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, 2004
Commission File No. 000-25386
FX ENERGY, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 87-0504461
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(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 5, 2004, was 29,792,906.
FX ENERGY, INC. AND SUBSIDIARIES
Form 10-Q for the Three Months Ended March 31, 2004
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.................... 11
3 Quantitative and Qualitative Disclosures about Market Risk.... 15
4 Controls and Procedures....................................... 16
Part II. Other Information
6 Exhibits and Reports on Form 8-K.............................. 17
-- Signatures.................................................... 18
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2004 2003
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 17,805,376 $ 17,370,531
Accounts receivable:
Accrued oil sales................................................. 273,858 245,511
Joint interest and other receivables.............................. 424,987 137,479
Inventory........................................................... 77,230 79,318
Other current assets................................................ 133,230 126,007
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Total current assets.............................................. 18,714,681 17,958,846
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Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved............................................................ 5,870,407 5,752,518
Unproved.......................................................... 321,287 173,969
Other property and equipment...................................... 3,771,834 3,598,137
------------- -------------
Gross property and equipment.................................... 9,963,528 9,524,624
Less accumulated depreciation, depletion and amortization......... (4,588,558) (4,451,168)
------------- -------------
Net property and equipment.................................... 5,374,970 5,073,456
------------- -------------
Other assets:
Certificates of deposit............................................. 356,500 356,500
Other............................................................... 379,743 379,743
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Total other assets................................................ 736,243 736,243
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Total assets.......................................................... $ 24,825,894 $ 23,768,545
============= =============
-- Continued --
The accompanying notes are an integral part of the consolidated financial statements.
3
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
-- Continued --
March 31, December 31,
2004 2003
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 874,600 $ 621,414
Accrued liabilities................................................. 1,250,528 1,305,735
------------- -------------
Total current liabilities......................................... 2,125,128 1,927,149
------------- -------------
Long-term liabilities:
Asset retirement obligation ....................................... 393,007 382,696
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Total liabilities................................................. 2,518,135 2,309,845
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Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized,
no shares issued as of March 31, 2004, and as of
December 31, 2003................................................. -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 27,638,118 and 27,300,063 issued as of
March 31, 2004, and December 31, 2003, respectively............... 27,638 27,300
Additional paid-in capital.......................................... 79,205,411 77,326,046
Accumulated deficit................................................. (56,925,290) (55,894,646)
------------- -------------
Total stockholders' equity........................................ 22,307,759 21,458,700
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Total liabilities and stockholders' equity ........................... $ 24,825,894 $ 23,768,545
============= =============
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,
------------------------------------
2004 2003
----------------- ------------------
Revenues:
Oil and gas sales.................................................. $ 633,795 $ 611,943
Oilfield services................................................... 253,324 9,328
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Total revenues.................................................... 887,119 621,271
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Operating costs and expenses:
Lease operating costs............................................... 383,588 360,461
Geological and geophysical costs.................................... 376,156 66,879
Oilfield services costs............................................. 132,569 75,141
Depreciation, depletion and amortization............................ 137,390 99,530
General and administrative costs (G&A).............................. 898,839 497,516
Accretion expense................................................... 10,310 9,286
------------- -------------
Total operating costs and expenses................................ 1,938,852 1,108,813
------------- -------------
Operating loss........................................................ (1,051,733) (487,542)
------------- -------------
Other income (expense):
Interest and other income........................................... 21,089 9,613
Interest expense.................................................... -- (229,808)
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Total other income (expense) ..................................... 21,089 (220,195)
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Loss before cumulative effect of change in accounting
principle........................................................... (1,030,644) (707,737)
Cumulative effect of change in accounting principle................... -- 1,799,494
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Net income (loss) after cumulative effect of change
in accounting principle............................................. $ (1,030,644) $ 1,091,757
