U.S. 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 SEPTEMBER 30, 2004
Commission File No. 000-25386
FX ENERGY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0504461
-------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
----------------------------------------
(Address of principal executive offices)
(801) 486-5555
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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 November 2, 2004, was
34,128,530.
FX ENERGY, INC. AND SUBSIDIARIES
Form 10-Q for the Quarterly Period Ended September 30, 2004
TABLE OF CONTENTS
Item Page
---- ----
Part I. Financial Information
1 Financial Statements
Consolidated Balance Sheets..................................... 3
Consolidated Statements of Operations and Comprehensive Loss.... 5
Consolidated Statements of Cash Flows........................... 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........ 17
4 Controls and Procedures........................................... 18
Part II. Other Information
6 Exhibits.......................................................... 19
-- Signatures........................................................ 20
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2004 2003
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 10,084,202 $ 17,370,531
Marketable securities.................................................. 32,235,196 --
Accounts receivable:
Accrued oil sales.................................................... 381,411 245,511
Joint interest owners and others..................................... 355,585 137,479
Inventory.............................................................. 92,167 79,318
Other current assets................................................... 290,957 126,007
------------ ------------
Total current assets................................................. 43,439,518 17,958,846
------------ ------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved............................................................... 8,133,224 5,752,518
Unproved............................................................. 342,087 173,969
Other property and equipment......................................... 3,920,695 3,598,137
------------ ------------
Gross property and equipment....................................... 12,396,006 9,524,624
Less: accumulated depreciation, depletion and amortization........... (4,907,780) (4,451,168)
------------ ------------
Net property and equipment......................................... 7,488,226 5,073,456
------------ ------------
Other assets:
Certificates of deposit ............................................... 356,500 356,500
Other.................................................................. 2,789 379,743
------------ ------------
Total other assets................................................... 359,289 736,243
------------ ------------
Total assets............................................................. $ 51,287,033 $ 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 --
September 30, December 31,
2004 2003
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 830,240 $ 621,414
Accrued liabilities.................................................. 1,243,595 1,305,735
------------ ------------
Total current liabilities.......................................... 2,073,835 1,927,149
Asset retirement obligation ......................................... 396,042 382,696
------------ ------------
Total liabilities.................................................. 2,469,877 2,309,845
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no
shares issued as of September 30, 2004 and December 31, 2003....... -- --
Common stock, $0.001 par value, 100,000,000 shares authorized;
33,829,711 and 27,300,063 shares issued as of September 30, 2004
and December 31, 2003, respectively................................ 33,830 27,300
Additional paid-in capital........................................... 115,061,597 77,326,046
Accumulated other comprehensive loss................................. (212,457) --
Accumulated deficit.................................................. (66,065,814) (55,894,646)
------------ ------------
Total stockholders' equity......................................... 48,817,156 21,458,700
------------ ------------
Total liabilities and stockholders' equity ............................ $ 51,287,033 $ 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 and Comprehensive Loss
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
------------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
Oil and gas sales................................. $ 869,349 $ 557,637 $ 2,196,679 $ 1,676,155
Oilfield services................................ 100,825 43,874 410,912 76,402
------------- ------------- ------------- -------------
Total revenues.................................. 970,174 601,511 2,607,591 1,752,557
------------- ------------- ------------- -------------
Operating costs and expenses:
Lease operating expenses.......................... 510,118 361,008 1,321,305 1,117,812
Exploration costs................................. 647,787 115,624 1,861,156 406,483
Oilfield services costs........................... 92,479 97,077 354,897 225,851
Depreciation, depletion and amortization (DD&A)... 166,701 157,205 456,612 412,625
Accretion expense................................. 10,310 9,287 30,932 27,859
Stock compensation (G&A).......................... 12,132 -- 5,841,487 --
General and administrative (G&A).................. 1,102,125 515,538 3,195,598 1,569,426
------------- ------------- ------------- -------------
Total operating costs and expenses.............. 2,541,652 1,255,739 13,061,987 3,760,056
------------- ------------- ------------- -------------
Operating loss...................................... (1,571,478) (654,228) (10,454,396) (2,007,499)
------------- ------------- ------------- -------------
Other income (expense):
Interest and other income (expense), net.......... 166,784 9,474 283,228 18,793
Interest expense.................................. -- (221,474) -- (691,335)
------------- ------------- ------------- -------------
Total other income (expense).................... 166,784 (212,000) 283,228 (672,542)
------------- ------------- ------------- -------------
Loss before cumulative effect of change in
accounting principle (1,404,694) (866,228) (10,171,168) (2,680,041)
Cumulative effect of change in accounting principle -- -- -- 1,799,494
------------- ------------- ------------- -------------
Net loss (1,404,694) (866,228) (10,171,168) (880,547)
Other comprehensive loss
Decrease in market value of available for
sale marketable securities........................ (129,329) -- (212,457) --
------------- ------------- ------------- -------------
Comprehensive loss $ (1,534,023) $ (866,228) $ (10,383,625) $ (880,547)
============= ============= ============= =============
-- Continued --
The accompanying notes are an integral part of the consolidated financial statements.
