<PAGE>
As filed with the Securities and Exchange Commission on November 20, 2000
================================================================================
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 Nine-month Period Ended September 30,
2000; Or
[_] Act Of 1934 For The Transition Period From ________ To _______
Commission File No. 0-24027
ENERGY EXPLORATION TECHNOLOGIES
(Exact name of registrant as specified in its charter)
Nevada 61-1126904
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 700 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 [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
13,112,116 shares of common stock, par value $0.001 per share, as of
November 14, 2000
================================================================================
<PAGE>
ENERGY EXPLORATION TECHNOLOGIES
QUARTERLY REPORT ON FORM 10--Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION.......................................................................... 1
ITEM 1. FINANCIAL STATEMENTS........................................................................... 1
Consolidated Balance Sheets.................................................................... 1
Consolidated Statements Of Loss................................................................ 2
Consolidated Statements Of Shareholders' Equity(Deficit)....................................... 3
Consolidated Statements Of Cash Flows.......................................................... 5
Notes To Financial Statements.................................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 15
General........................................................................................ 15
Overview....................................................................................... 16
Capital Requirements........................................................................... 19
Results Of Operations.......................................................................... 20
Liquidity And Capital Resources................................................................ 22
Other Matters.................................................................................. 23
Uncertainties And Other Factors That May Affect Our Future Results And Financial Condition..... 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................... 35
Oil And Gas Price Fluctuations................................................................. 35
Currency Fluctuations.......................................................................... 35
Interest Rate Fluctuations..................................................................... 36
ITEM II OTHER INFORMATION.............................................................................. 36
ITEM 1. LEGAL PROCEEDINGS.............................................................................. 36
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................................................... 36
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................ 36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................ 36
ITEM 5. OTHER INFORMATION.............................................................................. 37
ITEM 6. EXHIBITS....................................................................................... 37
Reports On Form 8--K........................................................................... 37
</TABLE>
-ii-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY EXPLORATION TECHNOLOGIES
(A Development Stage Enterprise)
Consolidated Balance Sheets
(Unaudited)
(Expressed in U.S. Dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of
------------------------------
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 3,978,371 $ 9,068,723
Accounts receivable.......................................................... 450,615 101,731
Due from officers and employees.............................................. 322 3,219
Prepaid expenses and other................................................... 63,080 85,343
------------- ------------
Total current assets....................................................... 4,492,388 9,259,016
Note receivable from officer [note 4].......................................... 36,646 34,550
Unproved oil and natural gas properties,
net of impairments [notes 2(g) and 5]......................................... 2,801,667 775,159
Other property and equipment, net of accumulated depreciation and
amortization [notes 2(h) and 6].............................................. 3,834,389 661,201
------------- ------------
Total assets............................................................ $ 11,165,090 $ 10,729,926
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade payables............................................................... $ 280,043 $ 32,716
Wages and employee benefits payable.......................................... 136,242 132,685
Accrued oil and natural gas property costs................................... 556,663 382,386
Other accrued liabilities.................................................... 17,752 54,534
------------- ------------
Total current liabilities.................................................. 990,700 602,321
Shareholders' equity:
Series "A" convertible preferred stock; par value $0.001 per share,
liquidation preference $7.50 per share:
800,000 shares authorized; 800,000 shares issued as of September 30, 2000
and December 31, 1999, respectively [note 8]............................... 800 800
Common stock, par value $0.001 per share:
50,000,000 shares authorized;
13,112,916 shares issued as of September 30, 2000;
12,856,816 shares issued as of December 31, 1999 [note 7].................. 13,113 12,857
Warrants [notes 8 and 9]..................................................... -- 1,132,000
Additional paid-in capital................................................... 19,612,276 16,330,692
Deficit accumulated during the development stage............................. (9,372,332) (7,319,341)
Accumulated other comprehensive loss......................................... (79,467) (29,403)
------------- ------------
Total shareholders' equity................................................. 10,174,390 10,127,605
------------- ------------
Total liabilities and shareholders' equity.............................. $ 11,165,090 $ 10,729,926
============= ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets
-1-
<PAGE>
ENERGY EXPLORATION TECHNOLOGIES
(A Development Stage Enterprise)
Consolidated Statements Of Loss
(Unaudited)
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Oct. 20, 1995
Three months ended Nine months ended (inception) to
September 30, September 30, Sept. 30, 2000
2000 1999 2000 1999 (cumulative)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Administrative.................................... $ 393,392 $ 375,155 $ 1,119,930 $ 895,048 $ 4,382,292
Amortization and depreciation [note 2(h)]......... 62,418 70,796 282,088 142,612 576,083
Impairment of oil and natural gas properties...... 487,256 -- 487,256 -- 487,256
Research and development [note 2(i)].............. 95,620 38,589 264,845 135,512 799,246
Survey support [note 2(j)]........................ 74,809 51,524 182,783 120,346 784,762
Survey operations and data analysis [note 2(k)]... (51,872) 82,745 3,070 88,675 63,450
Write-down of assets.............................. -- -- -- 588 17,662
----------- ----------- ----------- ----------- -------------
Total operating expenses....................... (1,061,623) (618,809) (2,339,972) (1,382,781) (7,110,751)
Operating loss....................................... (1,061,623) (618,809) (2,339,972) (1,382,781) (7,110,751)
Other income (expense):
Interest cost on promissory notes................. -- -- -- -- (124,299)
Interest income................................... 71,439 116,161 286,981 244,336 910,412
Other income...................................... -- -- -- -- 19,231
Settlement of damages............................. -- -- -- -- 157,500
----------- ----------- ----------- ----------- -------------
Total other income (expenses).................. 71,439 116,161 286,981 244,336 962,844
Net loss for the period.............................. (990,184) (502,648) (2,052,991) (1,138,445) (6,147,907)
Other comprehensive loss:
Foreign currency translation adjustments.......... (35,307) (17,559) (50,064) (94,575) (79,467)
----------- ----------- ----------- ----------- -------------
Comprehensive loss for the period.................... $(1,025,491) $ (520,207) $(2,103,055) $(1,233,020) $(6,227,374)
Basic and diluted loss per share [note 2(m)]......... $ (0.08) $ (0.04) $ (0.16) $ (0.10)
=========== =========== =========== ===========
Weighted average shares outstanding.................. 12,945,118 12,590,793 12,945,118 12,590,793
=========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements of loss
-2-
<PAGE>
ENERGY EXPLORATION TECHNOLOGIES
(A Development Stage Enterprise)
Consolidated Statements of Shareholders' Equity(deficit)
(Unaudited)
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Accumulated Series "A" Deficit
Other Convertible Common Stock Accumulated
Compre- Common Stock Preferred Stock Warrants Additional During the
hensive -------------------- --------------- --------------------- Paid-in Development
Loss Shares Amount Shares Amount Number Amount Capital Stage
----------- ----------- ------- ------- ------ -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
Issued at inception for cash
at $0.001 per share on
October 20, 1995................. $ -- 5,000,000 $ 5,000 -- $ -- -- $ -- $ -- $ --
Net loss for fiscal 1995.......... -- -- -- -- -- -- -- -- (53,696)
Net other comprehensive
loss for fiscal 1995............. -- -- -- -- -- -- -- -- --
------ ---------- ------- ------- ------- ------- ---------- ----------- -----------
Balance -- December 31, 1995.... -- 5,000,000 5,000 -- -- -- -- -- (53,696)
1996:
Issued on reverse acquisition
on January 30, 1996.............. -- 5,968,281 5,968 -- -- -- -- (5,968) --
Issued for cash at $1 per share
on May 29, 1996.................. -- 975,000 975 -- -- -- -- 967,775 --
Net loss for fiscal 1996.......... -- -- -- -- -- -- -- -- (475,578)
Net other comprehensive loss
for fiscal 1996................... -- -- -- -- -- -- -- -- --
------ ---------- ------- ------- ------- ------- ---------- ----------- -----------
Balance -- December 31, 1996.... -- 11,943,281 11,943 -- -- -- -- 961,807 (529,274)
1997:
Issued for services at $2.31 1/2
per share on July 1, 1997........ -- 71,938 72 -- -- -- -- 166,469 --
Net loss for fiscal 1997.......... -- -- -- -- -- -- -- -- (913,321)
Net other comprehensive loss
for fiscal 1997................... -- -- -- -- -- -- -- -- --
------ ---------- ------- ------- ------- ------- ---------- ----------- -----------
Balance -- December 31, 1997.... -- 12,015,219 12,015 -- -- -- -- 1,128,276 (1,442,595)
1998:
Issued on conversion of promissory
notes at $2.72 per share on
February 1, 1998 (1), net of
issuance costs................... -- 411,764 412 -- -- -- -- 1,119,588 --
Issued for cash at $7.50 per
share on April 3, 1998........... -- -- -- 800,000 800 -- -- 7,792,167 (2,104,000)
Issued with series "A" preferred
stock on April 3, 1998........... -- -- -- -- -- 200,000 1,132,000 -- (1,132,000)
Net loss for fiscal 1998.......... -- -- -- -- -- -- -- -- (1,117,808)
Net other comprehensive loss
for fiscal 1998................... -- -- -- -- -- -- -- -- --
------ ---------- ------- ------- ------- ------- ---------- ----------- -----------
Balance -- December 31, 1998.... $ -- 12,426,983 $ 12,427 800,000 $ 800 200,000 $1,132,000 $10,040,031 $(5,796,403)
</TABLE>
[continued on next page]
-3-
<PAGE>
ENERGY EXPLORATION TECHNOLOGIES
(A Development Stage Enterprise)
Consolidated Statements Of Shareholders' Equity (Deficit)
(Unaudited)
(Expressed in U.S. Dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Series "A" Deficit
Other Convertible Common Stock Accumulated
Compre- Common Stock Preferred Stock Warrants Additional During the
hensive -------------------- --------------- --------------------- Paid-in Development
Loss Shares Amount Shares Amount Number Amount Capital Stage
----------- ----------- ------- ------- ------ -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999:
Issued for cash at $15 per share
on May 17, 1999 net of
issuance costs.................. $ -- 400,000 $ 400 -- $ -- -- $ -- $ 5,998,252 $ --
Options exercised for cash at
prices between $8.12 1/2 and
$9.50 per share during 1999..... -- 35,000 35 -- -- -- -- 303,979 --
Cancelled on October 14, 1999.... -- (5,167) (5) -- -- -- -- (11,570) 11,575
Net loss for fiscal 1999......... -- -- -- -- -- -- -- -- (1,534,513)
Net other comprehensive loss
for fiscal 1999................. (29,403) -- -- -- -- -- -- -- --
--------- ---------- ------- ------- ------ -------- ----------- ----------- -----------
Balance -- December 31, 1999..... (29,403) 12,856,816 12,857 800,000 800 200,000 1,132,000 16,330,692 (7,319,341)
2000:
Warrants exercised for cash at
$7.50 per share on March 31,
2000............................ -- 200,000 200 -- -- (200,000) (1,132,000) 2,631,800 --
Options exercised for cash at
prices between $8.25 and
$17.00 per share for the
nine months ended September 30,
2000............................ -- 56,100 56 -- -- -- -- 649,784 --
Net loss for the nine months
ended September 30, 2000........ -- -- -- -- -- -- -- -- (2,052,991)
Net other comprehensive loss
for the nine months ended
September 30, 2000.............. (50,064) -- -- -- -- -- -- -- --
----------- ---------- ------- ------- ------ -------- ----------- ----------- -----------
Balance -- September 30, 2000... $ (79,467) 13,112,916 $13,113 800,000 $ 800 -- -- $19,612,276 $(9,372,332)
=========== ========== ======= ======= ====== ======== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements of shareholders' equity
(deficit)
-4-
<PAGE>
ENERGY EXPLORATION TECHNOLOGIES
(A Development Stage Enterprise)
Consolidated Statements Of Cash Flows
(Unaudited)
(Expressed in U.S. Dollars)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months Ended Oct. 20, 1995
September 30, (inception) to
--------------------------- Sept. 30, 2000
Operating activities: 2000 1999 (cumulative)
------------ ------------ --------------
<S> <C> <C> <C>
Net loss for the period...................................... $ (2,052,991) $ (1,138,445) $ (6,147,907)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of property and equipment..................... 282,088 142,613 576,082
Impairment of oil and natural gas properties............... 487,256 -- (487,256)
Write-down of property and equipment....................... -- -- 17,662
Amortization of deferred costs............................. -- 93,014 154,287
Changes in non-cash working capital:
Accounts receivable...................................... (348,884) 61,945 (450,615)
Due from officers and employees.......................... 2,897 (1,329) (322)
Prepaid expenses......................................... 22,263 (36,763) (63,080)
Trade payables........................................... 247,327 (70,238) 280,043
Wages and employee benefits payable...................... 3,557 15,756 136,242
Accrued liabilities...................................... (36,782) 26,628 17,752
Deferred financing for insurance premium................. -- -- 7,766
Consulting costs settled by issuance of common stock..... -- -- 166,541
Interest costs settled by issuance of common stock....... -- -- 120,000
------------ ------------ -------------
Net cash used in operating activities................. (1,393,269) (906,819) (4,698,293)
Financing activities:
Funds borrowed from affiliates............................... -- -- 1,100,000
Repayment of funds borrowed from affiliates.................. -- 1,216 (100,000)
Funds raised through the sale of common
stock, net of issuance costs............................... -- 5,998,652 6,972,402
Funds raised through the sale of preferred
stock and warrants, net of issuance costs.................. -- -- 5,688,967
Funds raised through the exercise of options,
net of issuance costs...................................... 649,840 95,000 953,819
Funds raised through the exercise of warrants,
net of issuance costs...................................... 1,500,000 -- 1,500,000
Repayment of deferred financing for insurance premium........ -- -- (146,520)
------------ ------------ -------------
Net cash generated by financing activities............ 2,149,840 6,094,868 15,968,668
Investing activities:
Funds invested in property and equipment..................... (3,455,276) (134,670) (4,443,631)
Funds Invested in oil and natural gas properties............. (2,513,764) (28,125) (3,288,923)
Funds borrowed by an employee................................ -- -- (35,760)
Repayment of funds borrowed by an employee................... (2,096) (447) (886)
Changes in non-cash working capital:
Accrued oil and natural gas property costs.................... 174,277 -- 556,663
------------ ------------ -------------
Net cash used in investing activities................. (5,796,859) (163,242) (7,212,537)
Effect of net other comprehensive loss.......................... (50,064) (94,575) (79,467)
Net cash inflow (outflow)....................................... (5,090,352) 4,930,232 3,978,371
Cash position, beginning of period.............................. 9,068,723 4,713,822 --
------------ ------------ -------------
Cash position, end of period.................................... $ 3,978,371 $ 9,644,054 $ 3,978,371
============ ============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements of cash flows
-5-
<PAGE>
ENERGY EXPLORATION TECHNOLOGIES
(A Development Stage Enterprise)
Notes To Financial Statements
(Unaudited)
(Expressed in U.S. Dollars)
-------------------------------------------------------------------------------
1. Organization And Operations
(a) Our Company
Energy Exploration Technologies ("we," "our company" or "NXT"), a
development stage enterprise, was incorporated under the laws of
the State of Nevada on September 27, 1994, under the name "Auric
Mining Corporation." Subsequent to a reverse acquisition on
February 20, 1996, we changed our name to "Pinnacle Oil
International, Inc." on February 23, 1996, and then again to our
current name on June 13, 2000.
