<PAGE>
As filed with the Securities and Exchange Commission on August 14, 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 SIX-MONTH PERIOD ENDED JUNE 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:
13,094,216 shares of common stock, par value $0.001 per share,
as of August 13, 2000
================================================================================
<PAGE>
ENERGY EXPLORATION TECHNOLOGIES
QUARTERLY REPORT ON FORM 10--Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <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.................................................. 16
GENERAL................................................................ 16
OVERVIEW............................................................... 16
CAPITAL REQUIREMENTS................................................... 19
RESULTS OF OPERATIONS.................................................. 20
LIQUIDITY AND CAPITAL RESOURCES........................................ 21
OTHER MATTERS.......................................................... 23
UNCERTAINTIES AND OTHER FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND
FINANCIAL CONDITION.................................................... 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............. 34
OIL AND GAS PRICE FLUCTUATIONS......................................... 34
CURRENCY FLUCTUATIONS.................................................. 35
INTEREST RATE FLUCTUATIONS............................................. 35
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...................................................... 36
ITEM 6. EXHIBITS............................................................... 36
REPORTS ON FORM 8--K................................................... 36
</TABLE>
-ii-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
d
ENERGY EXPLORATION TECHNOLOGIES
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
As of
----------------------------------
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 5,393,719 $ 9,068,723
Accounts receivable......................................................... 551,906 101,731
Due from officers and employees............................................. 322 3,219
Prepaid expenses and other.................................................. 106,453 85,343
----------- -----------
Total current assets....................................................... 6,052,400 9,259,016
Note receivable from officer [note 4]........................................ 35,716 34,550
Unproved oil and natural gas properties [notes 2(g) and 5]................... 2,087,578 775,159
Other property and equipment, net of accumulated depreciation and
amortization of $507,991 and $292,363, respectively [notes 2(h)
and 6]...................................................................... 3,761,754 661,201
----------- -----------
Total assets............................................................. $11,937,448 $10,729,926
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade payables.............................................................. $ 166,590 $ 32,716
Wages and employee benefits payable......................................... 136,596 132,685
Accrued oil and natural gas property costs.................................. 742,731 382,386
Other accrued liabilities................................................... -- 54,534
----------- -----------
Total current liabilities.................................................. 1,045,917 602,321
Shareholders' equity:
Series "A" convertible preferred stock; par value $0.001 per share,
liquidation preference $7.50 per share:
800,000 shares authorized; and 800,000 shares issued as of
June 30, 2000 and December 31, 1999 [note 8]............................... 800 800
Common stock, par value $0.001 per share:
50,000,000 shares authorized;
13,085,016 shares issued as of June 30, 2000;
12,856,816 shares issued as of December 31, 1999 [note 7].................. 13,085 12,857
Warrants [notes 8 and 9].................................................... -- 1,132,000
Additional paid-in capital.................................................. 19,303,954 16,330,692
Deficit accumulated during the development stage............................ (8,382,148) (7,319,341)
Accumulated other comprehensive loss........................................ (44,160) (29,403)
----------- -----------
Total shareholders' equity................................................. 10,891,531 10,127,605
----------- -----------
Total liabilities and shareholders' equity............................... $11,937,448 $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>
October 20,
Three months ended Six months ended 1995
June 30, June 30, (inception) to
----------------------------- -------------------------- June 30, 2000
2000 1999 2000 1999 (cumulative)
----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Administrative..................................... $ 398,854 $ 323,023 $ 726,538 $ 519,893 $ 3,988,900
Amortization and depreciation [note 2(h)].......... 145,650 26,390 219,671 71,816 513,665
Research and development [note 2(i)]............... 104,584 47,809 169,225 49,114 703,626
Survey support [note 2(j)]......................... 23,925 24,233 107,974 116,631 709,953
Survey operations and data analysis [note 2(k)] 1,609 (13,935) 54,942 5,930 115,322
Write-down of assets............................... -- -- -- -- 17,662
----------- ----------- ----------- ----------- -----------
Total operating expenses......................... (674,622) (407,520) (1,278,350) (763,384) (6,049,128)
Operating loss...................................... (674,622) (407,520) (1,278,350) (763,384) (6,049,128)
Other income (expense):
Interest cost on promissory notes.................. -- -- -- -- (124,299)
Interest income.................................... 102,713 77,259 215,543 128,115 838,973
Other income....................................... -- 60 -- 60 19,231
Settlement of damages.............................. -- -- -- -- 157,500
----------- ----------- ----------- ----------- -----------
Total other income (expenses).................... 102,713 77,319 215,543 128,175 891,405
Net loss for the period............................. (571,909) (330,201) (1,062,807) (635,209) (5,157,723)
Other comprehensive loss:
Foreign currency translation adjustments........... (6,055) (94,736) (14,757) (77,016) (44,160)
----------- ----------- ----------- ----------- -----------
Comprehensive loss for the period................... $ (577,964) $ (424,937) $(1,077,564) $ (712,225) $(5,201,883)
=========== =========== =========== =========== ===========
Basic and diluted loss per share [note 2(m)]........ $ (0.04) $ (0.04) $ (0.08) $ (0.06)
=========== =========== =========== ===========
Weighted average shares outstanding................. 12,969,289 12,465,657 12,969,289 12,465,657
=========== =========== =========== ===========
</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]
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<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 June 30,
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
six months ended June 30,
2000............................. -- 28,200 28 -- -- -- -- 341,462 --
Net loss for the six months
ended June 30, 2000.............. -- -- -- -- -- -- -- -- (1,062,807)
Net other comprehensive loss for
the six months ended June 30,
2000............................. (14,757) -- -- -- -- -- -- -- --
-------- ---------- ------- ------- ---- -------- ---------- ----------- -----------
Balance -- June 30, 2000........ $(44,160) 13,085,016 $13,085 800,000 $800 -- -- $19,303,954 $(8,382,148)
======== ========== ======= ======= ==== ======== ========== =========== ===========
</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>
--------------------------------------------------------------------------------------------------------------------------
Six months Ended Oct. 20, 1995
June 30, (inception) to
--------------------------- June 30, 2000
2000 1999 (cumulative)
----------- ----------- ---------------
<S> <C> <C> <C>
Operating activities:
Net loss for the period................................................ $(1,062,807) $ (635,209) $(5,157,723)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of property and equipment................................ 219,671 71,816 513,665
Write-down of property and equipment.................................. -- -- 17,662
Amortization of deferred costs........................................ -- 93,014 154,287
Changes in non-cash working capital:
Accounts receivable.................................................. (450,175) 22,526 (551,906)
Due from officers and employees...................................... 2,897 1,336 (322)
Prepaid expenses..................................................... (21,110) (50,335) (106,453)
Trade payables....................................................... 133,874 (60,290) 166,590
Wages and employee benefits payable.................................. 3,911 7,391 136,596
Accrued liabilities.................................................. (54,534) 10,684 --
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.............................. (1,228,273) (539,067) (4,533,297)
Financing activities:
Funds borrowed from affiliates......................................... -- -- 1,100,000
Repayment of funds borrowed from affiliates............................ -- -- (100,000)
Funds raised through the sale of common stock,
net of issuance costs................................................. -- 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..................................................... 341,490 95,000 645,469
Funds raised through the exercise of warrants, net
of issuance costs..................................................... 1,500,000 -- 1,500,000
Repayment of deferred financing for insurance premium.................. -- -- (146,520)
----------- ----------- -----------
Net cash generated by financing activities......................... 1,841,490 6,093,652 15,660,318
Investing activities:
Funds invested in property and equipment............................... (3,320,224) (72,146) (4,308,579)
Funds Invested in oil and natural gas properties....................... (1,312,419) -- (2,087,578)
Funds borrowed by an employee.......................................... -- -- (35,760)
Repayment of funds borrowed by an employee............................. (1,166) 761 44
Changes in non-cash working capital:
Accrued oil and natural gas property costs........................... 360,345 -- 742,731
----------- ----------- -----------
Net cash used in investing activities.............................. (4,273,464) (71,385) (5,689,142)
Effect of net other comprehensive loss.................................. (14,757) (77,016) (44,160)
Net cash inflow (outflow)............................................... (3,675,004) 5,406,184 5,393,719
Cash position, beginning of period...................................... 9,068,723 4,713,822 --
----------- ----------- -----------
Cash position, end of period............................................ $ 5,393,719 $10,120,006 $ 5,393,719
=========== =========== ===========
</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. Although we have sufficient
working capital as of June 30, 2000 to fund our current level of
operations for two years assuming we make minimal investments in
petroleum properties, and one year assuming we make budgeted
investments in petroleum properties, our ability to continue as a going
concern in the longer term will nevertheless be dependent upon our
ability, either through our joint venture arrangements or for our own
account, to successfully identify hydrocarbon bearing prospects, and to
finance, develop, extract and market oil and natural gas from these
prospects for a profit. We anticipate that we will continue to incur
further operating losses until such time as we receive revenues from
our production with respect to prospects currently in the development
stage, or through prospects we identify and exploit for our own
account.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
We have prepared these consolidated financial statements in accordance
with accounting principles generally accepted in the United States for
interim financial reporting. While these
-6-
<PAGE>
financial statements reflect all normal recurring adjustments which are,
in the opinion of management, necessary for fair presentation of the
results of the interim period, they do not include all of the information
and notes required by accounting principles generally accepted in the
United States for complete financial statements. For further information,
refer to 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:
. land acquisition costs;
. geological and geophysical costs;
-7-
<PAGE>
. costs of drilling both productive and non-productive wells,
production equipment and related facilities; and
. various costs associated with evaluating petroleum and natural gas
properties for potential acquisition.
