U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission File No. 0-25386
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)
(801) 486-5555
(Issuer's telephone number)
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 Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of $0.001 par value common stock outstanding as of July 27,
2000, was 17,838,575.
FX ENERGY, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Item Description Page
- ---- ---------------------------------------------------------------- ----
Part I. Financial Information
1. Consolidated Balance Sheets................................. 3
1. Consolidated Statements of Operations....................... 5
1. Consolidated Statements of Cash Flows...................... 6
1. Notes to Consolidated Financial Statements.................. 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10
Part II. Other Information
2. Changes in Securities and Use of Proceeds................... 21
4. Submission of Matters to a Vote of Security Holders......... 21
6. Exhibits and Reports on Form 8-K............................ 22
-- Signatures.................................................. 23
2
PART I.
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June December
30, 2000 31, 1999
----------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 9,974,261 $ 1,619,237
Investment in marketable debt securities...................... 3,222,843 5,249,003
Accounts receivable:
Accrued oil sales........................................... 296,186 243,183
Interest receivable......................................... 86,909 86,723
Joint interest owners and others............................ 272,312 171,242
Advances to oil and gas ventures.............................. 587,534 --
Inventory..................................................... 54,160 66,361
Other current assets.......................................... 33,129 126,006
----------------- ------------------
Total current assets.................................... 14,527,334 7,561,755
----------------- ------------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved...................................................... 4,106,099 1,687,089
Unproved.................................................... 955,307 1,382,880
Other property and equipment.................................. 2,856,116 2,652,102
----------------- ------------------
Gross property and equipment............................ 7,917,522 5,722,071
Less accumulated depreciation, depletion and amortization..... (3,268,895) (3,173,493)
----------------- ------------------
Net property and equipment.............................. 4,648,627 2,548,578
----------------- ------------------
Other assets:
Certificates of deposit ...................................... 356,500 356,500
Other......................................................... 2,789 2,789
----------------- ------------------
Total other assets...................................... 359,289 359,289
----------------- ------------------
Total assets.................................................... $ 19,535,250 $ 10,469,622
================= ==================
-- Continued --
The accompanying notes are an integral part of the consolidated financial statements.
3
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
-- Continued --
June December
30, 2000 31, 1999
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 1,890,521 $ 623,911
Accrued liabilities........................................... 3,395,131 1,478,862
----------------- ------------------
Total current liabilities................................... 5,285,652 2,102,773
----------------- ------------------
Total liabilities........................................... 5,285,652 2,102,773
----------------- ------------------
Commitments (Note 8)
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 and 30,000,000
shares authorized as of June 30, 2000 and December 31,
1999, respectively; 17,838,575 and 14,849,003 shares
issued and outstanding as of June 30, 2000 and December
31, 1999, respectively...................................... 17,839 14,849
Notes receivable from officers................................ (1,327,122) (1,370,873)
Additional paid-in capital.................................... 47,823,961 38,480,556
Accumulated deficit........................................... (32,265,080) (28,757,683)
----------------- ------------------
Total stockholders' equity.................................. 14,249,598 8,366,849
----------------- ------------------
Total liabilities and stockholders' equity...................... $ 19,535,250 $ 10,469,622
================= ==================
The accompanying notes are an integral part of the consolidated financial statements.
4
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- ---------------
Revenues:
Oil sales........................................ $ 613,147 $ 360,044 $ 1,209,777 $ 593,752
Contract servicing............................... 312,193 91,254 385,931 178,797
-------------- -------------- -------------- ---------------
Total revenues............................... 925,340 451,298 1,595,708 772,549
-------------- -------------- -------------- ---------------
Operating costs and expenses:
Lease operating expenses......................... 251,977 178,568 536,969 414,637
Production taxes................................. 9,601 24,323 16,547 38,691
Geological and geophysical costs................. 680,483 160,994 1,164,892 340,826
Exploratory dry hole costs....................... 928,759 32,859 928,759 32,859
Impairment of unproved oil and gas properties.... 674,158 -- 674,158 --
Contract servicing costs......................... 259,164 80,512 334,429 133,386
Depreciation, depletion and amortization......... 94,279 125,960 181,347 252,389
General and administrative....................... 804,513 742,558 1,401,480 1,278,947
-------------- -------------- -------------- ---------------
Total operating costs and expenses........... 3,702,934 1,345,774 5,238,581 2,491,735
-------------- -------------- -------------- ---------------
Operating loss..................................... (2,777,594) (894,476) (3,642,873) (1,719,186)
-------------- -------------- -------------- ---------------
Other income (expense):
Interest and other income........................ 115,655 105,243 249,600 207,434
Impairment of notes receivable from officers..... (109,266) -- (114,124) --
-------------- -------------- -------------- ---------------
Total other income........................... 6,389 105,243 135,476 207,434
-------------- -------------- -------------- ---------------
Net loss........................................... $ (2,771,205) $ (789,233) $ (3,507,397) $ (1,511,752)
============== ============== ============== ===============
Basic and diluted net loss per common share........ $ (0.18) $ (0.06) $ (0.23) $ (0.11)
============== ============== ============== ===============
Basic and diluted weighted average number
of shares outstanding............................ 15,142,866 14,016,618 14,995,935 13,538,218
============== ============== ============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
5
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended June 30,
-------------------------------------
2000 1999
------------------ -----------------
Cash flows from operating activities:
Net loss............................................................ $ (3,507,397) $ (1,511,752)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion and amortization........................ 181,347 252,389
Impairment of unproved oil and gas properties................... 674,158 --
Impairment of notes receivable from officers.................... 114,124 --
Interest income on officer loans................................ (70,373) (62,792)
Increase (decrease) from changes in working capital items:
Accounts receivable............................................... (154,259) (118,947)
Advances to oil and gas ventures.................................. (587,534) (157,054)
Inventory......................................................... 12,201 2,441
Other current assets.............................................. 92,877 (17,659)
Accounts payable and accrued liabilities.......................... 882,879 (690,971)
------------------ -----------------
Net cash used in operating activities........................... (2,361,977) (2,304,345)
------------------ -----------------
Cash flows from investing activities:
Additions to oil and gas properties................................. (365,595) (210,249)
Additions to other property and equipment........................... (289,959) (63,438)
Additions to other assets........................................... -- (2,789)
Proceeds from sale of property interests............................ -- 6,000
Purchase of marketable debt securities.............................. (3,715,840) (5,459,874)
Proceeds from maturing marketable debt securities................... 5,742,000 1,957,000
------------------ -----------------
Net cash provided by (used in) investing activities............. 1,370,606 (3,773,350)
------------------ -----------------
Cash flows from financing activities:
Advances to officers................................................ -- (597,563)
Proceeds from sale of common stock (net of offering costs........... 9,312,451 7,057,403
Proceeds from the exercise of warrants.............................. 33,944 --
------------------ -----------------
Net cash provided by (used in) financing activities............. 9,346,395 6,459,840
------------------ -----------------
Increase in cash and cash equivalents................................. 8,355,024 382,145
Cash and cash equivalents at beginning of period...................... 1,619,237 1,811,780
------------------ -----------------
Cash and cash equivalents at end of period............................ $ 9,974,261 $ 2,193,925
================== =================
The accompanying notes are an integral part of the consolidated financial statements.
