UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
Commission File No. 000-25386
FX ENERGY, INC.
(Exact name of registrant as specified in its charter)
NEVADA 87-0504461
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
(Address of principal executive offices and zip code)
(801) 486-5555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The number of shares
of $0.001 par value common stock outstanding as of August 4, 2006, was
35,162,029.
FX ENERGY, INC. AND SUBSIDIARIES
Form 10-Q for the Quarterly Period Ended June 30, 2006
TABLE OF CONTENTS
Item Page
- --------- --------
Part I. Financial Information
1 Financial Statements
Consolidated Balance Sheets.................................... 3
Consolidated Statements of Operations and Comprehensive Loss... 5
Consolidated Statements of Cash Flows.......................... 6
Notes to the Consolidated Financial Statements................. 7
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 11
3 Quantitative and Qualitative Disclosures about Market Risk......... 17
4 Controls and Procedures............................................ 17
Part II. Other Information
1A Risk Factors....................................................... 18
4 Submission of Matters to a Vote of Security Holders................ 18
6 Exhibits........................................................... 19
-- Signatures......................................................... 19
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
June 30, December 31,
2006 2005
(Unaudited)
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 6,610 $ 2,390
Marketable securities............................................... 13,698 26,479
Accounts receivable:
Accrued oil sales................................................. 503 626
Joint interest and other receivables.............................. 2,365 1,449
Input VAT receivable.............................................. 1,989 1,965
Inventory........................................................... 96 96
Other current assets................................................ 156 270
------------------ -----------------
Total current assets.............................................. 25,417 33,275
------------------ -----------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved............................................................ 16,885 15,918
Unproved.......................................................... 319 304
Other property and equipment...................................... 4,443 4,262
------------------ -----------------
Gross property and equipment...................................... 21,647 20,484
Less accumulated depreciation, depletion and amortization......... (6,345) (5,844)
------------------ -----------------
Net property and equipment.................................... 15,302 14,640
------------------ -----------------
Other assets:
Certificates of deposit............................................. 382 356
------------------ -----------------
Total assets.......................................................... $ 41,101 $ 48,271
================== =================
-- Continued --
The accompanying notes are an integral part of the consolidated financial statements.
3
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
-- Continued --
June 30, December 31,
2006 2005
(Unaudited)
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 1,891 $ 4,110
Accrued liabilities................................................. 787 1,450
----------------- ------------------
Total current liabilities......................................... 2,678 5,560
----------------- ------------------
Long-term liabilities:
Asset retirement obligation ....................................... 454 431
----------------- ------------------
Total liabilities................................................. 3,132 5,991
----------------- ------------------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized,
no shares issued as of June 30, 2006 and December 31, 2005........ -- --
Common stock, $0.001 par value, 100,000,000 shares authorized,
35,162,029 and 35,097,279 issued and outstanding as of
June 30, 2006 and December 31, 2005, respectively................. 35 35
Additional paid-in capital.......................................... 124,160 125,216
Deferred compensation............................................... -- (2,975)
Accumulated other comprehensive loss................................ (44) (58)
Accumulated deficit................................................. (86,182) (79,938)
----------------- ------------------
Total stockholders' equity........................................ 37,969 42,280
----------------- ------------------
Total liabilities and stockholders' equity........................... $ 41,101 $ 48,271
================= ==================
The accompanying notes are an integral part of the consolidated financial statements.
4
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(in thousands, except per share amounts)
For the three months For the six months
ended June 30, ended June 30,
--------------------------------- --------------------------------
2006 2005 2006 2005
---------------- ---------------- --------------- ----------------
Revenues:
Oil and gas sales................................. $ 1,229 $ 898 $ 2,290 $ 1,736
Oilfield services................................ 908 105 932 155
---------------- ---------------- --------------- ----------------
Total revenues.................................. 2,137 1,003 3,222 1,891
---------------- ---------------- --------------- ----------------
Operating costs and expenses:
Lease operating expenses.......................... 599 600 1,286 1,229
Geological and geophysical costs.................. 1,021 518 3,063 1,215
Oilfield services costs........................... 581 98 713 187
Depreciation, depletion and amortization (DD&A)... 287 176 501 340
Accretion expense................................. 11 11 23 22
Stock compensation (G&A).......................... 706 20 1,403 38
General and administrative (G&A).................. 1,159 1,304 2,839 2,781
---------------- ---------------- --------------- ----------------
Total operating costs and expenses.............. 4,364 2,727 9,828 5,812
---------------- ---------------- --------------- ----------------
Operating loss...................................... (2,227) (1,724) (6,606) (3,921)
---------------- ---------------- --------------- ----------------
Other income:
Interest and other income......................... 172 154 362 460
---------------- ---------------- --------------- ----------------
Total other income.............................. 172 154 362 460
---------------- ---------------- --------------- ----------------
Net loss (2,055) (1,570) (6,244) (3,461)
Other comprehensive income (loss)
Increase (decrease) in market value of
available for sale marketable securities.......... (4) 157 14 14
---------------- ---------------- --------------- ----------------
Comprehensive loss $ (2,059) $ (1,413) $ (6,230) $ (3,447)
================ ================ =============== ================
Basic and diluted net loss per common share......... $ (0.06) $ (0.04) $ (0.18) $ (0.10)
================ ================ =============== ================
Basic and diluted weighted average number of shares
outstanding....................................... 35,162 34,643 35,136 34,583
================ ================ =============== ================
The accompanying notes are an integral part of the consolidated financial statements.