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.
Our company conducts oil and natural gas exploration, drilling,
development and production activities through our joint venture partners.
These consolidated financial statements reflect only our proportionate
interest in these activities.
(h) Other Property and Equipment
We carry our other capitalized property and equipment at cost. We
depreciate or amortize our other capitalized property and equipment over
their estimated service lives using the declining balance method as
follows:
-8-
<PAGE>
<TABLE>
<S> <C>
Aircraft........................................................... 15%
Computer equipment................................................. 30%
Computer software.................................................. 100%
Equipment.......................................................... 20%
Furniture and fixtures............................................. 20%
Leasehold improvements............................................. 20%
Tools.............................................................. 20%
Vehicles........................................................... 30%
</TABLE>
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.
-9-
<PAGE>
(l) Foreign Currency Translation
We use the United States dollar as our reporting currency, although NXT
and our subsidiaries maintain Canadian denominated accounts for some
matters and also periodically engage in transactions using Canadian
currency. We use the following methodology to convert Canadian dollar
denominated accounts and transactions into U.S. dollars for consolidation
purposes:
. all asset and liability accounts are translated into U.S. dollars at
the rate of exchange in effect as of the end of the applicable fiscal
period;
. all shareholders' equity accounts are translated into U.S. dollars
using historical exchange rates; and
. all revenue and expense accounts are translated into U.S. dollars at
the average rate of exchange for the applicable fiscal period.
We record the cumulative gain or loss arising from the conversion of the
noted Canadian dollar denominated accounts and transactions into U.S.
dollars as a foreign currency translation adjustment as a component of
accumulated other comprehensive income or loss for that period.
(m) Basic And Diluted Loss Per Common Share
Our basic loss per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS No.
128"), by dividing the net loss for the period attributable to holders of
our common stock by the weighted average number of shares of our common
stock outstanding for the period. Our diluted loss per share is
computed, also in accordance with SFAS No. 128, by including the
potential dilution that could occur if holders of our dilutive securities
were to exercise or convert these securities into our common stock.
In calculating our diluted loss per share, we take into consideration
deemed distributions analogous to the declaration of a dividend
attributable to the beneficial conversion features affording a discount
or benefit to the holders of our securities. See note 8.
(n) Stock-based Compensation
In accounting for our employee and director stock options, we have
elected to follow Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees," ("APB 25"), and related interpretations.
Pursuant to APB 25, we have not recorded any compensation expense for any
period in these consolidated financial statements insofar as the exercise
price for all options we have granted to date to our employees and
directors have equaled the market price of the underlying common shares
on the effective date of grant. See note 10.
(o) Recent Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as subsequently amended by SFAS No.
137,which established accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either
an asset or liability measured at its fair value for fiscal quarters of
fiscal years beginning after June 15, 2000. Our management has not had
the opportunity to evaluate the impact of SFAS Nos. 133 and 137 on our
consolidated financial position, results of operations or cash flows.
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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.
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 six-month interim periods ended June 30, 2000 and June 30,1999 and
as of June 30, 2000:
<TABLE>
<CAPTION>
Six months Ended
June 30, As of
----------------------- June 30,
2000 1999 2000
---------- -------- ----------
<S> <C> <C> <C>
Acquisition costs...................... $ 36,757 $ -- $ 441,342
Exploration costs...................... 1,275,662 -- 1,646,236
Development costs...................... -- -- --
Capitalized interest................... -- -- --
---------- ----- ----------
$1,312,419 $ -- $2,087,578
========== ===== ==========
</TABLE>
Since all of our oil and gas properties as of June 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.
Following the close of our six-month interim period ended June 30, 2000, our
management performed a property assessment with respect to each of our
unproved properties as of June 30, 2000 to determine if any of these
properties had been subject to any impairment in value, and concluded that
no impairment had occurred. This assessment included a determination of the
future production potential based upon SFD data, seismic data and
exploration results. Our company is currently
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conducting active exploration and development programs with respect to each
of these unproved oil and gas properties, and we anticipate that all of
these properties will be evaluated and the associated costs transferred into
the amortization base or impaired over the next five years.
6. OTHER PROPERTY AND EQUIPMENT
Summarized below are our capitalized costs for other property and equipment
as of June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
As of
-----------------------------
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Aircraft................................................. $3,233,890 $ 238,653
Computer equipment....................................... 230,211 189,586
Computer software........................................ 121,734 71,174
Equipment................................................ 74,687 62,749
Furniture and fixtures................................... 183,345 165,274
Leasehold improvements................................... 250,213 102,761
SFD Survey System (including software)................... 111,509 59,169
Tools.................................................... 1,661 1,704
Vehicle.................................................. 62,495 62,494
---------- ---------
Property and equipment................................. 4,269,745 953,564
Less accumulated depreciation and amortization........... (507,991) (292,363)
---------- ---------
Net property and equipment............................. $3,761,754 $ 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.
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<PAGE>
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 six-month interim period ended June 30, 2000, we raised $341,490
in gross proceeds through our employees' exercise of incentive stock options
entitling them to purchase 28,200 shares of our common stock at exercise
prices between $8.25 and $17 per share.
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 $5,688,867, after deducting
$311,833 in offering expenses, including the cost of becoming a reporting
company with the Securities and Exchange Commission.
