-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PZk8rCUUNb8CxzdXtNR2cA7zRXsSJDWFIhj5Z4APYCayoOk89vfS5Jlw9un5LyzF AGwI59uNvwGvzWw397MSCQ== /in/edgar/work/20000814/0000944209-00-001316/0000944209-00-001316.txt : 20000921 0000944209-00-001316.hdr.sgml : 20000921 ACCESSION NUMBER: 0000944209-00-001316 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENERGY EXPLORATION TECHNOLOGIES / CENTRAL INDEX KEY: 0001009922 STANDARD INDUSTRIAL CLASSIFICATION: [1311 ] IRS NUMBER: 611126904 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24027 FILM NUMBER: 696037 BUSINESS ADDRESS: STREET 1: 840 SEVENTH AVENUE SW STREET 2: SUITE 750 T2P 3G2 CITY: CALGARY ALBE T2P 3G2 STATE: A2 ZIP: 99204 MAIL ADDRESS: STREET 1: 840 SEVENTH AVE SW STREET 2: SUITE 750 T2P 3G2 CITY: CALGARY ALBERTA STATE: A2 ZIP: 90035 FORMER COMPANY: FORMER CONFORMED NAME: PINNACLE OIL INTERNATIONAL INC DATE OF NAME CHANGE: 20000626 FORMER COMPANY: FORMER CONFORMED NAME: ENERGY EXPLORATION TECHNOLOGIES DATE OF NAME CHANGE: 20000616 10-Q 1 0001.txt FORM 10-Q 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 ================================================================================ ENERGY EXPLORATION TECHNOLOGIES QUARTERLY REPORT ON FORM 10--Q TABLE OF CONTENTS
Page ---- 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
-ii- 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)
- -------------------------------------------------------------------------------------------------------------------------- As of ---------------------------------- June 30, December 31, 2000 1999 ----------- ------------ 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 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets -1- ENERGY EXPLORATION TECHNOLOGIES (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF LOSS (Unaudited) (Expressed in U.S. Dollars) - --------------------------------------------------------------------------------
October 20, Three months ended Six months ended 1995 June 30, June 30, (inception) to ----------------------------- -------------------------- June 30, 2000 2000 1999 2000 1999 (cumulative) ----------- ------------ ------------ ----------- ------------- 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 =========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements of loss -2- ENERGY EXPLORATION TECHNOLOGIES (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(DEFICIT) (Unaudited) (Expressed in U.S. Dollars)
- ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Series "A" Deficit Other Convertible Common Stock Accumulated Compre- Common Stock Preferred Stock Warrants Additional During the hensive ------------------- --------------- ----------------- Paid-in Development Loss Shares Amount Shares Amount Number Amount Capital Stage ----------- ---------- ------- ------- ------ ------- ---------- ----------- ----------- 1995: Issued at inception for cash at $0.001 per share on October 20, 1995.................. $ -- 5,000,000 $ 5,000 -- $ -- -- $ -- $ -- $ -- Net loss for fiscal 1995........... -- -- -- -- -- -- -- -- (53,696) Net other comprehensive loss for fiscal 1995.............. -- -- -- -- -- -- -- -- -- ---- ---------- ------- ------- ---- ------- ---------- ----------- ----------- Balance -- December 31, 1995..... -- 5,000,000 5,000 -- -- -- -- -- (53,696) 1996: Issued on reverse acquisition on January 30, 1996............... -- 5,968,281 5,968 -- -- -- -- (5,968) -- Issued for cash at $1 per share on May 29, 1996................... -- 975,000 975 -- -- -- -- 967,775 -- Net loss for fiscal 1996........... -- -- -- -- -- -- -- -- (475,578) Net other comprehensive loss for fiscal 1996................... -- -- -- -- -- -- -- -- -- ---- ---------- ------- ------- ---- ------- ---------- ----------- ----------- Balance -- December 31, 1996..... -- 11,943,281 11,943 -- -- -- -- 961,807 (529,274) 1997: Issued for services at $2.31 1/2 per share on July 1, 1997......... -- 71,938 72 -- -- -- -- 166,469 -- Net loss for fiscal 1997........... -- -- -- -- -- -- -- -- (913,321) Net other comprehensive loss for fiscal 1997................... -- -- -- -- -- -- -- -- -- ---- ---------- ------- ------- ---- ------- ---------- ----------- ----------- Balance -- December 31, 1997..... -- 12,015,219 12,015 -- -- -- -- 1,128,276 (1,442,595) 1998: Issued on conversion of promissory notes at $2.72 per share on February 1, 1998 (1), net of issuance costs.................... -- 411,764 412 -- -- -- -- 1,119,588 -- 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)
[continued on next page] -3- ENERGY EXPLORATION TECHNOLOGIES (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (Unaudited) (Expressed in U.S. Dollars) - --------------------------------------------------------------------------------
Accumulated Series "A" Deficit Other Convertible Common Stock Accumulated Compre- Common Stock Preferred Stock Warrants Additional During the hensive ------------------- --------------- ------------------ Paid-in Development Loss Shares Amount Shares Amount Number Amount Capital Stage ----------- ---------- ------- ------- ------ ------- ---------- ----------- ----------- 1999: Issued for cash at $15 per share on May 17, 1999, net of issuance costs................... $ -- 400,000 $ 400 -- $ -- -- $ -- $ 5,998,252 $ -- Options exercised for cash at prices between $8.12 1/2 and $9.50 per share during 1999...... -- 35,000 35 -- -- -- -- 303,979 -- Cancelled on October 14, 1999..... -- (5,167) (5) -- -- -- -- (11,570) 11,575 Net loss for fiscal 1999.......... -- -- -- -- -- -- -- -- (1,534,513) Net other comprehensive loss for fiscal 1999.................. (29,403) -- -- -- -- -- -- -- -- -------- ---------- ------- ------- ---- -------- ---------- ----------- ----------- Balance -- December 31, 1999...... (29,403) 12,856,816 12,857 800,000 800 200,000 1,132,000 16,330,692 (7,319,341) 2000: Warrants exercised for cash at $7.50 per share on 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) ======== ========== ======= ======= ==== ======== ========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements of shareholders' equity (deficit) -4- ENERGY EXPLORATION TECHNOLOGIES (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Expressed in U.S. Dollars)