============= =============
- continued -
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,
------------------------------------
2004 2003
----------------- ------------------
Basic loss per common share before
cumulative effect of change in accounting principle................. $ (0.04) $ (0.04)
Cumulative effect of change in accounting principle................... -- 0.10
-------------- --------------
Basic net income (loss) per common share
after cumulative effect of change in accounting principle........... $ (0.04) $ 0.06
============== ==============
Diluted loss per common share before
cumulative effect of change in accounting principle................. $ (0.04) $ (0.04)
Cumulative effect of change in accounting principle................... -- 0.10)
-------------- --------------
Diluted net income (loss) per common share
after cumulative effect of change in accounting principle........... $ (0.04) $ 0.06
============== ==============
Basic weighted average number
of shares outstanding............................................... 27,431,008 17,651,917
Diluted weighted average number
of shares outstanding............................................... 27,431,008 17,651,917
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,
------------------------------------
2004 2003
----------------- ------------------
Cash flows from operating activities:
Net income (loss).................................................. $ (1,030,644) $ 1,091,757
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Cumulative effect of change in accounting principle............ -- (1,799,494)
Accretion expense.............................................. 10,310 9,286
Depreciation, depletion and amortization....................... 137,390 99,530
Stock issued for services...................................... 5,000 10,000
Amortization of loan fees...................................... -- 7,718
Increase (decrease) from changes in working capital items:
Accounts receivable.............................................. (315,855) (29,662)
Inventory........................................................ 2,088 2,724
Other current assets............................................. (7,223) 42,758
Accounts payable and accrued liabilities......................... 197,979 (271,790)
------------- ------------
Net cash used in operating activities.......................... (1,000,955) (837,173)
------------- ------------
Cash flows used in investing activities:
Additions to oil and gas properties................................ (265,206) (84,944)
Additions to other property and equipment.......................... (173,698) (4,356)
Net change in other assets......................................... -- 15,283
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Net cash used in investing activities............................ (438,904) (74,017)
------------- ------------
Cash flows from financing activities:
Proceeds from preferred stock offering, net........................ -- 5,593,872
Proceeds from stock option exercises............................... 1,874,704 --
Payment of loan fees............................................... -- (100,000)
Payments on notes payable.......................................... -- (1,675,000)
------------- ------------
Net cash provided by financing activities........................ 1,874,704 3,818,872
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Increase in cash and cash equivalents................................ 434,845 2,907,682
Cash and cash equivalents at beginning of period..................... 17,370,531 705,012
------------- ------------
Cash and cash equivalents at end of period........................... $ 17,805,376 $ 3,612,694
============= ============
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 results may not be indicative of results for the
entire year. 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, 2003,
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, 2004, FX Energy owned 100% of the voting stock of
all of its subsidiaries.
Note 2: Net Income (Loss) Per Share
Basic earnings per share is computed by dividing 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
4,522,694 and 4,544,017 shares of common stock at prices ranging from $2.40 to
$10.25 per share with a weighted average exercise price of $4.11 per share and
$5.52 per share were outstanding at March 31, 2004 and 2003, respectively. No
options or warrants were included in the computation of diluted net loss per
share for the period ended March 31, 2004 and 2003, because the effect would
have been antidilutive.
Note 3: Income Taxes
FX Energy recognized no income tax expense (benefit) from the net
income (loss) generated in the first quarter of 2004 and the first quarter of
2003. SFAS No. 109 "Accounting for Income Taxes" requires that a valuation
allowance be provided if it is more likely than not that some portion or all of
a deferred tax asset will not be realized. The Company's ability to realize the
benefit of its deferred tax asset will depend on the generation of future
taxable income through profitable operations and the expansion of exploration
and development activities. The market and capital risks associated with
achieving the above requirement are considerable, resulting in the Company's
conclusion that a full valuation allowance be provided.
8
Note 4: 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,
2004, and for the three months ended March 31, 2004, is as follows:
Non-
Oilfield Segmented
E&P(2) Services Items(1) Total
--------------- --------------- --------------- ---------------
Business segment information:
Revenues................................. $ 633,795 $ 253,324 $ -- $ 887,119
Net income (loss)........................ (196,239) 49,325 (883,730) (1,030,644)
Identifiable net property and equipment.. 4,588,238 535,235 251,496 5,374,970
- --------------------
(1) Net loss reconciling items include $5,980 of corporate DD&A, $944,794 of
general and administrative expenses, and $21,089 of other income and
expense. Identifiable net property and equipment includes $251,496 of
corporate office equipment, hardware and software.
(2) E&P operating costs include $376,000 in geological and geophysical costs,
$3,000 in lease operating costs, and $84,000 in general and administrative
costs incurred in Poland.