Each share of preferred stock is convertible into one common share at the
election of the holder, and carries a $7.50 liquidation preference should
our company wind-up and dissolve. We have reserved the right to redeem the
preferred stock at a price of $7.50 per share if it has not been converted
into common stock by April 3, 2000, and the holder forgoes a final
opportunity to exercise his conversion rights to avoid redemption. The
preferred shares are not entitled to payment of any dividends, although they
are entitled under certain circumstances to participate in dividends on the
same basis as if converted into common shares. Each warrant carried a $7.50
per share exercise price, and lapsed to the extent not exercised by April 3,
2000. All of the warrants were exercised on March 31, 2000. See note 7.
Insofar as the preferred shares and warrants contained beneficial conversion
features affording a discount or benefit to the purchaser of these
securities, we recorded a deemed distribution analogous to the declaration
of a dividend to that purchaser. This deemed distribution resulted in:
. An increase in additional paid-in capital in the amount of $2,104,000
to record the intrinsic value of the beneficial conversion feature of
the preferred shares--i.e., the discount in the purchase price of these
securities relative to the public trading price as of the date of
issuance of the underlying common shares into which these preferred
shares could be converted, without adjustment for discounts or
restrictions.
. A newly created warrant capital account to record the fair value of the
warrants in the amount of $1,132,000, including the value of their
beneficial conversion feature, as determined by the Black-Scholes
method of valuation. This amount was subsequently reclassified to
additional paid-in capital upon the exercise of the warrants.
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<PAGE>
. A counterbalancing charge against our accumulated deficit capital
account in the amount of $3,236,000.
We also made appropriate adjustment for the deemed distribution in
calculating our basic loss per common share. See note 2(m).
9. PERFORMANCE WARRANTS
On August 1, 1996, we granted a performance-based contractual right to be
granted warrants to the licensor of our SFD technology, Momentum Resources
Corporation, in connection with the amendment of our exclusive SFD
technology license with Momentum to use the SFD technology for hydrocarbon
exploration. The primary purpose of the amendment was to indefinitely
extend the termination date of the license. Pursuant to this contractual
right, Momentum is entitled to a separate grant of warrants entitling it to
purchase 16,000 shares of our common stock at the then current trading
price for each month after December 31, 2000 in which production from SFD-
identified prospects during that month exceeds 20,000 barrels of
hydrocarbons. Momentum has not earned any warrants under the SFD technology
license as of June 30, 2000.
10. OPTIONS
Through June 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 six-month interim period ended June 30, 2000, 310,000 options
with an average weighted exercise price of $28.17 were granted under the
Plans, 28,200 previously-granted options under the Plans with an average
weighted exercise price of $12.11 were exercised, and 16,000 previously-
granted options under the Plans with an average weighted exercise price of
$14.06 lapsed.
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We have summarized below all outstanding options under the Plans as of June
30, 2000:
<TABLE>
<CAPTION>
June 30, 2000
Grant Exercise --------------------------
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 37,500 7,500
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 8.25 131,100 8,600
Employee Incentive......................... 10-1-98 8.12 1/2 20,000 --
Employee Non-qualified..................... 5-1-99 14.00 1,005,470 162,134
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 29.00 45,000 --
Employee Incentive......................... 6-1-00 32.12 1/2 20,000 --
--------- -------
1,978,400 414,900
========= =======
</TABLE>
The employee options outstanding as of June 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 June 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 June 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 June 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 June 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 June 30, 2000 was Cdn.
$21,418 per month, which translates into U.S. $14,466 per month based upon
the closing conversion rate as of June 30, 2000.
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<PAGE>
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, August 13, 2000, unless an earlier or
later date is indicated. All references to "dollars" in this report refer to
United States, or U.S., dollars unless specific reference is made to Canadian,
or Cdn., dollars. For information relative to currency conversion, see note
2(l) to our consolidated financial statements. The rate of exchange of Canadian
dollars to United States dollars as of June 30, 2000, was Cdn. $1.4806 to U.S.
$1.
OVERVIEW
Energy Exploration Technologies ("we," "our company" or "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 whose common stock trades over-the-counter on the NASD
Electronic Bulletin Board under the symbol "ENXT." Our principal executive
offices are located at Suite 700, Phoenix Place, 840 7th Avenue S.W., Calgary,
Alberta, Canada T2P 3G2, and our telephone number is (403) 264-7020.
We use our SFD technology to survey or reconnoiter large exploration areas from
our survey aircraft at speeds in excess of 150 mph to identify and "high-grade"
leads for further evaluation and potential drilling. Our SFD technology is a
recently developed technology which we adapted for airborne survey operations,
and field tested for independent geologists and our joint venture partners, in
1996 and 1997. We commenced SFD survey activities on a full commercial basis
for our joint venture partners in early 1998.
Our SFD technology affords us the relatively inexpensive ability to obtain near
real-time analysis and interpretation of potential hydrocarbon accumulations in
a matter of days or weeks, as compared to months and in some cases years in the
case of the seismic methods currently employed by the oil and gas exploration
industry for wide area exploration or reconnaissance. These cost and time
advantages will ultimately enable us to effectuate potentially significant
reductions in oil and gas exploration "finding costs." Finding costs include
the cumulative costs of acquiring seismic, purchasing mineral rights, and
drilling and completing exploration wells. The ability to reduce finding costs
is an extremely important financial factor in the oil and gas industry, insofar
as low finding costs represent a measure of an oil and gas company's ability to
effectively and efficiently find new reserves, as well as generate cash flow.
We conduct our reconnaissance exploration activities, as well as land
acquisition, drilling, completion and production activities to exploit prospects
identified using our SFD technology, through our two wholly-owned operating
subsidiaries. Our first subsidiary, NXT USA, focuses on United States-based
exploration, while our second subsidiary, NXT Energy Canada Inc., whom we refer
to as "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
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<PAGE>
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 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:
. Leucite Hills South Prospect--Wyoming: This exploration well was drilled,
cased and completed by at third-party operator in September 1999 as a
natural gas discovery. This well will not be placed into production by the
operator, however, until a sufficient number of additional wells are
drilled on the exploratory block and can be tied into a gathering system.
NXT USA elected a combination working interest and overriding royalty
interest with respect to this prospect. The Bureau of Land Management in
Wyoming declined three applications to drill offsets to this well due to
environmental considerations. We are currently investigating our options
with respect to this prospect.
. Poblano Prospect--Wyoming: CamWest, as operator, spudded the initial test
well on this prospect in October 1999, and cased and completed the well in
January 2000 as a natural gas discovery. CamWest has since drilled and
cased two step-out exploratory wells on this prospect, and is currently
designing a frac plan to complete these wells. We anticipate both wells
will be completed and connected to a twelve-mile pipeline that will tie the
wells into a sales system, currently planned for the end of September 2000.
NXT USA elected a combination working interest and overriding royalty
interest with respect to this prospect.
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<PAGE>
. Poblano South Prospect--Wyoming: This exploration well, which was spudded
by a third-party operator in October 1999 and cased and completed in
January 2000, has been shut-in by the operator pending further evaluation
of its completion program. NXT USA elected a combination working interest
and overriding royalty interest with respect to this prospect.
. Gold Coast Prospect--Wyoming: This 16,000 foot natural gas test well, which
was spudded by a CamWest in May 2000, encountered severe mechanical
problems when the operator attempted to cement the intermediate casing in
place at 10,500 feet. After unsuccessful attempts to remediate the problem,
the operator junked the well. As of the date of this report, a new adjacent
well drilling to the same target depth is at 7,600 feet, reaching total
depth by the end of September 2000.
. Carbon Prospect--Southern Alberta: Encal, as operator, spudded this test
well in December 1999, and cased and completed the well in January 2000 as
a natural gas discovery. This well should be tied in by the end of the
fourth quarter 2000. NXT Canada elected an overriding royalty interest with
respect to this prospect.