We have two wholly owned subsidiaries, NXT Energy USA Inc. ("NXT
USA"), which was incorporated under the laws of the State of Nevada
on October 20, 1995 under the name "Pinnacle Oil Inc." and
subsequently changed its name to that presently used on June 16,
2000, and NXT Energy Canada Inc. ("NXT Canada"), which was
incorporated under the federal laws of Canada on April 1, 1997
under the name "Pinnacle Oil Canada, Inc." and subsequently changed
its name to that presently used on June 19, 2000.
(b) Our Business
We are a technology-based reconnaissance exploration company which
utilizes our proprietary stress field detection or "SFD"
remote-sensing airborne survey technology, which we refer to as our
"SFD Survey System," to quickly and inexpensively identify and
high-grade oil and natural gas prospects. We conduct our
reconnaissance exploration activities, as well as land acquisition,
drilling, completion and production activities to exploit prospects
identified using our SFD technology, through our two
subsidiaries--NXT USA, which focuses on United States-based
exploration, and NXT Canada, which focuses on Canadian-based
exploration. NXT, in turn, focuses on research and development
efforts to improve the efficacy of our SFD Survey System.
Since we have not generated operating revenues to date, we should
be considered a development stage enterprise. After taking into
consideration $1,600,000 in loan proceeds from the refinance of our
aircraft and commitments to complete pending acquisition and
drilling programs, we have sufficient working capital as of
September 30, 2000 to fund our current level of operations for
approximately nineteen months, assuming we make no major
expenditures on new capital projects. Our ability to continue as a
going concern in the longer term will be dependent upon our
ability, either through our joint venture arrangements or for our
own account, to successfully identify hydrocarbon bearing
prospects, and to finance, develop, extract and market oil and
natural gas from these prospects for a profit. We anticipate that
we will continue to incur further operating losses until such time
as we receive revenues from our production with respect to
prospects currently in the development stage, or through prospects
we identify and exploit for our own account.
-6-
<PAGE>
2. Significant Accounting Policies
(a) Basis of Presentation
We have prepared these consolidated financial statements in
accordance with accounting principles generally accepted in the
United States for interim financial reporting. While these
financial statements reflect all normal recurring adjustments
which, in the opinion of management, are necessary for fair
presentation of the results of the interim period, they do not
include all of the information and notes required by accounting
principles generally accepted in the United States for complete
financial statements. For additional information, refer to our
financial statements included in NXT's annual report on form 10--K
(amendment no. 1) for our fiscal year ended December 31, 1999.
(b) Consolidation
We have consolidated the accounts of our wholly owned subsidiaries
with those of NXT in the course of preparing these consolidated
financial statements. All significant intercompany balances and
transactions amongst NXT and its subsidiaries have been eliminated
as a consequence of the consolidation process, and are therefore
not reflected in these consolidated financial statements.
(c) Reclassifications
We have changed the manner of presentation in these consolidated
financial statements and, as a consequence, have reclassified
certain accounts and amounts reflected in our prior annual
consolidated financial statements to conform to this change in
presentation.
(d) Estimates and Assumptions
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles in the
United States requires our management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of these consolidated financial statements and the
reported amount of revenues and expenses during the reporting
periods. Actual results may differ from those estimates.
(e) Cash and Cash Equivalents
For purposes of preparing the consolidated balance sheets and
statements of cash flows contained in these consolidated financial
statements, we consider all investments with original maturities of
ninety days or less to constitute "cash and cash equivalents."
(f) Fair Value of Financial Instruments
Our financial instruments consist of cash, accounts receivable,
notes receivable, accounts payable and accrued liabilities. The
fair value of these financial instruments approximates their
carrying values on our consolidated financial statements due to
their short-term to maturity and similarity to current market
rates. It is the opinion of our management that we are not exposed
to significant interest, currency or credit risks arising from
these financial instruments.
(g) Oil and Natural Gas Properties
We follow the full cost method of accounting for oil and natural
gas properties and equipment whereby we capitalize all costs
relating to our acquisition of, exploration for and development of
oil and natural gas reserves. These capitalized costs include:
-7-
<PAGE>
. land acquisition costs;
. geological and geophysical costs;
. costs of drilling both productive and non-productive wells,
. cost of production equipment and related facilities; and
. various costs associated with evaluating petroleum and natural
gas properties for potential acquisition.
We only capitalize overhead that is directly identified with
acquisition, exploration or development activities. All costs
related to production, general corporate overhead and similar
activities are expensed as incurred.
Under the full cost method of accounting, capitalized costs are
accumulated into cost centers on a country-by-country basis. These
costs, plus a provision for future development costs (including
estimated dismantlement, restoration and abandonment costs) of
proved undeveloped reserves, are then depleted and depreciated
using the unit-of-production method, based on estimated proved oil
and gas reserves as determined by independent engineers where
significant. For purposes of the depletion and depreciation
calculation, proved oil and gas reserves are converted to a common
unit of measure on the basis of their approximate relative energy
content.
In applying the full cost method of accounting, capital costs in
each cost center less accumulated depletion and depreciation and
related deferred income taxes are restricted from exceeding an
amount equal to the sum of the present value of their related
estimated future net revenues discounted at 10% less estimated
future expenditures, and the lower of cost or estimated fair value
of unproved properties included in the costs being amortized, net
of related tax effects. Should this comparison indicate an excess
carrying value, a write-down would be recorded.
The carrying values of unproved properties, which are excluded from
the depletion calculation, are assessed on a quarterly basis to
ascertain whether any impairment in value has occurred. This
assessment typically includes a determination of the anticipated
future net cash flows based upon reserve potential and independent
appraisal where warranted. Impairment is recorded if this
assessment indicates the future potential net cash flows are less
than the capitalized costs.
All recoveries of costs through the sale or other disposition of
oil and gas properties and equipment are accounted for as
adjustments to capitalized costs, with no gain or loss recorded,
unless the sale or disposition involves a significant change in the
relationship between costs and the value of proved reserves or the
underlying value of unproved property, in which case the gain or
loss is computed and recognized.
We conduct oil and natural gas exploration, drilling, development
and production activities through our joint venture partners. These
consolidated financial statements reflect only our proportionate
interest in these activities.
(h) Other Property and Equipment
We carry our other capitalized property and equipment at cost. We
depreciate or amortize our other capitalized property and equipment
over their estimated service lives using the declining balance
method as follows:
-8-
<PAGE>
Aircraft.................................................... 5%
Computer equipment.......................................... 30%
Computer software........................................... 100%
Equipment................................................... 20%
Furniture and fixtures...................................... 20%
Leasehold improvements...................................... 20%
Tools....................................................... 20%
Vehicles.................................................... 30%
When we retire or otherwise dispose of our other capitalized
property and equipment, we remove their cost and related
accumulated depreciation or amortization from our accounts, and
record any resulting gain or loss in the results of operations for
the period. Our management periodically reviews the carrying value
of our property and equipment to ensure that any permanent
impairment in value is recognized and reflected in our results of
operations.
(i) Research And Development Expenditures
We expense all research and development expenditures we incur to
develop, improve and test our SFD Survey System and related
components, including allocable salaries.
(j) Survey Support Expenditures
We expense all survey support expenditures we incur, after netting
costs which are reimbursable by our joint venture partners. Survey
support expenditures consist primarily of the cost, including
allocable salaries, to:
. conduct field evaluations designed by our joint venture
partners to evaluate the SFD Survey System (after netting
costs which are reimbursable by our joint venture partners);
and
. develop, organize, staff and train our survey and
interpretation operational functions.
(k) Survey Operations And Data Analysis Expenditures
We expense all survey operations and data analysis expenditures we
incur, after netting costs which are reimbursable by our joint
venture partners. Survey operations and data analysis expenditures
consist primarily of:
. aircraft operating costs, travel expenses and allocable
salaries of our personnel while on survey assignment (after
netting costs which are reimbursable by our joint venture
partners); and
. allocable salaries of our personnel while interpreting SFD
data.
(l) Foreign Currency Translation
Our only operations outside of the United States are in Canada.
Foreign currency translation adjustments resulting from the
translation of the financial statements of our Canadian
subsidiaries, whose function currency is Canadian dollars, into
U.S. dollar equivalents for purposes of consolidating our financial
statements, are included in other comprehensive loss. For purposes
of consolidation, we use the following methodology to convert
Canadian dollar denominated accounts and transactions into U.S.
dollars:
. all asset and liability accounts are translated into U.S.
dollars at the rate of exchange in effect as of the end of the
applicable fiscal period;
-9-
<PAGE>
. all shareholders' equity accounts are translated into U.S.
dollars using historical exchange rates; and
. all revenue and expense accounts are translated into U.S.
dollars at the average rate of exchange for the applicable
fiscal period.
We record the cumulative gain or loss arising from the conversion
of the noted Canadian dollar denominated accounts and transactions
into U.S. dollars as a foreign currency translation adjustment as a
component of accumulated other comprehensive income or loss for
that period.
(m) Basic And Diluted Loss Per Common Share
Our basic loss per share is computed in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," by dividing the net loss for the period attributable to
holders of our common stock by the weighted average number of
shares of our common stock outstanding for the period. Our diluted
loss per share is computed, also in accordance with SFAS No. 128,
by including the potential dilution that could occur if holders of
our dilutive securities were to exercise or convert these
securities into our common stock.
In calculating our diluted loss per share, we take into
consideration deemed distributions analogous to the declaration of
a dividend attributable to the beneficial conversion features
affording a discount or benefit to the holders of our securities.
(n) Stock-based Compensation
In accounting for our employee and director stock options, we have
elected to follow Accounting Principles Board No. 25, "Accounting
for Stock Issued to Employees," ("APB 25"), and related
interpretations. Pursuant to APB 25, we have not recorded any
compensation expense for any period in these consolidated financial
statements insofar as the exercise price for all options we have
granted to date to our employees and directors have equaled the
market price of the underlying common shares on the effective date
of approval or grant.
