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 MARCH 31, 2003
Commission File No. 0-25386
FX ENERGY, INC.
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(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
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(Address of principal executive offices and zip code)
(801) 486-5555
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(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 an accelerated filer
(as defined in Rule 12b-2 of the Exchange 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 May 13, 2003, was 17,655,119.
FX ENERGY, INC. AND SUBSIDIARIES
Form 10-Q for the three months ended March 31, 2003
TABLE OF CONTENTS
Item Page
- ---------- ------
Part I. Financial Information
1 Financial Statements
Consolidated Balance Sheets................................ 3
Consolidated Statements of Operations...................... 5
Consolidated Statements of Cash Flows...................... 7
Notes to the Consolidated Financial Statements............. 8
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
3 Quantitative and Qualitative Disclosures about Market Risk..... 17
4 Controls and Procedures........................................ 17
Part II. Other Information
2 Changes in Securities and Use of Proceeds...................... 18
6 Exhibits and Reports on Form 8-K............................... 19
-- Signatures..................................................... 19
-- Certifications................................................. 20
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 3,612,694 $ 705,012
Accounts receivable:
Accrued oil sales................................................. 272,606 238,236
Joint interest and other receivables.............................. 32,185 36,893
Inventory........................................................... 81,538 84,262
Other current assets................................................ 145,250 95,726
------------ ------------
Total current assets.............................................. 4,144,273 1,160,129
------------ ------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved............................................................ 6,215,086 4,754,377
Unproved.......................................................... 154,261 154,261
Other property and equipment...................................... 3,684,948 3,683,226
------------ ------------
Gross property and equipment.................................... 10,054,295 8,591,864
Less accumulated depreciation, depletion and amortization......... (4,013,103) (4,685,487)
------------ ------------
Net property and equipment.................................... 6,041,192 3,906,377
------------ ------------
Other assets:
Certificates of deposit............................................. 356,500 356,500
Other............................................................... 2,789 18,072
------------ ------------
Total other assets................................................ 359,289 374,572
------------ ------------
Total assets.......................................................... $ 10,544,754 $ 5,441,078
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
-- Continued --
3
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
-- Continued --
March 31, December 31,
2003 2002
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 402,382 $ 376,264
Current portion of note payable..................................... 3,325,000 5,000,000
Accrued liabilities................................................. 4,635,485 4,933,393
------------ ------------
Total current liabilities......................................... 8,362,867 10,309,657
------------ ------------
Long-term liabilities:
Asset retirement obligation ....................................... 354,837 --
------------ ------------
Total liabilities................................................. 8,717,704 10,309,657
------------ ------------
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 5,000,000 shares authorized,
2,250,000 shares issued ($5,625,000 liquidation preference) as
of March 31, 2003 and no shares as of December 31, 2002........... 2,250 --
Common stock, $.001 par value, 100,000,000 shares
authorized, 17,655,119 and 17,651,917 issued as of
March 31, 2003 and December 31, 2002, respectively................ 17,655 17,652
Additional paid-in capital.......................................... 54,650,644 49,049,025
Accumulated deficit................................................. (52,843,499) (53,935,256)
------------ ------------
Total stockholders' equity (deficit).............................. 1,827,050 (4,868,579)
------------ ------------
Total liabilities and stockholders' equity (deficit).................. $ 10,544,754 $ 5,441,078
============ ============
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 March 31,
------------------------------------
2003 2002
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Revenues:
Oil and gas sales................................................... $ 611,943 $ 445,809
Oilfield services................................................... 9,328 4,353
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Total revenues.................................................... 621,271 450,162
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Operating costs and expenses:
Lease operating costs............................................... 360,461 352,542
Geological and geophysical costs.................................... 66,879 126,836
Oilfield services costs............................................. 75,141 112,442
Depreciation, depletion and amortization............................ 99,530 164,985
General and administrative costs (G&A).............................. 497,516 638,049
Accretion expense................................................... 9,286 --
Amortization of deferred compensation (G&A)......................... -- 54,688
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Total operating costs and expenses................................ 1,108,813 1,449,542
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Operating loss........................................................ (487,542) (999,380)
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Other income (expense):
Interest and other income........................................... 9,613 104,953
Interest expense.................................................... (229,808) (123,526)
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Total other income (expense) ..................................... (220,195) (18,573)
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Loss before cumulative effect of change in accounting principle....... (707,737) (1,017,953)
Cumulative effect of change in accounting principle 1,799,494 --
------------- -------------
Net income (loss) after cumulative effect of change in
accounting principle................................................ $ 1,091,757 $ (1,017,953)
============= =============
Pro forma net loss reflecting adoption of SFAS 143.................... $ (1,051,416)
=============
The accompanying notes are an integral part of the consolidated financial statements.