5
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
-- Continued --
For the three months For the nine months
ended September 30, ended September 30,
------------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Basic and diluted loss per common share
before cumulative effect of change in
accounting principle.............................. $ (0.05) $ (0.04) $ (0.35) $ (0.15)
------------- ------------- ------------- -------------
Cumulative effect of change in accounting
principle......................................... -- -- -- 0.10
------------- ------------- ------------- -------------
Basic and diluted net loss per common share......... $ (0.05) $ (0.04) $ (0.35) $ (0.05)
============= ============= ============= =============
Basic and diluted weighted average number of
shares outstanding................................ 31,178,766 20,065,624 29,080,282 18,486,055
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 nine months
ended September 30,
----------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities:
Net loss............................................................... $ (10,171,168) $ (880,547)
Adjustments to reconcile net loss to net
cash used in operating activities:
Cumulative effect of change in accounting principle................ -- (1,799,494)
Accretion expense.................................................. 30,932 27,859
Amortization of loan fees.......................................... -- 69,467
Depreciation, depletion and amortization........................... 456,612 412,625
Loss on asset disposition.......................................... 1,174 --
Stock compensation (G&A)........................................... 5,841,487 --
Common stock issued for services................................... 149,861 91,181
Increase (decrease) from changes in working capital items:
Accounts receivable.................................................. (354,006) (3,215)
Inventory............................................................ (12,849) 4,606
Other current assets................................................. (164,950) (81,998)
Accounts payable and accrued liabilities............................. 146,686 (194,983)
Asset retirement obligation.......................................... (17,586) --
-------------- --------------
Net cash used in operating activities.............................. (4,093,807) (2,354,499)
-------------- --------------
Cash flows from investing activities:
Additions to oil and gas properties.................................... (2,171,869) (2,301,743)
Additions to other property and equipment.............................. (323,732) (37,149)
Partner advance........................................................ -- (365,584)
Additions to marketable securities..................................... (32,447,653) --
Increase in restricted cash............................................ -- (3,325,000)
(Increase) decrease in other assets.................................... -- 15,283
-------------- --------------
Net cash used in investing activities................................ (34,943,254) (6,014,193)
-------------- --------------
Cash flows from financing activities:
Proceeds from preferred stock offering, net............................ -- 5,593,872
Payment of loan fees................................................... -- (100,000)
Proceeds from common stock offering, net............................... 20,723,656 8,774,007
Proceeds from stock option and warrant exercises....................... 11,027,076 --
Payments on notes payable.............................................. -- (1,675,000)
-------------- --------------
Net cash provided by financing activities............................ 31,750,732 12,592,879
-------------- --------------
Increase (decrease) in cash and cash equivalents......................... (7,286,329) 4,224,187
Cash and cash equivalents at beginning of period......................... 17,370,531 705,012
-------------- --------------
Cash and cash equivalents at end of period............................... $ 10,084,202 $ 4,929,199
============== ==============
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,
2003, and quarterly reports Form 10-Q for the quarters ended March 31 and June
30, 2004, 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 September 30, 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 net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing net income (loss) by the sum of the weighted
average number of common shares and the effect of dilutive unexercised stock
options and warrants and convertible preferred stock. Options to purchase
4,181,966 and 4,421,017 shares of common stock at prices ranging from $2.40 to
$8.88 per share with a weighted average exercise price of $4.55 per share and
$4.68 per share were outstanding at September 30, 2004 and 2003, respectively.