5
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
For the Six Months Ended June 30,
------------------------------------
2006 2005
----------------- ------------------
Cash flows from operating activities:
Net loss........................................................... $ (6,244) $ (3,461)
Adjustments to reconcile net loss to net cash used in
operating activities:
Accretion expense.............................................. 23 22
Depreciation, depletion and amortization....................... 501 340
Stock issued for services...................................... 516 263
Stock compensation (G&A)....................................... 1,403 37
Loss on asset disposal......................................... -- 18
Increase (decrease) from changes in working capital items:
Accounts receivable.............................................. (817) (111)
Inventory........................................................ -- (4)
Other current assets............................................. 88 124
Accounts payable and accrued liabilities......................... (2,297) (944)
----------------- ------------------
Net cash used in operating activities.......................... (6,827) (3,716)
----------------- ------------------
Cash flows from investing activities:
Additions to oil and gas properties................................ (1,567) (3,246)
Additions to other property and equipment.......................... (181) (353)
Additions to marketable securities................................. (405) (326)
Proceeds from maturities of marketable securities.................. 13,200 4,500
----------------- ------------------
Net cash provided by investing activities........................ 11,047 575
----------------- ------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants............... -- 826
----------------- ------------------
Net cash provided by financing activities........................ -- 826
----------------- ------------------
Increase (decrease) in cash and cash equivalents..................... 4,220 (2,315)
Cash and cash equivalents at beginning of period..................... 2,390 3,784
----------------- ------------------
Cash and cash equivalents at end of period........................... $ 6,610 $ 1,469
================= ==================
The accompanying notes are an integral part of the consolidated financial statements.
6
FX ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1: Basis of Presentation
The interim financial data are unaudited; however, in the opinion of
the management of FX Energy, Inc. and subsidiaries ("FX Energy" or the
"Company"), the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. The interim financial statements should be read in conjunction
with FX Energy's annual report on Form 10-K for the year ended December 31,
2005, and Form 10-Q for the quarter ended March 31, 2006, including the
financial statements and notes thereto.
The consolidated financial statements include the accounts of FX Energy
and its wholly-owned subsidiaries and FX Energy's undivided interests in Poland.
All significant intercompany accounts and transactions have been eliminated in
consolidation. At June 30, 2006, FX Energy owned 100% of the voting stock of all
of its subsidiaries.
Note 2: Net Income (Loss) Per Share
Basic earnings per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing net income (loss) by the sum of the weighted
average number of common shares and the effect of dilutive unexercised stock
options and warrants. Options, including restricted stock purchase rights, to
purchase 3,491,083 and 3,642,332 shares of common stock, at prices ranging from
$0.00 to $10.65 per share with a weighted average exercise price of $4.72 and
$5.53 per share, were outstanding at June 30, 2006 and 2005, respectively.
Warrants to purchase 3,505,373 and 3,517,873 shares of common stock, at prices
ranging from $3.60 to $3.75 per share with a weighted average exercise price of
$3.65 per share, were outstanding at June 30, 2006 and 2005, respectively. No
options or warrants were included in the computation of diluted net loss per
share for the periods ended June 30, 2006 and 2005, because the effect would
have been antidilutive.
Note 3: Income Taxes
FX Energy recognized no income tax benefit from the net losses
generated in the first six months of 2006 and 2005. Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," requires
that a valuation allowance be provided if it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The Company's
ability to realize the benefit of its deferred tax asset will depend on the
generation of future taxable income through profitable operations and the
expansion of exploration and development activities. The market and capital
risks associated with achieving the above requirement are considerable,
resulting in the Company's conclusion that a full valuation allowance be
provided.
Note 4: Business Segments
FX Energy operates within two segments of the oil and gas industry: the
exploration and production segment ("E&P") and the oilfield services segment.
Identifiable net property and equipment are reported by business segment for
management reporting and reportable business segment disclosure purposes.