5
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
continued
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
2003 2002
--------------- ----------------
Basic net loss per common share before cumulative effect of
change in accounting principle...................................... (0.04) (0.06)
Cumulative effect of change in accounting principle................... 0.10) --
--------------- ----------------
Basic net income (loss) per common share after cumulative
effect of change in accounting principle............................ $ 0.06 $ (0.06)
=============== ================
Diluted net loss per common share before cumulative effect
of change in accounting principle................................... (0.04) (0.06)
Cumulative effect of change in accounting principle................... 0.10) --
--------------- ----------------
Diluted net income (loss) per common share after cumulative
effect of change in accounting principle............................ $ 0.06 $ (0.06)
=============== ================
Pro forma net loss per common share reflecting adoption of SFAS 143
Basic.......................................................... $ (0.06)
================
Diluted........................................................ $ (0.06)
================
Basic weighted average number of shares outstanding................... 17,651,917 17,628,235
Diluted weighted average number of shares outstanding................. 18,413,880 17,628,235
The accompanying notes are an integral part of the consolidated financial statements.
6
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss).................................................. $ 1,091,757 $ (1,017,953)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of change in accounting principle............ (1,799,494) --
Accretion expense.............................................. 9,286 --
Depreciation, depletion and amortization....................... 99,530 164,985
Stock issued for services...................................... 10,000 --
Amortization of loan fees...................................... 7,718 --
Amortization of deferred compensation (G&A).................... -- 54,688
Increase (decrease) from changes in working capital items:
Accounts receivable.............................................. (29,662) (147,562)
Inventory........................................................ 2,724 35
Other current assets............................................. 42,758 49,103
Accounts payable and accrued liabilities......................... (271,790) (259,194)
------------ ------------
Net cash used in operating activities.......................... (837,173) (1,155,898)
------------ ------------
Cash flows used in investing activities:
Additions to oil and gas properties................................ (84,944) (12,747)
Additions to other property and equipment.......................... (4,356) (26,582)
Net change in other assets......................................... 15,283 --
------------ ------------
Net cash used in investing activities............................ (74,017) (39,329)
------------ ------------
Cash flows from financing activities:
Proceeds from preferred stock offering, net........................ 5,593,872 --
Payment on loan fees............................................... (100,000) --
Payments on notes payable.......................................... (1,675,000) --
------------ ------------
Net cash provided by financing activities........................ 3,818,872 --
------------ ------------
Increase in cash and cash equivalents................................ 2,907,682 (1,195,227)
Cash and cash equivalents at beginning of period..................... 705,012 3,157,427
------------ ------------
Cash and cash equivalents at end of period........................... $ 3,612,694 $ 1,962,200
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
7
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,
2002, 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 March 31, 2003, FX Energy owned 100% of the voting stock of
all of its subsidiaries.
Note 2: Private Placement of Convertible Preferred Stock
On March 13, 2003, the Company sold 2,250,000 shares of 2003 Series
Convertible Preferred Stock in a private placement of securities, raising a
total of $5.6 million after offering costs of $31,000. Each share of preferred
stock immediately converts into one share of common stock and one warrant to
purchase one share of common stock at $3.60 per share upon registration of the
common shares. The warrants to purchase are exercisable anytime between March 1,
2004, and March 1, 2008. The preferred stock has a liquidation preference equal
to the sales price for the shares, which was $2.50 per share.
In connection with the issuance of the 2003 Series Convertible
Preferred Stock, the Company allocated approximately $2.3 million of the
proceeds to the warrants, and the remaining amount of the proceeds to a
beneficial conversion feature. As the conversion of the preferred shares and the
issuance of the warrants are contingent upon the registration of the underlying
shares, these amounts will be recognized in the calculation of earnings per
share upon the conversion of the preferred stock to common stock. A Form S-3 has
been filed with the SEC to effect this registration.
The net proceeds from the offering were used to reduce the obligation
to RRPV, and will be used to fund ongoing geological and geophysical costs in
Poland and support ongoing prospect marketing and general and administrative
costs.