6
FX ENERGY, INC. AND SUBSIDIARIES
NOTES TO 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 quarterly report on Form 10-Q for the three months ended March
31, 2000, and the annual report on Form 10-K for the year ended December 31,
1999, including the financial statements and notes thereto.
The consolidated financial statements include the accounts of FX Energy
and its wholly-owned subsidiaries and undivided interests in Poland. All
significant inter-company accounts and transactions have been eliminated in
consolidation. At June 30, 2000, FX Energy owned 100% of the voting stock of all
of its subsidiaries.
Certain balances in the 1999 financial statements have been
reclassified to conform to the current quarter presentation. These changes had
no effect on total assets, total liabilities, stockholders' equity or net loss.
Note 2: Income Taxes
FX Energy recognized no income tax benefit from the losses generated in
the first six months of 2000 and the first six months of 1999.
Note 3: Officer Loans
As of June 30, 2000, notes receivable and accrued interest from
officers, before an impairment allowance, totaled $2,106,759, with a due date of
on or before December 31, 2000. The notes receivable and accrued interest are
collateralized by 233,340 shares of FX Energy's common stock. In accordance with
"Accounting by Creditors for Impairment of a Loan," or SFAS 114, FX Energy has
recorded a cumulative impairment allowance of $779,637 as of June 30, 2000,
including $114,124 for the six months ended June 30, 2000, based on the value of
the underlying collateral.
In consideration for extending the term from December 31, 1999 through
December 31, 2000, the officers agreed that if the average closing price of the
common stock for five consecutive trading days results in a value of the
collateral equal to or above the total principal and accrued interest balances,
the officers will repay the loans within 45 days thereafter either in cash or by
tendering to the Company such number of shares which at the average closing
price for the previous five consecutive trading days equals the principal and
accrued interest then due.
The impairment allowance will continue to be adjusted quarterly based
on the market value of the collateral shares until the officer loans are deemed
paid in full.
Note 4: Net Loss Per Share
Basic earnings per share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing the net loss by the sum
7
of the weighted average number of common shares and the effect of dilutive
unexercised stock options and warrants and convertible preferred stock. Options
and warrants to purchase 4,146,167 shares of common stock at prices ranging from
$1.50 to $10.25 per share with a weighted average of $5.25 per share were
outstanding at June 30, 2000. Options and warrants to purchase 3,678,240 shares
of common stock at prices ranging from $1.50 to $10.25 per share with a weighted
average price of $5.17 per share were outstanding at June 30, 1999. No options
or warrants were included in the computation of diluted earnings per share for
the periods ended June 30, 2000 and 1999, because the effect would have been
antidilutive.
Note 5: Business Segments
FX Energy operates within two segments of the oil and gas industry: the
exploration and production segment ("E&P") and the contract servicing segment.
Mining, which consisted solely of gold exploration on FX Energy's Sudety Project
Area in Poland, has been discontinued and is not considered a reportable
business segment by FX Energy. Identifiable net property and equipment are
reported by business segment for management reporting and reportable business
segment disclosure purposes. Current assets, current liabilities and other
assets are not allocated to business segments for management reporting or
reportable business segment disclosure purposes.
Reportable business segment information for the three months ended June
30, 2000, the six months ended June 30, 2000 and as of June 30, 2000 follows:
Reportable Segments
------------------------------- Non- Non-
Contract Reportable Segmented
E&P Servicing Segments Items Total
--------------- -------------- -------------- -------------- --------------
Three months ended June 30, 2000:
Revenues................. $ 613,147 $ 312,193 $ -- $ -- $ 925,340
Net Loss (1)............. (1,949,913) (3,801) -- (817,491) (2,771,205)
Six months ended June 30, 2000:
Revenues................. 1,209,777 385,931 -- -- 1,595,708
Net Loss(2).............. (2,145,572) (56,514) -- (1,305,311) (3,507,397)
As of June 30, 2000:
Identifiable net property
and equipment(3)...... 3,834,464 676,576 -- 137,587 4,648,627
(1) Nonsegmented items include $804,513 of general and administrative
expenses, $115,655 of other income, $19,367 of corporate DD&A and an
officer loan impairment of $109,266.