. Monarch Prospect--Southern Alberta: Encal, as operator, spudded this test
well in March 2000. This well is cased and was completed as a natural gas
discovery. Tie-in options are being evaluated. NXT Canada elected a
combination working interest and overriding royalty interest with respect
to this prospect.
. Dalroy Prospect #1--Southern Alberta: This new pool wildcat well, which was
spudded by Encal in May 2000, was cased and completed in July 2000 as a
natural gas discovery. In order to enhance production volumes from this new
discovered pool, the operator of the well is planning to reenter the well
and drill into the pay zone horizontally, the preferred method of
completion in the area. NXT Canada elected a combination working interest
and overriding royalty interest with respect to this prospect.
. Dalroy Prospect #2--Southern Alberta: Encal is operating this Basal
Quartz/Crossfield depth test. NXT Canada has a working interest and royalty
interest in this well. The present depth is 1,800 meters.
. Irricana Prospect #1--Southern Alberta: This exploration test, which was
spudded by Encal in July 2000, encountered tight reservoir rock in the
target zone and has been abandoned. NXT Canada elected a combination
working interest and overriding royalty interest with respect to this
prospect.
. Irricana Prospect #2--Southern Alberta: This horizontal new field wildcat
well operated by Encal is drilling ahead at 3,275 meters. NXT Canada has
elected to participate for both a working interest and a royalty interest.
Our rights to use our SFD technology arises from an SFD technology license which
we acquired from the owner and licensor of that technology, Momentum Resources
Corporation, pursuant to which we received the exclusive world-wide right to use
the SFD technology for hydrocarbon exploration purposes. We are obligated under
the terms of that license to pay Momentum Resources Corporation a fee equal to
1% of any "prospect profits" (as that term is defined in the license) which we
may receive on or before December 31, 2000, and 5% of any prospect profits which
we may receive after December 31, 2000. Momentum is controlled and indirectly
owned by our two largest stockholders, Messrs. George Liszicasz and R. Dirk
Stinson. Each of these stockholders currently serve as our directors, and Mr.
Liszicasz currently serves as one of our executive officers.
Since we have not generated operating revenues to date, we should be considered
a development stage enterprise.
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<PAGE>
CAPITAL REQUIREMENTS
We have not generated operating revenues to date, although we have one completed
one test well at our Poblano Prospect, and have drilled and cased two additional
step-out exploratory wells at this location. We anticipate that production will
commence as soon as a twelve-mile pipeline is completed which will connect all
three prospects to a sales system upon the completion of the two step-out
exploratory wells. Assuming no unforeseen delays or changes in production
plans, we anticipate that production will commence by the end of our third
quarter in fiscal 2000. We are also drilling several additional exploratory
wells in fiscal 2000, including the noted step-out exploratory wells, which
should add to any revenues we generate.
Absent revenues, our sole source of cash to fund our operational and capital
investment needs are 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 the following level of expenditures over the twelve-month
period ended June 30, 2001:
. Approximately $2,500,000 for continuing operations including SFD research
and development activities; and
. Up to $3,000,000 in capital expenditures to invest in working interests
with our joint venture partners or acquire drilling interests for our own
account, although the overall amount of these capital expenditures may be
significantly reduced or increased depending upon the success of drilling
efforts over the next six to twelve months.
After taking into consideration the $5,006,483 in working capital we had
available as of June 30, 2000, we have sufficient working capital on hand to
fund our current level of operations, including research and development and
budgeted capital investments in working interests noted above, through mid--
2001. We also intend later this fiscal year to refinance our recently acquired
aircraft, for which we paid cash, in order to raise additional capital for
working interest investments. Our ability in the longer term to continue as a
going concern will be dependent upon our ability to either:
. raise additional capital through our aircraft refinance and through private
or public placements of our securities, or
. our receipt of meaningful amounts of revenues from our joint venture
partners or through our own exploration efforts, which, in either case,
will be dependent upon successful exploration and production activities.
We cannot give you any assurance that any SFD Prospect that is drilled will
ultimately produce commercially viable quantities of oil or gas. We also cannot
give you any assurance that our strategic partners will drill any planned
exploratory well on any accepted SFD Prospects at all or by projected drilling
dates due to the various factors that may affect the drilling process, including
the perceived economics of drilling at any time, the ability of the strategic
partner to obtain drilling rights (where necessary) on favorable terms or at
all, and the ability of the strategic partner to timely schedule a drilling rig
and other drilling services. See "Uncertainties And Other Factors That May
Affect Our Future Results And Financial Condition--Uncertainties And Risk
Factors Generally Relating To Our Company And Our Business," generally, and "--
We Are Reliant Upon Our Joint Venture Partners For Opportunities To Participate
In Exploration Projects" and "--Our Revenues And Cash Flow Will Be Principally
Dependent Upon The Success Of Drilling And Production From Prospects In Which We
Participate Through Agreements With Our Joint Venture Partners," particularly.
For additional and more detailed information relating to our company and our
business, see our annual report on form 10--K (amendment no. 1) for our fiscal
year ended December 31, 1999.
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<PAGE>
RESULTS OF OPERATIONS
Operating Revenues
We had no oil and gas working interest or royalty revenues for our three-month
and six-month interim fiscal periods ended June 30, 2000 and June 30, 1999,
respectively.
Operating Loss
We incurred an operating loss of $674,622 for our three-month interim period
ended June 30, 2000, as compared to $407,520 for the three-month interim period
ended June 30, 1999, representing a $267,102 or 65.5% overall increase. For our
six-month interim period ended June 30, 2000, we incurred an operating loss of
$1,278,350 as compared to $763,384 for the six-month interim period ended June
30, 1999, representing a $514,966, or 67.5%, overall increase.
Relative Changes In Administrative Expense
The $75,831, or 23.5% and $206,645, or 39.8% increases in administrative expense
for our three-month and six-month interim periods ended June 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
increases of $95,844 and $169,617 for our three-month and six-month interim
periods ended June 30, 2000, respectively, over the same periods in fiscal 1999,
were in wages and benefits and payments to consultants.
Relative Changes In Amortization and Depreciation
The $119,260, or 451.9% and $147,855, or 205.9% increases in amortization and
depreciation for the three-month and six-month interim periods ended June 30,
2000, respectively, over these same periods in 1999, were 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.
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 $56,775, or 118.8% and $120,111, or 244.6% increases in
research and development expense for our three-month and six-month interim
periods ended June 30, 2000, respectively, over these same periods in 1999, were
principally attributable to salaries associated with additional research and
development staffing as we focused increased efforts to improve the operation
and efficacy of our SFD Survey System.
Relative Changes In Survey Operations And Data Analysis Expense
Survey and data analysis expenditures consist primarily of any costs we incur
conducting commercial SFD survey activities. These costs can be generally
broken down into the following two components:
. aircraft operating costs, travel expenses and allocable salaries of our
personnel while on survey assignment (after netting any costs our joint
venture partners are required to reimburse us for); and
. allocable salaries incurred by our personnel interpreting SFD data.
Our total survey and data analysis expense, before taking any joint venture
partner reimbursements into account, was $1,609 and $75,220 for our three-month
and six-month interim periods ended June 30, 2000, respectively, as compared to
$47,791 and $92,103 for the same periods in fiscal 1999. The
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decrease in total survey 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 $0 and $61,726 for our three-month interim
periods ended June 30, 2000 and 1999, respectively, was $1,609 for the three-
month period ended June 30, 2000, representing an increase of $15,544, or 111.5%
from the $13,935 recovery for the same period in fiscal 1999.