(o) Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as subsequently amended by SFAS Nos. 137 and 138,
which established accounting and reporting standards requiring that
every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value
for fiscal quarters of fiscal years beginning after June 15, 2000.
Our management is evaluating the impact of SFAS Nos. 133, 137 and
138 on our consolidated financial position, results of operations
or cash flows.
3. Reverse Acquisition
We acquired what is now our wholly-owned subsidiary, NXT USA (then known as
Pinnacle Oil Inc.), on January 20, 1996, in a transaction accounted for as
a "reverse acquisition." This acquisition was effected through the issuance
of 10,090,675 common shares of NXT (then known as Auric Mining
Corporation), constituting approximately 92% of our outstanding shares at
that date, in exchange for all of the outstanding shares of NXT USA. As a
result of the application of the noted accounting principles governing
reverse acquisitions, NXT USA (and not NXT) was treated as the "acquiring"
or "continuing" entity for financial accounting purposes.
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We have accounted for the NXT USA acquisition as an issuance of stock by
NXT USA in exchange for the tangible net assets of NXT, valued at fair
value, which approximate historical costs. As a result, our consolidated
statements of loss and shareholders' equity (deficit) included in these
consolidated financial statements are deemed to be a continuation of NXT
USA's financial statements, and therefore reflect:
. NXT USA's operations from the date of its formation (October 20, 1995)
through the effective date of the reverse acquisition (January 20,
1996); and
. our consolidated operations after the effective date of the reverse
acquisition (January 20, 1996).
4. Note Receivable From Officer
In September 1998, we loaned the sum of Cdn. $54,756 (U.S. $35,760 as of
that date) to one of our officers in connection with his relocation to
Calgary, Alberta. Pursuant to the terms of an underlying promissory note,
the officer is required to repay the loan on a monthly basis, with a
balloon payment due on October 3, 2003. The amount of the monthly payments
is calculated on the basis of a 300-month amortization rate, principal plus
interest, using a variable interest rate computed at our cost of funds,
which we define as our floating interest rate for liquid investments
(presently 5 1/2%).
5. Oil And Natural Gas Properties
Summarized below are the oil and natural gas property costs we capitalized
for our nine-month interim periods ended September 30, 2000 and September
30,1999, and as of September 30, 2000:
<TABLE>
<CAPTION>
Nine months Ended As of
September 30, September 30,
---------------------------
2000 1999 2000
----------- -------- -----------
<S> <C> <C> <C>
Acquisition costs...................... $ 33,475 $ 28,125 $ 438,060
Exploration costs...................... 2,480,289 -- 2,850,863
Development costs...................... -- -- --
Capitalized interest................... -- -- --
----------- -------- ----------
Oil and natural gas properties......... 2,513,764 28,125 3,288,923
Less impairment........................ (487,256) -- (487,256)
----------- -------- ----------
Net oil and natural gas properties..... $ 2,026,508 $ 28,125 $ 2,801,667
=========== ======== ===========
</TABLE>
Since all of our oil and gas properties as of September 30, 2000 were
either not yet producing or still in the drilling stage, we have classified
all of these properties as unproved properties. Consequently, we did not
record any depletion to date for these properties.
The impairment of oil and natural gas properties relates to the write-down
of the cost of drilling and completing wells which are either non-
commercial or which we are unable to complete for technical reasons. While,
as noted below, our management believes in the prospective commercial
viability and non-impairment of the overall prospects of which each of
these wells are a part and is continuing active exploration and development
activities with respect to each of these prospects, we have nevertheless
written-off these individual well costs as an impairment cost since we have
not established proved reserves to date.
At the end of each fiscal quarter, our management performs an overall
assessment of each of our oil and natural gas properties to determine if
any of these properties had been subject to any impairment in value (see
note 2(g)). Based upon these evaluations, our management has determined
that each of our oil and natural gas properties continued to have
prospective commercial viability as of that date, including each of those
properties noted above that contain wells which we have written-off. Based
upon these considerations, we have not recorded any impairments against our
properties to date other than the noted write-offs. While we are currently
conducting active exploration and development programs with respect to each
of these unproved oil and gas properties, we anticipate that all of these
properties will be evaluated and the associated costs transferred into the
amortization base or impaired over the next five years.
6. Other Property And Equipment
Summarized below are our capitalized costs for other property and equipment
as of September 30, 2000 and December 31, 1999:
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<PAGE>
<TABLE>
<CAPTION>
As of
-----------------------------------
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Aircraft.......................................................... $ 3,338,716 $ 238,653
Computer equipment ............................................... 244,075 189,586
Computer software ................................................ 120,554 71,174
Equipment ........................................................ 77,147 62,749
Furniture and fixtures ........................................... 189,112 165,274
Leasehold improvements ........................................... 252,785 102,761
SFD Survey System (including software) ........................... 114,809 59,169
Tools............................................................. 1,636 1,704
Vehicle .......................................................... 62,495 62,494
----------- ----------
Property and equipment........................................ 4,401,329 953,564
Less accumulated depreciation and amortization ................... (566,940) (292,363)
----------- ----------
Net property and equipment ................................... $ 3,834,389 $ 661,201
=========== ==========
</TABLE>
7. Common Stock
On January 31, 1997, two of our executive officer-directors at that time
each loaned our company the sum of $500,000, for total loan proceeds of
$1,000,000. These loans were extended by these officer-directors pursuant
to unsecured, convertible promissory notes due January 31, 1998, together
with interest accrued at a rate of 12% per annum. Each promissory note
contained identical conversion provisions pursuant to which:
. each officer-director could elect to convert any or all of the
outstanding balance of his loan into common stock based upon a ratio
of one share per $4.07 in converted principal and interest at any
time; and
. our company could convert any or all of the outstanding balance of
either loan into common stock based upon a ratio of one share per
$2.72 in converted principal and interest should we be unable to repay
that amount by the January 31, 1998 due date.
We exercised our right to convert the notes into 411,764 shares of common
stock on February 1, 1998, in satisfaction of $1,200,000 in aggregate
principal and accrued interest which became due on January 31, 1998.
On May 17, 1999, we raised $6,000,000 in gross proceeds through a private
placement of 400,000 shares of our common stock at $15 per share. Net
proceeds to our company from this offering were $5,998,652, after deducting
$1,348 in offering expenses.
During 1999, we raised $303,979 in gross proceeds through our employees'
exercise of incentive stock options entitling them to purchase 35,000
shares of our common stock at exercise prices between $8.12 1/2 and $9.50
per share.
On March 31, 2000, the holder of warrants to purchase 200,000 shares of our
common stock at an exercise price of $7.50 per share exercised these
warrants, resulting in gross proceeds to our company of $1,500,000. See
note 8.
During the nine-month interim period ended September 30, 2000, we raised
$649,812 in gross proceeds through our employees' exercise of incentive
stock options entitling them to purchase 56,100 shares of our common stock
at exercise prices between $8.25 and $17 per share.
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<PAGE>
8. Preferred Stock And Warrants
On April 3, 1998, we completed a series of transactions pursuant to which:
. NXT USA entered into a joint venture agreement, and
. we concurrently raised $6,000,000 in gross proceeds from an affiliate
of the joint venture partner through the private placement to that
party of 800,000 shares of our series "A" convertible preferred stock,
and warrants to purchase 200,000 shares of our common stock at an
exercise price of $7.50 per share.
The net proceeds of this private placement were $5,688,167, after deducting
$311,833 in offering expenses, including the cost of becoming a reporting
company with the Securities and Exchange Commission.
Each share of preferred stock is convertible into one common share at the
election of the holder, and carries a $7.50 liquidation preference should
our company wind-up and dissolve. We have reserved the right to redeem the
preferred stock at a price of $7.50 per share if it has not been converted
into common stock by April 3, 2000, and the holder forgoes a final
opportunity to exercise his conversion rights to avoid redemption. The
preferred shares are not entitled to payment of any dividends, although
they are entitled under certain circumstances to participate in dividends
on the same basis as if converted into common shares. Each warrant carried
a $7.50 per share exercise price, and would lapse, to the extent not
exercised, by April 3, 2000. All of the warrants were exercised on March
31, 2000 for gross proceeds of $1,500,000. See note 7.
Insofar as the preferred shares and warrants contained beneficial
conversion features affording a discount or benefit to the purchaser of
these securities, we recorded a deemed distribution analogous to the
declaration of a dividend to that purchaser. This deemed distribution
resulted in:
. An increase in additional paid-in capital in the amount of $2,104,000
to record the intrinsic value of the beneficial conversion feature of
the preferred shares (i.e., the discount in the purchase price of
these securities relative to the public trading price as of the date
of issuance of the underlying common shares into which these preferred
shares could be converted, without adjustment for discounts or
restrictions);
. A newly created warrant capital account to record the fair value of
the warrants in the amount of $1,132,000, including the value of their
beneficial conversion feature, as determined by the Black-Scholes
method of valuation (this amount was subsequently reclassified to
additional paid-in capital upon the exercise of the warrants); and
. A counterbalancing charge against our accumulated deficit capital
account in the amount of $3,236,000.
We also made appropriate adjustment for the deemed distribution in
calculating our basic loss per common share. See note 2(m).
9. Performance Warrants
On August 1, 1996, we granted a performance-based contractual right to be
granted warrants to the licensor of our SFD technology, Momentum Resources
Corporation, in connection with the amendment of our exclusive SFD
technology license with Momentum to use the SFD technology for hydrocarbon
exploration. The primary purpose of the amendment was to indefinitely
extend the termination date of the license. Pursuant to this contractual
right, Momentum is entitled to a separate grant of warrants entitling it to
purchase 16,000 shares of our common stock at the then current trading
price for each month after December 31, 2000 in which production from
SFD-identified
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<PAGE>
prospects during that month exceeds 20,000 barrels of hydrocarbons.
Momentum has not earned any warrants under the SFD technology license as of
September 30, 2000.
10. Options
Through September 30, 2000, we have granted options to selected employees
and directors of our company pursuant to the following separate
arrangements or plans (the "Plans"):
. Separate free-standing directors options which we granted to selected
directors as compensation for serving on our Board of Directors;
. The 1997 Energy Exploration Technologies Stock Plan, pursuant to which
1,000,000 shares of our common stock were reserved for issuance to
employees, directors and consultants in the form of stock options or
outright stock grants;
. The 1999 Energy Exploration Technologies Executive Option Plan,
pursuant to which 1,000,000 shares of our common stock were reserved
for issuance to executive officers in the form of stock options; and
. The 2000 Energy Exploration Technologies Directors' Option Plan,
pursuant to which 400,000 shares of our common stock were reserved for
issuance to selected directors in the form of stock options.
During the nine-month interim period ended September 30, 2000, 565,000
options with an average weighted exercise price of $28.26 were granted
under the Plans, 56,100 previously-granted options under the Plans with an
average weighted exercise price of $11.58 were exercised, and 16,000
previously-granted options under the Plans with an average weighted
exercise price of $14.06 lapsed.
We have summarized below all outstanding options under the Plans as of
September 30, 2000:
<TABLE>
<CAPTION>
Grant Exercise September 30, 2000
Type of Option Date Price Outstanding Vested
------------------------------- -------- -------- ----------- ------
<S> <C> <C> <C> <C>
Director Non-qualified......... 5-12-97 $ 5.81 75,000 75,000
Director Non-qualified......... 5-20-97 5.25 90,000 90,000
Employee Incentive............. 11-24-97 9.50 36,600 6,600
Director Non-qualified......... 3-10-98 8.31 45,000 45,000
Employee Incentive............. 5-12-98 8.25 30,000 20,000
Employee Incentive............. 8-24-98 8.25 117,500 17,500
Employee Incentive............. 10-1-98 8.12 1/2 20,000 --
Employee Non-qualified......... 5-1-99 14.00 993,770 150,434
Employee Incentive............. 5-1-99 15.00 33,330 6,666
Employee Incentive............. 5-12-99 17.00 16,000 --
Employee Incentive............. 9-21-99 13.62 1/2 100,000 --
Employee Incentive............. 11-16-99 14.12 1/2 85,000 --
Director Non-qualified......... 2-15-00 28.75 75,000 --
Employee Incentive............. 3-20-00 34.50 20,000 --
Director Non-qualified......... 4-17-00 26.25 150,000 --
Employee Incentive............. 5-8-00 29.75 45,000 --
Employee Incentive............. 6-1-00 32.12 1/2 30,000 --
Employee Incentive............. 6-1-00 27.12 1/2 100,000 --
Employee Incentive............. 8-9-00 28.06 1/2 20,000 --
Employee Incentive............. 9-1-00 28.87 1/2 125,000 --
---------- ----------
2,207,200 411,200
========== ==========
</TABLE>
The employee options outstanding as of September 30, 2000 vest over three
to five years from the grant date, depending upon the recipient, based upon
the continued provision of services as an employee. The director options
granted before December 31, 1999 that are outstanding as of
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<PAGE>
September 30, 2000 vest one-third on date of grant, and an additional one-
third each on the first anniversary and second anniversaries of the grant
date, respectively, based upon the continued provision of services as a
director. The director options granted after December 31, 1999 that are
outstanding as of September 30, 2000 vest one-third each on the first
through third anniversaries of the grant date, respectively, based upon the
continued provision of services as a director. Both the employee and
director options generally lapse, if unexercised, five years from the date
of vesting.
