale
of hydrocarbons produced by SFD Prospects identified by such subsidiaries. In
any situation where the subsidiary is being paid a royalty, each strategic
partner will be responsible, at its own cost and risk, to acquire the necessary
drilling rights for such prospect (if it has not already done so), and to
conduct all drilling, production and marketing activities necessary to exploit
such prospect. Each of the joint venture agreements also provides for the
applicable strategic partner (CamWest Exploration or Encal Energy) to pay all of
the survey expenses of the applicable subsidiary, while the survey agreement
requires the third strategic partner (Renaissance Energy) to pay one-half of all
such expenses.
The joint venture agreements each also permit the applicable subsidiary to elect
to receive a higher working interest (in percentage terms relative to a royalty
interest) with respect to hydrocarbons produced by any SFD Prospect, in which
case such subsidiary must bear its share of the acquisition (if necessary),
drilling and production costs incurred with respect to such prospect based upon
its applicable working interest percentage. Notwithstanding that such
subsidiary bears a share of the costs in such circumstances, the strategic
partner (CamWest Exploration or Encal Energy) will nevertheless still be
responsible for conducting and managing all drilling, production and marketing
activities to exploit the SFD Prospect.
Should the Company receive revenues, it will be required to pay the licensor of
the SFD, Momentum Resources Corporation ("Momentum"), pursuant to the terms of
an SFD Technology License, a fee equal to 1% of "Prospect Profits" (as such term
is defined in the SFD Technology License) received by the Company on or before
December 31, 2000, and 5% of Prospect Profits received by the Company after
December 31, 2000. Momentum, which provides the SFD Data to the Company
pursuant to the terms of an SFD Technology License, is controlled and indirectly
owned by the Company's controlling shareholders, Mr. George Liszicasz, the chief
executive officer and a director of the Company, and Mr. R. Dirk Stinson, also a
director of the Company.
Since the Company has not generated operating revenues to date, it should be
considered a development stage entity. As a result of a $6 million private
placement of the Company's securities in April 1998, the Company has sufficient
working capital as of the date of this Quarterly Report ($4,513,631) to fund
operations for the next two years, including increased levels of operations
facilitated by recent and anticipated additional staffing. The Company has also
raised an additional $6,000,000 through the private placement of 400,000
unregistered shares of common stock through May 17, 1999, which gives the
Company flexibility to fund operations for an additional several years if
required, or to fund additional capital projects if management deems such
expenditures to be appropriate. The Company's ability to continue as a going
concern in the longer term will nevertheless be dependent upon any joint venture
or other arrangement in which the Company participates successfully identifying,
financing, developing, extracting and marketing oil and natural gas
accumulations for a profit, and making distributions of distributable cash flow
from such profits to its participants, including the Company. The Company
expects it will continue to incur further losses until such time as such joint
ventures and/or other arrangements make such distributions in meaningful
amounts. (See "Outlook and Prospective Capital Requirements" below).
For additional information relating to the Company and its business, see
Pinnacle International's Annual Report on Form 10--K for its fiscal year ended
December 31, 1998.
-13-
<PAGE>
Results Of Operations
The Company had no oil and gas royalty or working interest revenues for its
three-month interim fiscal periods ended March 31, 1999 and 1998 (the "first
quarter of 1999" and the "first quarter of 1998," respectively).
The Company incurred total operating expenses of $355,864 for the first quarter
of 1999, as compared to $296,865 for the first quarter of 1998, representing a
$58,999, or 19.9%, overall increase.
The $58,999 increase in total operating expense for the first quarter of 1999
over the first quarter of 1998 was primarily attributable to an $83,070, or
781.2%, increase in production development and support expenditures from $10,633
to $93,703, and a $37,814, or 496.8%, increase in amortization and depreciation
from $7,612 to $45,426; partially offset by a $59,072, or 23.1%, decrease in
administrative expense from $255,942 to $196,870, and a $2,813, or 12.4%,
decline in net (unreimbursed) survey and data analysis expenditures from $22,678
to $19,865.
The $59,072 decrease in administrative expense for the first quarter of 1999
over the first quarter of 1998 was primarily attributable to a $94,659 decrease
in legal expense from $101,001 to $6,342; partially offset by across-the-board
net increases in costs to support the Company's increased level of business
activities in the first quarter of fiscal 1999, the most significant of which
were increases of $14,084 in rent and property taxes and $10,839 in wages and
benefits.
Survey operation support and expenditures consist primarily of the cost,
including allocable salaries, of: (i) developing, improving and testing the
various components of the SFD Survey System; (ii) conducting 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
(iii) developing the Company's research and development and survey functions.