(2) Nonsegmented items include $1,401,480 of general and administrative
expenses, $249,600 of other income, $39,307 of corporate DD&A and an
officer loan impairment of $114,124.
(3) Nonsegmented items include $137,587 of corporate office equipment,
hardware and software.
Reportable business segment information for the three months ended June
30, 1999, the six months ended June 30, 1999, and as of June 30, 1999 follows:
8
Reportable Segments
------------------------------- Non- Non-
Contract Reportable Segmented
E&P Servicing Segments Items Total
--------------- -------------- -------------- -------------- --------------
Three months ended June 30, 1999:
Revenues................. $ 360,044 $ 91,254 $ -- $ -- $ 451,298
Net Loss(1).............. (35,750) (70,193) (14,682) (668,608) (789,233)
Six months ended June 30, 1999:
Revenues................. 593,752 178,797 -- -- 772,549
Net Loss(2).............. (241,652) (116,458) (19,784) (1,133,858) (1,511,752)
As of June 30, 1999:
Identifiable net property
and equipment(3)...... 2,014,387 623,405 -- 193,760 2,831,552
(1) Nonsegmented items include $742,558 of general and administrative
expenses, $105,243 of other income and $31,293 of corporate DD&A.
(2) Nonsegmented items include $1,278,947 of general and administrative
expenses, $207,434 of other income and $62,345 of corporate DD&A.
(3) Nonsegmented items include $193,760 of corporate office equipment,
hardware and software.
Note 6: Supplemental Noncash Activity Disclosure
Noncash Investing Activities
During the six months ended June 30, 2000 and June 30, 1999, additions
to oil and gas properties included unproved property additions of $2,300,000 and
$197,000, respectively, financed by accrued liabilities.
Note 7: Private Placement of Securities
During June 2000, FX Energy completed a private placement of 2,969,000
shares of common stock that resulted in net proceeds of $9,312,451 ($10,391,500
gross). The proceeds from this placement are to be used to partially fund
current planned ongoing exploration and development activities in Poland and for
other general corporate purposes.
Note 8: Fences Project Area
On April 11, 2000, FX Energy signed an agreement with the Polish Oil
and Gas Company ("POGC") under which FX Energy will earn a 49% working interest
in approximately 300,000 gross acres in west central Poland (the "Fences"
project area) by spending $16.0 million for agreed drilling, seismic acquisition
and other related activities.
On June 28, 2000, FX Energy announced that the Kleka 11, the first well
drilled in the Fences project area, was an exploratory success after the well
tested a calculated open flow rate of 34.3 MMcf of gas per day from a
Rotliegendes sandstone reservoir.
9
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Information May Prove Inaccurate
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," "will," "should," "expect,"
"anticipate," "estimate," "project," "propose," "plan," "intend" and similar
words and expressions. Statements that describe FX Energy's future strategic
plans, goals or objectives are also forward-looking statements. FX Energy
intends the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in Section 27A of the
Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934.
Readers of this report are cautioned that any forward-looking
statements, including those regarding FX Energy or its 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:
o the future results of drilling individual wells and other
exploration and development activities;
o uncertainties regarding drilling potential and expected
results;
o the inability to estimate precisely the hydrocarbon potential
of any exploration prospect or the related risks;
o future variations in well performance as compared to initial
test data; o future events that may result in the need for
additional capital;
o fluctuations in prices for oil and gas;
o uncertainties of certain terms to be determined in the future
relating to FX Energy's oil and gas interests, including
exploitation fees, royalty rates and other matters;
o future drilling and other exploration schedules and sequences
for various wells and other activities;
o uncertainties regarding estimates of hydrocarbon reserves,
production rates, accumulations and recoveries;
o uncertainties regarding future political, economic,
regulatory, fiscal, taxation and other policies in Poland;
o the future ability of FX Energy to attract strategic partners
to share the costs of exploration, exploitation, development
and acquisition activities; and
o future plans and the financial and technical resources of
strategic partners.
The forward-looking information is based on present circumstances and on FX
Energy's predictions respecting events that have not occurred, which may not
occur or which 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. The forward-looking statements included in
this report are made only as of the date of this report. FX Energy is not
obligated to update such forward-looking statements to reflect subsequent events
or circumstances.
10
Introduction
FX Energy is an independent energy company engaged in the exploration,
development and production of oil and gas from properties located primarily in
the Republic of Poland. However, to date, all of FX Energy's production has been
from its United States producing properties. In the western United States, FX
Energy produces oil from fields in Montana and Nevada and has a drilling and
well servicing company in northern Montana and oil and gas exploration prospects
in several western states.
FX Energy conducts substantially all of its exploration and development
activities jointly with others and, accordingly, recorded amounts for FX
Energy's activities in Poland reflect only FX Energy's proportionate interest in
these activities.
FX Energy's results of operations may vary significantly from period to
period based on the factors discussed above and on other factors such as FX
Energy's exploratory and development drilling success. Therefore, the results of
any one period may not be indicative of future results.
FX Energy follows the successful efforts method of accounting for its
oil and gas properties. Under this method of accounting, all property
acquisition costs and costs of exploratory and development wells are capitalized
when incurred, pending determination of whether the well has found proved
reserves. If an exploratory well has not found proved reserves, these costs plus
the costs of drilling the well are expensed. The costs of development wells are
capitalized, whether productive or nonproductive. Geological and geophysical
costs on exploratory prospects and the costs of carrying and retaining unproved
properties are expensed as incurred. An impairment allowance is provided to the
extent that capitalized costs of unproved properties, on a property-by-property
basis, are considered not to be realizable. An impairment loss is recorded if
the net capitalized costs of proved oil and gas properties exceed the aggregate
undiscounted future net revenues determined on a property-by-property basis. The
impairment loss recognized equals the excess of net capitalized costs over the
related fair value, determined on a property-by-property basis. As a result of
the foregoing, FX Energy's results of operations for any particular period may
not be indicative of the results that could be expected over longer periods.