Our net survey and data analysis expense, after taking into consideration joint
venture partner reimbursements of $20,278 and $86,173 for our first six months
of fiscal 2000 and 1999, respectively, was $54,942 for the six-month period
ended June 30,2000, representing an increase of $49,012,or 826.5% from $5,930
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 $308, or 1.3% and $8,657, or 7.4% decreases in survey support expense for
our three-month and six- month interim periods ended June 30, 2000,
respectively, over these same periods in fiscal 1999, were primarily
attributable to a decrease in additional aircraft improvement expenses,
partially offset by 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 six months of fiscal 2000
as compared to the first six months of fiscal 1999 through the hiring of key
professionals, including executive, geological, geophysical, scientific,
information technology and aviation personnel, and we anticipate that we will
continue to hire similar personnel over the pending fiscal year. We anticipate
that our total operating expenses will continue to significantly increase on a
quarterly basis through the end of fiscal 2000 as a result of the additional
wages and employee benefits to be paid to any additional personnel we may hire
as well as an increased level of operations which will be facilitated by recent
and anticipated hirings.
Other Income And Expense
. Interest Income
We earned $102,713 and $215,543 in interest income for our three-month and
six-month interim periods ended June 30, 2000, respectively, as compared to
$77,259 and $128,115 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 June 30, 2000 were funded principally from:
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o a private placement in May 1996 of 975,000 shares of our common stock
for total gross proceeds of $975,000,
o loans to our company by Messrs. Liszicasz and Stinson in the amount of
$1,000,000 in January 1997, and the subsequent conversion of the
outstanding balance of principal and accrued interest of these loans in
the amount of $1,120,000 into 411,764 shares of our common stock in
February 1998;
o a private placement in April 1998 of 800,000 shares of our convertible
series "A" preferred stock and 200,000 common stock purchase warrants
for total gross proceeds of $6,000,000;
o a private placement in May 1999 of 400,000 shares of our common stock
for total gross proceeds of $6,000,000;
o the exercise 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
o the exercise of employee stock options during fiscal 1999 and the first
six months of fiscal 2000, resulting in gross proceeds to our company of
$645,469.
. Cash Position and Sources And Uses Of Cash
Our cash position as of June 30, 2000 was $5,393,719, as compared to
$9,068,723 as of December 31, 1999. Our cash position as of June 30, 1999
was $10,120,006, as compared to $4,713,822 as of December 31, 1998. The
bulk of our cash is maintained in a United States government and
government-backed securities money-market account.
The $3,675,004 decrease in our cash position as of June 30, 2000 as
compared to December 31, 1999 was attributable to $1,841,490 in cash raised
through financing activities, partially offset by $1,228,273 in cash used
in operating activities, $4,273,464 in cash used in investing activities,
and a $14,757 comprehensive loss due to the effect of exchange rate
changes. The $5,406,184 increase in our cash position as of June 30, 1999
as compared to December 31, 1998 was attributable to $6,093,652 in cash
raised through financing activities, partially offset by $539,067 in cash
used in operating activities, $71,385 in cash used in investing activities
and a $77,016 comprehensive loss due to the effect of exchange rate
changes.
Our operating activities required cash in the amount of $1,228,273 for the
first six months of fiscal 2000, as compared to cash requirements of
$539,067 for the first six months of fiscal 1999. The $1,228,273 in cash
used in operating activities for the first six months of fiscal 2000
reflected our net loss of $1,062,807 for that period, as decreased for non-
cash deductions and a net increase in non-cash working capital balances.
The $539,067 in cash used in operating activities for the first six months
of fiscal 1999 reflected our net loss of $635,209 for that period, as
decreased for non-cash deductions and a net increase in non-cash working
capital balances.
We raised $1,841,490 in cash from financing activities for the first six
months of fiscal 2000, as compared to $6,093,652 in cash raised from
financing activities for the first six months of fiscal 1999. The
$1,841,490 in cash raised through financing activities for the first six
months of fiscal 2000 was comprised of $1,500,000 in gross proceeds from
the exercise of warrants and $341,490 in gross proceeds from the exercise
of employee stock options. The $6,093,652 in cash raised through financing
activities for the first six months of fiscal 1999 was 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.
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We used cash in the amount of $4,273,464 for investing activities for the
first six months of fiscal 2000, as compared to $71,385 in cash used for
investing activities for the first six months of fiscal 1999. The principal
use of cash for the first six months of fiscal 2000 was to acquire drilling
rights in exploratory blocks pursuant to working interest elections
($1,312,419) and to acquire property, equipment, computer software and
leasehold improvements ($3,320,224), including the purchase of a second
survey aircraft for $2,790,000. The principal use of cash for the first six
months of fiscal 1999 was to acquire property, equipment and computer
software ($72,146).
OTHER MATTERS
Foreign Exchange Fluctuations
We recorded a $14,757 foreign currency translation loss for the first six 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 six 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.
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 we may file during the remainder of
fiscal 2000, and
. any current reports on Form 8-K we may file subsequent to this report
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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 $5,157,723 from our inception in October 1995 through June
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 end of the third
quarter of fiscal 2000, at the earliest, assuming our current contemplated
drilling program is successful and there are no complications in drilling
or completing the wells or tying them into a sales or gathering system. We
anticipate that we will continue to incur significant losses on a month-to-
month basis for at least twelve to eighteen months going forward from the
date of this report, notwithstanding our receipt of oil and gas revenues
based upon our internal projections, due to our significant monthly
operating and research and development costs.
. Our Limited Operating History Could Adversely Affect Our Business
We are a recently organized development stage enterprise with an unproven
technology and a limited operating history. Our activities through the date
of this report have encompassed:
o developing our business plan;
o obtaining license rights to our SFD technologies;
o establishing administrative offices and laboratory facilities, and
engaging executive, administrative, scientific, geological, geophysical,
scientific, information technology and aviation personnel;
o developing our SFD technology to a commercial stage;
o acquiring joint venture partners;
o conducting commercial SFD surveys on behalf of our joint venture
partners; and
o successfully drilling oil and gas wells identified through our SFD
technology.
We are subject to all the risks and issues inherent in the establishment
and expansion of a new business enterprise including, among others,
problems of using new and unproven technologies, hiring and training
personnel, acquiring reliable facilities and equipment, and implementing
operational controls. In general, startup businesses are subject to risks
and or levels of risk that are often greater than those encountered by
companies with established operations and relationships. Startups often
require significant capital from sources other than operations. The
management and employees of startup business shoulder the burdens of the
business operations and a workload associated with company growth and
capitalization that is disproportionately greater than that for an
established business. Our limited operating history makes it difficult, if
not impossible, to predict future operating results. We cannot give you
any assurance that we will successfully address these risks. Our failure
to successfully address these risks could have a material, adverse effect
on our business, financial condition and operating results.
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. Our Future Success Is Dependent Upon Our Ability, Through Utilization Of
Our SFD Technology, To Locate Commercially Viable Hydrocarbon Accumulations
For Development By Our Joint Venture Partners.
Our future success is dependent upon our ability, through utilization of
our SFD technology, to locate commercially viable hydrocarbon accumulations
for development by our joint venture partners. Based on our business plan,
we will be dependent on:
o the efficacy of our SFD technology in locating SFD Prospects; and
o the cooperation of, and capital investment by, of our joint venture
partners in exploiting these prospects.
Although the results of our SFD technology as a geologic structural
identification tool have been satisfactorily tested by our joint venture
partners, we cannot give you any assurances that our SFD technology will be
able to consistently locate hydrocarbons or oil and gas prospects, or that
these prospects will be commercially exploitable. We also cannot give you
any assurances that we will be able to discover commercial quantities of
oil and gas, or that our joint venture partners will successfully acquire
and drill properties at low finding costs.