Note 3: Financing with Rolls Royce Power Ventures
In early 2003, the Company reached an agreement with Rolls-Royce Power
Ventures Limited, or RRPV, to amend its 9.5% Convertible Secured Note in the
amount of $5,000,000. Following its private placement of convertible preferred
stock described in Note 2, the Company paid $2,250,000 to RRPV, $1,675,000 of
which was applied to the outstanding balance, $475,000 of which was applied to
accrued interest, and the remaining $100,000 was a loan extension payment and is
being amortized over the remaining term of the loan. In return, RRPV extended
the maturity date of the note from March 9, 2003, to December 31, 2003. The
Company also agreed to pay 40% of the gross proceeds of any subsequent equity or
debt offering concluded prior to the amended maturity date to RRPV, and agreed
to assign its rights to payments under the CalEnergy Gas agreement to RRPV,
except for those amounts related to drilling the two wells. All such payments
will be used to offset the remaining principal and interest. In exchange for
these payments, RRPV agreed to release its lien on interests earned by CalEnergy
Gas under its agreement with the Company.
8
The loan amendment contained other terms and conditions, including an
increase in the interest rate on the note from 9.5% to 12% per annum effective
March 9, 2003. The time period during which RRPV can convert the principal
amount of the note into shares of common stock was extended to December 31,
2003, with the conversion price being changed from $5.00 per share to $3.42 per
share.
Note 4: Net Income (Loss) Per Share
Basic earnings per share is computed by dividing the net income (loss)
by the weighted average number of common shares outstanding. Diluted earnings
per share is computed by dividing the net income (loss) by the sum of the
weighted average number of common shares and the effect of dilutive unexercised
stock options and warrants and convertible preferred stock. Options to purchase
4,544,017 and 5,885,585 shares of common stock at prices ranging from $1.50 to
$10.25 per share with a weighted average of $5.52 per share and at $4.87 per
share were outstanding at March 31, 2003 and 2002, respectively. Of these
outstanding options, 286,963 shares were used to calculate diluted net income
per share for the period ended March 31, 2003. In addition, the preferred stock
(see Note 2) is convertible into 2,250,000 shares of common stock upon
registration, at which time an additional 2,250,000 warrants to purchase common
stock at $3.60 per share will be issued. No options or warrants were included in
the computation of diluted net loss per share for the period ended March 31,
2002, because the effect would have been antidilutive.
Note 5: Asset Retirement Obligations
In August 2001, the FASB issued SFAS No. 143 (SFAS 143), "Accounting
for Asset Retirement Obligations." The Company adopted SFAS 143 beginning
January 1, 2003. The most significant impact of this standard on the Company was
a change in the method of accruing for site restoration costs. Under SFAS 143,
the fair value of asset retirement obligations is recorded as a liability when
incurred, which is typically at the time the assets are placed in service.
Amounts recorded for the related assets are increased by the amount of these
obligations. Over time, the liabilities are accreted for the change in their
present value and the initial capitalized costs are depreciated over the useful
lives of the related assets.
The Company used an expected cash flow approach to estimate its asset
retirement obligations under SFAS 143. Upon adoption, the Company recorded a
retirement obligation of $345,000, an increase in property and equipment cost of
$1,535,000, a decrease in accumulated depreciation, depletion and amortization
of $609,000 and a cumulative effect of accounting change income, net of $0 tax,
of $1,799,000. As a result of adoption of SFAS 143, the Company estimates that
accretion expense will be approximately $37,000 in 2003.
At January 1, 2003, there are no assets legally restricted for purposes
of settling asset retirement obligations. There was no impact on the Company's
cash flows as a result of adopting SFAS 143 because the cumulative effect of
change in accounting method is a noncash transaction.
The Company's estimated asset retirement obligation liability at
January 1, 2002, was approximately $322,000.
Note 6: Income Taxes
FX Energy recognized no income tax expense (benefit) from the net
income (loss) generated in the first quarter of 2003 and the first quarter of
2002. The Company has sufficient net operating losses to offset any taxable
income generated by the cumulative effect of accounting change in 2003.