- -------------------------------------------------------------------------------------------------------------------------- Six months Ended Oct. 20, 1995 June 30, (inception) to --------------------------- June 30, 2000 2000 1999 (cumulative) ----------- ----------- --------------- 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 =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements of cash flows -5- 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- 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- . 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- Aircraft........................................................... 15% Computer equipment................................................. 30% Computer software.................................................. 100% Equipment.......................................................... 20% Furniture and fixtures............................................. 20% Leasehold improvements............................................. 20% Tools.............................................................. 20% Vehicles........................................................... 30%
When we retire or otherwise dispose of our other capitalized property and equipment, we remove their cost and related accumulated depreciation or amortization from our accounts, and record any resulting gain or loss in the results of operations for the period. Our management periodically reviews the carrying value of our property and equipment to ensure that any permanent impairment in value is recognized and reflected in our results of operations. (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- (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. -10- 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:
Six months Ended June 30, As of ----------------------- June 30, 2000 1999 2000 ---------- -------- ---------- Acquisition costs...................... $ 36,757 $ -- $ 441,342 Exploration costs...................... 1,275,662 -- 1,646,236 Development costs...................... -- -- -- Capitalized interest................... -- -- -- ---------- ----- ---------- $1,312,419 $ -- $2,087,578 ========== ===== ==========
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 -11- 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:
As of ----------------------------- June 30, December 31, 2000 1999 ---------- ------------ 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 ========== =========
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. -12- 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. -13- . 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. -14- We have summarized below all outstanding options under the Plans as of June 30, 2000:
June 30, 2000 Grant Exercise -------------------------- Type of Option Date Price Outstanding Vested - ------------------------------------------- --------- ----------------- ----------- ------- Director Non-qualified..................... 5-12-97 $ 5.81 75,000 75,000 Director Non-qualified..................... 5-20-97 5.25 90,000 90,000 Employee Incentive......................... 11-24-97 9.50 37,500 7,500 Director Non-qualified..................... 3-10-98 8.31 45,000 45,000 Employee Incentive......................... 5-12-98 8.25 30,000 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 ========= =======
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. -15- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion of our consolidated financial condition and the results of operations should be read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements included in Part I, Item 1, of this report. The information set forth below in this report is current as of the date of this report, 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 -16- have been conducted under an exploration joint venture agreement with Encal Energy Ltd., a Calgary-based exploration and production company. Under this agreement we conduct aerial surveys to identify prospects in exploration areas in Canada selected by Encal. We have also recently commenced conducting exploration activities in western Canada for our own account. We anticipate developing these prospects through a joint venture with either Encal or another Canadian exploration company. The joint venture agreements we have entered into with our joint venture partners 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. -17- . 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. -18- 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. -19- 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 -20- 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: -21- 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. -22- 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 -23- 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. -24- . 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. -25- . 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 -26- 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. -27- . 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. -28- . 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 -29- 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, -30- 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. -31- . 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. -32- . 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 -33- 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-- -34- 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. -35- 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 -36- 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) -37- EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ENERGY EXPLORATION TECHNOLOGIES' CONSOLIDATED BALANCE SHEET AT JUNE 30, 2000, AND ENERGY EXPLORATION TECHNOLOGIES' CONSOLIDATED STATEMENT OF LOSS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 5,393,719 0 551,906 0 0 6,052,400 5,849,332 507,991 11,937,448 1,045,917 0 0 800 13,085 0 11,937,448 0 0 0 (1,278,350) 215,543 0 0 (1,062,807) 0 (1,062,807) 0 0 0 (1,062,807) (0.08) (0.08)
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