FX Energy has reviewed all recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on its results
of operations or financial position. Based on that review, FX Energy believes
that none of these pronouncements will have a significant effect on current or
future earnings or operations.
Results of Operations by Business Segment
FX Energy operates within two segments of the oil and gas industry: the
exploration and production segment and the contract servicing segment. Mining,
which consisted solely of gold exploration on FX Energy's Sudety Project Area in
Poland, has been discontinued and is excluded from the following discussion.
Depreciation, depletion and amortization costs ("DD&A") directly associated with
their respective segments are detailed within the following discussion. General
and administrative costs ("G&A"), interest income, other income and officer loan
impairment are not allocated to individual operating segments for management or
segment reporting purposes and are discussed in their entirety following the
segment discussion.
11
Comparison of the second quarter of 2000 to the second quarter of 1999
Exploration and Production
A summary of the percentage change in oil revenues, average oil price,
production volumes and lifting cost per barrel for the second quarter of 2000
and 1999, as compared to their respective prior year's period ,is set forth in
the following table:
Quarter ended June 30,
-------------------------------------
2000 1999
----------------- -----------------
Oil revenues................................................ $ 613,000 $ 360,000
Percent change versus prior year's quarter................ +70% +32%
Average oil price........................................... $ 24.86 $ 14.22
Percent change versus prior year's quarter................ +75% +43%
Production volumes (bbls)................................... 24,668 25,323
Percent change versus prior year's quarter................ -3% -13%
Lifting cost per barrel..................................... $ 10.21 $ 7.05
Percent change versus prior year's quarter................ +45% -9%
Oil Revenues. Oil revenues were $613,000 during the second quarter of
2000, an increase of $253,000, as compared to $360,000 during the same period of
1999. During the second quarters of 2000 and 1999, FX Energy's oil revenues were
positively affected by increased oil prices and negatively affected by lower
production rates attributable to the natural production declines of FX Energy's
producing properties, as compared to their respective prior year period.
Lease Operating Costs. FX Energy's lease operating costs are composed
of normal recurring lease operating expenses ("LOE") and production taxes. Lease
operating costs were $262,000 during the second quarter of 2000, an increase of
$59,000, as compared to $203,000 during the same period of 1999. A comparative
discussion of each component of lease operating costs incurred during the second
quarter of 2000 and 1999 follows:
LOE costs were $252,000 during the second quarter of 2000, an increase
of $73,000, as compared to $179,000 during the same period of 1999. During the
second quarter of 2000, FX Energy incurred substantially more workover,
maintenance and repair costs as it completed work that had been postponed due to
low oil prices during 1999. During the second quarter of 1999, FX Energy
deferred workovers and reduced its LOE costs by redesigning the pattern of
injecting fluids into the Cut Bank Sand Unit, its principal producing property.
Production taxes were $10,000 during the second quarter of 2000, a
decrease of $14,000, as compared to $24,000 during the same period of 1999.
During the second quarters of 2000 and 1999, production taxes averaged
approximately 1.6% and 6.8% of oil revenues, respectively. During late 1999, the
state of Montana substantially reduced the production tax rate for stripper
wells, which in turn resulted in substantially lower production taxes for the
second quarter of 2000, as compared to the same period of 1999.
DD&A Expense - E&P. DD&A expense for producing properties was $18,000
for the second quarter of 2000, an increase of $4,000, as compared to $14,000
during the same period of 1999. The DD&A rate per barrel for the second quarter
of 2000 was $0.73, an increase of $0.19, as compared to
12
$0.54 during the same period of 1999. The DD&A rate increase for the second
quarter of 2000, as compared to the same period of 1999, was due principally to
a 29% reduction in estimated proved reserves as of December 31, 1999, as
compared to December 31, 1998.
Exploration Costs. FX Energy's exploration costs consist of geological
and geophysical costs ("G&G"), exploratory dry holes and nonproducing leasehold
impairments. Exploration costs were $2,283,000 during the second quarter of
2000, an increase of $2,089,000, as compared to $194,000 during the same period
of 1999. Exploration costs include $20,000 of G&G costs relating to gold
exploration in Poland during the second quarter of 1999, which are excluded from
the following discussion of each component of exploration costs.
G&G costs were $680,000 during the second quarter of 2000, an increase
of $539,000, as compared to $141,000 during the same period of 1999. During the
second quarter of 2000, FX Energy incurred approximately $561,000 of 2-D seismic
acquisition and other G&G related costs on its primary project areas in Poland.
During the second quarter of 1999, FX Energy's G&G costs were primarily covered
by Apache in accordance with the Apache Exploration Program terms. G&G costs
will continue to fluctuate from period to period, based on FX Energy's level of
exploratory activity in Poland and the respective cost participation percentage
of FX Energy's industry partners.
Exploratory dry hole costs were $929,000 during the second quarter of
2000, an increase of $896,000, as compared to $33,000 during the same period of
1999. During the second quarter of 2000, the Wilga 3 was determined to be an
exploratory dry hole after it tested the perimeter of the northwest section of
the Wilga field, an area where proved reserves were not assigned prior to
drilling. In accordance with Generally Accepted Accounting Principles, or
"GAAP," the Wilga 3 has been classified as an exploratory dry hole for
accounting purposes, although in industry parlance FX Energy previously referred
to the Wilga 3, the first well drilled near the Wilga 2 discovery well, as
either an appraisal or a developmental well. Under the terms of a recent
revision to the Apache Exploration Program, Apache covered one half of FX
Energy's 45% share of costs to drill the Wilga 3. All of the exploratory dry
hole costs incurred during the second quarter of 1999 were associated with the
Gladysze 1A, an exploratory dry hole drilled during 1997.