9
Note 7: Business Segment Information
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
disclosure purposes. Reportable business segment information as of March 31,
2003, and for the three months ended March 31, 2003, excluding the impact of the
change in accounting principle, follows:
Non-
Oilfield Segmented
E&P Services Items(1) Total
--------------- --------------- --------------- ---------------
Business segment information:
Revenues................................... $ 611,943 $ 9,328 $ -- $ 621,271
Net income (loss).......................... 152,209 (139,544) (720,402) (707,737)
Identifiable net property and
equipment................................ 3,713,640 721,659 70,227 4,505,526
- -----------------
(1) Net loss reconciling items include $2,691 of corporate DD&A, $497,514 of
general and administrative expenses, and $(220,197) of other income and
expense. Identifiable net property and equipment includes $70,227 of
corporate office equipment, hardware and software.
Reportable business segment information as of March 31, 2002, and for
the three months ended March 31, 2002, follows:
Non-
Oilfield Segmented
E&P Services Items (1) Total
--------------- --------------- --------------- ---------------
Business segment information:
Revenues................................... $ 445,809 $ 4,353 $ -- $ 450,162
Net loss................................... (117,281) (183,806) (716,866) (1,017,953)
Identifiable net property and
equipment................................ 3,785,652 934,489 96,118 4,816,259
- -----------------------
(1) Net loss reconciling items include $5,558 of corporate DD&A, $638,047 of
general and administrative expenses, $54,688 of amortization of deferred
compensation (G&A) and $18,573 of other income and expense. Identifiable
net property and equipment includes $96,118 of corporate office equipment,
hardware and software.
Note 8: Stock-Based Compensation
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25 and related interpretations. Nonemployee stock-based compensation is
accounted for using the fair value method in accordance with SFAS No. 123
"Accounting for Stock-based Compensation."
10
On December 31, 2002, the FASB issued SFAS 148, "Accounting for Stock
Based Compensation Transition and Disclosure," which amends SFAS 123. SFAS 148
requires more prominent and frequent disclosures about the effects of
stock-based compensation. The Company adopted SFAS 148 for the year ended
December 31, 2002. The Company will continue to account for its stock-based
compensation according to the provisions of APB Opinion No. 25.
Had compensation cost for the Company's stock options been recognized
based on the estimated fair value on the grant date under the fair value
methodology prescribed by SFAS No. 123, as amended, the Company's net earnings
and earnings per share for the periods ended March 31 2003 and 2002 would have
been as follows:
(in thousands) 2003 2002
------------ ------------
Net income (loss):
Net income (loss), as reported..................................... $ 1,092 $ (1,018)
Less: Total stock-based employee compensation expense determined
under the fair value based method for all awards, net of related
tax effects........................................................ (202) (281)
------------- -------------
Pro forma net income (loss)................................... $ 890 $ (1,299)
============= =============
Basic and diluted net income (loss) per share:
As reported................................................... $ 0.06 $ (0.06)
Pro forma..................................................... 0.05 (0.07)
11
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 their respective segments
are detailed within the following discussion. Amortization of deferred
compensation (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 ended March 31, 2003 and 2002,
follows.
Quarter Ended March 31, 2003, Compared to the Same Period of 2002
Exploration and Production Segment
FX Energy's oil and gas revenues are comprised of oil production in the
United States and, until December 31, 2002, gas production in Poland. A summary
of the percentage change in oil and gas revenues, average prices and production
for first quarter of 2003 and 2002 from year to year is set forth on the
following table:
Quarter Ended March 31,
------------------------------------------------------------
Oil Gas
----------------------------- -----------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Revenues.............................................. $ 612,000 $ 354,000 $ -- $ 92,000
Percent change versus prior year's quarter.......... 73% -34% --% 48%
Average price per (Bbl or Mcf(1)) .................... $ 29.27 $ 16.96 $ -- $1.58
Percent change versus prior year's quarter.......... 73% -26% --% --%
Production volumes (Bbls or Mcf)...................... 20,906 22,662 -- 58,250
Percent change versus prior year's quarter.......... -8% -3% --% 47%
- -------------------
(1) The contract price prior to adjusting for Btu content was $2.02 per Mcf.
Oil Revenues. Oil revenues were $612,000 during the first quarter of
2003, an increase of $258,000 compared to $354,000 during the same period of
2002. During the first quarter of 2003, our oil revenues were positively
affected by significantly higher average oil prices, offset by 8% lower
production which was attributable to the natural production declines of our
producing properties.