The $83,070 increase in these expenditures for the first quarter of 1999 over
the first quarter of 1998 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 the Company's
research and development and survey functions
Survey and data analysis expenditures consist primarily of the cost, including
allocable salaries, of commercial SFD survey activities for the Company's
strategic partners, which costs consist primarily of: (i) aircraft operating
costs, travel expenses and allocable salaries of Company personnel while on
survey assignment (after netting direct survey costs reimbursed to the Company
by its strategic partners); and (ii) allocable salaries of Company personnel
while interpreting SFD Data for the Company's strategic partners. Although the
Company incurred gross survey and data analysis expenditures of $44,312 and
$59,261 for the first quarters of 1999 and 1998, respectively, its net survey
and data analysis expenditures for these respective periods were only $19,865
and $22,678 as the result of the Company's strategic partners reimbursing
$24,447 and $36,583 of these costs for these respective periods pursuant to the
terms of their respective agreements with the Company.
The Company is in the process of effectively doubling its survey operation and
support staff through the hiring of key professionals, including executive,
geological, geophysical, scientific, information technology and aviation
personnel, and anticipates that total operating expenses will increase
significantly on a quarterly basis through the end of fiscal 1999 as a result of
the increase level of operations facilitated by these additions.
The Company incurred $10,000 in interest expense for the first quarter of 1998,
as compared to $0 for the first quarter of 1999. The noted expense primarily
represents interest accrued on $1 million in loans made to the Company in
January of 1997 by Messrs. R. Dirk Stinson and George Liszicasz, which loans
were converted into Common Stock on February 1, 1998.
The Company earned $50,856 in interest income for the first quarter of 1999, as
compared to $6,988 for the first quarter of 1998. The increase in interest
income was attributable to higher cash balances in the Company's accounts as a
result of a $6,000,000 private placement of the Company's securities in April
1998.
-14-
<PAGE>
The Company incurred a $17,720 foreign currency gain in the first quarter of
1999, as compared to a $2,403 foreign currency loss for the first quarter of
1998. The foreign currency gains and losses are attributable to the conversion
of the Company's Canadian-dollar denominated year-end balances and revenue and
expenses denominated in Canadian dollars into U.S. dollars in consolidating the
Company's accounts.
Liquidity And Capital Resources
The Company's cash flow requirements from the inception of Pinnacle U.S.
(October 20, 1995) through March 31, 1999 were funded principally from: (i) a
private placement of the Company's Common Stock in the amount of $975,000 in
February 1996; (ii) loans to the Company by Messrs. Liszicasz and Stinson in the
amount of $1,000,000 in January 1997, of which the outstanding balance of
principal and accrued interest was subsequently converted into 411,764 shares of
common stock in February 1998; and (iii) a private placement of convertible
preferred stock and warrants in the amount of $6 million in April of 1998. The
Company has since raised an additional $6,000,000 through the private placement
of 400,000 unregistered shares of common stock through May 17, 1999.
The Company's cash position as of March 31, 1999 and March 31, 1998 was
$4,410,835, and $385,180, respectively, as compared to $4,713,822 and $848,339
as of the beginning of each such respective period. The Company principally
maintains its cash in a money-market account which invests in United States
government and government-backed securities.
The $302,987 decrease in the Company's cash position for the first quarter of
1999 was attributable $280,229 in cash used in operating activities and $70,516
in cash used in investing activities, partially offset by $47,758 in cash
generated by financing activities. The $463,159 decrease in the Company's cash
position for the first quarter of 1998 was attributable $236,870 in cash used in
operating activities and $226,289 in cash used in investing activities.
The Company's operating activities required cash in the amount of $280,229 for
the first quarter of 1999, as compared to cash requirements of $236,870 for the
first quarter of 1998. The $280,229 in cash used in operating activities for
the first quarter of 1999 reflected the Company's net loss of $287,288 for such
period, as decreased for non-cash deductions for amortization ($138,440) and a
net increase in non-cash working capital balances ($131,380). The $236,870 in
cash used in operating activities for the first quarter of 1998 reflected the
Company's net loss of $302,280 for such period, as decreased for non-cash
deductions (interest accrued of $10,000 and amortization of $7,612), and a net
decrease in non-cash working capital balances ($47,798).
The Company generated cash of $47,758 from financing activities for the first
quarter of 1999, as compared to generating cash of $0 from financing activities
for the first quarter of 1998. The $47,758 in cash generated in the first
quarter of 1999 was primarily comprised of the net proceeds of the issuance of
common stock upon the exercise of employee options.
The Company used cash in the amount of $70,516 for investing activities for the
first quarter of 1999, as compared to cash used in investing activities in the
amount of $226,289 for the first quarter of 1998. The principal use of cash for
both the first quarter of 1999 and 1998 was to acquire property and equipment.