Nonproducing leasehold impairments were $674,000 during the second
quarter of 2000, as compared to no nonproducing leasehold impairments during the
second quarter of 1999. During the second quarter of 2000, FX Energy wrote off
$674,000 of nonproducing leasehold costs relating to the Williston Basin in
North Dakota, where it has no further exploration plans. Nonproducing leasehold
impairments will continue to vary from period to period based on FX Energy's
determination that capitalized costs of unproved properties, on a property by
property basis, are considered not to be realizable.
Contract Servicing
Contract Servicing Revenues. Contract servicing revenues were $312,000
during the second quarter of 2000, an increase of $221,000, as compared to
$91,000 for the same period of 1999. During the second quarter of 2000, FX
Energy performed substantially more contract services, as compared to the same
period of 1999. Contract servicing revenues will continue to fluctuate period to
period based on market conditions, the degree of emphasis on utilizing equipment
on Company owned properties and other factors.
Contract Servicing Costs. Contract servicing costs were $259,000 during
the second quarter of 2000, an increase of $178,000, as compared to $81,000 for
the same period of 1999. During the second
13
quarters of 2000 and 1999, contract servicing costs were 83% and 88%,
respectively, of contract servicing revenues. Contract servicing costs will
continue to fluctuate period to period based on the contract servicing revenues
generated, degree of emphasis on utilizing equipment on Company owned properties
and other factors.
DD&A Expense - Contract Servicing. DD&A expense for contract servicing
was $57,000 during the second quarter of 2000, a decrease of $24,000, as
compared to $81,000 during the same period of 1999, primarily due to capital
items being depreciated during the second quarter of 1999 subsequently becoming
fully depreciated prior to or during the second quarter of 2000.
Nonsegmented Information
G&A Costs. G&A costs were $805,000 during the second quarter of 2000,
an increase of $62,000, as compared to $743,000 for the same period of 1999.
During the second quarter of 2000, FX Energy incurred substantially more legal,
travel and other associated G&A costs as a result of its increased level of
activities in Poland, as compared to the same period of 1999. Through June 30,
2000, Apache has covered all of FX Energy's pro rata share of Apache's G&A costs
in Poland. Effective July 1, 2000, FX Energy will begin to pay approximately
32.5% of Apache's G&A costs in Poland, to be adjusted as each of Apache's
remaining drilling requirements is completed, up to a maximum of 50%. We expect
that our initial share of such costs will be approximately $600,000 per quarter.
DD&A Expense - Corporate. DD&A expense for corporate activities was
$19,000 during the second quarter of 2000, a decrease of $12,000, as compared to
$31,000 during the same period of 1999, primarily due to capital items being
depreciated during the first second quarter of 1999 subsequently becoming fully
depreciated prior to or during the second quarter of 2000.
Interest and Other Income. Interest and other income was $116,000
during the second quarter of 2000, an increase of $11,000, as compared to
$105,000 during the same period of 1999. During the second quarter of 2000, FX
Energy's cash and marketable debt securities average balances were relatively
unchanged, as compared to the same period of 1999.
Officer Loan Impairment. Officer loan impairment was $109,000 for the
second quarter of 2000, as compared to no officer loan impairment for the same
period of 1999. In accordance with SFAS 114, FX Energy recorded an officer loan
impairment of $109,000 for the second quarter of 2000. The notes receivable from
officers totaled $1,327,000 as of June 30, 2000, representing principal and
interest of $2,107,000 reduced by a cumulative impairment allowance of $780,000.
The notes receivable from officers are collateralized by 233,340 shares of FX
Energy's common stock. The impairment allowance will continue to be adjusted
quarterly based on the market value of the collateral shares.
Comparison of the first six months of 2000 to the first six months of
1999
Exploration and Production
A summary of the percentage change in oil revenues, average oil price
production volumes and lifting cost per barrel for the first six months of 2000
and 1999, as compared to their respective prior year's period, is set forth in
the following table:
14
Six months ended June 30,
-------------------------------------
2000 1999
----------------- -----------------
Oil revenues................................................ $ 1,210,000 $ 594,000
Percent change versus prior year's quarter................ +103% -2%
Average oil price........................................... $ 24.90 $ 11.44
Percent change versus prior year's quarter................ +118% +8%
Production volumes (Bbls)................................... 48,592 51,895
Percent change versus prior year's quarter................ -6% -9%
Lifting cost per barrel..................................... $ 11.05 $ 7.99
Percent change versus prior year's quarter................ +38% -9%
Oil Revenues. Oil revenues were $1,210,000 during the first six months
of 2000, an increase of $616,000 as compared to $594,000 during the same period
of 1999. During the first six months of 2000, FX Energy's oil revenues were
positively affected by increased oil prices, which were partially offset by
lower production rates attributable to the natural production declines of FX
Energy's producing properties. During the first six months of 1999, FX Energy's
oil revenues were positively affected by higher oil prices and negatively
affected by lower production rates attributable to the natural production
declines of FX Energy's producing properties.
Lease Operating Costs. Lease operating costs were $554,000 during the
first six months of 2000, an increase of $100,000, as compared to $454,000
during the same period of 1999. A comparative discussion of each component of
lease operating costs incurred during the first six months of 2000 and 1999
follows:
LOE costs were $537,000 during the first six months of 2000, an
increase of $122,000, as compared to $415,000 during the same period of 1999.