Warrants to purchase 3,866,192 and 5,515,137 shares of common stock at prices
ranging from $3.60 to $3.75 per share with a weighted average exercise price of
$3.66 per share and $3.69 per share were outstanding at September 30, 2004 and
2003, respectively. No options or warrants were included in the computation of
diluted net loss per share for the periods ended September 30, 2004 and 2003,
because the effect would have been antidilutive.
Note 3: Income Taxes
FX Energy recognized no income tax benefit from the net loss generated
in the first nine months of 2004 and the first nine months of 2003. Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
requires that a valuation allowance be provided if it is more likely than not
that some portion or all of a deferred tax asset will not be realized. The
Company's ability to realize the benefit of its deferred tax asset will depend
on the generation of future taxable income through profitable operations and the
expansion of exploration and development activities. The market and capital
risks associated with achieving the above requirement are considerable,
resulting in the Company's conclusion that a full valuation allowance be
provided.
Note 4: Business Segments
FX Energy operates within two segments of the oil and gas industry: the
exploration and production segment ("E&P") and the oilfield services segment.
Identifiable net property and equipment are reported by business segment for
management reporting and reportable business segment disclosure purposes.
Current assets, other assets, current liabilities and long-term debt are not
allocated to business segments for management reporting or business segment
disclosure purposes. Reportable business segment information for the three
8
months ended September 30, 2004, the nine months ended September 30, 2004, and
as of September 30, 2004, is as follows:
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P Services Items Total
--------------- --------------- --------------- ---------------
Three months ended September 30, 2004:
Revenues(1)...................................... $ 869,349 $ 100,825 $ -- $ 970,174
Net loss(2)...................................... (366,328) (68,499) (969,867) (1,404,694)
Nine months ended September 30, 2004:
Revenues(1)...................................... 2,196,679 410,912 -- 2,607,591
Net loss(2)...................................... (1,205,780) (159,205) (8,806,183) (10,171,168)
As of September 30, 2004:
Identifiable net property and equipment(3)....... 6,742,768 411,141 334,316 7,488,226
- ---------------------
(1) E&P operating costs for the third quarter include $647,787 in geological
and geophysical costs, $4,703 in lease operating costs, and $43,567 in
general and administrative costs incurred in Poland. E&P operating costs
for the first nine months include $1,861,156 in geological and geophysical
costs, $9,567 in lease operating costs, and $157,434 in general and
administrative costs incurred in Poland.
(2) Net loss reconciling items for the third quarter include $1,102,125 of
general and administrative costs, $12,132 of noncash stock compensation
expense, $166,784 of other income and expense, and $22,394 of corporate
DD&A. Net loss reconciling items for the nine months include $3,195,598 of
general and administrative costs, $5,841,487 of noncash stock compensation
expense, $283,228 of other income and expense, and $52,325 of corporate
DD&A.
(3) Identifiable net property and equipment not associated with a segment
consists of $334,316 of corporate office equipment, hardware and software.
Reportable business segment information for the three months ended
September 30, 2003, the nine months ended September 30, 2003, and as of
September 30, 2003, excluding the cumulative effect of a change in accounting
principle, follows:
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P Services Items Total
--------------- --------------- --------------- ---------------
Three months ended September 30, 2003:
Revenues(1)...................................... $ 557,637 $ 43,874 $ -- $ 601,511
Net loss(2)...................................... (8,363) (127,641) (730,224) (866,228)
Nine months ended September 30, 2003:
Revenues(1)...................................... 1,676,155 76,402 -- 1,752,557
Net loss(2)...................................... (58,440) (371,565) (2,250,036) (2,680,041)
As of September 30, 2003:
Identifiable net property and equipment(3)....... 5,161,730 581,531 89,382 5,832,643
- --------------------
(1) E&P operating costs for the third quarter include $115,624 in geological
and geophysical costs, $1,488 in lease operating costs, $39,647 in general
and administrative costs, and $95,034 in interest costs incurred in Poland.