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(2) 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.
(2) E&P operating costs include $67,000 in geological and geophysical costs,
$2,000 in lease operating costs, and $61,000 in general and administrative
costs incurred in Poland.
Note 5: 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."
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
9
methodology prescribed by SFAS No. 123, as amended, the Company's net earnings
and earnings per share for the periods ended March 31, 2004 and 2003, would have
been as follows:
(in thousands) 2004 2003
------------- -------------
Net income (loss):
Net income (loss), as reported..................................... $ (1,031) $ 1,092
Less: Total stock-based employee compensation expense determined
under the fair value based method for all awards, net of related
tax effects........................................................ (250) (202)
-------- --------
Pro forma net income (loss)................................... $ (1,281) $ 890
======== ========
Basic and diluted net income (loss) per share:
As reported................................................... $ (0.04) $ 0.06
Pro forma..................................................... (0.05) 0.05
Note 6: Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standard Board ("FASB")
issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," and addresses consolidation by business
enterprises of variable interest entities (more commonly known as Special
Purpose Entities or SPEs). In December 2003, FASB issued FIN No. 46R, which
replaced FIN 46 and clarified ARB 51. This interpretation provides guidance on
how to identify a variable interest entity and determine when the assets,
liabilities, noncontrolling interests and results of operations of a variable
interest entity should be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb a majority of the variable
interest entity's expected losses or receive a majority of the expected residual
returns as a result of holding variable interests. This FIN requires the
consolidation of results of variable interest entities in which the Company is
the primary beneficiary of the variable interest entity. As of March 31, 2004,
the Company did not own an interest in a variable interest entity that met the
consolidation requirements and as such the adoption of FIN No. 46R did not have
any effect on its financial condition, results of operations, or liquidity.
Interests in entities acquired or created will be evaluated based on FIN No. 46R
criteria and consolidated, if required.
Note 7: Subsequent Event
On April 13, 2004, the Company completed the sale of 2.15 million
shares of common stock at $7.20 per share. The Company received net proceeds of
approximately $14.5 million after offering costs of approximately $1 million.
Proceeds from the offering will allow the Company to maintain two rigs drilling
full-time in Poland through 2005 and should provide cash on hand to fund the
drilling of approximately 10 new exploration prospects in Poland and cover
development costs of the Zaniemysl field.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations by Business Segment
We operate within two segments of the oil and gas industry: the
exploration and production segment, or E&P, and the oilfield services segment.
Depreciation, depletion and amortization costs, or DD&A, and general and
administrative costs, or G&A, directly associated with their respective segments
are detailed within the following discussion. G&A, interest income, other
income, and other costs that are not allocated to individual operating segments
for management or segment reporting purposes, are discussed in their entirety
following the segment discussion. A comparison of the results of operations by
business segment and the information regarding nonsegmented items for the three
months ended March 31, 2004 and 2003, follows.
Quarter Ended March 31, 2004, Compared to the Same Period of 2003
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 2004 and 2003 from year to year is set forth in the
following table:
Quarter Ended March 31,
------------------------------------------------------------
Oil Gas
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues.............................................. $ 634,000 $ 612,000 $ -- $ --
Percent change versus prior year's quarter.......... 4% 73% --% --%
Average price per barrel of oil ...................... $ 30.44 $ 29.27 $ -- $ --
Percent change versus prior year's quarter.......... 4% 73% --% --%
Production volumes (barrels of oil)................... 20,823 20,906 -- --
Percent change versus prior year's quarter.......... -0% -8% --% --%
Oil Revenues. Oil revenues were $634,000 during the first quarter of
2004, an increase of $22,000 compared to $612,000 during the same period of
2003. During the first quarter of 2004, our oil revenues were positively
affected by slightly higher average oil prices, while oil production was
essentially constant from year to year.
Gas Revenues. There were no gas revenues in the United States or Poland
during the first quarter of both 2004 and 2003.
Lease Operating Costs. Lease operating costs were $384,000 during the
first quarter of 2004, an increase of $24,000 compared to the same period of
2003. During the first quarter of 2004 in the United States, lifting costs were
$17.98 per barrel, an increase of $1.15, compared to $16.93 during the same
period of 2003. The increase was due primarily to higher third-party maintenance
activities.