During the first six months of 2000, FX Energy incurred substantially more
workover, maintenance and repair costs as it completed work that had been
postponed due to low oil prices during 1999. During the first six months of
1999, FX Energy deferred workovers and reduced its LOE costs by redesigning the
pattern of injecting fluids into the Cut Bank Sand Unit, its principal producing
property.
Production taxes were $17,000 during the first six months of 2000, a
decrease of $22,000, as compared to $39,000 during the same period of 1999.
During the first six months of 2000 and 1999, production taxes averaged
approximately 1.4% and 6.6% of oil revenues, respectively. During late 1999, the
state of Montana substantially reduced the production tax rate for stripper
wells, which in turn resulted in substantially lower production taxes for the
first six months of 2000, as compared to the same period of 1999.
DD&A Expense - E&P. DD&A expense for producing properties was $34,000
for the first six months of 2000, an increase of $6,000, as compared to $28,000
during the same period of 1999. The DD&A rate per barrel for the first six
months of 2000 was $0.70, an increase of $0.16, as compared to $0.54 during the
same period of 1999. The DD&A rate increase for the first six months of 2000, as
compared to the same period of 1999, was due principally to a 29% reduction in
estimated proved reserves as of December 31, 1999, as compared to December 31,
1998.
Exploration Costs. Exploration costs were $2,768,000 during the first
six months of 2000, an increase of $2,394,000, as compared to $374,000 during
the same period of 1999. Exploration costs include $20,000 of G&G costs relating
to gold exploration in Poland during the first six months of 1999, which are
excluded from the following discussion of each component of exploration costs.
15
G&G costs were $1,165,000 during the first six months of 2000, an
increase of $844,000, as compared to $321,000 during the same period of 1999.
During the first six months of 2000, FX Energy incurred approximately $958,000
of 2-D seismic acquisition and other G&G related costs on its primary project
areas in Poland. During the first six months of 1999, FX Energy's G&G costs were
primarily covered by Apache in accordance with the Apache Exploration Program
terms. G&G costs will continue to fluctuate from period to period, based on FX
Energy's level of exploratory activity in Poland and the respective cost
participation percentage of FX Energy's industry partners.
Exploratory dry hole costs were $929,000 during the first six months of
2000, an increase of $896,000, as compared to $33,000 during the same period of
1999. During the first six months of 2000, the Wilga 3 was determined to be an
exploratory dry hole after it tested the perimeter of the northwest section of
the Wilga field, an area where proved reserves were not assigned prior to
drilling. In accordance with GAAP, the Wilga 3 has been classified as an
exploratory dry hole for accounting purposes, although in industry parlance FX
Energy previously referred to the Wilga 3, the first well drilled near the Wilga
2 discovery well, as either an appraisal or a developmental well. Under the
terms of a recent revision to the Apache Exploration Program, Apache covered one
half of FX Energy's 45% share of costs to drill the Wilga 3. All of the
exploratory dry hole costs incurred during the first six months of 1999 were
associated with the Gladysze 1A, an exploratory dry hole drilled during 1997.
Nonproducing leasehold impairments were $674,000 during the first six
months of 2000, as compared to no nonproducing leasehold impairments during the
first six months of 1999. During the first six months of 2000, FX Energy wrote
off $674,000 of nonproducing leasehold costs relating to the Williston Basin in
North Dakota, where it has no further exploration plans. Nonproducing leasehold
impairments will continue to vary from period to period based on FX Energy's
determination that capitalized costs of unproved properties, on a property by
property basis, are considered not to be realizable.
Contract Servicing
Contract Servicing Revenues. Contract servicing revenues were $386,000
during the first six months of 2000, an increase of $207,000, as compared to
$179,000 during the first six months of 1999. During the first six months of
2000, FX Energy performed substantially more contract services, as compared to
the same period of 1999. Contract servicing revenues will continue to fluctuate
period to period based on market conditions, the degree of emphasis on utilizing
equipment on Company owned properties and other factors.
Contract Servicing Costs. Contract servicing costs were $334,000 during
the first six months of 2000, an increase of $201,000, as compared to $133,000
for the same period of 1999. During the first six months of 2000 and 1999,
contract servicing costs were 87% and 75%, respectively, of contract servicing
revenues. Contract servicing costs will continue to fluctuate period to period
based on the contract servicing revenues generated, degree of emphasis on
utilizing equipment on Company owned properties and other factors.
DD&A Expense - Contract Servicing. DD&A expense for contract servicing
was $108,000 during the first six months of 2000, a decrease of $54,000, as
compared to $162,000 during the same period of 1999, primarily due to capital
items being depreciated during the first six months of 1999 subsequently
becoming fully depreciated prior to or during the first six months of 2000.
16
Nonsegmented Information
G&A Costs. G&A costs were $1,401,000 during the first six months of
2000, an increase of $122,000, as compared to $1,279,000 for the same period of
1999. During the first six months of 2000, FX Energy incurred substantially more
legal, travel and other associated G&A costs as a result of its increased level
of activities in Poland, as compared to the same period of 1999. Through June
30, 2000, Apache has covered all of FX Energy's pro rata share of Apache's G&A
costs in Poland. Effective July 1, 2000, FX Energy will begin to pay
approximately 32.5% of Apache's G&A costs in Poland, to be adjusted as each of
Apache's remaining drilling requirements is completed, up to a maximum of 50%.
We expect that our initial share of such costs will be approximately $600,000
per quarter.