E&P operating costs for the nine months include $406,483 in geological and
geophysical costs, $6,599 in lease operating costs, and $120,961 in general
and administrative costs incurred in Poland.
(2) Net loss reconciling items for the third quarter include $515,538 of
general and administrative costs, $212,000 of other income and expense, and
$2,687 of corporate DD&A. Net loss reconciling items for the nine months
include $1,569,426 of general and administrative costs, $672,542 of other
income and expense, and $8,069 of corporate DD&A.
(3) Identifiable net property and equipment not associated with a segment
consists of $89,382 of corporate office equipment, hardware and software.
9
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," as amended.
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 September 30, 2004 and 2003, would
have been as follows:
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
(in thousands, except for per share data)
Net loss:
Net loss, as reported................................... $ (1,405) $ (866) $ (10,171) $ (881)
Add: Stock-based employee compensation expense
included in reported net loss......................... -- -- 5,820 --
Less: Total stock-based employee compensation expense
determined under the fair value based method for all
awards................................................ (338) (207) (1,047) (620)
------------- ------------- ------------- -------------
Pro forma net loss................................. $ (1,743) $ (1,073) $ (5,398) $ (1,501)
============= ============= ============= =============
Basic and diluted net loss per share:
As reported........................................ $ (0.05) $ (0.04) $ (0.35) $ (0.05)
Pro forma.......................................... $ (0.06) $ (0.05) $ (0.19) $ (0.08)
During the second quarter of 2004, two of the Company's officers
exercised options to acquire a total of approximately 660,000 shares of FX
Energy common stock, at an exercise price of $3.00 per share, by canceling
options to purchase approximately 340,000 shares and applying the option equity
to pay the exercise price on the options exercised, as reported on their
respective Form 4. The ten-year options were due to expire during the second
quarter. In connection with this cashless exercise, the Company recorded a stock
compensation charge of approximately $5.8 million in the second quarter, which
is equal to the difference between the exercise price and fair value of the
options on the date of exercise, and a corresponding increase in additional
paid-in capital. This noncash transaction had no impact on the Company's working
capital, cash flows or stockholders' equity.
Note 6: Stockholders' Equity
During the first nine months of 2004, the Company completed a
registered offering of 3,102,788 shares of common stock, resulting in proceeds,
after offering costs, of $20.7 million. During the same period, warrant holders
exercised warrants for 2,375,118 shares of common stock, resulting in proceeds
to the Company of $8,906,693. In addition, during the first nine months of 2004,
nonexecutive option holders exercised options for a total of 381,468 shares,
resulting in additional proceeds of $2,120,381.
10
Note 7: Investments
The cost and estimated market value of marketable securities at
September 30, 2004, are as follows:
Gross Estimated
Unrealized Market
Cost Losses Value
------------- ------------- --------------
Marketable securities.......... $32,447,653 $ (212,457) $ 32,235,196
The investments consist primarily of U.S. government agency bonds and
notes. The investments have been classified as available-for-sale, and are
reported at fair value with unrealized gains and losses, if any, recorded as a
component of other comprehensive income.
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 and nine ended September 30, 2004 and 2003, follows.
Comparison of the Third Quarter of 2004 to the Third Quarter of 2003
Exploration and Production
Our oil revenues are comprised of oil production in the United States
in 2004 and 2003. A summary of the percentage change in oil revenues, average
price and production volumes for the third quarter of 2004 and 2003 is set forth
in the following table:
Quarter Ended September 30,
------------------------------------
2004 2003
------------------ -----------------
Revenues............................................. $ 869,000 $ 558,000
Percent change versus prior year's quarter....... +56% -1%
Average price (per barrel of oil).................... $ 38.96 $ 25.58
Percent change versus prior year's quarter....... +52% +5%
Production volumes (barrels of oil).................. 22,316 21,800
Percent change versus prior year's quarter....... +2% -6%
Oil Revenues. Oil revenues were $869,000 during the third quarter of
2004, a 56% increase compared to the same period of 2003. During the third
quarter of 2004, our average oil prices rose 52%, from $25.58 per barrel in 2003
to $38.96 per barrel in 2004, while oil production quantities increased by 2%.