11. Commitments
At September 30, 2000, we had entered into joint venture agreements with
two separate oil and gas exploration companies. We are required under these
joint venture agreements to conduct SFD surveys to identify oil and natural
gas prospective prospects on selected exploration areas of up to 2,400
square miles, and our joint venture partners are required to drill each
SFD-identified prospect they accept under their respective agreement.
Our recent practice with our joint venture partners has been to participate
in selected prospects on a combination working interest/overriding royalty
interest basis, typically a 22 1/2% working interest and a 4% overriding
royalty. In any situation where we elect to participate on a working
interest basis, we must bear our share of mineral and drilling right
acquisition (if necessary), drilling, completion and production costs
incurred with respect to the prospect based upon our elected working
interest percentage. Although we will bear our share of these costs, our
joint venture partner will nevertheless remain responsible for conducting
and managing all drilling, production and marketing activities to exploit
the prospect.
On November 25, 1997, we entered into a five-year non-cancelable operating
lease for our principal executive offices. This lease, which consists
13,325 rentable square feet as of September 30, 2000, expires on January
21, 2003. Our combined obligations for base lease payments and building
operating cost and other pass-through items as of September 30, 2000 was
Cdn. $21,418 per month, which translates into U.S. $14,245 per month based
upon the closing conversion rate as of September 30, 2000.
On June 1, 2000, we entered into a five-year operating lease for our hanger
facility. This lease, which consists of 14,513 rentable square feet,
expires May 31, 2005. Our combined monthly obligation is Cdn. $13,345,
which translates into U.S. $8,876 per month based upon the closing
conversion rate as of September 30, 2000. The monthly lease obligation
increases three percent annually commencing June 1, 2002 until the end of
the lease term.
12. Subsequent Events
On November 16, 2000, we partially refinanced the purchase price of our
recently acquired aircraft for gross loan proceeds of $1,600,000. This
loan, which is collateralized by the aircraft, is repayable in 156
monthly payments of approximately $18,000, including interest.
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
General
The following discussion of our consolidated financial condition and the results
of operations should be read in conjunction with our consolidated financial
statements and the notes to our consolidated financial statements included in
Part I, Item 1, of this report. The information set forth below in this report
is current as of the date of this report, November 14, 2000, unless an earlier
or later date is indicated. All references to "dollars" in this report refer to
United States, or U.S., dollars unless specific reference is made to Canadian,
or Cdn., dollars. For information relative to currency conversion, see note 2(l)
to our
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<PAGE>
consolidated financial statements. The rate of exchange of Canadian dollars to
United States dollars as of September 30, 2000, was Cdn. $1.5035 to U.S. $1.
Overview
NXT is a technology-based reconnaissance exploration company which utilizes our
proprietary, quantum physics-based, stress field detection or "SFD"
remote-sensing airborne survey technology, which we refer to as our "SFD Survey
System," to quickly and inexpensively identify and high-grade oil and natural
gas prospects. We are a publicly traded company with principal executive offices
located in Calgary, Alberta, Canada, whose common stock trades over-the-counter
on the NASD Electronic Bulletin Board under the symbol "ENXT."
We use our SFD technology to survey or reconnoiter large exploration areas from
our survey aircraft at speeds in excess of 150 mph to identify and "high-grade"
leads for further evaluation and potential drilling. Our SFD technology is a
recently developed technology which we adapted for airborne survey operations,
and field tested for independent geologists and our joint venture partners, in
1996 and 1997. We commenced SFD survey activities on a full commercial basis for
our joint venture partners in early 1998.
Our SFD technology affords us the relatively inexpensive ability to obtain near
real-time analysis and interpretation of potential hydrocarbon accumulations in
a matter of days or weeks, as compared to months and in some cases years in the
case of the seismic methods currently employed by the oil and gas exploration
industry for wide area exploration or reconnaissance. These cost and time
advantages will ultimately enable us to effectuate potentially significant
reductions in oil and gas exploration "finding costs." Finding costs include the
cumulative costs of acquiring seismic, purchasing mineral rights, and drilling
and completing exploration wells. The ability to reduce finding costs is an
extremely important financial factor in the oil and gas industry, insofar as low
finding costs represent a measure of an oil and gas company's ability to
effectively and efficiently find new reserves, as well as generate cash flow.
We conduct our reconnaissance exploration activities, as well as land
acquisition, drilling, completion and production activities to exploit prospects
identified using our SFD technology, through our two wholly-owned operating
subsidiaries. Our first subsidiary, NXT USA, focuses on United States-based
exploration, while our second subsidiary, NXT Canada focuses on Canadian-based
exploration. NXT, in turn, concentrates on research and development efforts to
improve the efficacy of our SFD Survey System.
Our United States exploration efforts to date have been focused on the Greater
Green River Basin in Wyoming and the Williston Basin in North Dakota. These
exploration activities have been conducted under a joint exploration and
development agreement with CamWest Exploration LLC, a Colorado-based exploration
company. Under this agreement we conduct aerial surveys to identify prospects in
exploration areas in the United States selected by CamWest.
Our Canadian exploration efforts to date have been focused on southern Alberta,
northeastern British Columbia, southwestern Saskatchewan and Newfoundland. The
majority of these exploration activities have been conducted under an
exploration joint venture agreement with Encal Energy Ltd., a Calgary-based
exploration and production company. Under this agreement we conduct aerial
surveys to identify prospects in exploration areas in Canada selected by Encal.
We have also recently commenced conducting exploration activities in western
Canada for our own account. We anticipate developing these prospects through a
joint venture with either Encal or another Canadian exploration company.
The joint venture agreements we have entered into with our joint venture
partners have historically entitled us to elect to receive one of the two
following payment streams for each SFD-identified prospect accepted and drilled
under the applicable agreement:
. a capital investment and generally risk-free overriding royalty of 5% to
8% of oil or natural gas revenues received by the joint venture partner
with respect to the prospect. In any situation where
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<PAGE>
we elect to receive this royalty, our joint venture partner will be
responsible, at its own cost and risk, to acquire the necessary drilling
rights for the prospect if it has not already done so, and to conduct
all drilling, production and marketing activities necessary to exploit
the prospect.
. a working interest of up to 45% of the joint venture partner's revenues
with respect to the prospect. In any situation where we elect to
participate on a working interest basis, we must bear our share of the
mineral rights and drilling acquisition (if necessary), drilling and
production costs incurred with respect to the prospect based upon our
working interest percentage. Although we will bear our share of these
costs, our joint venture partner will nevertheless remain responsible
for conducting and managing all drilling, production and marketing
activities to exploit the prospect.
Our recent practice with our joint venture partners has been to participate in
selected prospects on a combination working interest/overriding royalty interest
basis, typically a 22 1/2% working interest and a 4% overriding royalty. We
recently amended our Canadian joint venture agreement to allow us to make a
graduated combination working interest/overriding royalty interest election
along these lines for the duration of the joint venture term.
Our joint venture partners are also each required under the terms of their
respective joint venture agreements to reimburse us for 100% of the expenses we
incur in conducting aerial surveys for their accounts.
The term of our U.S joint venture agreement expires in March 2003, while the
term of our Canadian joint venture agreement expires in March 2001.
The status of our current activities as of the date of this report is as
follows:
. United States: Our U.S. joint venture partner has drilled or
participated in seven wells to date in the Green River Basin of Wyoming
on three separate play concepts--Poblano, Goldcoast and Leucite Hills.
. Poblano--At this prospect, located approximately eight miles
southeast of the giant multi-TCF Jonah field, three deep wells were
drilled and cased and one completed by our U.S. joint venture
partner, and a fourth deep well was drilled and completed by a
third-party operator with whom our U.S. joint venture partner is
participating. All four of these wells encountered overpressured
gas sands that are very tight and well cemented. While pressure
gradients at our Poblano wells appear to be higher than those
typically found at Jonah, the overall quality of the Poblano
reservoirs in terms of porosity and permeability appear to be
lower. Based upon a number of similarities in these fields, our
U.S. joint venture partner has decided to follow the approach
successfully used to develop Jonah. Specifically, we believe that
the large increases in commercial production rates at Jonah over
the past several years, ranging from an average of approximately
one mmcfpd per new well at the commencement of development in 1996
to approximately five mmcfpd per new well today, can be primarily
attributed to a strategy of selecting drilling locations through
identification of natural micro-fracturing of the productive
reservoirs as identified from seismic. In furtherance of this
belief, our U.S. partner decided in late summer to participate in a
100+ square mile 3-D seismic program, which is currently being
conducted, which we hope will enable it to delineate the fault
lineaments and overall micro-fracture patterns propagated
throughout Poblano's gas-charged reservoirs. We believe that
Poblano will have the potential, if satisfactory information is
acquired through this pending seismic program, to also deliver
higher commercial production results on a well by well basis.
Pending the completion and evaluation of this seismic program, our
U.S. joint venture partner decided for cost considerations to delay
the completion of the second and third wells it drilled and the
construction of a twelve-mile pipeline to tie all three wells into
the Jonah gas gathering system that it had previously planned for
the third quarter of fiscal 2000. NXT USA holds a combination
working interest and overriding royalty interest with respect to
this prospect.
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<PAGE>
. Gold Coast--Two deep wells have been drilled to date at this 40,000-acre
prospect by our U.S. joint venture partner. The first well encountered a
thick gas and condensate saturated sand section in the 10,000-foot deep
Blair zone that resulted in a 25-foot gas flare at surface during
drilling operations. Unfortunately, the operator was forced to junk and
abandon this well after a severe casing failure during the cement job. A
follow-up well drilled one half mile to the east did not encounter these
sands or any deeper productive zones, possibly as the result of an
intervening fault zone, and was temporarily abandoned. There are two
other wells in the same township (over 23,000 acres) that penetrated the
Blair, one of which is now producing from this zone. The other well was
drilled in 1963 and resulted in ambiguous well data. We believe that it
is probable that the SFD was imaging the Blair, and that the size of the
prospective gas reservoir could be significant. The evaluation of these
drilling results and determination of future development activities is
pending. NXT USA holds a combination working interest and overriding
royalty interest with respect to this prospect.
. Leucite Hills--A single well was drilled, cased and completed by a
third-party operator with whom our U.S. joint venture partner is
participating at this prospect. This well, which was located
approximately one-half mile to the south of our SFD anomaly, was
completed as a marginal gas producer. Reprocessed 3-D seismic shows
enhanced amplitude believed to be indicative of better-developed
porosity and permeability in the same area as the original SFD feature.
However, the Bureau of Land Management has declined applications by our
U.S. joint venture partner to drill a vertical well at our preferred
location as a consequence of rugged surface geography. Further
negotiations with the BLM are pending. NXT USA holds a combination
working interest and overriding royalty interest with respect to this
prospect.
. Canada: Our Canadian joint venture partner has drilled or participated in
seven wells to date in Southern Alberta on three separate play concepts--the
Dalroy/Irricana Block, Carbon and Monarch.
. Dalroy/Irricana Block--In this play, five wells were drilled for the
purpose of testing whether the SFD technology and seismic could image
the stratigraphically trapped Crossfield member of the Wabamun
formation. All five wells were drilled with the assistance of geological
mapping together with high-resolution 2-D and 3-D seismic and extensive
geophysical modeling of the Crossfield reservoir. All five wells
encountered one or more commercial shallow gas reservoirs that were
excluded from our earning under the terms of a farm in agreement. Two of
the five wells were abandoned after examining the initial well data.
Three of the cased wells are currently shut-in monitoring pressures in
the open-hole sections. NXT Canada holds a combination working interest
and overriding royalty interest with respect to these prospects.
. Carbon and Monarch--The remaining two wells drilled in Alberta
encountered limited gas accumulations in the predicted reservoirs but
have been cased. These two wells require further area drilling to
justify tie-ins. NXT Canada holds an overriding royalty interest with
respect to Carbon, and a combination working interest and overriding
royalty interest with respect to Monarch.