Current assets, other assets, current liabilities and long-term debt are not
allocated to business segments for management reporting or business segment
7
disclosure purposes. Reportable business segment information for the three
months ended June 30, 2006, the six months ended June 30, 2006, and as of June
30, 2006, is as follows (in thousands):
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P(1) Services Items(2) Total
--------------- --------------- --------------- ---------------
Three months ended June 30, 2006:
Revenues......................................... $ 1,229 $ 908 $ -- $ 2,137
Net income (loss)(1, 2).......................... (607) 289 (1,737) (2,055)
Six months ended June 30, 2006:
Revenues......................................... $ 2,290 $ 932 $ -- $ 3,222
Net income (loss)(1, 2).......................... (2,427) 149 (3,966) (6,244)
As of June 30, 2006:
Identifiable net property and equipment(3)....... $ 14,546 $ 460 $ 296 $ 15,302
- --------------------
(1) E&P revenues and costs recorded in Poland for the second quarter include
$67 in gas sales, $860 in geological and geophysical costs, $58 in DD&A,
and $35 in lease operating costs. E&P revenues and costs recorded in Poland
for the first six months include $133 in gas sales, $2,865 in geological
and geophysical costs, 58 in DD&A, and $61 in lease operating costs.
(2) Net loss reconciling items for the second quarter include $1,159 of general
and administrative costs, $706 of non-cash stock compensation expense, $172
of other income, and $44 of corporate DD&A. Nonsegmented expenses for the
second quarter include $113 in general and administrative costs incurred in
Poland. Net loss reconciling items for the first six months include $2,839
of general and administrative costs, $1,403 of non-cash stock compensation
expense, $362 of other income, and $86 of corporate DD&A. Nonsegmented
expenses for the first six months include $204 in general and
administrative costs incurred in Poland.
(3) Identifiable net property and equipment not associated with a segment
consists of $296 of corporate office equipment, hardware and software.
Reportable business segment information for the three months ended June 30,
2005, the six months ended June 30, 2005, and as of June 30, 2005, is as follows
(in thousands):
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P(1) Services Items(2) Total
--------------- --------------- --------------- ---------------
Three months ended June 30, 2005:
Revenues......................................... $ 898 $ 105 $ -- $ 1,003
Net loss(1, 2)................................... (322) (49) (1,199) (1,570)
Six months ended June 30, 2005:
Revenues......................................... $ 1,736 $ 155 $ -- $ 1,891
Net loss(1, 2)................................... (892) (143) (2,426) (3,461)
As of June 30, 2005:
Identifiable net property and equipment(3)....... $ 14,770 $ 510 $ 352 $ 15,632
- --------------------
(1) E&P costs recorded in Poland for the second quarter include $517 in
geological and geophysical costs and $1 in lease operating costs. E&P costs
recorded in Poland for the first six months include $1,209 in geological
and geophysical costs and $1 in lease operating costs.
(2) Net loss reconciling items for the second quarter include $1,304 of general
and administrative costs, $12 of non-cash stock compensation expense, $154
of other income, and $37 of corporate DD&A. Nonsegmented expenses for the
second quarter include $122 in general and administrative costs incurred in
Poland. Net loss reconciling items for the first six months include $2,781
8
of general and administrative costs, $38 of non-cash stock compensation
expense, $460 of other income, and $67 of corporate DD&A. Nonsegmented
expenses for the first six months include $244 in general and
administrative costs incurred in Poland.
(3) Identifiable net property and equipment not associated with a segment
consists of $352 of corporate office equipment, hardware and software.
Note 5: Share-Based Compensation
The Company maintains several share-based incentive plans. Under these
plans, the Company may issue options, restricted stock or restricted stock
purchase rights. Options are granted at an option price equal to the market
value of the stock at the date of grant, have terms ranging from five to seven
years and vest over periods ranging from the date of grant to three years.
Restricted stock awards and restricted stock purchase rights have similar terms
and vesting requirements.
Effective January 1, 2006, the Company adopted the provisions of SFAS
No. 123R, "Share-Based Payment" ("SFAS No. 123R"). Under SFAS No. 123R,
share-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
employee's requisite service period. The Company adopted SFAS No. 123R using the
modified prospective transition method. Under this method, prior periods are not
revised for comparative purposes. The provisions of SFAS No. 123R apply to new
awards and to awards that are outstanding on the effective date that are
subsequently modified or cancelled. Compensation expense for unvested awards at
the effective date will be recognized over the remaining requisite service
period using the compensation cost calculated for pro forma disclosure purposes
under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
The following table summarizes option activity for the first six months
of 2006:
Weighted
Average
Remaining
Weighted Contractual Aggregate
Number of Average Life (in Intrinsic
Options Exercise Price years) Value
------------------------------------------------------------
Fixed Options outstanding:
Beginning of year................................ 3,492,283 $4.72
Cancelled........................................ (1,200) 0.00
---------------
End of period.................................... 3,491,083 $4.72 3.67 $0
===============
The aggregate intrinsic value in the table above represents the total
pretax intrinsic value, based on the Company's stock price of $4.62 as of June
30, 2006, which would have been received by the restricted stock purchase right
and stock option holders had all restricted stock purchase rights and options
been exercised as of that date.