Oil revenues in 2004 increased from 2003 levels by approximately $299,000 due to
higher oil prices and by approximately $13,000 related to production increases.
11
Lease Operating Costs. Lease operating costs were $510,000 during the
third quarter of 2004, an increase of $149,000, or 41%, compared to the same
period of 2003. The increase was due primarily to higher value-based production
taxes incurred during this year. Our 2004 operating costs increased
approximately $98,000 due to higher production taxes, in addition to $51,000
related to nonrecurring workover costs.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$648,000 during the third quarter of 2004, compared to $116,000 during the same
period of 2003, an increase of 459%. The successful completion of financing
activities in 2003 and 2004 has given us the funds necessary to increase both
the amount and pace of our exploration activities in Poland in 2004, which
during the third quarter of 2004 were composed primarily of seismic acquisition,
reprocessing and reinterpretation.
DD&A Expense - E&P. DD&A expense for producing properties was $67,000
during the third quarter of 2004, a decrease of $13,000 compared to $80,000
during the same period of 2003.
Accretion Expense. Accretion expense for both years reflects the
increase in our asset retirement obligation and was essentially flat from 2003
to 2004.
Oilfield Services
Oilfield Services Revenues. Oilfield services revenues were $101,000
during the third quarter of 2004, an increase of $57,000 compared to $44,000 for
the same quarter of 2003. During much of the third quarter of 2003, our drilling
rig was idle. Drilling activity where we operate increased significantly during
the first nine months of 2004. Oilfield servicing revenues were generated
primarily by performing drilling services for third parties. These revenues will
continue to fluctuate from period to period based on market demand, weather, the
number of wells drilled, downtime for equipment repairs, the degree of emphasis
on utilizing our oilfield servicing equipment on our Company-owned properties,
and other factors.
Oilfield Services Costs. Oilfield services costs were $92,000 during
the third quarter of 2004, down slightly from the $97,000 incurred in the same
period of 2003. 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, and other factors.
DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $77,000 during the third quarter of 2004, up slightly compared to the
$74,000 recorded during the same period of 2003.
Nonsegmented Information
G&A Costs. G&A costs were $1,102,000 during the third quarter of 2004,
compared to $516,000 during the third quarter of 2003, an increase of 114%.
During the third quarter of 2003, as part of our cost-cutting measures,
executive salaries were reduced by 50%. All executive salaries have since been
increased to their full 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.
Interest and Other Income. Interest and other income during the third
quarter was $167,000, reflecting our higher cash balances available for
investment. Interest and other income was negligible during the third quarter of
2003.
12
Interest Expense. Interest expense was $0 during the third quarter of
2004, compared to $221,000 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 by conversion to common stock in December
2003.
Comparison of the First Nine Months of 2004 to the First Nine Months of 2003
Exploration and Production
Our oil revenues are comprised of oil production in the United States
during 2004 and 2003. A summary of the percentage change in oil revenues,
average price and production volumes for the first nine months of 2004 and 2003
is set forth in the following table:
Nine Months Ended September 30,
----------------------------------
2004 2003
---------------- ----------------
Revenues............................................. $ 2,197,000 $ 1,676,000
Percent change versus prior year's quarter....... +31% +19%
Average price (per barrel of oil).................... $ 34.40 $ 26.20
Percent change versus prior year's quarter....... +31% +28%
Production volumes (barrels of)...................... 63,849 63,986
Percent change versus prior year's quarter....... 0% -7%
Oil Revenues. Oil revenues were $2,197,000 during the first nine months
of 2004, a 31% increase compared to the same period of 2003. During the first
nine months of 2004, our average oil prices were 31% higher than in the same
period of the prior year, while oil production quantities were essentially
unchanged. Oil revenues in 2004 increased from 2003 levels by approximately
$524,000 due to higher oil prices, offset by approximately $3,000 related to
production declines.