Outlook And Prospective Capital Requirements
The Company's ability to begin earning revenues and profits is dependent upon
joint ventures or other arrangements in which the Company participates
successfully identifying, financing, developing, extracting and marketing oil
and natural gas accumulations for a profit, and making distributions of
distributable cash flow from such profits to the parties to such ventures,
including to the Company. As of the date of this Quarterly Report, the Company
has commenced identifying and tendering Recommended SFD Leads to each of its
three strategic partners, and anticipates, based upon discussions with each of
its strategic partners, that such strategic partners
-15-
<PAGE>
will commence drilling activities with respect to a number of these leads by
mid-1999. The Company does not anticipate it will receive meaningful revenues
until the last quarter of 1999 at the earliest.
No assurance can be given that the SFD Prospects described above, if confirmed
by the Company's strategic partners using seismic or other methodologies, will
be drilled at all or by projected drilling dates due to, among other things,
factors such as the perceived economics of drilling at such 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. Even if an SFD Prospect is drilled,
no assurance can be given that the well will produce commercially viable
quantities of oil or gas. See "Uncertainties And Other Factors That May Affect
The Company's 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.
The Company expects it will continue to incur further losses until such time as
any joint venture or other arrangement makes distributions in meaningful
amounts. The Company estimates it will incur operating costs of approximately
$1.5 million over the twelve-month period ended March 31, 2000. In April 1998,
the Company raised $6 million through a private placement of convertible
preferred stock and warrants, which will enable the Company to fund its
operations for at least the next twelve months following the date of this
Quarterly Report.
Other Matters
Foreign Exchange
The Company's business to date is principally conducted in the United States and
Canada, in transactions denominated in United States and Canadian dollars,
respectively. The Company maintains its cash and investments predominately in
United States denominated funds, and only converts such funds into Canadian
dollars at such time as necessary to pay Canadian expenses. Management does not
believe that the fluctuation in the value of the United States dollar in
relation to the Canadian dollar in the last three fiscal periods has adversely
affected the Company's operating results. No assurance can be given, however,
that adverse currency exchange rate fluctuations will not occur in the future,
which would affect the Company's operating results. (See Part I, Item 7A,
"Quantitative and Qualitative Disclosure About Market Risk").
Effect Of Inflation
In the Company's view, at no time during any of the last three fiscal periods
have inflation or changing prices had a material impact on the Company.
Year 2000 Compliance
Management has reviewed the Company's internal computer systems and software
products for Year 2000 problems, and believes they are generally Year 2000
compliant. The Company uses two types of computer software, proprietary
software developed in-house by the Company's programming personnel, and industry
software acquired for use with the Company's computer systems. The Company's
proprietary software has been designed by the Company's programming personnel to
be free of year 2000 problems, and the industry software used by the Company are
recent versions which have been updated by their manufacturer to address year
2000 issues. The Company is not reliant upon third parties, and has 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. In the event Year 2000
considerations do arise, management does not believe such considerations will
materially impact the Company's internal operations or future financial or
operating results or future financial condition.
-16-
<PAGE>
Uncertainties And Other Factors That May Affect The Company's 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 Quarterly
Report, may affect the Company's future results of operations and/or financial
condition, and which should be considered carefully in evaluating the Company
and its business.
Matters Generally Relating To The Company And Its Business
Continuing Operating Losses; Development Stage Entity. The Company has not
generated operating revenues to date, and should be considered a development
stage entity. The Company's ability to increase revenues and generate profits
will depend primarily upon the successful implementation of the Company's
business plan, which is dependent upon one or more of the Company's joint
venture partners successfully drilling and producing commercially viable
quantities of oil or natural gas from SFD Prospects identified by the Company,
and making distributions to the Company of gross-overriding royalties and, in
certain cases, working interest distributions, to the Company. No assurance can
be given that the Company will be successful in implementing its business plan,
or that the revenues of the Company will commence or be sustained, or that the
Company will be able to achieve or sustain profitable operations. The extremely
limited operating history of the Company makes the prediction of future results
of operations difficult or impossible.
Limited Operating History. The Company has a limited operating history upon
which any evaluation of the Company and its long-term prospects might be based.
The Company did not commence its business plan for the exploitation of the SFD
Survey System until December of 1995. The Company is 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. The Company and its
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 that the Company might achieve will
depend upon many factors, including factors which will be beyond its 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 the
Company's strategy; changes in expenses; the timing of research and development
expenditures; the level of the Company's 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 the Company competes, among others. To address these risks, the Company
must, among other things, continue to respond to competitive developments;
attract, retain and motivate qualified personnel; implement and successfully
execute its business plan; obtain additional joint venture partners; negotiate
additional working interests and participations; and upgrade and perfect the SFD
Survey System. There can be no assurance that the Company will be successful in
addressing these risks.