Gas Revenues. Gas revenues were $0 during the first quarter of 2003,
compared to $92,000 in gas revenues during the same period of 2002. As part of
our Fences I settlement with the Polish Oil and Gas Company, or POGC, in early
2003, we agreed to assign our interest in the Kleka well, along with the related
accounts receivable amount, to POGC as soon as possible in 2003. Accordingly, we
have stopped recording gas sales in 2003. Gas volumes in the first quarter of
2002 reflected a full quarter of production during 2002 from the Kleka 11, our
first producing well in Poland, which began producing in late February 2001.
12
Lease Operating Costs. Lease operating costs were $360,000 during the
first quarter of 2003, an increase of $7,000 compared to the same period of
2002. Lease operating costs incurred during the first quarter of 2003 include no
costs associated with the Kleka 11, while lease operating costs at the Kleka 11
well averaged approximately $0.16 per Mcf in the prior year. During the first
quarter of 2003 in the United States, lifting costs were $17.24 per barrel, an
increase of $2.29 compared to $14.95 during the same period of 2002. The
increase was due primarily to one-time workover expenses and higher third-party
maintenance activities. We expect that operating costs will trend lower during
the balance of the year.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$67,000 during the first quarter of 2003, compared to $127,000 during the same
period of 2002, a decrease of 47%. Limited available capital in 2003 and 2002
has caused us to sharply curtail our exploration activities in Poland compared
to prior years. We expect that our exploration activities in Poland will
continue to be curtailed in the near term pending the successful farmout of
additional prospects.
DD&A Expense - Exploration and Production. DD&A expense for producing
properties was $23,000 for the first quarter of 2003, a decrease of 73% compared
to $84,000 during the same period of 2002. Essentially all of the decrease in
DD&A is associated with the assignment of the Kleka 11 well. In 2002, we
recorded a full quarter of DD&A expense in Poland related to the Kleka well.
Accretion Expense. Accretion expense reflects the first quarter
increase in our Asset Retirement Obligation under SFAS 143 that we adopted on
January 1, 2003.
Oilfield Services Segment
Oilfield Services Revenues. Oilfield services revenues were $9,000
during the first quarter of 2003, an increase of $5,000 compared to $4,000 for
the first quarter of 2002. During most of the first quarters of 2003 and 2002,
our drilling rig was idle due to winter weather. Oilfield servicing revenues
were generated primarily by our well-servicing equipment during these periods.
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 $75,000 during
the first quarter of 2003, down from the $112,000 incurred in the same period of
2002. The bulk of the costs in both periods related to downtime maintenance
costs associated primarily with our drilling rig. Oilfield services costs will
also continue to fluctuate year to year 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 $74,000 during the first quarter of 2003, compared to $75,000 during the
same period of 2002. The year-to-year decrease was primarily due to capital
additions from prior years being fully depreciated during 2002.
Nonsegmented Information
DD&A - Corporate. DD&A for corporate activities was $3,000 during the
first quarter of 2003, a decrease of $3,000 compared to the same period of 2002.
DD&A was lower primarily due to capital items being depreciated in the first
quarter of 2002 subsequently becoming fully depreciated prior to the first
quarter of 2003.
13
G&A Costs. G&A costs were $498,000 during the first quarter of 2003, a
decrease of 22% compared to the same period of 2002, primarily due to a 50%
reduction in executive salaries that was instituted on July 1, 2002.
Amortization of Deferred Compensation (G&A). Amortization of deferred
compensation was $0 during the first quarter of 2003, compared to $55,000 during
the same period of 2002. On April 5, 2001, we extended the term of options to
purchase 125,000 shares of the Company's common stock that were to expire during
2001 for a period of two years, with a one-year vesting period. On August 4,
2000, we extended the term of options and warrants to purchase 678,000 shares of
our common stock that were to expire during 2000 for a period of two years, with
a one-year vesting period. In accordance with FIN 44 "Accounting for Certain
Transactions involving Stock Compensation," we incurred total noncash deferred
compensation costs of $1.8 million associated with the option extensions, to be
amortized over their respective one-year vesting periods from the date of
extension. All of the deferred compensation associated with these transactions
was amortized by the end of the first quarter of 2002. All of the extended
options have expired.
Interest and Other Income. Interest and other income was $10,000 during
the first quarter of 2003, a decrease of $95,000 compared to $105,000 during the
same period of 2002. During the first quarter of 2002, we recorded other income
of $93,000 pertaining to amortizing an option premium resulting from granting
RRPV an option to purchase gas from our properties in Poland. There was no
income related to the option premium during 2003.