Based upon our increased understanding of the SFD technology and our drilling
activities over the past two years, NXT has learned the following lessons which
it is incorporating into our business strategy:
. First, stay in areas where we control all potential producing strata.
Our SFD technology cannot directly indicate depth, so we need to ensure
that the primary imaged horizon is not excluded when drilling in areas
involving multiple zones and segmented ownership of mineral rights.
. Second, continue to encourage testing of the SFD technology in varying
play concepts. Like seismic, the SFD technology will work for some play
types better than for others. We have not yet
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<PAGE>
tested the SFD technology in many of the more conventional plays in the
United States and Western Canada.
. Finally, concentrate in the short term on prospects that can easily be
imaged with standard seismic data in order to ensure that we have a high
degree of confidence in our drill sites.
Our rights to use our SFD technology arises from an SFD technology license which
we acquired from the owner and licensor of that technology, Momentum Resources
Corporation, pursuant to which we received the exclusive world-wide right to use
the SFD technology for hydrocarbon exploration purposes. We are obligated under
the terms of that license to pay Momentum Resources Corporation a fee equal to
1% of any "prospect profits" (as that term is defined in the license) which we
may receive on or before December 31, 2000, and 5% of any prospect profits which
we may receive after December 31, 2000. Momentum is controlled and indirectly
owned by our two largest stockholders, Messrs. George Liszicasz and R. Dirk
Stinson. Each of these stockholders currently serve as our directors, and Mr.
Liszicasz also currently serves as our chief executive officer.
Since we have not generated operating revenues to date, we should be considered
a development stage enterprise.
Capital Requirements
We have not generated operating revenues to date. Our most likely source of
prospective revenue generation would be our Poblano prospect, however,
production decisions relating to this field, including construction of a
pipeline necessary to tie the wells into the Jonah collection system, have been
deferred until the first quarter of fiscal 2001 pending the completion and
evaluation of a 3-D seismic program currently being conducted. We do not
anticipate that production will commence at any of our projects until the second
quarter in fiscal 2001 at the earliest.
Absent revenues, our sole source of cash to fund our operational and capital
investment needs are funds we have raised through the private placement of our
securities and exercise of employee options. For further information regarding
these transactions, see "--Liquidity And Capital Resources--Sources Of Cash"
below.
We have budgeted approximately $2,800,000 for the twelve-month period ended
September 30, 2001 to cover administrative and operational costs, and an
additional $1,000,000 to complete pending drilling and well completion
activities. Assuming funds are available, we would also like to budget up to $5
million for prospective acquisition, drilling and completion activities, through
investments in working interests with our joint venture partners or directly for
our own account.
After taking into consideration gross loan proceeds from the refinance of our
aircraft in November 2000 and cash and net working capital available as of
September 30, 2000, we have sufficient working capital on hand to fund our
current level of operations, including research and development and minimum
budgeted capital commitments noted above, for approximately nineteen months,
assuming no meaningful revenues and no major expenditures on new capital
projects. We anticipate that we will expend a portion of our surplus funds in
lease and data acquisition and drilling costs for new projects over the next two
to six months where such expenditures are warranted, which will reduce our
available capital to fund our monthly burn rate. While one of our objectives in
committing to new capital projects will be to preserve sufficient cash flow to
fund operations in excess of twelve months from the date of this report, our
management nevertheless reserves the right, in their discretion, to expend
larger amounts of funds on new capital projects based upon their risk-reward
profiles, which could reduce our burn rate to a lesser period of time assuming
no meaningful revenues or additional capital in the meantime. The exact amount
of funds to be expended on these new capital projects will be ultimately
determined by future events over the next six months, including prospect and
data evaluation costs, land availability and acquisition costs, and the level of
partner drilling commitments. Our ability in the longer term to continue as a
going concern will be dependent upon our ability to either:
. raise additional capital through private or public placements of our
securities, or
. our receipt of meaningful amounts of revenues from our joint venture
partners or through our own exploration efforts, which, in either case,
will be dependent upon successful exploration and production activities.
We cannot give you any assurance that any SFD Prospect that is drilled will
ultimately produce commercially viable quantities of oil or gas. We also cannot
give you any assurance that our strategic
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partners will drill any planned exploratory well on any accepted SFD Prospects
at all or by projected drilling dates due to the various factors that may affect
the drilling process, including the perceived economics of drilling at any time,
the ability of the strategic partner to obtain drilling rights (where necessary)
on favorable terms or at all, and the ability of the strategic partner to timely
schedule a drilling rig and other drilling services. See "Uncertainties And
Other Factors That May Affect Our Future Results And Financial Condition--
Uncertainties And Risk Factors Generally Relating To Our Company And Our
Business," generally, and "--We Are Reliant Upon Our Joint Venture Partners For
Opportunities To Participate In Exploration Projects" and "--Our Revenues And
Cash Flow Will Be Principally Dependent Upon The Success Of Drilling And
Production From Prospects In Which We Participate Through Agreements With Our
Joint Venture Partners," particularly.
For additional and more detailed information relating to our company and our
business, see our annual report on form 10--K (amendment no. 1) for our fiscal
year ended December 31, 1999.
Results Of Operations
Operating Revenues
We had no oil and gas working interest or royalty revenues for our three-month
and nine-month interim fiscal periods ended September 30, 2000 and September 30,
1999, respectively.
Operating Loss
We incurred an operating loss of $1,061,623 for our three-month interim period
ended September 30, 2000, as compared to $618,809 for the three-month interim
period ended September 30, 1999, representing a $442,814 or 71.6% overall
decrease. For our nine-month interim period ended September 30, 2000, we
incurred an operating loss of $1,852,716 as compared to $1,382,781 for the
nine-month interim period ended September 30, 1999, representing a $469,936, or
34%, overall increase.
Impairment Of Oil And Natural Gas Properties
The $487,256 impairment of oil and natural gas properties for our three-month
and nine-month interim periods ended September 30, 2000 relates to the write-off
of the cost of drilling and completing wells which are either non-commercial or
which we are unable to complete for technical reasons. Since we do not have
proved reserves to date, these costs are fully expensed notwithstanding our
continuing active exploration and development activities with respect to each of
the prospects that contain these wells.
Relative Changes In Administrative Expense
The $18,237, or 4.9% and $224,882, or 25.1% increases in administrative expense
for our three-month and nine-month interim periods ended September 30, 2000,
respectively, over these same periods in fiscal 1999, were primarily
attributable to across-the-board net increases in costs to support our increased
level of business activities in fiscal 2000. The most significant cost increase
for our three-month and nine-month interim periods ended September 30, 2000,
respectively, over the same period in fiscal 1999, were in wages and benefits
and payments to consultants and office rental expense.
Relative Changes In Amortization and Depreciation
The $139,476, or 97.8% increase in amortization and depreciation for the
nine-month interim period ended September 30, 2000, over the same period in
1999, was primarily attributable to additional depreciation and amortization
arising in connection with our acquisition of a second survey aircraft,
additional purchases of computer equipment and software, and additional
leasehold improvements arising from the recent expansion of our executive
offices and research and development facilities. The decrease of $8,378 or 11.8%
in amortization and depreciation for the three-month interim period ended
September 30, 2000, over the same period in 1999, was due to an adjustment which
increased amortization and depreciation recorded in the third quarter of 1999.
Relative Changes In Research and Development Expense
Research and development expense generally relates to the cost--including
allocable salaries--to develop, improve and test our SFD Survey System and
related components. The $57,031, or 147.8% and $129,333, or 95.4% increases in
research and development expense for our three-month and nine-month interim
periods ended September 30, 2000, respectively, over these same periods in 1999,
were
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principally attributable to salaries associated with additional research and
development staffing as we continued to focus increased efforts to improve the
operation and efficacy of our SFD Survey System.
Relative Changes In Survey Operations And Data Analysis Expense
Survey operations and data analysis expenditures consist primarily of any costs
we incur conducting commercial SFD survey activities. These costs can be
generally broken down into the following two components:
. aircraft operating costs, travel expenses and allocable salaries of our
personnel while on survey assignment (after netting any costs our joint
venture partners are required to reimburse us for); and
. allocable salaries incurred by our personnel interpreting SFD data.
Our gross survey operations and data analysis expense (before taking any joint
venture partner reimbursements into account) for our three-month and nine-month
interim periods ended September 30, 2000 was $67,710 and $142,930, respectively,
as compared to $92,001 and $184,104 for the same periods in fiscal 1999. The
decrease in total survey operations and data analysis expense was primarily
attributable to a lesser amount of interpretation time arising from our
increased inventory of prospects and fewer survey flights carried out over these
periods.
Our net survey and data analysis expense (after taking into consideration joint
venture partner reimbursements of $119,582) for the three-month period ended
September 30, 2000, was a recovery of $51,872, representing an decrease of
$134,617, or 162.7% from $82,745 for the same period in fiscal 1999.
Our net survey and data analysis expense (after taking into consideration joint
venture partner reimbursements of $139,860) for the nine-month period ended
September 30, 2000 was $3,070, representing a decrease of $85,605, or 96.5% from
$88,675 for the same period in fiscal 1999.
Relative Changes In Survey Support Expense
Survey support expense generally relates to the cost--including allocable
salaries--to:
. conduct field evaluations designed by our joint venture partners to
evaluate our SFD technology (after netting any costs which our joint
venture partners are required to reimburse us for); and
. develop, organize, staff and train our survey and interpretation
operational functions.
The $23,285, or 45.2% and $62,437, or 51.9% increases in survey support expense
for our three-month and nine-month interim periods ended September 30, 2000,
respectively, over these same periods in fiscal 1999, were primarily
attributable to an increase in salaries associated with additional support staff
necessary for our increased level of survey operations and data analysis.
Expectations Relative To Future Expense Levels
We effectively doubled our company staff for the first nine months of fiscal
2000 as compared to the first nine months of fiscal 1999 through the hiring of
key professionals, including executive, geological, geophysical, scientific,
information technology and aviation personnel. As a consequence of these staff
additions, we anticipate that future hirings over the pending fiscal year will
be minimal. We anticipate that our total operating expenses will continue to
significantly increase on a quarterly basis through the end of fiscal 2000 as a
result of the additional wages and employee benefits to be paid to any
additional personnel we may hire as well as an increased level of operations
which will be facilitated by recent and anticipated hirings.
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Other Income And Expense
. Interest Income
We earned $71,439 and $286,981 in interest income for our three-month and
nine-month interim periods ended September 30, 2000, respectively, as
compared to $116,161 and $244,336 for the same periods in fiscal 1999. The
increase in interest income for fiscal 2000 was attributable to higher cash
balances in our accounts as a result of a $6,000,000 private placement of
our common stock in May 1999.
Liquidity And Capital Resources
. Sources of Cash
Our cash flow requirements from our inception as NXT USA (October 20, 1995)
through September 30, 2000 were funded principally from:
. a private placement in May 1996 of 975,000 shares of our common stock
for total gross proceeds of $975,000,
. loans to our company by Messrs. Liszicasz and Stinson in the amount of
$1,000,000 in January 1997, and the subsequent conversion of the
outstanding balance of principal and accrued interest of these loans in
the amount of $1,120,000 into 411,764 shares of our common stock in
February 1998;
. a private placement in April 1998 of 800,000 shares of our convertible
series "A" preferred stock and 200,000 common stock purchase warrants
for total gross proceeds of $6,000,000;
. a private placement in May 1999 of 400,000 shares of our common stock
for total gross proceeds of $6,000,000;
. the exercise on March 31, 2000 of warrants to purchase 200,000 shares
of our common stock at an exercise price of $7.50 per share, resulting
in gross proceeds to our company of $1,500,000; and
. the exercise of employee stock options during fiscal 1999 and the first
nine months of fiscal 2000, resulting in net proceeds to our company of
$953,819.
. Cash Position and Sources And Uses Of Cash
Our cash position as of September 30, 2000 was $3,978,371, as compared to
$9,068,723 as of December 31, 1999. Our cash position as of September 30,
1999 was $9,644,054, as compared to $4,713,822 as of December 31, 1998. We
maintain the bulk of our cash in a United States government and government-
backed securities money-market account.
The $5,090,352 decrease in our cash position as of September 30, 2000 as
compared to December 31, 1999 was attributable to $2,149,840 in cash raised
through financing activities, partially offset by $1,393,269 in cash used
in operating activities, $5,796,859 in cash used in investing activities,
and a $50,064 comprehensive loss due to the effect of exchange rate
changes. The $4,930,232 increase in our cash position as of September 30,
1999 as compared to December 31, 1998 was attributable to $6,094,868 in
cash raised through financing activities, partially offset by $906,819 in
cash used in operating activities, $163,242 in cash used in investing
activities and a $94,575 comprehensive loss due to the effect of exchange
rate changes.