11
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$376,000 during the first quarter of 2004, compared to $67,000 during the same
period of 2003, an increase of 461%. The successful completion of financing
activities in 2003 has given us the funds necessary to increase both the amount
and pace of our exploration activities in Poland in 2004, including funds for
seismic acquisition, reprocessing, and reinterpretation.
DD&A Expense - Exploration and Production. DD&A expense for producing
properties was $60,000 for the first quarter of 2004, an increase of 161%
compared to $23,000 during the same period of 2003. Essentially all of the
increase in DD&A is associated with higher property costs incurred in 2003 and
2004.
Accretion Expense. Accretion expense for both years reflects the
increase in our Asset Retirement Obligation under SFAS 143, which we adopted on
January 1, 2003, and was essentially flat from 2003 to 2004.
Oilfield Services Segment
Oilfield Services Revenues. Oilfield services revenues were $253,000
during the first quarter of 2004, an increase of $244,000 compared to $9,000 for
the first quarter of 2003. During most of the first quarter of 2003, our
drilling rig was idle due to winter weather. Drilling activity where we operate
picked up significantly during the first quarter of 2004. Oilfield servicing
revenues were generated primarily by performing drilling services for
third-party companies. 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 $135,000 during
the first quarter of 2004, up from the $75,000 incurred in the same period of
2003, reflecting the increased pace of drilling activities this year. Oilfield
services costs will also continue to fluctuate period to period based on
revenues generated, market demand, weather, the number of wells drilled,
downtime for equipment repairs, the degree of emphasis on utilizing our oilfield
servicing equipment on our company-owned properties, and other factors.
DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $71,000 during the first quarter of 2004, compared to $74,000 during the
same period of 2003. The quarter to quarter decrease was primarily due to
capital additions from prior years being fully depreciated during 2003.
Nonsegmented Information
DD&A - Corporate. DD&A for corporate activities was $6,000 during the
first quarter of 2004, an increase of $3,000 compared to the same period of
2003. DD&A was higher primarily due to increased capital expenditures during the
latter part of 2003 and early 2004.
G&A Costs. G&A costs were $899,000 during the first quarter of 2004,
compared to $498,000 during the first quarter of 2003, an increase of 81%.
During the first quarter of 2003, as part of our cost-cutting measures,
executive salaries were reduced by 50%. All executive salaries have since been
increased to full contract amounts. In addition, we have increased our headcount
in 2004, making additions to our technical team. We have also experienced higher
levels of spending in 2004 associated with investor relations activities,
consulting fees, and legal and accounting fees associated with Sarbanes-Oxley
Act compliance.
12
Interest and Other Income. Interest and other income was $21,000 during
the first quarter of 2004, an increase of $11,000 compared to $10,000 during the
same period of 2003. The increase was a reflection of higher cash balances
available for investment
Interest Expense. Interest expense was $0 during the first quarter of
2004, compared to $230,000 during the same period of 2003. All interest expense
in 2003 was related to our note payable to Rolls-Royce Power Ventures Limited,
or RRPV, which was satisfied in full in December 2003.
Liquidity and Capital Resources
To date, we have financed our operations principally through the sale
of equity securities, issuance of debt securities, and agreements with industry
participants that funded our share of costs in certain exploratory activities in
return for an interest in our properties. The continuation of our exploratory
efforts in Poland may be dependent on our ability to raise additional capital or
to farm out our properties. The availability of such capital or farmouts may
affect the timing, pace, scope and amount of our future capital expenditures.
There is no assurance that we will be able to secure additional industry
participants or obtain additional equity or debt financing or complete farmout
or other industry cost- and risk-sharing arrangements, particularly if we fail
to make additional discoveries. Such events would materially and adversely
affect our financial position and results of operations.
We may seek to obtain additional funds for future capital investments
from strategic alliances with other energy or financial participants, the sale
of additional securities, project financing, sale of partial property interests,
or other arrangements, all of which may dilute the interest of our existing
stockholders or our interest in the specific project financed. We may change the
allocation of capital among the categories of anticipated expenditures depending
upon future events. For example, we may change the allocation of our
expenditures based on the actual results and costs of future exploration,
appraisal, development, production, property acquisition and other activities.