Uncertain Discovery Of Viable Commercial Prospects. The Company's future
success is dependent upon its ability, through utilization of the SFD Survey
System, to locate commercially viable hydrocarbon accumulations for development
by its strategic partners. Based on the Company's business plan, the Company
will be dependent on both (i) the efficacy of the SFD Survey System in locating
SFD Prospects; and (ii) the cooperation and capital of joint-venture and other
strategic partners in exploiting such prospects. Although the results of the
SFD Survey System as a geologic structural identification tool have been
satisfactorily tested by the Company's strategic partners, the Company can make
no representations, warranties or guaranties that the SFD Survey System will be
able to consistently locate hydrocarbons or oil and gas prospects, or that such
prospects will be commercially exploitable. There can be no assurance that the
Company will be able to discover commercial quantities of oil and gas, or that
the Company's joint venture partners will have success in acquiring properties
at low finding costs and in drilling productive wells. Because the Company's
revenues will be solely from gross-overriding royalties and, in certain cases,
working interest distributions, from its strategic partners with respect to
prospects identified by the SFD Survey System, an inability of the Company to
identify and exploit commercially viable hydrocarbon accumulations would have a
material and adverse effect on the Company's business and financial position.
-17-
<PAGE>
Uncertain Market Acceptance Of The SFD Survey System And Strategic Partner
Participation. The market for the Company's SFD Survey System is undeveloped,
and such technology 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 new services
are subject to a high level of uncertainty and risk. Because the market for the
Company's exploration services is new and evolving, it is difficult to predict
the future growth rate, and the size of the potential market. There can be no
assurance that a market for the Company's services will develop, or be
sustainable. If the market fails to develop, or if the Company's services do
not achieve or sustain market acceptance, the Company's business, results of
operations and financial condition would be materially and adversely affected.
Reliance On Strategic Partners; Non-Operator Status. The Company has and will
rely upon its 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. The Company focuses exclusively on exploration and the
review and identification of viable prospects through the SFD Survey System, and
relies upon its strategic partners to provide and complete all other project
operations and responsibilities, including land acquisition, drilling, marketing
and project administration. As a result, the Company has only a limited ability
to exercise control over the selection of prospects for development, drilling or
production operations, or the associated costs of such operations. The success
of each project will be dependent upon a number of factors which are outside the
Company's control, or controlled by the Company's strategic partner(s) as the
operators of the project(s), in accordance with the applicable agreements
between the Company and such strategic partners. Such factors include: (i) the
selection and approval of prospects for lease/acquisition and exploratory
drilling; (ii) obtaining favorable leases and required permitting for projects;
(iii) the availability of capital resources of the strategic partner for land
acquisition and drilling expenditures; (iv) the timing of drilling activity, and
the economic conditions at such time, including then prevailing prices for oil
and gas; and (iv) the timing and amount of distributions from the production.
The Company's reliance on its strategic partners, and its limited ability to
directly control project operations, costs and distributions, could have a
material adverse effect on the realization of return from the Company's interest
in projects, and on the Company's overall financial condition.
Risk Of Exploratory Drilling Activities. Pursuant to the Company's business
plan, the Company's revenues and cash flow will be principally dependent upon
the success of drilling and production from prospects in which the Company
participates through agreements with its strategic partners, in the form of a
gross overriding royalty or, in certain cases, a working interest or other
participation right. The success of such 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
the applicable strategic partner of drilling, completing 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. The
inability to successfully locate and drill wells that will produce commercial
quantities of oil and gas would have a material adverse effect on the Company's
business, financial position and results of operations.
Volatility Of Oil And Natural Gas Prices. Although the Company's primary
efforts are focused on locating commercially viable prospects and obtaining
gross overriding royalty and, in certain cases, working interest participations,
the Company's ultimate profitability, cash flow and future growth will be
affected by changes in prevailing oil and gas prices. Oil and gas prices have
been subject to wide fluctuations in recent years in response to relatively
minor changes in the supply and demand for oil and natural gas, to market
uncertainty and a variety of additional factors that are beyond the control of
the Company, including economic, political and regulatory developments, and
competition from other sources of energy. It is impossible to predict future
oil and natural gas price movements with any certainty. The Company does not
currently engage in hedging activities. As a result, the Company may be more
adversely affected by fluctuations in oil and gas prices than other industry
participants that do engage in such activities. No assurances can be given as
to the future level of activity in the oil and gas
-18-
<PAGE>
exploration and development industry, or as to the future demand for the
technology offered by the Company. An extended or substantial decline in oil and
gas prices would have a material adverse effect on (i) the ability of the
Company to negotiate favorable joint ventures with viable industry participants;
(ii) the volume of oil and gas that could be economically produced by the joint
ventures in which the Company participates; (iii) the Company's access to
capital; and (iv) the Company's financial position and results of operations.
See Part II, Item 3, captioned "Quantitative And Qualitative Disclosures About
Market Risk."
Competition. The Company competes directly with independent, technology-driven
exploration and service companies, and indirectly (through its strategic
partnerships) with major and independent oil and gas companies in its
exploration for and development of commercial oil and gas properties. With
respect to the SFD Survey System, the Company has experienced and expects to
continue to experience competition from numerous hydrocarbon exploration
competitors, which offer a wide variety of geological and geophysical services.