. We Are Reliant Upon Our Joint Venture Partners For Opportunities To
Participate In Exploration Prospects
We will be reliant, at least in the near-term, upon our joint venture
partners for opportunities to participate in exploration prospects, through
overriding royalties or equity participation on a working interest basis
from producing SFD Prospects. We exclusively focus on exploration and the
review and identification of viable prospects through our SFD technology,
and rely upon our joint venture partners to provide and complete all other
project operations and responsibilities, including land acquisition,
drilling, marketing and project administration. As a result, we have only a
limited ability to exercise control over the selection of prospects for
development, drilling or production operations, or the associated costs of
such operations. The success of each project will be dependent upon a
number of factors which are outside our control, or controlled by our joint
venture partners as the project operator, in accordance with the applicable
agreements between our company and the joint venture partners. These
factors include:
o the selection and approval of prospects for lease/acquisition and
exploratory drilling;
o obtaining favorable leases and required permitting for projects;
o the availability of capital resources of the joint venture partner for
land acquisition and drilling expenditures;
o the timing of drilling activity, and the economic conditions at such
time, including then prevailing prices for oil and gas; and
o the timing and amount of distributions from the production.
Our reliance on our joint venture partners, and our limited ability to
directly control project operations, costs and distributions could have a
material adverse effect on the realization of return from our interest in
projects, and on our overall financial condition.
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. Our Revenues And Cash Flow Will Be Principally Dependent Upon The Success
Of Drilling And Production From Prospects In Which We Participate Through
Agreements With Our Joint venture partners
Pursuant to our business plan, our revenues and cash flow will, at least in
the near-term, be principally dependent upon the success of drilling and
production from prospects in which we participate through agreements with
our joint venture partners in the form of an overriding royalty or a
working interest or other participation right. The success of these
prospects will be determined by the location, development and production of
commercial quantities of hydrocarbons. Exploratory drilling is subject to
numerous risks, including the risk that no commercially productive oil and
gas reservoirs will be encountered. The cost to our joint venture partners
to drill, complete and operate wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety
of factors including unexpected formation and drilling conditions, pressure
or other irregularities in formations, equipment failures or accidents, as
well as weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment. Our partners' inability
to successfully locate and drill wells that produce commercial quantities
of oil and gas would have a material adverse effect on our business,
financial position and results of operations.
. Our Future Operating Results May In The Future Fluctuate Significantly
Our operating results may in the future fluctuate significantly depending
upon a number of factors including industry conditions, prices of oil and
gas, rate of drilling success, rates of production from completed wells and
the timing of capital expenditures. This variability could have a material
adverse effect on our business, financial condition and results of
operations. In addition, any failure or delay in the realization of
expected cash flows from initial operating activities could limit our
future ability to continue exploration and to participate in economically
attractive projects.
. Volatility Of Oil And Natural Gas Prices Could Have A Material Adverse
Effect On Our Business
It is impossible to predict future oil and natural gas price movements with
any certainty, as they have historically been subject to wide fluctuations
in response to a variety of market conditions, including:
o relatively minor changes in the supply and demand for oil and natural
gas,
o economic, political and regulatory developments, and
o competition from other sources of energy.
Any extended or substantial decline in oil and gas prices would have a
material adverse effect on:
o our ability to negotiate favorable joint ventures with viable industry
participants;
o the volume of oil and gas that could be economically produced by the
joint ventures in which we participate;
o our cash flow; and
o our access to capital.
We do not currently intend to engage in hedging activities, and may be more
adversely affected by fluctuations in oil and gas prices than other
industry participants that do engage in such activities. Our business,
results of operations and financial condition would be materially and
adversely affected by adverse changes in prevailing oil and gas prices. See
Part I, Item 3, of this report
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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.
. 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.
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. Our Inability To Retain Our Key Managerial, Geological and Geophysical, and
Research and Development Personnel Could Have A Material Adverse Effect On
Our Business
Our success depends to a significant extent on the continued efforts of our
senior management team, which currently is composed of a small number of
individuals, including Mr. George Liszicasz, the inventor of our SFD
technology who is our Chief Executive Officer and who is responsible for
the continuing development of our SFD technology and the interpretation of
SFD data, and Messrs. Daniel C. Topolinsky and James R. Ehrets, our
President/Chief Operations Officer and our Executive Vice President of
Operations, respectively.
The loss of Mr. Liszicasz's services would be extremely difficult to
replace since he is the inventor of, and has intimate knowledge of, the
theoretical basis of the SFD technology, and has also developed the
methodologies used to interpret SFD data, and the loss of his services
would likely have a material adverse effect on our business, results of
operations and financial condition. While we are presently training
personnel to operate our SFD technology and to interpret SFD data, we
cannot give you any assurance that these personnel could fully replace Mr.
Liszicasz with respect to these functions, at least in the short-term.
Moreover, we do not know if we would be able to successfully replicate the
SFD technology in the event of the loss of Mr. Liszicasz.
The loss of Messrs. Topolinsky's and Ehret's services would also be
extremely difficult to replace due to their management skills and their
core knowledge of our SFD technology and business as a result of their
association with our company over the past several years, and their loss
would also likely have a material adverse effect on our business, results
of operations and financial condition.
While we have entered into employment agreements with our senior management
team, Mr. Liszicasz is not obligated--and as a result of his relationships
with Momentum Resources Corporation may in the future be unable--to devote
his entire undivided time and effort to or for our benefit. While we
currently carry a key person life insurance on Mr. Liszicasz, we do not
carry any key person life insurance policies any of our other executive
officers.
Our success also depends, to a lesser extent, on the continued efforts of
our geological interpretive and research and development teams, which are
composed of a small number of individuals. While there are professionals
who could replace these individuals, none of these professionals have any
theoretical or working knowledge of how to interpret SFD data or how our
SFD technology operates, and it would take a significant period of time to
train any replacement personnel. Until such time as we have a fully trained
complement of geological interpretive and research and development and
teams, the loss of any members of these teams could adversely affect the
pace at which we interpret SFD data or effect improvements to our SFD
technology, which could adversely impact our business and results of
operations and financial condition.
. We May Be Unable To Attract The Qualified Managerial, Geological and
Geophysical, and Research and Development Personnel Required To Implement
Our Longer-Term Growth Strategies
Our ability to implement our longer-term growth strategies depends upon our
continuing ability to attract and retain highly qualified geological,
technical, scientific, information management and administrative personnel.
Competition for these types of personnel is intense and we cannot give you
any assurance that we will be able to retain our key managerial,
professional and/or technical employees, or that we will be able to attract
and retain additional highly qualified managerial, professional and/or
technical personnel in the future. Our inability to attract and retain the
necessary personnel could impede our growth.
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. We May Be Unable To Effectively Manage Our Expected Growth
Our success will depend upon the rapid expansion of our business. Expansion
will place a significant strain on our financial, management and other
resources, and will require us, among other things, to:
o change, expand and improve our operating, managerial and financial
systems and controls; and
o improve coordination between our various corporate functions.
We cannot give you any assurance that we will be able to manage the
expansion of our business effectively. Our inability to effectively manage
our growth, including the failure of any new personnel we hire to achieve
anticipated performance levels, would have a material adverse effect on our
business, results of operations and financial position.
. Our Business May Be Adversely Affected By Currency Fluctuation, Regulatory,
Political And Other Risks Associated with International Transactions
We currently operate within the United States and Canada and anticipate we
will also operate outside of these countries in the foreseeable future.