Prior to the adoption of SFAS No. 123R, the Company recorded
compensation expense for employee stock options based on their intrinsic value
on the date of grant pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations and provided the pro forma disclosures required by SFAS No. 123.
The pro forma effects of recognizing compensation expense under the fair value
9
method required by SFAS No. 123 on net loss and net loss per common share were
as follows (in thousands, except per share data):
2005
------------------------------
Quarter Six Months
Ended Ended
June 30 June 30
-------------- --------------
Net loss:
Net loss, as reported.................................. $ (1,570) $ (3,461)
Less: Total stock-based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effects................... (498) (991)
-------------- --------------
Pro forma net loss................................ $ (2,068) $ (4,452)
============== ==============
Basic and diluted net loss per share:
As reported....................................... $ (0.04) $ (0.10)
Pro forma......................................... $ (0.06) $ (0.13)
As a result of adopting SFAS No. 123R, for the three and six month
periods ended June 30, 2006, the Company recognized $449,000 and $892,000,
respectively, of stock compensation expense, equal to $0.01 and $0.03 per basic
and diluted share, related to the amortization of unvested options as of January
1, 2006. In addition, for the three and six-month periods ended June 30, 2006,
the Company recognized $268,000 and $522,000, respectively, of stock
compensation expense related to the amortization of restricted stock purchase
rights granted in November 2005. Effective January 1, 2006, the Company
reclassified $2,975,000 of deferred compensation related to the restricted stock
purchase rights to additional paid-in capital. As of June 30, 2006, deferred
compensation to be amortized in future periods totaled $4,141,000, including
$2,453,000 related to restricted stock purchase rights.
Note 6: Stockholders' Equity
During the first six months of 2005, warrant holders exercised warrants
to purchase 35,500 shares of common stock, resulting in proceeds to the Company
of $133,000. In addition, during the first six months of 2005, option holders
exercised options to purchase 227,734 shares, resulting in additional proceeds
of $693,000. No options or warrants have been exercised during 2006. During the
first six months of 2006, the Company issued 64,750 shares for its 2005
contribution to the Company's employee benefit plan. During the first six months
of 2005, the Company issued 27,764 shares primarily to Polish consultants for
services.
Note 7: Investments
The cost and estimated market value of marketable securities at June
30, 2006, are as follows (in thousands):
Gross Estimated
Unrealized Market
Cost Losses Value
------------------ ---------------- -----------------
Marketable securities.............................. $ 13,742 $ (44) $ 13,698
The investments consist primarily of U.S. government agency bonds and
notes, whose value fluctuates with changes in interest rates. The Company
believes the gross unrealized losses are temporary. The investments have been
classified as available-for-sale, and are reported at fair value with unrealized
gains and losses, if any, recorded as a component of other comprehensive income
(loss).
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations by Business Segment
We operate within two segments of the oil and gas industry: the
exploration and production segment, or E&P, and the oilfield services segment.
Depreciation, depletion and amortization costs, or DD&A, and general and
administrative costs, or G&A, directly associated with the respective segments
are detailed within the following discussion. G&A, interest income, other income
and other costs that are not allocated to individual operating segments for
management or segment reporting purposes are discussed in their entirety
following the segment discussion. A comparison of the results of operations by
business segment and the information regarding nonsegmented items for the three
months and six months ended June 30, 2006 and 2005, follows.
Quarter Ended June 30, 2006, Compared to the Same Period of 2005
Exploration and Production Segment
Our oil and gas revenues are comprised primarily of oil production in
the United States. A summary of the percentage change in oil revenues, average
prices and production volumes for the second quarters of 2006 and 2005 is set
forth in the following table:
Quarter Ended June 30,
-----------------------------
2006 2005
------------- --------------
Oil Revenues..................................... $ 1,162,000 $ 898,000
Percent change versus prior year's quarter..... +29% +29%
Average price per barrel of oil.................. $ 59.83 $ 44.22
Percent change versus prior year's quarter..... +35% +32%
Production volumes (barrels of oil).............. 19,421 20,318
Percent change versus prior year's quarter..... -4% -2%
Oil Revenues. Oil revenues were $1,162,000 during the second quarter of
2006, a 29% increase compared to the same period of 2005. During the second
quarter of 2006, our average oil prices rose 35%, from $44.22 per barrel in 2005
to $59.83 per barrel in 2006, while oil production quantities decreased by 4%.