Many of such competitors have substantially greater financial, technical, sales,
marketing and other resources, as well as greater historical market acceptance
than the Company. Accordingly, such competitors or future competitors may be
able to respond more quickly to changes in customer requirements, or to devote
greater resources to the development, promotion and sales of their services than
the Company. There can be no assurance that the Company's competitors will not
develop exploration services that are superior to those of the Company, or that
such technologies will not achieve greater market acceptance than the SFD Survey
System. Increased competition could impair the Company's ability to attract
viable industry participants, and to negotiate favorable participations and
joint ventures with such parties, which could materially and adversely affect
the Company's 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. The
Company's 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 the Company. Such competitive disadvantages could adversely affect
the Company's 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, the Company may be
placed at a competitive disadvantage, and competitive pressures may force the
Company to improve or complement the SFD Survey System, or to implement
additional technologies at substantial cost. In addition, other oil and gas
exploration companies may implement new technologies before the Company, and
such companies may be able to provide enhanced capabilities and superior quality
compared with those of the Company. There can be no assurance that the Company
will be able to respond to such competitive pressures and implement or enhance
its technology on a timely basis, or at an acceptable cost. One or more of the
technologies currently utilized by the Company or implemented in the future may
become obsolete. In such case, the Company's business, financial condition and
results of operations could be materially adversely affected.
Operating Hazards. The exploration and development projects in which the
Company will participate through its 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. Company management that the applicable joint
venture 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 the financial condition of the Company.
Variability Of Operating Results. The Company's 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,
-19-
<PAGE>
rates of production from completed wells and the timing of capital expenditures.
Such variability could have a material adverse effect on the Company's 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 the Company's future ability to continue exploration and to
participate in economically attractive projects.
Dependence On Key Personnel. The Company's success depends to a significant
extent on the continued efforts of its senior management team, which currently
is composed of a small number of individuals, including Mr. George Liszicasz,
the inventor of the SFD Technology who is the Chief Executive Officer and a
director of the Company, and who is responsible for the development of the SFD
Survey System (including the SFD Technology) and the interpretation of SFD Data.
While the Company has entered into an employment agreement with its senior
management team, Mr. Liszicasz is not obligated, (and as a result of his
relationships with Momentum may in the future be unable), to devote his entire
undivided time and effort to or for the benefit of the Company. The Company
does not currently carry key person life insurance on its executive officers.
The services of Mr. Liszicasz would be extremely difficult to replace since he
is the inventor of, and has intimate knowledge of, the theoretical basis of the
SFD Survey System and, in particular, the SFD Technology and the SFD Sensor, and
has also developed the methodologies used to interpret the SFD Data, and the
loss of his services would likely have a material adverse effect on the
business, results of operations and financial condition of the Company. While
the Company is presently training personnel to operate the SFD Survey System and
to interpret the SFD Data, no assurance can be given that these personnel could
fully replace Mr. Liszicasz with respect to these functions, at least in the
short-term. Moreover, the Company does not know if it would be able to
successfully replicate the SFD Survey System and, in particular, the SFD
Technology and the SFD Sensor, in the event of the loss of Mr. Liszicasz. The
Company's ability to implement its growth strategies also depends upon its
continuing ability to attract and retain highly qualified geological, technical,
scientific, information management and administrative personnel. Competition for
such personnel is intense and there can be no assurance that the Company will be
able to retain its key managerial, professional and/or technical employees, or
that it will be able to attract and retain additional highly qualified
managerial, professional and/or technical personnel in the future. The
inability to attract and retain the necessary personnel could impede the growth
of the Company. (See "Management of Growth" below).
Management Of Growth. The success of the Company will depend upon the rapid
expansion of its business. Such expansion will place a significant strain on
the Company's financial, management and other resources and will require the
Company to: (i) change, expand and improve its operating, managerial and
financial systems and controls; (ii) improve coordination between corporate
functions; and (iii) hire additional geophysical, geological, professional,
administrative and managerial personnel. There can be no assurance that the
Company will be successful in hiring or retaining these personnel to the extent
required, or that it will be able to manage the expansion of its operations
effectively. If the Company were unable to effectively manage growth, or if new
personnel were unable to achieve anticipated performance levels, the Company's
business, financial position and results of operations will be materially and
adversely affected.