Lease Operating Costs. Lease operating costs were $1,321,000 during the
first nine months of 2004, an increase of 18% compared to $1,118,000 during the
same period of 2003. The increase was due primarily to higher value-based
production taxes incurred during the first nine months of this year. Our 2004
operating costs increased approximately $177,000 due to higher production taxes,
in addition to approximately $26,000 related to nonrecurring workover costs.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$1,861,000 during the first nine months of 2004, compared to $406,000 during the
same period of 2003, an increase of 358%. The successful completion of financing
activities in 2003 and 2004 has given us the funds necessary to increase both
the amount and pace of our exploration activities in Poland in 2004, which
during the first nine months of 2004 were composed primarily of seismic
acquisition, reprocessing and reinterpretation.
DD&A Expense - E&P. DD&A expense for producing properties was $189,000
during the first nine months of 2004, an increase of $7,000 compared to $182,000
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 and was essentially flat from 2003
to 2004.
13
Oilfield Services
Oilfield Services Revenues. Oilfield services revenues were $411,000
during the first nine months of 2004, an increase of $335,000 compared to
$76,000 for the same period of 2003. During most of the first nine months of
2003, our drilling rig was idle. Drilling activity where we operate increased
significantly during the first nine months of 2004. Oilfield servicing revenues
were generated primarily by performing drilling services for third-party
companies. These revenues will continue to fluctuate from period to period based
on market demand, weather, the number of wells drilled, downtime for equipment
repairs, the degree of emphasis on utilizing our oilfield servicing equipment on
our Company-owned properties, and other factors.
Oilfield Services Costs. Oilfield services costs were $355,000 during
the first nine months of 2004, up from the $226,000 incurred in the same period
of 2003, reflecting the increased pace of drilling activities this year.
Oilfield services costs will also continue to fluctuate from period to period
based on revenues generated, market demand, weather, the number of wells
drilled, downtime for equipment repairs, the degree of emphasis on utilizing our
oilfield servicing equipment on our Company-owned properties, and other factors.
DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $215,000 during the first nine months of 2004, compared to $226,000 during
the same period of 2003. The year-to-year decrease was primarily due to capital
additions from prior years being fully depreciated during 2003.
Nonsegmented Information
G&A Costs. G&A costs were $3,196,000 during the first nine months of
2004, compared to $1,569,000 during the same period of 2003, an increase of
104%. During the first nine months of 2003, as part of our cost-cutting
measures, executive salaries were reduced by 50%. All executive salaries have
since been increased to their full 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.
Stock Compensation Expense. During the second quarter of 2004, we
recorded a stock compensation charge in the amount of approximately $5.8 million
in connection with the cashless exercise of certain stock options, as described
in Note 5 to the financial statements.
Interest and Other Income. We recorded $283,000 in interest and other
income during the first nine months of 2004, compared to $19,000 during the same
period of 2003. The year-to-year increase is a direct reflection of our higher
cash balances available for investment.
Interest Expense. Interest expense was $0 during the first nine months
of 2004, compared to $691,000 during the same period of 2003. All interest
expense in 2003 was related to our note payable to RRPV, which was satisfied in
full by conversion to common stock 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. We may seek to obtain additional funds
for future capital investments from the sale of additional securities, project
financing to help finance the completion of successful wells, sale of partial
property interests, or other arrangements, all of which may dilute the interest
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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 $41,366,000 as of September 30, 2004, an increase of $25,334,000
from our working capital at December 31, 2003, of $16,032,000. As of September
30, 2004, our cash, cash equivalents and marketable securities balances totaled
approximately $42.3 million. We have no outstanding long-term debt. Our current
liabilities at September 30, 2004, include $1.1 million payable to the Polish
Oil and Gas Company, which is to be settled later in the year primarily by a
transfer of our interest in the Kleka 11 well. We believe our current cash
resources, coupled with anticipated future revenues, are sufficient to fund an
aggressive exploration program through the end of 2006.