These operations will subject us to several potential risks, including
risks associated with:
o fluctuating exchange rates,
o the regulation by the governments of the United States and Canada as
well as foreign governments of fund transfers and export and import
duties and tariffs; and
o political instability.
We cannot give you any assurance that any of these risks will not have a
material adverse effect upon our business. We do not currently engage in
activities to mitigate the effects of foreign currency fluctuations. If
earnings from international operations increase, our exposure to
fluctuations in foreign currencies may increase, and we may utilize forward
exchange rate contracts or engage in other efforts to mitigate foreign
currency risks. We can give no you assurance as to the effectiveness of
these efforts in limiting any adverse effects of foreign currency
fluctuations on our international operations and our overall results of
operations.
. Impact Of Governmental and Environmental Regulation On Our Business
o SFD Survey Flight Operations
The operation of our business, namely, conducting aerial SFD surveys and
interpreting SFD data, is not subject to material governmental or
environmental regulation with the exception of flight rules promulgated
by the Federal Aviation Administration and Transport Canada governing
the use of private aircraft, including rules relating to low altitude
flights.
o Oil And Gas Exploration And Development Projects
The oil and natural gas industry in general is subject to extensive
controls and regulations imposed by various levels of the federal and
state governments in the United States and federal and provincial
governments in Canada. In particular, oil and gas exploration and
production is subject to laws and regulations governing environmental
quality and pollution control, limits on allowable rates of production
by well or proration unit, and other similar regulations. Laws and
regulations generally are intended to prevent waste of oil and natural
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gas; protect rights to produce oil and natural gas between owners in a
common reservoir, control the amount of oil and natural gas produced by
assigning allowable rates of production, and control contamination of
the environment. Environmental regulations affect our operations on a
daily basis. Public interest in the protection of the environment has
increased dramatically in recent years. Drilling in certain areas has
been opposed by environmental groups and, in certain areas, has been
restricted. We believe that the trend of more expansive and stricter
environmental legislation and regulations will continue.
We do not expect that any of these government controls or regulations
will affect projects in which we participate in a manner materially
different than they would affect project of similar size or scope of
operations. All current legislation is a matter of public record and we
are not able to accurately predict what additional legislation or
amendments may be enacted. Governmental regulations may be changed from
time to time in response to economic or political conditions. Any laws
enacted or other governmental action taken which prohibit or restrict
onshore and offshore drilling or impose environmental protection
requirements that result in increased costs to the oil and gas industry
in general would have a material adverse effect on our business, results
of operations and financial position.
. Impact Of Operating Hazards On Our Business
o SFD Survey Flight Operations
The operation of our SFD survey aircraft is subject to the usual hazards
incident to general and low level flight operations. These hazards can
cause personal injury and loss of life, as well as severe damage to and
destruction of property. While we maintain insurance coverage against
some, but not all, operating risks associated with the operation of our
aircraft, we cannot predict the continued availability of insurance
coverage or the availability of insurance at premium levels that justify
its purchase, nor can we give any assurance that any claim would not
exceed our policy limits. If we were unable to procure insurance for our
flight operations at an acceptable cost, the occurrence of significant
adverse aircraft accident not fully insured or indemnified against could
have a material, adverse effect on our business, financial condition and
operating results. Similarly, a judgment or settlement in excess of our
policy limits could also have a material, adverse effect on our
business, financial condition and operating results.
o Oil And Gas Exploration And Development Projects
The oil and gas exploration and development projects in which we
participate through our joint venture partners will also be subject to
the usual hazards incident to the drilling of oil and gas wells,
including the risk of fire, explosions, blow-out, pipe failure, casing
collapse, abnormally pressured formations and environmental hazards such
as oil spills, gas leaks, ruptures and discharges of toxic gases. In
addition to the foregoing, offshore operations are subject to the
additional hazards of marine operations, such as capsizing, collision
and adverse weather and sea conditions. These hazards can cause personal
or loss of life, severe damage to or destruction of property, natural
resources and equipment, pollution or other environmental damage, clean-
up responsibilities, regulatory investigation and penalties and
suspension of operations.
The project operator will, in accordance with prevailing industry
practice, maintain insurance against some, but not all, of these risks.
The insurance maintained by the project operator generally would not
cover claims relating to failure of title to oil and gas leases,
trespass during survey acquisition or surface damage attributable to
seismic operations, or business interruption, nor would it protect
against loss of revenues due to well failure. There can be no assurance
that any insurance obtained by the project operating covering claims
related to worker's compensation, comprehensive general liability for
bodily injury and property damage,
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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 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.
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. You May Become Subject To The Penny Stock Rules If Our Stock Price Declines
To Less Than $5
Since our common stock is not listed on a national stock exchange or quoted
on the Nasdaq Market, it will become subject, in the event the market price
for these shares declines to less than $5 per share, to a number of
regulations known as the "penny stock rules." The penny stock rules require
a broker-dealer to deliver a standardized risk disclosure document prepared
by the Securities and Exchange Commission, to provide the customer with
additional information including current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in
the transaction, monthly account statements showing the market value of
each penny stock held in the customer's account, and to make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
To the extent these requirements may be applicable they will reduce the
level of trading activity in the secondary market for our common stock and
may severely and adversely affect the ability of broker-dealers to sell our
common stock.
. Our Common Stockholders Should Not Expect To Receive A Liquidation
Distribution
If we were to wind-up or dissolve our company and liquidate and distribute
our assets, the holders of our common stock would share ratably in our
assets only after we satisfy any amounts we would owe to our creditors and
any amounts we would owe to our series "A" preferred stockholders as a
liquidation preference ($7.50 per share, or $6,000,000 in the aggregate).
If our liquidation or dissolution were attributable to our inability to
profitably operate our business, then it is likely that we would have
material liabilities at the time of liquidation or dissolution.
Accordingly, we cannot give you any assurance that sufficient assets will
remain available after the payment of our creditors and preferred
stockholders to enable you to receive any liquidation distribution with
respect to any shares of our common stock you may hold.
. Two Of Our Principal Stockholders Control Our Company
Messrs. George Liszicasz and R. Dirk Stinson, our two principal
stockholders and two of our directors, beneficially own over two-thirds of
our common stock, and will therefore have the power, as a group, to elect a
majority of our Board of Directors. Our Board, in turn, has the power to
appoint our officers and to determine, in accordance with their fiduciary
duties and the business judgment rule, our direction, objectives and
policies, such as:
o our business expansion or acquisition policies;
o whether we should raise additional capital through financing or equity
sources, and in what amounts;
o whether we should retain cash reserves for future product development,
or distribute them as a dividend, and in what amounts;
o whether we should sell all or a substantial portion of our assets, our
should merge or consolidate with another corporation; and
o transactions which may cause or prevent a change in control or the
winding up and dissolution of our company.
An investment in our common stock will entail entrusting these and similar
decisions to our present management subject, of course, to their fiduciary
duties and the business judgment rule.
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. There Is An Inherent Conflict In Interest Arising As a Result Of the
Relationship Between Our Two Principal Stockholders And The Licensor Of Our
SFD Technology
Messrs. George Liszicasz and R. Dirk Stinson indirectly own and control
both our company and Momentum Resources Corporation, which has granted us
an exclusive license to identifying oil and natural gas prospects using the
SFD data while reserving the exclusive right to use the SFD technology for
purposes other than oil and natural gas exploration. Although Mr. Liszicasz
has entered into an employment agreement with us he is not obligated, and
as a result of his relationships with Momentum may in the future not be
able, to devote his entire undivided time and effort to or for our benefit.