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Our operating activities required cash in the amount of $1,393,269 for
the first nine months of fiscal 2000, as compared to cash requirements of
$906,819 for the first nine months of fiscal 1999. The $1,393,269 in cash
used in operating activities for the first nine months of fiscal 2000
reflected our net loss of $2,052,991 for that period, as decreased for
non-cash deductions and a net increase in non-cash working capital
balances. The $906,819 in cash used in operating activities for the first
nine months of fiscal 1999 reflected our net loss of $1,138,445 for that
period, as decreased for non-cash deductions and a net increase in
non-cash working capital balances.
We raised $2,149,840 in cash from financing activities for the first nine
months of fiscal 2000, as compared to $6,094,868 in cash raised from
financing activities for the first nine months of fiscal 1999. The
$2,149,840 in cash raised through financing activities for the first nine
months of fiscal 2000 was comprised of $1,500,000 in gross proceeds from
the exercise of warrants and $649,840 in gross proceeds from the exercise
of employee stock options. The $6,094,868 in cash raised through
financing activities for the first nine months of fiscal 1999 was
principally comprised of $5,998,652 in net proceeds from the private
placement of common stock and $95,000 in gross proceeds from the exercise
of employee stock options.
We used cash in the amount of $5,796,859 for investing activities for the
first nine months of fiscal 2000, as compared to $163,242 in cash used
for investing activities for the first nine months of fiscal 1999. The
principal use of cash for the first nine months of fiscal 2000 was to
acquire drilling rights in exploratory blocks pursuant to working
interest elections ($2,513,764) and to acquire property, equipment,
computer software and leasehold improvements ($3,455,276), including the
purchase of a second survey aircraft for $2,790,000. The principal use of
cash for the first nine months of fiscal 1999 was to acquire property,
equipment and computer software ($134,670) and to acquire drilling rights
in exploratory blocks pursuant to working interest elections ($28,125)
Other Matters
Foreign Exchange Fluctuations
We recorded a $50,064 foreign currency translation loss for the first nine
months of fiscal 2000 as a comprehensive loss item on our statements of loss and
stockholders' equity (deficit) in consolidating our books for financial
reporting purposes as a result of the fluctuation in United States--Canadian
currency exchange rates during that period. We anticipate that our exposure to
significant foreign currency gains or losses on our books will increase as we
invest a greater portion of our United States-dollar denominated cash reserves
into our Canadian operations and properties through intercompany advancements.
We cannot give you any assurance that our future operating results will not be
similarly adversely affected by currency exchange rate fluctuations. See Part I,
Item 3, of this report captioned "Quantitative and Qualitative Disclosure About
Market Risk," for a description of other aspects of our company that may be
potentially affected by foreign exchange fluctuations.
Effect Of Inflation
We do not believe that our operating results were adversely affected during the
first nine months of fiscal 2000 or fiscal 1999 by inflation or changing prices.
Year 2000 Compliance
During fiscal 1999 we reviewed our internal computer systems and software
products for Year 2000 problems, and found them to be generally Year 2000
compliant, and have had no Year 2000 complications as of the date of this
report.
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Uncertainties And Other Factors That May Affect Our Future Results And Financial
Condition
Readers are urged to carefully review and consider the various uncertainties and
risks which, in addition to uncertainties and risks presented elsewhere in this
report, may affect our future results of operations or financial condition and
an investment in our securities. These uncertainties and risks should also be
considered in context with the various disclosures concerning our company and
our business and uncertainties and risks that may affect our future results of
operations or financial condition made in other reports we periodically file
with the Securities and Exchange Commission, including the following fillings
which we incorporate by reference into this report:
. our annual report on form 10--K (amendment no. 1) for our fiscal year
ended December 31, 1999.
. any quarterly reports on form 10-Q or amendments thereto which we may
file during the remainder of fiscal 2000, and
. any current reports on Form 8-K we may file subsequent to this report
Uncertainties and Risk Factors Generally Relating To Our Company And Our
Business
. We Are A Development Stage Enterprise Which Has Accumulated Losses
Since Our Inception, And We Anticipate That We Will Continue To Incur
Operating Losses For The Near Future
We are a developmental stage enterprise since we have not received any
oil or gas revenues to date, and have, as a consequence of our lack of
revenues, incurred a cumulative net loss (before comprehensive losses)
in the amount of $6,147,907 from our inception in October 1995 through
September 30, 2000. Our ability to generate revenues and profits will
depend primarily upon the successful implementation of our business
plan, which is dependent at this point in time upon one or more of our
joint venture partners successfully drilling and producing
commercially viable quantities of oil or natural gas from SFD
Prospects we identify. We do not anticipate that we will receive any
oil or gas revenues until the second quarter of fiscal 2001, at the
earliest. We anticipate that we will continue to incur significant
losses on a month-to-month basis for at least twelve to eighteen
months going forward from the date of this report, notwithstanding our
receipt of oil and gas revenues based upon our internal projections,
due to our significant monthly operating and research and development
costs.
. Our Limited Operating History Could Adversely Affect Our Business
We are a recently organized development stage enterprise with an
unproven technology and a limited operating history. Our activities
through the date of this report have encompassed:
. developing our business plan;
. obtaining license rights to our SFD technologies;
. establishing administrative offices and laboratory
facilities, and engaging executive, administrative,
scientific, geological, geophysical, scientific, information
technology and aviation personnel;
. developing our SFD technology to a commercial stage;
. acquiring joint venture partners;
. conducting commercial SFD surveys on behalf of our joint
venture partners; and
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. successfully drilling oil and gas wells identified through our
SFD technology.
We are subject to all the risks and issues inherent in the
establishment and expansion of a new business enterprise including,
among others, problems of using new and unproven technologies, hiring
and training personnel, acquiring reliable facilities and equipment,
and implementing operational controls. In general, startup businesses
are subject to risks and or levels of risk that are often greater
than those encountered by companies with established operations and
relationships. Startups often require significant capital from
sources other than operations. The management and employees of
startup business shoulder the burdens of the business operations and
a workload associated with company growth and capitalization that is
disproportionately greater than that for an established business. Our
limited operating history makes it difficult, if not impossible, to
predict future operating results. We cannot give you any assurance
that we will successfully address these risks. Our failure to
successfully address these risks could have a material, adverse
effect on our business, financial condition and operating results.
. Our Future Success Is Dependent Upon Our Ability, Through Utilization
Of Our SFD Technology, To Locate Commercially Viable Hydrocarbon
Accumulations For Development By Our Joint Venture Partners.
Our future success is dependent upon our ability, through utilization
of our SFD technology, to locate commercially viable hydrocarbon
accumulations for development by our joint venture partners. Based on
our business plan, we will be dependent on:
. the efficacy of our SFD technology in locating SFD Prospects;
and
. the cooperation of, and capital investment by, of our joint
venture partners in exploiting these prospects.
Although the results of our SFD technology as a geologic structural
identification tool have been satisfactorily tested by our joint
venture partners, we cannot give you any assurances that our SFD
technology will be able to consistently locate hydrocarbons or oil and
gas prospects, or that these prospects will be commercially
exploitable. We also cannot give you any assurances that we will be
able to discover commercial quantities of oil and gas, or that our
joint venture partners will successfully acquire and drill properties
at low finding costs.
. We Are Reliant Upon Our Joint Venture Partners For Opportunities To
Participate In Exploration Prospects
We will be reliant, at least in the near-term, upon our joint venture
partners for opportunities to participate in exploration prospects,
through overriding royalties or equity participation on a working
interest basis from producing SFD Prospects. We exclusively focus on
exploration and the review and identification of viable prospects
through our SFD technology, and rely upon our joint venture partners
to provide and complete all other project operations and
responsibilities, including land acquisition, drilling, marketing and
project administration. As a result, we have only a limited ability to
exercise control over the selection of prospects for development,
drilling or production operations, or the associated costs of such
operations. The success of each project will be dependent upon a
number of factors which are outside our control, or controlled by our
joint venture partners as the project operator, in accordance with the
applicable agreements between our company and the joint venture
partners. These factors include:
. the selection and approval of prospects for lease/acquisition
and exploratory drilling;
. obtaining favorable leases and required permitting for
projects;
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. the availability of capital resources of the joint venture
partner for land acquisition, drilling, completion and tie-in
expenditures;
. the timing of drilling, completion and tie-in activities, and
the economic conditions at such time, including then prevailing
prices for oil and gas; and
. the timing and amount of distributions from the production.
Our reliance on our joint venture partners, and our limited ability to
directly control project operations, costs and distributions could
have a material adverse effect on the realization of return from our
interest in projects, and on our overall financial condition.
. Our Revenues And Cash Flow Will Be Principally Dependent Upon The
Success Of Drilling And Production From Prospects In Which We
Participate Through Agreements With Our Joint Venture Partners
Pursuant to our business plan, our revenues and cash flow will, at
least in the near-term, be principally dependent upon the success of
drilling and production from prospects in which we participate through
agreements with our joint venture partners in the form of an
overriding royalty or a working interest or other participation right.
The success of these prospects will be determined by the location,
development and production of commercial quantities of hydrocarbons.
Exploratory drilling is subject to numerous risks, including the risk
that no commercially productive oil and gas reservoirs will be
encountered. The cost to our joint venture partners to drill,
complete, tie-in and operate wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a
variety of factors including unexpected formation and drilling
conditions, pressure or other irregularities in formations, equipment
failures or accidents, as well as weather conditions, compliance with
governmental requirements and shortages or delays in the delivery of
equipment. Our partners' inability to successfully locate and drill
wells that produce commercial quantities of oil and gas would have a
material adverse effect on our business, financial position and
results of operations.
. Our Future Operating Results May In The Future Fluctuate Significantly
Our operating results may in the future fluctuate significantly
depending upon a number of factors including industry conditions,
prices of oil and gas, rate of drilling success, rates of production
from completed wells and the timing of capital expenditures. This
variability could have a material adverse effect on our business,
financial condition and results of operations. In addition, any
failure or delay in the realization of expected cash flows from
initial operating activities could limit our future ability to
continue exploration and to participate in economically attractive
projects.
. Volatility Of Oil And Natural Gas Prices Could Have A Material Adverse
Effect On Our Business
It is impossible to predict future oil and natural gas price movements
with any certainty, as they have historically been subject to wide
fluctuations in response to a variety of market conditions, including:
. relatively minor changes in the supply and demand for oil and
natural gas,
. economic, political and regulatory developments, and
. competition from other sources of energy.
Any extended or substantial decline in oil and gas prices would have a
material adverse effect on:
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. our ability to negotiate favorable joint ventures with viable
industry participants;
. the volume of oil and gas that could be economically produced by
the joint ventures in which we participate;
. our cash flow; and
. our access to capital.
We do not currently intend to engage in hedging activities, and may be
more adversely affected by fluctuations in oil and gas prices than
other industry participants that do engage in such activities. Our
business, results of operations and financial condition would be
materially and adversely affected by adverse changes in prevailing oil
and gas prices. See Part I, Item 3, of this report captioned
"Quantitative And Qualitative Disclosures About Market Risk," for
additional discussion of market risks relating to oil and gas price
fluctuations.
. The Intense Competition That Is Prevalent In The Oil And Gas Industry
Could Have A Material Adverse Effect On Our Business
We compete directly with independent, technology-driven exploration
and service companies, and indirectly (through our joint venture
partnerships) with major and independent oil and gas companies in our
exploration for and development of commercial oil and gas properties.
We will experience competition from numerous oil and gas exploration
competitors offering a wide variety of geological and geophysical
services. Many of these competitors have substantially greater
financial, technical, sales, marketing and other resources than we do,
and may be able to devote greater resources to the development,
promotion and sales of their services than our company. We cannot give
you any assurance that our competitors will not develop exploration
services that are superior to our SFD technology, or that these
technologies will not achieve greater market acceptance than our SFD
technology. Increased competition could impair our ability to attract
viable industry participants, and to negotiate favorable
participations and joint ventures with such parties, which could
materially and adversely affect our business, operating results and
financial condition.
The oil and gas industry is highly competitive. Many companies and
individuals are engaged in the business of acquiring interests in and
developing oil and gas properties in the United States and Canada, and
the industry is not dominated by any single competitor or a small
number of competitors. Our joint venture partners will compete with
numerous industry participants for the acquisition of land and rights
to prospects, and for the equipment and labor required to operate and
develop such prospects. Many of these competitors have financial,
technical and other resources substantially in excess of those
available to us or our joint venture partners. These competitive
disadvantages could adversely affect our company's or our joint
venture partners' ability to participate in projects with favorable
rates of return.