Oil revenues in 2006 increased from 2005 levels by approximately $303,000 due to
higher oil prices, offset by approximately $29,000 related to production
declines.
Gas Revenues. Gas revenues were $67,000 during the second quarter of
2006 as revenues from the Kleka gas well in Poland were recognized beginning
January 1, 2006. No gas revenues were recognized during the same period of 2005.
Our net production for the second quarter of 2006 was approximately 36,200 Mcf
at an average price of $1.85 per Mcf.
Lease Operating Costs. Lease operating costs were $599,000 during the
second quarter of 2006, essentially equivalent to the amount recorded during the
same period of 2005. Lease operating costs increased approximately $35,000 due
to costs associated with the Kleka gas well in Poland, but were offset by lower
internal workover costs in the United States.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
11
$1,021,000 during the second quarter of 2006, compared to $518,000 during the
same period of 2005, an increase of 97%. Second quarter 2006 exploration costs
include approximately $164,000 associated with the Drozdowice-1 and Nevada dry
holes, all drilled in prior periods, and approximately $857,000 for new
two-dimensional seismic and other geological and geophysical costs in Poland.
DD&A Expense - Exploration and Production. DD&A expense for producing
properties was $204,000 for the second quarter of 2006, an increase of 149%
compared to $82,000 during the same period of 2005. The increase in DD&A is due
primarily to new property costs incurred in late 2005 at our Montana producing
properties, in addition to DD&A associated with 2006 Kleka gas production in
Poland.
Accretion Expense. Accretion expense for both years reflects the
increase in our Asset Retirement Obligation under SFAS No. 143, and was
essentially flat from 2005 to 2006.
Oilfield Services Segment
Oilfield Services Revenues. Oilfield services revenues were $908,000
during the second quarter of 2006, an increase of $803,000 compared to $105,000
for the second quarter of 2005. The increase is related to higher utilization of
our drillings rigs for third-party services. Oilfield services revenues will
continue to fluctuate from period to period based on market demand, weather, the
number of wells drilled, downtime for equipment repairs, the degree of emphasis
on utilizing our oilfield servicing equipment on our company-owned properties,
and other factors.
Oilfield Services Costs. Oilfield services costs were $581,000 during
the second quarter of 2006, an increase of $483,000 compared to the $98,000
incurred in the same period of 2005, reflecting the increase in third-party
drilling activity. Oilfield services costs will also continue to fluctuate
period to period based on revenues generated, market demand, weather, the number
of wells drilled, downtime for equipment repairs, the degree of emphasis on
utilizing our oilfield servicing equipment on our Company-owned properties, and
other factors.
DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $38,000 during the second quarter of 2006, compared to $56,000 during the
same period of 2005. The quarter-to-quarter decrease was primarily due to
capital additions from prior years being fully depreciated during 2005.
Nonsegmented Information
G&A Costs. G&A costs were $1,159,000 during the second quarter of 2006,
compared to $1,304,000 during the second quarter of 2005, a decrease of
$145,000, or 11%. The decrease was primarily due to reductions in legal,
accounting and consulting fees.
Stock Compensation (G&A). As discussed above, we adopted the provisions
of SFAS No. 123R on January 1, 2006, using the modified prospective method.
Under this method, prior periods are not revised for comparative purposes.
Stock-based awards that are granted prior to the effective date continue to be
accounted for in accordance with SFAS No. 123, except that stock option expense
for unvested options must be recognized in the consolidated statement of
operations. Stock compensation expense recorded for the second quarter of 2006
represents $257,000 of amortization related to restricted stock purchase rights
granted in November 2005 and $449,000 of amortization of unvested stock options
granted prior to 2005, using the compensation cost calculated for pro forma
disclosure purposes under SFAS No. 123. Stock compensation expense recorded in
2005 represents the amortization of stock and options issued to consultants.
12
Interest and Other Income. Interest and other income was $172,000
during the second quarter of 2006, an increase of $19,000 compared to $153,000
during the same period of 2005. The increase was a reflection of higher interest
rates on cash balances available for investment.