Operating Activities. Net cash used in operating activities was
$4,094,000 during the first nine months of 2004, an increase of $1,739,000
compared to $2,355,000 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 and other G&A costs, and increases in accounts receivable.
Investing Activities. Excluding additions to our marketable securities,
we spent $2,496,000 in investing activities during the first nine months of
2004, including $1,687,000 for initial drilling costs at the Sroda-4 well,
$317,000 related to our proved properties in the United States, $128,000 in
Polish concession costs, $324,000 for office and drilling equipment, and $40,000
in undeveloped leasehold costs in the United States.
In late 2003, we paid $376,000 to CalEnergy Gas (Holdings) Ltd. as a
deposit towards drilling costs of the Zaniemysl-3 well, which would be applied
by CalEnergy towards drilling costs in the event that gross costs for the well
exceeded approximately $2.2 million. During the second quarter of 2004, we
agreed to final drilling costs for the well in an amount that enabled CalEnergy
to keep the entire deposit. Accordingly, the total deposit amount has been
reclassified from other assets to proved property costs.
Financing Activities. During the first nine months of 2004, we
completed registered offerings of 3,102,788 shares of common stock, resulting in
proceeds, after offering costs, of $20.7 million. During the same period,
warrant holders exercised warrants for 2,375,000 shares of common stock,
resulting in proceeds to us of $8,907,000. In addition, nonexecutive option
holders exercised options for a total of 381,000 shares, resulting in proceeds
to us of $2,120,000. During the first nine months of 2003, we completed private
placements of common and convertible preferred stock resulting in proceeds,
after offering costs, of approximately $14,368,000. 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.
New Accounting Pronouncements
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 ("ARB 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
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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. FIN No. 46R requires
the consolidation of variable interest entities in which we are the primary
beneficiary. As of September 30, 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 position or results of
operations. New interests in entities acquired or created will be evaluated
based on FIN No. 46R criteria and consolidated, if required.
We have reviewed all other 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 our review, we believe that none
of these pronouncements will have a significant effect on our current or future
financial position or results of operations.
Critical Accounting Policies
A summary of our significant accounting policies is included in Note 1
of our Consolidated Financial Statements contained in our annual report on Form
10-K for the year ended December 31, 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.
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
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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.
We currently do not engage in any hedging activities or have any
derivative financial instruments to protect ourselves against market risks
associated with oil and gas price fluctuations, although we may elect to do so
if we achieve a significant amount of production in Poland.
Foreign Currency Risk
We have entered into various agreements in Poland denominated in the
Polish zloty. The Polish zloty is subject to exchange rate fluctuations that are
beyond our control. We do not currently engage in hedging transactions to
protect ourselves against foreign currency risks, nor do we intend to do so in
the foreseeable future.
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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
September 30, 2004, pursuant to Rule 13a-15(b) under the Securities Exchange
Act. Based upon that evaluation, our Certifying Officers concluded that, as of
September 30, 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.
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
Exhibit
Number Title of Document Location
- ------------------- ------------------------------------------- --------------
Item 31 Rule 13a-14(a)/15d-14(a) Certifications
- ------------------------------------------------------------------------------
31.01 Certification of Chief Executive Officer Attached
Pursuant to Rule 13a-14
31.02 Certification of Chief Financial Officer Attached
Pursuant to Rule 13a-14
Item 32 Section 1350 Certifications
- ------------------------------------------------------------------------------
32.01 Certification of Chief Executive Officer Attached
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.02 Certification of Chief Financial Officer Attached
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- --------------
* All exhibits are numbered with the number preceding the decimal indicating
the applicable SEC reference number in Item 601 and the number following
the decimal indicating the sequence of the particular document.
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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: November 11, 2004 By /s/ David N. Pierce
--------------------------------
David N. Pierce, President,
Chief Executive Officer
Date: November 11, 2004 By /s/ Thomas B. Lovejoy
--------------------------------
Thomas B. Lovejoy,
Chief Financial Officer
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