. There Is Limited Market Acceptance For Our SFD Technology, And It Must
Compete With Established Geological And Geophysical Technologies Which
Have Already Achieved Market Acceptance.
There is limited market acceptance for our SFD technology, and it must
compete with established geological and geophysical technologies which
have already achieved market acceptance. As is typical in the case of
any new technology, demand and market acceptance for our SFD
technology is subject to a high level of uncertainty and risk. Because
the market for exploration services using our SFD technology is new
and evolving, it is difficult to predict the future growth rate, and
the size of the potential market. We cannot give you any assurance
that a market for our exploration services will develop, or be
sustainable. If the market fails to develop, or if our exploration
services do not achieve or sustain market acceptance, our business,
results of operations and financial condition would be materially and
adversely affected.
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. Technological Advancements In The Oil And Gas Industry Could Have A
Material Adverse Effect On Our Business
The oil and gas industry is characterized by rapid technological
advancements and the frequent introduction of new products, services
and technologies. As new technologies develop, we may be placed at a
competitive disadvantage, and competitive pressures may force us to
improve or complement our SFD technology, or to implement additional
technologies at substantial cost. In addition, other oil and gas
exploration companies may implement new technologies before us, and
these companies may be able to provide enhanced capabilities and
superior quality. We cannot give you any assurance that we will be
able to respond to these competitive pressures and implement or
enhance our SFD technology on a timely basis, or at an acceptable
cost. In that case our business, financial condition and results of
operations could be materially adversely affected.
. Our Inability To Retain Our Key Managerial, Geological And
Geophysical, And Research And Development Personnel Could Have A
Material Adverse Effect On Our Business
Our success depends to a significant extent on the continued efforts
of our senior management team, which currently is composed of a small
number of individuals, including Mr. George Liszicasz, the inventor of
our SFD technology who is our Chief Executive Officer and who is
responsible for the continuing development of our SFD technology and
the interpretation of SFD data, and Messrs. Daniel C. Topolinsky and
James R. Ehrets, our President/Chief Operations Officer and our
Executive Vice President of Operations, respectively.
The loss of Mr. Liszicasz's services would be extremely difficult to
replace since he is the inventor of, and has intimate knowledge of,
the theoretical basis of the SFD technology, and has also developed
the methodologies used to interpret SFD data, and the loss of his
services would likely have a material adverse effect on our business,
results of operations and financial condition. While we are presently
training personnel to operate our SFD technology and to interpret SFD
data, we cannot give you any assurance that these personnel could
fully replace Mr. Liszicasz with respect to these functions, at least
in the short-term. Moreover, we do not know if we would be able to
successfully replicate the SFD technology in the event of the loss of
Mr. Liszicasz.
The loss of Messrs. Topolinsky's and Ehret's services would also be
extremely difficult to replace due to their management skills and
their core knowledge of our SFD technology and business as a result of
their association with our company over the past several years, and
their loss would also likely have a material adverse effect on our
business, results of operations and financial condition.
While we have entered into employment agreements with our senior
management team, Mr. Liszicasz is not obligated--and as a result of
his relationships with Momentum Resources Corporation may in the
future be unable--to devote his entire undivided time and effort to or
for our benefit. While we currently carry a key person life insurance
on Mr. Liszicasz, we do not carry any key person life insurance
policies on any of our other executive officers.
Our success also depends, to a lesser extent, on the continued efforts
of our geological interpretive and research and development teams,
which are composed of a small number of individuals. While there are
professionals who could replace these individuals, none of these
professionals have any theoretical or working knowledge of how to
interpret SFD data or how our SFD technology operates, and it would
take a significant period of time to train any replacement personnel.
Until such time as we have a fully trained complement of geological
interpretive and research and development teams, the loss of any
members of these teams could adversely affect the pace at which we
interpret SFD data or effect improvements to our SFD technology, which
could adversely impact our business and results of operations and
financial condition.
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. We May Be Unable To Attract The Qualified Managerial, Geological And
Geophysical, And Research And Development Personnel Required To
Implement Our Longer-Term Growth Strategies
Our ability to implement our longer-term growth strategies depends
upon our continuing ability to attract and retain highly qualified
geological, technical, scientific, information management and
administrative personnel. Competition for these types of personnel is
intense and we cannot give you any assurance that we will be able to
retain our key managerial, professional and/or technical employees, or
that we will be able to attract and retain additional highly qualified
managerial, professional and/or technical personnel in the future. Our
inability to attract and retain the necessary personnel could impede
our growth.
. We May Be Unable To Effectively Manage Our Expected Growth
Our success will depend upon the rapid expansion of our business.
Expansion will place a significant strain on our financial, management
and other resources, and will require us, among other things, to:
. change, expand and improve our operating, managerial and
financial systems and controls; and
. improve coordination between our various corporate functions.
We cannot give you any assurance that we will be able to manage the
expansion of our business effectively. Our inability to effectively
manage our growth, including the failure of any new personnel we hire
to achieve anticipated performance levels, would have a material
adverse effect on our business, results of operations and financial
position.
. Our Business May Be Adversely Affected By Currency Fluctuation,
Regulatory, Political And Other Risks Associated With International
Transactions
We currently operate within the United States and Canada and
anticipate we will also operate outside of these countries in the
foreseeable future. These operations will subject us to several
potential risks, including risks associated with:
. fluctuating exchange rates,
. the regulation by the governments of the United States and Canada
as well as foreign governments of fund transfers and export and
import duties and tariffs; and
. political instability.
We cannot give you any assurance that any of these risks will not have
a material adverse effect upon our business. We do not currently
engage in activities to mitigate the effects of foreign currency
fluctuations. If earnings from international operations increase, our
exposure to fluctuations in foreign currencies may increase, and we
may utilize forward exchange rate contracts or engage in other efforts
to mitigate foreign currency risks. We can give you no assurance as to
the effectiveness of these efforts in limiting any adverse effects of
foreign currency fluctuations on our international operations and our
overall results of operations.
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. Impact Of Governmental And Environmental Regulation On Our Business
. SFD Survey Flight Operations
The operation of our business, namely, conducting aerial SFD
surveys and interpreting SFD data, is not subject to material
governmental or environmental regulation with the exception of
flight rules promulgated by the Federal Aviation Administration
and Transport Canada governing the use of private aircraft,
including rules relating to low altitude flights.
. Oil And Gas Exploration And Development Projects
The oil and natural gas industry in general is subject to
extensive controls and regulations imposed by various levels of
the federal and state governments in the United States and
federal and provincial governments in Canada. In particular, oil
and gas exploration and production is subject to laws and
regulations governing environmental quality and pollution
control, limits on allowable rates of production by well or
proration unit, and other similar regulations. Laws and
regulations generally are intended to prevent waste of oil and
natural gas; protect rights to produce oil and natural gas
between owners in a common reservoir, control the amount of oil
and natural gas produced by assigning allowable rates of
production, and control contamination of the environment.
Environmental regulations affect our operations on a daily basis.
Public interest in the protection of the environment has
increased dramatically in recent years. Drilling in certain areas
has been opposed by environmental groups and, in certain areas,
has been restricted. We believe that the trend of more expansive
and stricter environmental legislation and regulations will
continue.
We do not expect that any of these government controls or
regulations will affect projects in which we participate in a
manner materially different than they would affect project of
similar size or scope of operations. All current legislation is a
matter of public record and we are not able to accurately predict
what additional legislation or amendments may be enacted.
Governmental regulations may be changed from time to time in
response to economic or political conditions. Any laws enacted or
other governmental action taken which prohibit or restrict
onshore and offshore drilling or impose environmental protection
requirements that result in increased costs to the oil and gas
industry in general would have a material adverse effect on our
business, results of operations and financial position.
. Impact Of Operating Hazards On Our Business
. SFD Survey Flight Operations
The operation of our SFD survey aircraft is subject to the usual
hazards incident to general and low level flight operations.
These hazards can cause personal injury and loss of life, as well
as severe damage to and destruction of property. While we
maintain insurance coverage against some, but not all, operating
risks associated with the operation of our aircraft, we cannot
predict the continued availability of insurance coverage or the
availability of insurance at premium levels that justify its
purchase, nor can we give any assurance that any claim would not
exceed our policy limits. If we were unable to procure insurance
for our flight operations at an acceptable cost, the occurrence
of significant adverse aircraft accident not fully insured or
indemnified against could have a material, adverse effect on our
business, financial condition and operating results. Similarly, a
judgment or settlement in excess of our policy limits could also
have a material, adverse effect on our business, financial
condition and operating results.
. Oil And Gas Exploration And Development Projects
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The oil and gas exploration and development projects in which we
participate through our joint venture partners will also be
subject to the usual hazards incident to the drilling of oil and
gas wells, including the risk of fire, explosions, blow-out, pipe
failure, casing collapse, abnormally pressured formations and
environmental hazards such as oil spills, gas leaks, ruptures and
discharges of toxic gases. In addition to the foregoing, offshore
operations are subject to the additional hazards of marine
operations, such as capsizing, collision and adverse weather and
sea conditions. These hazards can cause personal injury or loss of
life, severe damage to or destruction of property, natural
resources and equipment, pollution or other environmental damage,
clean-up responsibilities, regulatory investigation and penalties
and suspension of operations.
The project operator will, in accordance with prevailing industry
practice, maintain insurance against some, but not all, of these
risks. The insurance maintained by the project operator generally
would not cover claims relating to failure of title to oil and gas
leases, trespass during survey acquisition or surface damage
attributable to seismic operations, or business interruption, nor
would it protect against loss of revenues due to well failure.
There can be no assurance that any insurance obtained by the
project operating covering claims related to worker's
compensation, comprehensive general liability for bodily injury
and property damage, comprehensive automobile liability and
pollution, cleanup, underground blowout and evacuation will be
adequate to cover any losses or liabilities which may be incurred
within projects in which we participate. We also cannot predict
the continued availability of insurance coverage or the
availability of insurance at premium levels that justify its
purchase.
Since we do not act as operator on any projects in which we may
participate, we are dependent upon our partners to conduct
operations in a manner so as to minimize these operating risks.
In cases where we have direct liability as a result of our
participation on a working interest basis, the failure or
inability of the project operator to procure insurance at an
acceptable cost or the occurrence of a significant adverse event
not fully insured or indemnified against could have an direct
material, adverse effect on our business, financial condition and
operating condition. In these cases our exposure will be
commensurate with our participation percentage.
While we would have no direct liability in cases where our
participation is limited to an overriding royalty interest, the
failure or inability of the project operator to procure insurance
at an acceptable cost or the occurrence of a significant adverse
event not fully insured or indemnified against could have an
indirect material, adverse effect on our business, financial
condition and operating results to the extent it adversely affects
our joint venture partner's ability to complete current projects
or explore for and develop additional projects.
Matters Relating To Our Common Stock
. There Is Only A Limited Public Market For Our Common Stock
There is only a limited public market for our common stock on the NASD OTC
Electronic Bulletin, and we cannot give you any assurance that a broader or
more active public trading market for our common stock will develop or be
sustained. We are under no obligation to take any action to improve the
public market for our securities including, without limitation, filing an
application to list our common stock on any stock exchange or any over any
other counter market.
. Our Stock Price Is Extremely Volatile
The market price for our common stock is extremely volatile and subject to
significant price and volume fluctuations in response to a variety of
external and internal factors. This is especially true
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with respect to emerging companies such as ours. Examples of external
factors, which can generally be described as factors that are unrelated to
the operating performance or financial condition of any particular company,
include changes in interest rates and worldwide economic and market
conditions, as well as changes in industry conditions, such as changes in
oil and gas prices, oil and gas inventory levels, regulatory and
environment rules, and announcements of technology innovations or new
products by other companies. Examples of internal factors, which can
generally be described as factors that are directly related to our
operating performance or financial condition, would include release of
reports by securities analysts and announcements we may make from time-to-
time relative to our operating performance, drilling results, advances in
technology or other business developments.
Because we are a development stage enterprise with a limited operating
history and no revenues or profits, the market price for our common stock
will be more volatile than that of a seasoned issuer. Changes in the market
price of our common stock may have no connection with our operating results
or prospects. No predictions or projections can be made as to what the
prevailing market price for our common stock will be at any time.
. You May Become Subject To The Penny Stock Rules If Our Stock Price Declines
To Less Than $5
Since our common stock is not listed on a national stock exchange or quoted
on the Nasdaq Market, it will become subject, in the event the market price
for these shares declines to less than $5 per share, to a number of
regulations known as the "penny stock rules." The penny stock rules require
a broker-dealer to deliver a standardized risk disclosure document prepared
by the Securities and Exchange Commission, to provide the customer with
additional information including current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in
the transaction, monthly account statements showing the market value of
each penny stock held in the customer's account, and to make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
To the extent these requirements may be applicable they will reduce the
level of trading activity in the secondary market for our common stock and
may severely and adversely affect the ability of broker-dealers to sell our
common stock.