As a result of the foregoing relationships, certain conflicts of interests
between our company and one or more of Momentum and Messrs. Liszicasz and
Stinson may directly or indirectly arise, including the following:
o Mr. Liszicasz's potential inability to devote his undivided time and
attention to our affairs; and
o the proper exercise by Messrs. Liszicasz or Stinson of their fiduciary
duties on our behalf as directors and controlling stockholders of our
company in connection with any matters concerning Momentum such as, by
way of example and not limitation:
- disputes regarding the validity, scope or duration of the SFD
Technology License;
- the exploitation of corporate opportunities;
- rights to proprietary property and information;
- maintenance of confidential information as between entities; and
- potential competition between our company and Momentum.
While Messrs. Liszicasz and Stinson and our company have each executed
certain disclosures and consents relating to these conflicts, these
disclosures and consents will not remediate these conflicts, but will
merely release Messrs. Liszicasz and Stinson from liability as a result of
the conflicts so long as they use reasonable efforts to minimize the
conflicts. In the event any of these conflicts prove to be irreconcilable,
Messrs. Liszicasz may be forced to resign his positions with our company.
Our Statements About Anticipated Events Or Future Trends May Prove To Be
Inaccurate
In this report we have made a number of statements, which we refer to as
"forward-looking statements," generally relating to our expectations or
speculations as to future events and our observations as to trends and factors
that may impact our future operating results. You can generally identify any
forward-looking statements contained in this report through words such as
"anticipate," "believe," "estimate," "expect," "budget" and "project" and
similar expressions. Forward-looking statements that contained in this report,
for example, include statements relating to:
. the amount and character of future oil and gas revenues we may receive, the
timing of receipt of revenues, and the timing of break-even, including, by
way of example and not limitation, those statements contained in that
section in Part I, Item 2 of this report captioned "Management's Discussion
And Analysis Of Financial Condition And Results Of Operations--Overview;"
and Part I, Item 2, of this report captioned "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations--Capital
Requirements;"
. the amount and character of expenses we may incur, and the timing of these
expenditures including, by way of example and not limitation, those
statements contained in those sections in Part I, Item 2, of this report
captioned "Management's Discussion And Analysis Of Financial
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Condition And Results Of Operations--Capital Requirements" and
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations--Results Of Consolidated Operations--Expectations Relative To
Future Expense Levels;" and
. the amount and composition of our capital expense budget, and the timing of
these capital outlays including, by way of example and not limitation,
those statements contained in those sections in Part I, Item 2, of this
report captioned "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations--Capital Requirements" and
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations--Results Of Consolidated Operations--Expectations Relative To
Future Expense Levels."
Whenever you read any forward looking statement contained in this report, you
should be aware of and take into consideration that:
. the forward-looking statement merely reflects the current expectations and
speculation of our management as to anticipated events or observations
relating to future trends based, in part, upon currently available
information and our current business plan, and
. actual results from these future events may differ materially from the
results expected or speculated or trends observed as expressed in, or
implied by, the forward-looking statement, as a result of changes in
circumstances and events and other uncertainties and risks, including:
o changes in our business plan and corporate strategies or that of our
joint venture partners;
o delays in our ability to conduct and complete SFD surveys or interpret
SFD data,
o delays on the part of our joint venture partners in planning SFD survey
activities, in conducting geologic and geophysical evaluations of
recommended anomalies, in acquiring drilling rights, in conducting
exploratory drilling activities and completing wells, and in connecting
producing wells to pipelines and other production infrastructure; or
o the occurrence of the various types of uncertainties and risk factors
described above in this section as well as those described in Part I,
Item 3, of this report captioned "Quantitative and Qualitative
Disclosure About Market Risk;" and
. the forward-looking statement must, in any event, be considered in context
with the various disclosures concerning our company and our business made
in this report as well as other reports we periodically file with the
Securities and Exchange Commission, including our annual report on form
10--K (amendment no. 1) for our fiscal year ended December 31, 1999.
As a consequence of the forgoing factors, you are cautioned not to put undue
reliance on any forward-looking statement contained in this report.
We are not obligated to update or revise any forward looking statement contained
in this report to reflect new events or circumstances except to the extent
required by law. You are also cautioned that we intend for all forward-looking
statements contained in this report to be construed as "forward-looking
statements" within the meaning Section 21E of the United States Securities
Exchange Act of 1934, which establishes a safe-harbor from private actions for
forward-looking statements as defined by Section 21E.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Oil And Gas Price Fluctuations
Our primary market risks will be related to market changes in oil and gas prices
(See Item I, Item 2, captioned "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations--
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Uncertainties And Other Factors That May Affect Our Future Results And Financial
Condition--Risks Relating To The Company And Its Business--Volatility Of Oil And
Natural Gas Prices"). Since our prospective royalty revenues will be tied to the
price at which our joint venture partners sell oil and gas on the world market,
any fluctuations in these prices will directly and proportionately impact our
royalty income base (i.e., a 1% increase or decrease in oil or gas prices would
result in a corresponding 1% increase or decrease in our oil or gas royalties).
Should we elect a working interest in lieu of a royalty interest, our working
interest revenue base would be similarly affected, except that this affect would
not necessarily be proportional since production and marketing costs would most
likely remain the same. For example, in the case of a decline in oil and gas
prices where production and marketing costs are unaffected, the decline in our
working interest revenues would most likely be greater, in percentage terms,
than the decline in oil and gas prices.
We do not anticipate that any decline in world oil and gas prices would
adversely affect our operations (i.e., force our company or our joint venture
partners to slow down or cut-back SFD survey or interpretation operations or our
staff) insofar as a primary benefit of the SFD technology is to reduce finding
costs, which benefit becomes more important as oil and gas prices decline. A
decline in oil and gas prices could, however, force our joint venture partners
to curtail exploration drilling operations since these operations are ordinarily
funded out of available cash flow which, in turn, is dependent upon oil and gas
prices. This eventuality would adversely affect our future cash flows since
these prospects would not be drilled until the joint venture partner obtained
sufficient capital. (Even if exploration activities are curtailed, however, a
decline in oil and gas prices raises opportunities to acquire and "bank" SFD-
qualified prospects at lower acquisition prices, which can then be drilled when
oil and gas prices increase).
A decline in oil and gas prices could also lead our joint venture partners to
"shut-in" an existing producing well (primarily "marginal producing wells") on
the basis that the decline in price no longer make the well economic to operate.
In such an event we would no longer receive royalty or working interest revenues
from the shut-in well.
CURRENCY FLUCTUATIONS
An additional significant market risk relates to foreign currency fluctuations
between American and Canadian dollars. Since our royalty or working interest
revenues generated by our Canadian-based joint venture partners will be
denominated in Canadian currency, our financial position could be adversely
affected by 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 engage in other efforts to mitigate these
foreign currency risks. If entered into, there can be
We cannot give you any assurance that the use of exchange rate contracts or
other mitigation efforts would effectively limit any adverse effects of foreign
currency fluctuations on our Company's international operations and our overall
results of operations.
INTEREST RATE FLUCTUATIONS
We currently 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.
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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
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
27 Financial Data Table
REPORTS ON FORM 8--K
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this quarterly report on form 10--Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated at Calgary, Alberta, Canada, this 13th day of August, 2000.
ENERGY EXPLORATION TECHNOLOGIES
By: /s/ George Liszicasz
-------------------------------------
George Liszicasz
Chief Executive Officer
(principal executive officer)
By: /s/ Daniel C. Topolinsky
-------------------------------------
Daniel C. Topolinsky
President and Chief Operating Officer
(principal executive officer)
By: /s/ John M. Woodbury, Jr.
-------------------------------------
John M. Woodbury, Jr.,
Chief Financial Officer
(principal accounting officer)
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