Comparison of the First Half of 2006 to the First Half of 2005
Exploration and Production
Our oil and gas revenues are comprised primarily of oil production in
the United States. A summary of the percentage change in oil revenues, average
price and production volumes for the first halves of 2006 and 2005 is set forth
in the following table:
Six Months Ended June 30,
------------------------------
2006 2005
-------------- --------------
Oil Revenues......................................... $2,157,000 $1,736,000
Percent change versus prior year's period........ +24% +31%
Average price (per barrel of oil).................... $ 56.89 $ 42.53
Percent change versus prior year's period........ +34% +33%
Production volumes (barrels of)...................... 37,914 40,825
Percent change versus prior year's period........ -7% -2%
Oil Revenues. Oil revenues were $2,157,000 during the first half of
2006, a 24% increase compared to the same period of 2005. During the first half
of 2006, our average oil prices were 34% higher than in the same period of the
prior year, while oil production quantities declined by 7%. Oil revenues in 2006
increased from 2005 levels by approximately $544,000 due to higher oil prices,
offset by approximately $123,000 related to production declines.
Gas Revenues. Gas revenues were $133,000 during the first half of 2006
as revenues from the Kleka gas well in Poland were recognized beginning January
1, 2006. No gas revenues were recognized during the same period of 2005. Our net
production for the first half of 2006 was approximately 72,000 Mcf at an average
price of $1.85 per Mcf.
Lease Operating Expenses. Lease operating expenses were $1,286,000
during the first half of 2006, an increase of 5% compared to $1,229,000 during
the same period of 2005. Lease operating costs increased approximately $61,000
due to costs associated with the Kleka gas well in Poland, but were offset by
lower internal workover costs in the United States.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$3,063,000 during the first half of 2006, an increase of 152% compared to
$1,215,000 during the same period of 2005. First half 2006 exploration costs
include approximately $1,042,000 associated with the Drozdowice-1 and Nevada dry
holes, and approximately $2,021,000 for new two-dimensional seismic and other
geological and geophysical costs in Poland.
DD&A Expense - E&P. DD&A expense for producing properties was $345,000
during the first half of 2006, an increase of 113% compared to $162,000 during
13
the same period of 2005. The increase in DD&A is due primarily to new property
costs incurred in late 2005 at our Montana producing properties, in addition to
DD&A associated with 2006 Kleka gas production in Poland.
Accretion Expense. Accretion expense for both years reflects the
increase in our Asset Retirement Obligation under SFAS No. 143 and was
essentially flat from 2005 to 2006.
Oilfield Services
Oilfield Services Revenues. Oilfield services revenues were $932,000
during the first half of 2006, an increase of $777,000 compared to $155,000 for
the first half of 2005. The increase is related to higher utilization of our
drillings rigs for third-party services. These revenues will continue to
fluctuate from period to period based on market demand, weather, the number of
wells drilled, downtime for equipment repairs, the degree of emphasis on
utilizing our oilfield servicing equipment on our company-owned properties, and
other factors.
Oilfield Services Costs. Oilfield services costs were $713,000 during
the first half of 2006, up from the $187,000 incurred in the same period of
2005, reflecting the increase in third-party drilling activity. Oilfield
services costs will also continue to fluctuate from period to period based on
revenues generated, market demand, weather, the number of wells drilled,
downtime for equipment repairs, the degree of emphasis on utilizing our oilfield
servicing equipment on our Company-owned properties, and other factors.
DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $70,000 during the first half of 2006, compared to $110,000 during the same
period of 2005. The year-to-year decrease was primarily due to capital additions
from prior years being fully depreciated during 2005.
Nonsegmented Information
G&A Costs. G&A costs were $2,839,000 during the first half of 2006,
compared to $2,781,000 during the same period of 2005, an increase of 2%.
Reductions in legal, accounting and consulting fees were offset by higher
investor relations and personnel costs.
Stock Compensation (G&A). As discussed above, we adopted the provisions
of SFAS No. 123R on January 1, 2006, using the modified prospective method.
Under this method, prior periods are not revised for comparative purposes.
Stock-based awards that are granted prior to the effective date continue to be
accounted for in accordance with SFAS No. 123, except that stock option expense
for unvested options must be recognized in the consolidated statement of
operations. Stock compensation expense recorded for the first half of 2006
represents $511,000 of amortization related to restricted stock purchase rights
granted in November 2005 and $892,000 of amortization of unvested stock options
granted prior to 2005, using the compensation cost calculated for pro forma
disclosure purposes under SFAS No. 123. Stock compensation expense recorded in
2005 represents the amortization of stock and options issued to consultants.
Interest and Other Income. Interest and other income was $362,000
during the first half of 2006, compared to $460,000 during the first half of
2005. The year-to-year decrease is a direct reflection of lower cash balances
available for investment, offset by higher interest rates.