. Our Common Stockholders Should Not Expect To Receive A Liquidation
Distribution
If we were to wind-up or dissolve our company and liquidate and distribute
our assets, the holders of our common stock would share ratably in our
assets only after we satisfy any amounts we would owe to our creditors and
any amounts we would owe to our series "A" preferred stockholders as a
liquidation preference ($7.50 per share, or $6,000,000 in the aggregate).
If our liquidation or dissolution were attributable to our inability to
profitably operate our business, then it is likely that we would have
material liabilities at the time of liquidation or dissolution.
Accordingly, we cannot give you any assurance that sufficient assets will
remain available after the payment of our creditors and preferred
stockholders to enable you to receive any liquidation distribution with
respect to any shares of our common stock you may hold.
. Two Of Our Principal Stockholders Control Our Company
Messrs. George Liszicasz and R. Dirk Stinson, our two principal
stockholders and two of our directors, beneficially own over two-thirds of
our common stock, and will therefore have the power, as a group, to elect a
majority of our Board of Directors. Our Board, in turn, has the power to
appoint our officers and to determine, in accordance with their fiduciary
duties and the business judgment rule, our direction, objectives and
policies, such as:
. our business expansion or acquisition policies;
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. whether we should raise additional capital through financing or
equity sources, and in what amounts;
. whether we should retain cash reserves for future product
development, or distribute them as a dividend, and in what amounts;
. whether we should sell all or a substantial portion of our assets,
our should merge or consolidate with another corporation; and
. transactions which may cause or prevent a change in control or the
winding up and dissolution of our company.
An investment in our common stock will entail entrusting these and similar
decisions to our present management subject, of course, to their fiduciary
duties and the business judgment rule.
. There Is An Inherent Conflict Of Interest Arising As A Result Of The
Relationship Between Our Two Principal Stockholders And The Licensor Of Our
SFD Technology
Messrs. George Liszicasz and R. Dirk Stinson indirectly own and control
both our company and Momentum Resources Corporation, which has granted us
an exclusive license to identifying oil and natural gas prospects using the
SFD data while reserving the exclusive right to use the SFD technology for
purposes other than oil and natural gas exploration. Although Mr. Liszicasz
has entered into an employment agreement with us he is not obligated, and
as a result of his relationships with Momentum may in the future not be
able, to devote his entire undivided time and effort to or for our benefit.
As a result of the foregoing relationships, certain conflicts of interests
between our company and one or more of Momentum and Messrs. Liszicasz and
Stinson may directly or indirectly arise, including the following:
. Mr. Liszicasz's potential inability to devote his undivided time and
attention to our affairs; and
. the proper exercise by Messrs. Liszicasz or Stinson of their
fiduciary duties on our behalf as directors and controlling
stockholders of our company in connection with any matters concerning
Momentum such as, by way of example and not limitation:
. disputes regarding the validity, scope or duration of the SFD
Technology License;
. the exploitation of corporate opportunities;
. rights to proprietary property and information;
. maintenance of confidential information as between entities;
and
. potential competition between our company and Momentum.
While Messrs. Liszicasz and Stinson and our company have each executed
certain disclosures and consents relating to these conflicts, these
disclosures and consents will not remediate these conflicts, but will
merely release Messrs. Liszicasz and Stinson from liability as a result of
the conflicts so long as they use reasonable efforts to minimize the
conflicts. In the event any of these conflicts prove to be irreconcilable,
Messrs. Liszicasz and Stinson may be forced to resign their respective
positions with our company.
Our Statements About Anticipated Events Or Future Trends May Prove To Be
Inaccurate
In this report we have made a number of statements, which we refer to as
"forward-looking statements," generally relating to our expectations or
speculations as to future events and our observations as to trends
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and factors that may impact our future operating results. You can generally
identify any forward-looking statements contained in this report through words
such as "anticipate," "believe," "estimate," "expect," "budget" and "project"
and similar expressions. Forward-looking statements that are contained in this
report, for example, include statements relating to:
. the amount and character of future oil and gas revenues we may
receive, the timing of receipt of revenues, and the timing of break-
even, including, by way of example and not limitation, those
statements contained in that section in Part I, Item 2 of this report
captioned "Management's Discussion And Analysis Of Financial Condition
And Results Of Operations--Overview;" and Part I, Item 2, of this
report captioned "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations--Capital Requirements;"
. the amount and character of expenses we may incur, and the timing of
these expenditures including, by way of example and not limitation,
those statements contained in those sections in Part I, Item 2, of
this report captioned "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations--Capital Requirements"
and "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations--Results Of Consolidated Operations--
Expectations Relative To Future Expense Levels;" and
. the amount and composition of our capital expense budget, and the
timing of these capital outlays including, by way of example and not
limitation, those statements contained in those sections in Part I,
Item 2, of this report captioned "Management's Discussion And Analysis
Of Financial Condition And Results Of Operations--Capital
Requirements" and "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations--Results Of Consolidated
Operations--Expectations Relative To Future Expense Levels."
Whenever you read any forward looking statement contained in this report, you
should be aware of and take into consideration that:
. the forward-looking statement merely reflects the current expectations
and speculation of our management as to anticipated events or
observations relating to future trends based, in part, upon currently
available information and our current business plan, and
. actual results from these future events may differ materially from the
results expected or speculated or trends observed as expressed in, or
implied by, the forward-looking statement, as a result of changes in
circumstances and events and other uncertainties and risks, including:
. changes in our business plan and corporate strategies or that of
our joint venture partners;
. delays in our ability to conduct and complete SFD surveys or
interpret SFD data,
. delays on the part of our joint venture partners in planning SFD
survey activities, in conducting geologic and geophysical
evaluations of recommended anomalies, in acquiring drilling
rights, in conducting exploratory drilling activities and
completing wells, and in connecting producing wells to pipelines
and other production infrastructure; or
. the occurrence of the various types of uncertainties and risk
factors described above in this section as well as those
described in Part I, Item 3, of this report captioned
"Quantitative and Qualitative Disclosure About Market Risk;" and
. the forward-looking statement must, in any event, be considered in
context with the various disclosures concerning our company and our
business made in this report as well as other reports we periodically
file with the Securities and Exchange Commission, including our annual
report on form 10--K (amendment no. 1) for our fiscal year ended
December 31, 1999.
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As a consequence of the forgoing factors, you are cautioned not to put undue
reliance on any forward-looking statement contained in this report.
We are not obligated to update or revise any forward looking statement contained
in this report to reflect new events or circumstances except to the extent
required by law. You are also cautioned that we intend for all forward-looking
statements contained in this report to be construed as "forward-looking
statements" within the meaning of Section 21E of the United States Securities
Exchange Act of 1934, which establishes a safe-harbor from private actions for
forward-looking statements as defined by Section 21E.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Oil And Gas Price Fluctuations
Our primary market risks will be related to market changes in oil and gas prices
(See Item I, Item 2, captioned "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations--Uncertainties And Other Factors
That May Affect Our Future Results And Financial Condition--Risks Relating To
The Company And Its Business--Volatility Of Oil And Natural Gas Prices"). Since
our prospective royalty revenues will be tied to the price at which our joint
venture partners sell oil and gas on the world market, any fluctuations in these
prices will directly and proportionately impact our royalty income base (i.e., a
1% increase or decrease in oil or gas prices would result in a corresponding 1%
increase or decrease in our oil or gas royalties). Should we elect a working
interest in lieu of a royalty interest, our working interest revenue base would
be similarly affected, except that this affect would not necessarily be
proportional since production and marketing costs would most likely remain the
same. For example, in the case of a decline in oil and gas prices where
production and marketing costs are unaffected, the decline in our working
interest revenues would most likely be greater, in percentage terms, than the
decline in oil and gas prices.
We do not anticipate that any decline in world oil and gas prices would
adversely affect our operations (i.e., force our company or our joint venture
partners to slow down or cut-back SFD survey or interpretation operations or our
staff) insofar as a primary benefit of the SFD technology is to reduce finding
costs, which benefit becomes more important as oil and gas prices decline. A
decline in oil and gas prices could, however, force our joint venture partners
to curtail exploration drilling operations since these operations are ordinarily
funded out of available cash flow which, in turn, is dependent upon oil and gas
prices. This eventuality would adversely affect our future cash flows since
these prospects would not be drilled until the joint venture partner obtained
sufficient capital. (Even if exploration activities are curtailed, however, a
decline in oil and gas prices raises opportunities to acquire and "bank"
SFD-qualified prospects at lower acquisition prices, which can then be drilled
when oil and gas prices increase).
A decline in oil and gas prices could also lead our joint venture partners to
"shut-in" an existing producing well (primarily "marginal producing wells") on
the basis that the decline in price no longer make the well economic to operate.
In such an event we would no longer receive royalty or working interest revenues
from the shut-in well.
Currency Fluctuations
An additional significant market risk relates to foreign currency fluctuations
between United States and Canadian dollars. Since our royalty or working
interest revenues generated by our Canadian-based joint venture partners will be
denominated in Canadian currency, our financial position could be adversely
affected by United States-Canadian currency fluctuations. We have not previously
engaged in activities to mitigate the effects of foreign currency fluctuations
due to the absence of Canadian revenues to date, and we anticipate that the
exchange rate between the United States and Canadian dollar will remain fairly
stable.
If earnings from our Canadian operations increase, our exposure to fluctuations
in the United States-Canadian exchange rate will increase, and we may utilize
forward exchange rate contracts or
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engage in other efforts to mitigate these foreign currency risks. We cannot give
you any assurance that the use of exchange rate contracts or other mitigation
efforts would effectively limit any adverse effects of foreign currency
fluctuations on our company's international operations and our overall results
of operations.
Interest Rate Fluctuations
We currently maintain the bulk of our available cash in money-market accounts
maintained in U.S. dollars. Our interest income from these short-term
investments could be adversely affected by any material changes in interest
rates within the United States.
ITEM II OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of this report: (1) there are no material legal proceedings
pending or, to the knowledge of our management, contemplated or threatened, to
which to our company or properties are or may become a party; and (2) to the
knowledge of our management, no material proceedings to which any director,
officer of affiliate of our company is a party adverse to our company or has a
material interest adverse to our company.
Item 2. Changes In Securities And Use Of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
Our Annual Meeting of Stockholders was held on September 14, 2000. At the
meeting the holders of our common stock elected Messrs. George Liszicasz, Daniel
C. Topolinsky, R. Dirk Stinson, Lorne W. Carson, Dennis R. Hunter and John A.
Thomson to serve as our Non-Series A Directors, and the holders of our series
"A" preferred stock elected Messrs. Jon E.M. Jacoby and K. Rick Turner to serve
as our Series A Directors. The tally of the votes is set forth below:
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<TABLE>
<CAPTION>
Vote
-------------------------------------------------
Name of Nominee For Withhold Abstain
------------------------------- ---------- ---------------- --------------
<S> <C> <C> <C>
Non-Series A Directors:
George Liszicasz..................... 12,202,491 0 0
Daniel C. Topolinsky................. 12,202,491 0 0
R. Dirk Stinson...................... 12,202,491 0 0
Lorne W. Carson...................... 12,202,491 0 0
Dennis R. Hunter..................... 12,202,491 0 0
John A. Thomson...................... 12,202,491 0 0
Series A Directors:
Jon E.M. Jacoby...................... 800,000 0 0
K. Rick Turner....................... 800,000 0 0
</TABLE>
The holders of our common stock also ratified the appointment of Arthur Andersen
LLP to serve as our independent auditors for our pending fiscal year which will
end December 31, 2000 by the following vote: 12,129,497 shares voting For,
65,018 shares Withheld, and 7,976 shares Abstaining. There were no broker
non-votes with respect to any matter presented for vote at our Annual Meeting of
Stockholders.
Item 5. Other Information
Not Applicable
Item 6. Exhibits
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 16/th/ day of November, 2000.
Energy Exploration Technologies
By: /s/ George Liszicasz
----------------------------------------
George Liszicasz
Chief Executive Officer
(principal executive officer)
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By: /s/ Daniel C. Topolinsky
-----------------------------------------
Daniel C. Topolinsky
President and Chief Operating Officer
(principal executive officer)
By: /s/ John M. Woodbury, Jr.
-----------------------------------------
John M. Woodbury, Jr.,
Chief Financial Officer
(principal accounting officer)
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