In addition, we may have to change our anticipated expenditures if costs of
placing any particular discovery into production are higher, if the field is
smaller, or if the commencement of production takes longer than expected.
Working Capital (current assets less current liabilities). Our working
capital was $16,590,000 as of March 31, 2004, an increase of $558,000 from our
working capital at December 31, 2003, of $16,032,000. As of March 31, 2004, our
cash balance was approximately $17.8 million. We have no outstanding long-term
debt. Our current liabilities include $1.1 million payable to the Polish Oil and
Gas Company that will be settled later in the year, for the most part, by a
transfer of our interest in the Kleka 11 well. Subsequent to March 31, 2004, we
raised an additional $14.5 million through the sale of common stock (see Note 6
to the consolidated financial statements in Part I, Item I). We believe that we
now have cash on hand to fund our exploration and overhead costs as contemplated
through the end of 2005.
Operating Activities. Net cash used in operating activities was
$1,001,000 during the first quarter of 2004, an increase of $164,000 compared to
$837,000 in net cash used during the same period of 2003. This increase in cash
used is a direct reflection of our increased exploration activities and higher
geological and geophysical costs in Poland, as well as increased employee costs.
Investing Activities. We spent $439,000 in investing activities during
the first quarter of 2004, including $118,000 related to our proved properties
in the United States, $107,000 in Polish concession costs, $174,000 for office
and drilling equipment, and $40,000 in undeveloped leasehold costs in the United
States. In 2003, we used $74,000 in investing activities during the first
quarter of 2003, primarily related to our proved properties in the United
States.
13
Financing Activities. During the first quarter of 2004, option holders
exercised options for a total of 331,000 shares, resulting in proceeds to us of
$1,875,000. 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. The preferred stock was converted into 2,250,000
shares of common stock in October 2003. We used $1,675,000 of the proceeds to
pay down our RRPV note, and incurred loan fees of $100,000 relating to our new
agreement with RRPV.
Other Items
In January 2003, the Financial Accounting Standard Board ("FASB")
issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," and addresses consolidation by business
enterprises of variable interest entities (more commonly known as Special
Purpose Entities or SPEs). In December 2003, FASB issued FIN No. 46R which
replaced FIN 46 and clarified ARB 51. This interpretation provides guidance on
how to identify a variable interest entity and determine when the assets,
liabilities, noncontrolling interests and results of operations of a variable
interest entity should be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb a majority of the variable
interest entity's expected losses or receive a majority of the expected residual
returns as a result of holding variable interests. This FIN requires the
consolidation of results of variable interest entities in which we are the
primary beneficiary of the variable interest entity. As of March 31, 2004, we
did not own an interest in a variable interest entity that met the consolidation
requirements and as such the adoption of FIN No. 46R did not have any effect on
our financial condition, results of operations, or liquidity. Interests in
entities acquired or created will be evaluated based on FIN No. 46R criteria and
consolidated, if required.
We have reviewed all recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on our results of
operations or financial position. Based on that review, we believe that none of
these pronouncements will have a significant effect on current or future
financial position or results of operations.
Critical Accounting Policies
A summary of our significant accounting policies is included in Note 1
of our Consolidated Financial Statements contained in the annual report on Form
10-K for the year ended December 31, 2003. We believe the application of these
accounting policies on a consistent basis enables us to provide financial
statement users with useful, reliable and timely information about our earnings
results, financial condition and cash flows.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires our
management to make judgments, estimates and assumptions regarding uncertainties
that affect the reported amounts presented and disclosed in the financial
statements. Our management reviews these estimates and assumptions based on
historical experience, changes in business conditions and other relevant factors
that it believes to be reasonable under the circumstances. In any given
reporting period, actual results could differ from the estimates and assumptions
used in preparing our financial statements.
Critical accounting policies are those that may have a material impact
on our financial statements and also require management to exercise significant
judgment due to a high degree of uncertainty at the time the estimate is made.
Our senior management has discussed the development and selection of our
accounting policies, related accounting estimates and the disclosures set forth
below with the Audit Committee of our Board of Directors. We believe our
critical accounting policies include those addressing the recoverability and
useful lives of assets, the retirement obligations associated with those assets,
and the estimates of oil and gas reserves.