14
Liquidity and Capital Resources
To date, we have financed our operations principally through the sale
of equity securities, issuance of debt securities, and agreements with industry
participants that funded our share of costs in certain exploratory activities in
return for an interest in our properties. Our cash resources and marketable
securities at June 30, 2006, together with anticipated revenues from Polish gas
sales in 2006, are sufficient to cover our planned exploration program in the
United States and Poland for the next twelve months.
We may seek to obtain additional funds for future capital investments
and exploration costs from the sale of additional securities, project and/or
bank financing to help finance the completion of successful wells, sale of
partial property interests, or other arrangements, all of which may dilute the
interest of our existing stockholders or our interest in the specific project
financed. We may change the allocation of capital among the categories of our
anticipated expenditures depending upon future events. For example, we may
change the allocation of our expenditures based on the actual results and costs
of future exploration, appraisal, development, production, property acquisition
and other activities. In addition, we may have to change our anticipated
expenditures if costs of placing any particular discovery into production are
higher, if the field is smaller, or if the commencement of production takes
longer than expected.
Working Capital (current assets less current liabilities). Our working
capital was $22,739,000 as of June 30, 2006, a decrease of $4,976,000 from our
working capital at December 31, 2005, of $27,715,000. As of June 30, 2006, our
cash and cash equivalents and marketable securities totaled approximately $20.3
million. We have no outstanding long-term debt.
Operating Activities. Net cash used in operating activities was
$6,827,000 during the first half of 2006, an increase of 99% compared to
$3,716,000 in net cash used during the same period of 2005. The increase in cash
used is a direct reflection of our increased exploration activities and higher
geological and geophysical costs in Poland, increases in our accounts receivable
and significant reductions in our current liabilities.
Investing Activities. During the first half of 2006, we received
$11,047,000 from investing activities. We received proceeds of $13,200,000 from
maturities of marketable securities, purchased marketable securities of
$405,000, used $585,000 to pay accounts payable related to prior-year capital
costs, used $767,000 for current year capital additions in Poland and $215,000
related to our proved properties in the United States, and used $181,000 for
capital additions to our office and drilling equipment. During the first half of
2005, $575,000 was provided by investing activities. We received proceeds of
$4,500,000 from maturities of marketable securities, purchased marketable
securities of $326,000, used $1,076,000 to pay accounts payable related to
prior-year capital costs, used $1,823,000 for current year capital additions in
Poland and $347,000 related to our proved properties in the United States, and
used $353,000 for capital additions to our office and drilling equipment.
Financing Activities. During the first half of 2005, option and warrant
holders exercised options and warrants for a total of 263,000 shares, resulting
in proceeds of $826,000. No options or warrants were exercised during the first
half of 2006.
New Accounting Pronouncements
We have reviewed all recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on our results of
15
operations or financial position. Based on that review, we believe that none of
these pronouncements will have a significant effect on our current or future
financial position or results of operations.
Critical Accounting Policies
A summary of our significant accounting policies is included in Note 1
of our Consolidated Financial Statements contained in our annual report on Form
10-K for the year ended December 31, 2005. We believe the application of these
accounting policies on a consistent basis enables us to provide financial
statement users with useful, reliable and timely information about our earnings
results, financial condition and cash flows.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires our
management to make judgments, estimates and assumptions regarding uncertainties
that affect the reported amounts presented and disclosed in the financial
statements. Our management reviews these estimates and assumptions based on
historical experience, changes in business conditions and other relevant factors
that it believes to be reasonable under the circumstances. In any given
reporting period, actual results could differ from the estimates and assumptions
used in preparing our financial statements.
Critical accounting policies are those that may have a material impact
on our financial statements and also require management to exercise significant
judgment due to a high degree of uncertainty at the time the estimate is made.
Our senior management has discussed the development and selection of our
accounting policies, related accounting estimates and the disclosures set forth
below with the Audit Committee of our Board of Directors. We believe our
critical accounting policies include those addressing the recoverability and
useful lives of assets, the retirement obligations associated with those assets,
and the estimates of oil and gas reserves.
Forward-Looking Statements
This report contains statements about the future, sometimes referred to
as "forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "could," "should,"
"expect," "anticipate," "estimate," "project," "propose," "plan," "intend" and
similar words and expressions. We intend that the forward-looking statements
will be covered by the safe harbor provisions for forward-looking statements
contained in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements that describe our future strategic
plans, goals or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking
statements, including those regarding us or our management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as the future timing and results of
drilling individual wells and other exploration and development activities;
future variations in well performance as compared to initial test data; future
events that may result in the need for additional capital; the prices at which
we may be able to sell oil or gas; fluctuations in prevailing prices for oil and
gas; uncertainties of certain terms to be determined in the future relating to
our oil and gas interests, including exploitation fees, royalty rates and other
matters; future drilling and other exploration schedules and sequences for
various wells and other activities; uncertainties regarding future political,
economic, regulatory, fiscal, taxation and other policies in Poland; the cost of
additional capital that we may require and possible related restrictions on our
future operating or financing flexibility; our future ability to attract
16
strategic participants to share the costs of exploration, exploitation,
development and acquisition activities; and future plans and the financial and
technical resources of strategic participants.