DD&A Expense - Corporate. DD&A expense for corporate activities was
$39,000 during the first six months of 2000, a decrease of $23,000, as compared
to $62,000 during the same period of 1999, primarily due to capital items being
depreciated during the first six months of 1999 subsequently becoming fully
depreciated prior to or during the first six months of 2000.
Interest and Other Income. Interest and other income was $250,000
during the first six months of 2000, an increase of $43,000, as compared to
$207,000 during the same period of 1999. FX Energy's average cash and marketable
debt securities balances were higher during the first six months of 2000, as
compared to the same period of 1999. As a result, FX Energy earned $241,000 of
interest income during the first six months of 2000, an increase of $35,000, as
compared to $206,000 for the same period of 1999.
Officer Loan Impairment. Officer loan impairment was $114,000 for the
six months ended June 30, 2000, as compared to no officer loan impairment for
the same period of 1999. In accordance with SFAS No. 114, FX Energy recorded an
officer loan impairment of $114,000 for the first six months of 2000. The notes
receivable from officers totaled $1,327,000 as of June 30, 2000, representing
principal and interest of $2,107,000 reduced by a cumulative impairment
allowance of $780,000. The notes receivable from officers are collateralized by
233,340 shares of FX Energy's common stock. The impairment allowance will
continue to be adjusted quarterly based on the market value of the collateral
shares.
Financial Condition
Liquidity and Cash Flows
Working Capital. FX Energy's working capital was $9,242,000 as of June
30, 2000, an increase of $3,783,000, as compared to $5,459,000 at December 31,
1999. The increase was principally due to net proceeds of $9,312,000
($10,392,000 gross) from a private placement of 2,969,000 shares of FX Energy's
common stock during the second quarter of 2000, which was partially offset by a
net loss of $3,507,000 for the first six months of 2000 and approximately
$2,547,000 of capitalized costs incurred in Poland during the first six months
of 2000.
Cash Flows from Operating Activities. Net cash used in operating
activities was $2,362,000 during the first six months of 2000, an increase of
$58,000, as compared to $2,304,000 for the same period of 1999. During the first
six months of 2000 and 1999, FX Energy had net losses of $2,608,000 and
$1,322,000, respectively, before DD&A, impairments and interest income on
officer loans. Also, during the first six months of 2000 and 1999, FX Energy's
working capital items changed by an increase of $246,000 and a decrease of
$982,000, respectively.
Cash Flows from Investing Activities. Net cash provided by investing
activities was $1,371,000 during the first six months of 2000, as compared to
$3,773,000 used in investing activities for the same
17
period of 1999. During the first six months of 2000, FX Energy spent $119,000 to
upgrade its domestic producing properties, $247,000 on its Polish properties,
$274,000 on upgrading its contract servicing equipment, $16,000 on office
equipment, and realized a net amount $2,027,000 from maturing marketable debt
securities. During the first six months of 1999, FX Energy spent $73,000 on
upgrading its producing properties, a net amount of $131,000 on unproved
properties, $56,000 on upgrading its contract servicing equipment, $10,000 on
other assets and a net amount of $3,503,000 on purchasing marketable debt
securities.
Cash Flows from Financing Activities. Net cash provided by financing
activities was $9,346,000 during the first six months of 2000, an increase of
$2,886,000, as compared to $6,460,000 during the same period of 1999. During the
first six months of 2000, FX Energy realized net proceeds after offering costs
of $9,312,000 from the private placement of 2,969,000 shares of FX Energy's
common stock and $34,000 from the exercise of warrants to purchase 20,572 shares
of FX Energy's common stock. During the first six months of 1999, FX Energy
advanced two of its officers a total of $597,000 and realized net proceeds after
offering costs of $7,057,000 from the sale of 1,792,500 shares of FX Energy's
common stock.
Capital Requirements
As of June 30, 2000, FX Energy had $13.2 million of cash, cash
equivalents and marketable debt securities with no long-term debt. In order to
fully fund its current planned exploration and development activities, FX Energy
will need additional debt or equity capital during late 2000 or early 2001.
Fences Project Area. On April 11, 2000, FX Energy agreed to spend the
first $16.0 million of exploration and development costs on the Fences project
area to earn a 49% interest. FX Energy expects the $16.0 million will cover the
costs to drill five wells (approximately $2.5 million per well) and the
acquisition of approximately 200 square kilometers of 3-D seismic data
(approximately $3.5 million). After the first $16.0 million is spent, all costs
and net revenues will be shared 49% by FX Energy and 51% by POGC.
On June 28, 2000, FX Energy announced that the Kleka 11, the first
exploratory well drilled in the Fences project area, was an exploratory success
after the well tested a calculated open flow rate of 34.3 MMcf of gas per day
from a Rotliegendes sandstone reservoir. The Kleka 11 is located approximately
one kilometer from a pipeline. FX Energy expects to commence production from the
Kleka 11 by the end of 2000 or early 2001. The next well, the Mieszkow 1, is
expected to commence drilling during the third quarter of 2000. FX Energy
expects to utilize any net revenue it receives in the future from the Fences
project area to supplement its capital from other sources to further explore and
develop the Fences project area.
Wilga Project Area. During January 2000, Apache completed its
commitment to pay FX Energy's 45% share of costs to drill the Wilga 2, a
successful exploratory well which tested at an initial flow rate of 16.9 MMcf of
gas and 570 Bbls of condensate per day. On June 22, 2000, Apache agreed to cover
one half of FX Energy's share of costs to drill the Wilga 3 and Wilga 4 wells in
exchange for a release of Apache's commitment to cover FX Energy's share of
costs for one exploratory well in Poland. FX Energy will pay its 45% share of
costs for all further costs in the Wilga project area, including drilling
additional wells as warranted, which are expected to cost an average of
approximately $3.0 million gross per well ($1.4 million net per well) and the
construction of production facilities and pipelines during 2001 at a cost of
approximately $11.0 million gross ($5.0 million net).