Interest Expense. Interest expense was $230,000 during the first
quarter of 2003, compared to $124,000 during the same period of 2002. We began
accruing interest on our POGC obligation in the fourth quarter of 2002, which
accounted for a majority of the additional interest in the first quarter of
2003. In addition, the interest rate on our RRPV obligation was increased from
9.5% to 12% as of March 9, 2003.
Liquidity and Capital Resources
General. As of March 31, 2003, we had approximately $3.6 million of
cash and cash equivalents and negative working capital of approximately $4.2
million, coupled with a history of operating losses. These matters raise doubt
about our ability to continue as a going concern. In addition, we have a
remaining work commitment of $6.6 million, in addition to an accrued liability
of $4.6 million at March 31, 2003, that must be satisfied in order to earn a
49.0% interest in our Fences I project area.
To date, we have financed our operations principally through the sale
of equity securities, issuance of debt securities and agreements with industry
partners that funded our share of costs in certain exploratory activities in
order to earn an interest in our properties. We recently completed a private
placement of convertible preferred stock (see Note 2). However, the continuation
of our exploratory efforts in Poland is dependent on raising additional capital
or on arranging industry funding for such exploration. The availability of such
capital will affect the timing, pace, scope and amount of our future capital
expenditures. There can be no assurance that we will be able to obtain
additional financing, reduce expenses or successfully complete other steps to
continue as a going concern. If we are unable to obtain sufficient funds to
satisfy our future cash requirements, we may be forced to curtail operations,
dispose of assets or seek extended payment terms from our vendors. Such events
would materially and adversely affect our financial position and results of
operations.
14
Working Capital (current assets less current liabilities). Our working
capital deficit was $4,219,000 as of March 31, 2003, a decrease of $4,931,000
from our working capital deficit at December 31, 2002, of $9,150,000,
principally as a result of the private placement of preferred stock discussed
earlier. Our current liabilities include $4.6 million of costs related to our
Fences I project in Poland, and $3.3 million payable to RRPV, which has a
current maturity date of December 31, 2003.
Operating Activities. Net cash used in operating activities was
$837,000 during the first quarter of 2003, a decrease of $219,000 compared to
$1,156,000 in net cash used during the same period of 2002. This reduction in
cash used is a direct reflection of our curtailed exploration activities and
lower geological and geophysical costs in Poland, as well as lower employee
costs.
Investing Activities. We spent $74,000 in investing activities during
the first quarter of 2003, primarily related to our proved properties in the
United States. In 2002, we spent $39,000 in investing activities during the
first quarter of 2002, including $27,000 on upgrading our oilfield servicing
equipment and $12,000 on our proved properties in the United States.
Financing Activities. During the first quarter of 2003, we completed a
private placement of convertible preferred stock, resulting in proceeds after
offering costs of approximately $5,594,000. We used $1,675,000 of the proceeds
to pay down our RRPV note, and incurred loan fees relating to our new agreement
with RRPV of $100,000. We received no cash from financing activities during the
first quarter of 2002.
Contractual Obligations and Contingent Liabilities and Commitments
The following is a summary of our significant contractual obligations
as of March 31, 2003 (in thousands):
Due by December 31, 2003
Common stock issuable(1)................. --
Fences I work commitment(2) ............. $ 5,600
Cash payment to POGC(3).................. $ 4,400 plus interest
Note payable (RRPV)(3)................... $ 3,325 plus interest
-------------------------
Total ................................... $ 13,325
=========================
- -------------------
(1) 2,250,000 shares of common stock are issuable upon the conversion of the
2003 Series Convertible Preferred Stock (see Note 2). In addition, warrants
to purchase 2,250,000 shares of common stock at $3.60 per share will be
issued upon the preferred stock conversion.
2) The Fences I work commitment and the cash payment to POGC are required in
order for us to meet our commitment to earn a 49% interest in the Fences
I project area.
3) Included in current liabilities at March 31, 2003.
Risk Factors
We face a number of risks in our business, including, but not limited
to, the risk factors discussed in our annual report on Form 10-K for the year
ended December 31, 2002, and other Securities and Exchange Commission filings.