14
Forward Looking Statements
This report contains statements about the future, sometimes referred to
as "forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "could," "should,"
"expect," "anticipate," "estimate," "project," "propose," "plan," "intend" and
similar words and expressions. We intend that the forward-looking statements
will be covered by the safe harbor provisions for forward-looking statements
contained in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements that describe our future strategic
plans, goals or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking
statements, including those regarding us or our management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as the future 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 participants to share the costs of exploration, exploitation,
development and acquisition activities; and future plans and the financial and
technical resources of strategic participants.
The forward-looking information is based on present circumstances and
on our predictions respecting events that have not occurred, that may not occur
or that may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of various factors. The
forward-looking statements included in this report are made only as of the date
of this report. We disclaim any obligation to update any forward-looking
statements whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Price Risk
Realized pricing for our oil production in the United States is
primarily driven by the prevailing worldwide price of oil, subject to gravity
and other adjustments for the actual oil sold. Historically, oil prices have
been volatile and unpredictable. Price volatility relating to our oil production
in the United States is expected to continue in the foreseeable future.
There is currently no competitive market for the sale of gas in Poland.
Accordingly, we expect that the prices we receive for the gas we discover and
produce will be lower than would be the case in a competitive setting and may be
lower than prevailing western European prices, at least until a fully
competitive market develops in Poland.
15
We currently do not engage in any hedging activities or have any
derivative financial instruments to protect ourselves against market risks
associated with oil and gas price fluctuations, although we may elect to do so
if we achieve a significant amount of production in Poland.
Foreign Currency Risk
We have entered into various agreements in Poland, 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
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit to the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission's rules and forms, and that information is accumulated and
communicated to our management, including our principal executive and principal
financial officers (whom we refer to in this periodic report as our Certifying
Officers), as appropriate to allow timely decisions regarding required
disclosure. Our management evaluated, with the participation of our Certifying
Officers, the effectiveness of our disclosure controls and procedures as of
March 31, 2004, pursuant to Rule 13a-15(b) under the Securities Exchange Act.
Based upon that evaluation, our Certifying Officers concluded that, as of March
31, 2004, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting
that occurred during our most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
16
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
Exhibit
Number* Title of Document Location
- ------------------- ---------------------------------------------------------------------- --------------------
Item 10 Material Contracts
10.01 Greater Zaniemysl Area Agreement made as of March 12, 2004, among FX This filing
Energy Poland SP. z o.o. and CalEnergy Resources Poland Sp. z o.o.
Item 31 Rule 13a-14(a)/15d-14(a) Certifications
- ------------------- ---------------------------------------------------------------------- --------------------
31.01 Certification of Chief Executive Officer Pursuant to This filing
Rule 13a-14
31.02 Certification of Chief Financial Officer Pursuant to This filing
Rule 13a-14
Item 32 Section 1350 Certifications
- ------------------- ---------------------------------------------------------------------- --------------------
32.01 Certification of Chief Executive Officer Pursuant to This filing
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.02 Certification of Chief Financial Officer Pursuant to This filing
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- -----------------------
* All exhibits are numbered with the number preceding the decimal indicating
the applicable SEC reference number in Item 601 and the number following
the decimal indicating the sequence of the particular document.
(b) Reports on Form 8-K
During the quarter ended March 31, 2004, FX Energy filed or furnished
the following reports on Form 8-K:
Date Reported Item(s) Reported
--------------------- --------------------------------------
January 5, 2004 Item 7. Exhibits
Item 9. Regulation FD Disclosure
January 23, 2004 Item 5. Other Events
January 26, 2004 Item 5. Other Events
February 5, 2004 Item 5. Other Events
March 1, 2004 Item 5. Other Events
Item 7. Exhibits
March 9, 2004 Item 5. Other Events
March 16, 2004 Item 5. Other Events
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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 10, 2004 By /s/ David N. Pierce
--------------------------------
David N. Pierce, President,
Chief Executive Officer
Date: May 10, 2004 By /s/ Thomas B. Lovejoy
--------------------------------
Thomas B. Lovejoy,
Chief Financial Officer
18