Importance Of Trademarks And Proprietary Rights. The business of the Company
is to interpret and utilize SFD Data to identify commercially viable oil and
natural gas accumulations. The Company has the exclusive right to utilize the
SFD Data for hydrocarbon exploration, pursuant to a Restated Technology
Agreement with Momentum. 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,
management of Momentum and the Company 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, the Company may be vulnerable to competitors who
attempt to imitate the SFD Survey System, or to develop functionally similar
technologies. Although the Company believes that it has all rights necessary to
market its services without infringing upon any patents or copyrights held by
others, there can be no assurance that conflicting patent s or copyrights do not
exist. The Company relies upon trade secret protection and confidentiality
and/or license agreements with its employees, consultants, venture partners and
others to protect its proprietary rights. Furthermore, management of the
Company does not believe that if Momentum were to apply for and receive patent
protection, that such patent protection would necessarily protect Momentum or
the Company
-20-
<PAGE>
from competition. Momentum and the Company therefore anticipate continued
reliance upon contractual rights and on common law validating trade secrets. The
steps taken by Momentum and the Company to protect their respective rights may
not be adequate to deter misappropriation, or to preclude an independent third
party from developing functionally similar technology. There can be no assurance
that others will not independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to the Momentum's or the
Company's trade secrets, or otherwise disclose aspects of the technology, or
that the Company can meaningfully protect its trade secrets. Litigation to
enforce and/or defend intellectual property rights is costly, and either
Momentum or the Company may not have sufficient resources to pursue such
litigation.
Matters Relating to Canadian Government Regulation And Industry Conditions
Compliance With Governmental Regulations. The oil and natural gas industry is
subject to extensive controls and regulations imposed by various levels of the
federal and provincial governments in Canada. It is not expected that any of
these controls or regulations will affect the operations of the Company in a
manner materially different than they would affect other oil and gas companies
of similar size. All current legislation is a matter of public record and the
Company is unable to accurately predict what additional legislation or
amendments may be enacted. All of the governmental regulations noted below may
be changed from time to time in response to economic or political conditions.
Company management believes that the trend of more expansive and stricter
environmental laws and regulations will continue. The implementation of new or
the modified environmental laws or regulations could have a material adverse
impact on the Company.
Pricing And Marketing Of Oil And Natural Gas. In Canada, producers of oil
negotiate sales contracts directly with oil purchasers, with the result that the
market determines the price of oil. The price depends in part on oil quality,
prices of competing fuels, distance to market, the value of refined products and
the supply/demand balance. Oil exports may be made pursuant to export contracts
with terms not exceeding one year in the case of light crude, and not exceeding
two years in the case of heavy crude, provided that an order approving any such
export is obtained from the National Energy Board ("NEB"). Any oil export to be
made pursuant to a contract of longer duration (to a maximum of 25 years)
requires an exporter to obtain an export license from the NEB and the issue of
such a license requires the approval of the Governor in Council. In Canada the
price of natural gas sold in inter-provincial and international trade is
determined by negotiation between buyers and sellers. Natural gas exported from
Canada is subject to regulation by the NEB and the federal government of Canada.
Exporters are free to negotiate prices and other terms with purchasers, provided
that the export contracts must continue to meet certain criteria prescribed by
the NEB and the government of Canada. Natural gas exports for a term of less
than two years or for a term of two to 20 years (in quantities of not more than
30,000 m/3//day), must be made pursuant to an NEB order. Any natural gas export
to be made pursuant to a contract of longer duration (to a maximum of 25 years)
or a larger quantity requires an exporter to obtain an export license from the
NEB and the issue of such a license requires the approval of the Governor in
Council.
The North American Free Trade Agreement. On January 1, 1994 the North American
Free Trade Agreement ("NAFTA") among the governments of Canada, the United
States and Mexico became effective. The NAFTA carries forward most of the
material energy terms contained in the Canada-United States Free Trade
Agreement. In the context of energy resources, Canada continues to remain free
to determine whether exports to the United States or Mexico will be allowed,
provided that any export restrictions do not: (i) reduce the proportion of
energy resource exported relative to domestic use (based upon the proportion
prevailing in the most recent 36 month period); (ii) impose an export price
higher than the domestic price; and (iii) disrupt normal channels of supply. All
three countries are prohibited from imposing minimum export or import price
requirements. The NAFTA contemplates the reduction of Mexican restrictive trade
practices in the energy sector and prohibits discriminatory border restrictions
and export taxes. The agreement also contemplates clearer disciplines on
regulators to ensure fair implementation of any regulatory changes and to
minimize disruption of contractual arrangements, which is important for Canadian
natural gas exports.
Provincial Regulation--Royalties And Incentives. In addition to federal
regulation, each province has legislation and regulations which govern land
tenure, royalties, production rates, extra-provincial export,
-21-
<PAGE>
environmental protection and other matters. The royalty regime is a significant
factor in the profitability of oil and natural gas production. Royalties payable
on production from lands other than Crown lands are determined by negotiations
between the mineral owner and the lessee. Crown royalties are determined by
government regulation and are generally calculated as a percentage of the value
of the gross production, and the rate of royalties payable generally depends in
part on prescribed reference prices, well productivity, geographical location,
field discovery date and the type or quality of the oil or natural gas produced.