The forward-looking information is based on present circumstances and
on our predictions respecting events that have not occurred, that may not occur
or that may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of various factors. The
forward-looking statements included in this report are made only as of the date
of this report. We disclaim any obligation to update any forward-looking
statements whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Price Risk
Realized pricing for our oil production in the United States is
primarily driven by the prevailing worldwide price of oil, subject to gravity
and other adjustments for the actual oil sold. Historically, oil prices have
been volatile and unpredictable. Price volatility relating to our oil production
in the United States is expected to continue in the foreseeable future.
The limited volume and sources of our gas production in Poland mean we
cannot assure uninterruptible production or production in amounts that would be
meaningful to industrial users, which may depress the price we may be able to
obtain. The Polish Oil and Gas Company is the primary purchaser of domestic gas
in Poland. We expect that the prices we receive for the gas we produce will be
lower than would be the case in a more competitive setting and may be lower than
prevailing western European prices, at least until a fully competitive market
develops in Poland.
We currently do not engage in any hedging activities or have any
derivative financial instruments to protect ourselves against market risks
associated with oil and gas price fluctuations, although we may elect to do so
if we achieve a significant amount of production in Poland.
Foreign Currency Risk
We have entered into various agreements in Poland denominated in the
Polish zloty. The Polish zloty is subject to exchange rate fluctuations that are
beyond our control. We do not currently engage in hedging transactions to
protect ourselves against foreign currency risks, nor do we intend to do so in
the foreseeable future; however, it is our policy to reduce currency risk by
transferring dollars to zlotys on or about the occasion of making any
significant commitment payable in Polish currency.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit to the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission's rules and forms, and that information is accumulated and
communicated to our management, including our principal executive and principal
financial officers (whom we refer to in this periodic report as our Certifying
Officers), as appropriate to allow timely decisions regarding required
disclosure. Our management evaluated, with the participation of our Certifying
17
Officers, the effectiveness of our disclosure controls and procedures as of June
30, 2006, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based
upon that evaluation, our Certifying Officers concluded that, as of June 30,
2006, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting
that occurred during our most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II--OTHER INFORMATION
ITEM 1A. RISK FACTORS
Information regarding risk factors appears in "Management's Discussion
and Analysis of Financial Condition and Results of Operations --Forward-Looking
Statements," in Part I -- Item 2 of this Form 10-Q and in Part I -- Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2005. There have
been no material changes from the risk factors previously disclosed in our
Annual Report on Form 10-K. The risks described in our Annual Report on Form
10-K for the year ended December 31, 2005, are not the only risks we face.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially and adversely affect our
business, financial condition, or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 2006, at the annual meeting of our stockholders, the
stockholders voted as indicated on the following matters submitted to them for
consideration:
(a) Elect Richard Hardman and Jerzy Maciolek as our directors by a
plurality as shown below:
Withheld
Director For Authority Abstain
------------------- ---------------- ----------------- ----------------
Richard Hardman 29,483,471 1,000 1,351,968
Jerzy Maciolek 29,214,063 121,000 1,501,376
(b) Ratify the appointment of PricewaterhouseCoopers as the independent
registered public accounting firm for the Company as shown below:
For Against Abstain
----------------- ----------------- -----------------
30,628,193 164,248 43,997
18
ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
Exhibit
Number* Title of Document Location
- ------------------- -------------------------------------------------- --------
Item 31 Rule 13a-14(a)/15d-14(a) Certifications
- ------------------- -------------------------------------------------- --------
31.01 Certification of Chief Executive Officer Pursuant Attached
to Rule 13a-14
31.02 Certification of Chief Financial Officer Pursuant Attached
to Rule 13a-14
Item 32 Section 1350 Certifications
- ------------------- -------------------------------------------------- --------
32.01 Certification of Chief Executive Officer Pursuant Attached
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.02 Certification of Chief Financial Officer Pursuant Attached
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ------------------
* All exhibits are numbered with the number preceding the decimal indicating
the applicable SEC reference number in Item 601 and the number following
the decimal indicating the sequence of the particular document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FX ENERGY, INC.
(Registrant)
Date: August 7, 2006 By /s/ David N. Pierce
David N. Pierce, President,
Chief Executive Officer
Date: August 7, 2006 By /s/ Thomas B. Lovejoy
Thomas B. Lovejoy,
Chief Financial Officer
19