18
On June 5, 2000, the Wilga 3 was determined to be an exploratory dry
hole, with an estimated net cost of $0.9 million, after the well encountered
Carboniferous sands and a Lower Devonian sand package that tested noncommercial
in a separate fault block from the Wilga 2 discovery well. The next well, the
Wilga 4, commenced drilling on June 17, 2000, on the opposite side of the Wilga
2 discovery well.
Subject to further success in the Wilga project area and completion of
a pipeline and production facilities, FX Energy anticipates receiving production
revenue from the Wilga field during 2001. FX Energy expects to utilize any net
revenue it receives in the future from the Wilga project area to supplement its
capital from other sources to further explore and develop the Wilga project
area.
Apache Exploration Program. During the remainder of 2000, FX Energy
expects to have substantially all of its share of exploration activities
relating to the Apache Exploration Program paid for by Apache. Apache is
required to cover FX Energy's share of costs to drill three exploratory wells
and the cost to shoot 350 kilometers of 2-D seismic data. During the second half
of 2000, FX Energy and Apache have scheduled to commence drilling one
exploratory well in each of the Warsaw West and Pomeranian project areas.
POGC Property Acquisition. FX Energy will need additional capital if it
is able to reach an agreement with POGC to purchase an interest in any of POGC's
exploration, appraisal, development or producing projects in Poland. FX Energy
may undertake such projects alone or in partnership with Apache or other
industry partners. FX Energy intends to seek additional capital that may be
required for such purposes through a variety of means, including the issuance of
debt and equity securities, project financing, bank financing or other financing
alternatives. FX Energy cannot assure that it will be able to obtain funds that
will enable it to participate in any such further acquisitions or joint
activities.
Other. FX Energy expects to incur minimal exploration expenditures on
its Baltic project area in Poland during the remainder of 2000 and 2001.
Similarly, FX Energy expects to incur minimal exploration, appraisal and
development expenditures on its domestic operations during the remainder of 2000
and 2001.
FX Energy may change the allocation of capital among the categories of
anticipated expenditures depending upon future events that it cannot predict.
For example, FX Energy may change the allocation of its expenditures based on
the actual results and costs of future exploration, appraisal, development,
production, property acquisition and other activities. In addition, FX Energy
may have to change its 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.
FX Energy may obtain funds for future capital investments from the sale
of additional securities, project financing, sale of partial property interests,
strategic alliances with other energy or financial partners or other
arrangements, all of which may dilute the interest of its existing stockholders
or its interest in the specific project financed.
FX Energy previously initiated discussions with a commercial lender for
a possible project loan secured by proved reserves that may be developed as a
result of its Wilga discovery. FX Energy now intends to expand those discussions
to include possible project loan financing for the Kleka discovery as well as
other possible discoveries. FX Energy cannot assure it can establish such a
credit facility. In any event, borrowed funds are not likely to be available
until significant reserves are established through additional drilling. If FX
Energy is able to obtain such a loan, amounts initially allocated to develop
those discoveries may be allocated to other operations in Poland.
19
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Private Placement of Securities
During June 2000, FX Energy completed a private placement of 2,969,000
shares of its common stock that resulted in net proceeds of $9.3 million ($10.4
million gross), without registration under the Securities Act. These securities
were issued in reliance on the exemptions from the registration and prospectus
delivery requirements of the Securities Act provided in Section 4(2) thereof and
Rule 506 under Regulation D promulgated by thereunder. The basis for FX Energy's
reliance on the exemptions was that the securities were sold to 19 investors,
all of whom were "accredited investors" as defined in Rule 501 under Regulation
D; all of the investors were provided with detailed business, technical and
financial information about FX Energy, and all investors were fully informed
that the sale of the securities was restricted under the Securities Act. Each
investor acknowledged in writing that the securities purchased constituted
restricted securities and the certificates representing such securities would
bear a restrictive legend and stop transfer instructions could be lodged against
the transfer of such certificates. A notice on Form D was timely filed with the
Securities and Exchange Commission.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 28, 2000, at the annual meeting of the Company's stockholders,
the stockholders approved the following matters submitted to them for
consideration:
(a) elected Andrew W. Pierce, Jay W. Decker, and Jerzy B. Maciolek
as directors of the Company by a plurality;
(b) approved the FX Energy, Inc. 1999 Stock Option and Award Plan:
For: 11,980,320 Against: 1,100,395 Abstain: 125,078
(c) approved the amendment to the FX Energy, Inc. Articles of
Incorporation increasing the Company's capitalization to
100,000,000 shares of common stock.
For: 11,575,777 Against: 1,539,381 Abstain: 90,635
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included as part of this report:
Exhibit SEC
Number Reference Title of Document Location
Number
-----------------------------------------------------------------------
27.01 27 Financial Data Schedule This Filing
(b) Reports on form 8-K
During the quarter ended June 30, 2000, FX Energy filed the following
current reports on Form 8-K:
Date of Event Reported Item(s) Reported
---------------------- ----------------
April 26, 2000 Item 5. Other Events
May 18, 2000 Item 5. Other Events
June 6, 2000 Item 5. Other Events
June 20, 2000 Item 5. Other Events
June 28, 2000 Item 5. Other Events
21
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: July 27, 2000 By /s/ David N. Pierce
-------------------
President, Director, and Chief
Executive Officer
Date: July 27, 2000 By /s/ Dennis L. Tatum
-------------------
Vice-President, Treasurer, and
Chief Accounting Officer
22