From time to time the governments of Canada, Alberta, British Columbia and
Saskatchewan have established incentive programs which have included royalty
rate reductions, royalty holidays and tax credits for the purpose of encouraging
oil and natural gas exploration or enhanced planning projects.
Canadian Environmental Regulation. The oil and natural gas industry is
currently subject to environmental regulation pursuant to provincial and federal
legislation. Environmental legislation provides for restrictions and
prohibitions on releases or emissions of various substances produced or utilized
in association with certain oil and gas industry operations. In addition,
legislation requires that well and facility sites be abandoned and reclaimed to
the satisfaction of provincial authorities. A breach of such legislation may
result in the imposition of fines and penalties. In Alberta, environmental
compliance has been governed by the Alberta Environmental Protection and
Enhancement Act ("AEPEA") since September 1, 1993. In addition to replacing a
variety of older statutes which related to environmental matters, AEPEA also
imposes certain new environmental responsibilities on oil and natural gas
operators in Alberta and in certain instances also imposes greater penalties for
violations. British Columbia's Environmental Assessment Act became effective
June 30, 1995. This legislation rolls the previous processes for the review of
major energy projects into a single environmental assessment process which
contemplates public participation in the environmental review.
Matters Relating To The Company's Common Stock
Possible Volatility Of Stock Price. The market price for the Company's Common
Stock may be volatile and subject to significant fluctuations in response to a
variety of internal and external factors, including the liquidity of the market
for the Common Stock, variations in the Company's quarterly operating results,
regulatory or other changes in the oil and gas industry generally, announcements
of business developments by the Company or its competitors, changes in operating
costs and variations in general market conditions. Because the Company is a
development stage entity with a limited operating history and no prior revenues,
the market price for the Company's Common Stock may be more volatile than that
of a seasoned issuer. Changes in the market price of the Company's securities
may have no connection with the Company's operating results. No predictions or
projections can be made as to what the prevailing market price for the Company's
Common Stock will be at any time.
Limited Public Trading Market. There is only a limited public market on the
NASD OTC Electronic Bulletin Board for the Common Stock, and no assurance can be
given that a broad and/or active public trading market for such securities will
develop or be sustained. The Company is under no obligation to take any action
to improve the public market for such securities, including, without limitation,
filing an application to list of the Common Stock on any stock exchange or any
over the counter market.
No Likelihood Of Dividends. The Company plans to retain all available funds
for use in its business, and therefore does not plan to pay any cash dividends
with respect to its securities in the foreseeable future. Hence any holders of
the Common Stock could not expect to receive any distribution of cash dividends
with respect to such securities.
Control By Management. All decisions with respect to the management of the
Company will be made by the Board of Directors and officers of the Company, who
beneficially own approximately 70% of the Common Stock. The present stockholders
of the Company have the power to elect the Board of Directors who shall, in
turn, have the power to appoint the officers of the Company and to determine, in
accordance with their fiduciary duties and the business judgment rule, the
direction, objectives and policies of the Company, including without limitation
the purchase of businesses or assets; the sale of all or a substantial portion
of the assets of the Company; the merger or
-22-
<PAGE>
consolidation of the Company with another corporation; raising additional
capital through financing and/or equity sources; the retention of cash reserves;
the expansion of the Company's business and/or acquisitions; the filing of a
registration statement with the Securities and Exchange Commission for an
initial public offering of the Company's capital stock; transactions which may
cause or prevent a change in control of the Company; or the winding up and
dissolution of the Company.
Conflicts Of Interest. Mr. George Liszicasz (the Chief Executive Officer and a
director and principal stockholder of the Company) and Mr. Dirk Stinson (a
director and principal stockholder of the Company) indirectly own and control
both Pinnacle International and Momentum. Momentum owns the SFD Technology, and
provides raw SFD Data to the Company for its exclusive use in identifying oil
and natural gas prospects under the SFD Technology License. However, Momentum
reserves the exclusive right under the SFD Technology License to use SFD
Technology and the SFD Data for purposes other than oil and natural gas
exploration. Additionally, although Mr. Liszicasz has entered into an
employment agreement with the Company, he is not obligated, (and as a result of
his relationships with Momentum may in the future be unable), to devote his
entire undivided time and effort to or for the benefit of the Company. As a
result of the foregoing relationships amongst the Company, Momentum and Messrs.