Other Items
The Company has reviewed all other recently issued, but not yet
adopted, accounting standards in order to determine their effects, if any, on
the results of operations or financial position of the Company. Based on that
review, the Company believes that none of these pronouncements will have a
significant effect on current or future financial position or results of
operations.
15
Critical Accounting Policies
A summary of our significant accounting policies is included in Note 1
of our Consolidated Financial Statements contained in the annual report on Form
10-K for the year ended December 31, 2002. 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 generally
accepted accounting principles 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," "will," "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 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
strategic partners to share the costs of exploration, exploitation, development
and acquisition activities; and future plans and the financial and technical
resources of strategic partners.
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, including the
risk factors detailed in this report. 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.
16
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. 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.
Foreign Currency Risk
We have entered into various agreements in Poland, primarily in U.S.
dollars or the U.S. dollar equivalent of the Polish zloty. We conduct our
day-to-day business on this basis as well. 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.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this Report, the Company's
principal executive officer ("CEO") and principal financial officer ("CFO")
carried out an evaluation of the effectiveness of the Company's disclosure
controls and procedures. Based on those evaluations, the Company's CEO and CFO
believe:
(i) that the Company's disclosure controls and procedures are designed
to ensure that information required to be disclosed by the Company in
the reports it files under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and that such information is
accumulated and communicated to the Company's management, including the
CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure; and
(ii) that the Company's disclosure controls and procedures are
effective.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
internal controls subsequent to the evaluation referred to in Item 4, above, nor
have there been any corrective actions with regard to significant deficiencies
or material weaknesses.
17
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 13, 2003, we sold 2,250,000 shares of 2003 Series Convertible
Preferred Stock in a private placement of securities, raising a total of
approximately $5.6 million after offering costs. Each share of preferred stock
is convertible into one share of common stock and one warrant to purchase one
share of common stock at $3.60 per share anytime between March 1, 2004, and
March 1, 2008. The preferred stock has a liquidation preference equal to the
sales price for the shares, which was $2.50 per share.
The net proceeds from the offering were used to reduce the obligation
to RRPV, and will be used to fund ongoing geological and geophysical costs in
Poland and support ongoing prospect marketing and general and administrative
costs.
The foregoing transactions were the result of arm's-length negotiations
with accredited investors who were provided with our business and financial
information, including copies of our periodic reports as filed with the
Securities and Exchange Commission, and who were provided with the opportunity
to ask questions directly of our executive officers. In each instance, the
securities purchased were restricted securities taken for investment.
Certificates for all shares issued in the such transactions bore a restrictive
legend conspicuously on their face and stop-transfer instructions were noted
respecting such certificates on our stock transfer records. Each of the
foregoing transactions was effected in reliance on the exemption from
registration provided in Section 4(2) of the Securities Act of 1933 as
transactions not involving any public offering.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
SEC
Exhibit Reference
Number Number Title of Document Location
- ------------ ------------ ---------------------------------------- -------------
Item 99 Additional Exhibits
- ------------ ------------ ---------------------------------------- -------------
99.01 99 Certification of Chief Executive Officer This filing
99.02 99 Certification of Chief Financial Officer This filing
(b) Reports on form 8-K
During the quarter ended March 31, 2003, FX Energy filed the following
reports on Form 8-K:
Date of Event Reported Item(s) Reported
--------------------------- ------------------------------
January 9, 2003 Item 5. Other Events
January 13, 2003 Item 5. Other Events
January 27, 2003 Item 5. Other Events
February 6, 2003 Item 5. Other Events
February 26, 2003 Item 7. Exhibits
Item 9. Regulation FD Disclosure
March 13, 2003 Item 5. Other Events
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: May 15, 2003 By /s/ David N. Pierce
------------------------------
David N. Pierce, President,
Chief Executive Officer
Date: May 15, 2003 By /s/ Thomas B. Lovejoy
------------------------------
Chief Financial Officer
19
CERTIFICATION
I, David N. Pierce, President and Chief Executive Officer of FX Energy,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of FX Energy,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ David N. Pierce
- --------------------------------------------
David N. Pierce
Title: President and Chief Executive Officer
(Principal Executive Officer)
20
CERTIFICATION
I, Thomas B. Lovejoy, Chief Financial Officer of FX Energy, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of FX Energy,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Thomas B. Lovejoy
- ---------------------------------
Thomas B. Lovejoy
Title: Chief Financial Officer
(Principal Financial Officer)
21