Liszicasz and Stinson, certain conflicts of interests between the Company and
one or more of Momentum and Messrs. Liszicasz and Stinson may directly or
indirectly arise including, among others: (i) the inability of Mr. Liszicasz to
devote his undivided time and attention to the affairs of the Company; and (ii)
the proper exercise by Messrs. Liszicasz and/or Stinson of their fiduciary
duties on behalf of the Company in connection with any matters concerning
Momentum such as, by way of example and not limitation, disputes regarding the
validity, scope or duration of the SFD Technology License; the exploitation of
corporate opportunities; rights to proprietary property and information;
maintenance of confidential information as between entities; and potential
competition between the Company and Momentum. The Company and Messrs. Liszicasz
and Stinson have executed disclosures and consents with respect to these
conflicts. Nevertheless, such disclosures and consents will not remediate any
such conflicts, but will merely release Messrs. Liszicasz and Stinson from
liability as a result of such conflicts so long as they use reasonable efforts
to minimize the conflicts. In the event any of the conflicts prove to be
irreconcilable, Messrs. Liszicasz and Stinson may be forced to resign their
positions with the Company.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company's 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 The Company's Future Results And Financial Condition--
Risks Relating To The Company And Its Business--Volatility Of Oil And Natural
Gas Prices"). Since the Company's royalty revenues will be tied to the price at
which its strategic partners sell oil and gas on the world market, any
fluctuations in these prices will directly and proportionately impact the
Company's royalty income base (i.e., a 1% increase or decrease in oil or gas
prices would result in a 1% increase or decrease in the Company's royalty with
respect to the sale of such oil or gas). Should the Company elect a working
interest in lieu of a royalty interest, its working interest revenue base would
be similarly affected, except that such affect would not necessarily be
proportional since production and marketing costs would most likely remain the
same. For example, in the case of a decline in oil and gas prices where
production and marketing costs are unaffected, the decline in the Company's
working interest revenues would most likely be greater, in percentage terms,
than the decline in oil and gas prices.
The Company would not anticipate that any decline in world oil and gas prices
would adversely affect the Company's operations (i.e., force the Company or its
strategic partners to slow down or cut-back SFD survey or interpretation
operations or Company 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 a
strategic partner 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 the
Company's 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).
-23-
<PAGE>
A decline in oil and gas prices could also lead a strategic partner 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 the Company would no longer receive royalty or working interest
revenues from such well.
An additional significant market risk relates to foreign currency fluctuations
between American and Canadian dollars. Since two of the Company's three
strategic partners are located in Canada and will be exploiting Canadian
prospects, and the Company's royalty or working interest revenues with respect
to these partners will be denominated in Canadian currency, the Company's
financial position could be adversely affected by American-Canadian currency
fluctuations. The Company has not previously engaged in activities to mitigate
the effects of foreign currency fluctuations due to its absence of Canadian
revenues, and anticipates that the exchange rate between the American and
Canadian dollar will remain fairly stable. If earnings from Canadian operations
increase, the Company's exposure to fluctuations in the American-Canadian
exchange rate may increase, and the Company may utilize forward exchange rate
contracts or engage in other efforts to mitigate these foreign currency risks.
If entered into, there can be no assurance as to the effectiveness of such
efforts in limiting any adverse effects of foreign currency fluctuations on the
Company's international operations and on the Company's overall results of
operations.
The Company also currently maintains the bulk of its available cash in money-
market accounts maintained in U.S. dollars. The Company's interest income from
these short-term investments would be 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 Quarterly Report, there are no material pending legal
proceedings or, to the knowledge of the Company, contemplated or threatened
legal proceedings, to which the Company or its subsidiaries are or may become a
party, or with respect to properties of the Company or of its subsidiaries. As
of the date of this Quarterly Report, there are, to the knowledge of the
Company, no material proceedings to which any director, officer of affiliate of
the Company is a party adverse to the Company or its subsidiaries or has a
material interest adverse to the Company or its subsidiary.
Item 2. Changes In Securities And Use Of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
-24-
<PAGE>
Item 6. Exhibits
Exhibits
Exhibit 27 - Financial Data Table
Reports on Form 8--K
None
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 17th day of May, 1999.
Pinnacle Oil International, Inc.
By: /s/ George Liszicasz
----------------------------------------------
George Liszicasz, Chief Executive Officer
By: /s/ John M. Woodbury, Jr.
----------------------------------------------
John M. Woodbury, Jr., Chief Financial Officer
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PINNACLE OIL
INTERNATIONAL INC.'S CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999, AND PINNACLE
OIL INTERNATIONAL INC.'S CONSOLIDATED STATEMENT OF LOSS FOR THE THREE-MONTH
PERIOD ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,410,835
<SECURITIES> 0
<RECEIVABLES> 126,577
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,653,453
<PP&E> 733,637
<DEPRECIATION> 133,357
<TOTAL-ASSETS> 5,288,240
<CURRENT-LIABILITIES> 139,822
<BONDS> 0
0
800
<COMMON> 12,432
<OTHER-SE> 5,148,149
<TOTAL-LIABILITY-AND-EQUITY> 5,288,240
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> (355,864)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (355,864)
<INCOME-TAX> 0
<INCOME-CONTINUING> (355,864)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (287,288)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
