UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
Commission File No. 000-25386
FX ENERGY, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 87-0504461
-------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
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(Address of principal executive offices and zip code)
(801) 486-5555
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The number of shares
of $0.001 par value common stock outstanding as of August 5, 2005, was
34,679,204.
FX ENERGY, INC. AND SUBSIDIARIES
Form 10-Q for the Quarterly Period Ended June 30, 2005
TABLE OF CONTENTS
Item Page
---- ----
Part I. Financial Information
1 Financial Statements
Consolidated Balance Sheets.................................... 3
Consolidated Statements of Operations and Comprehensive Loss... 5
Consolidated Statements of Cash Flows.......................... 6
Notes to the Consolidated Financial Statements................. 7
2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 11
3 Quantitative and Qualitative Disclosures about Market Risk......... 17
4 Controls and Procedures............................................ 17
Part II. Other Information
4 Submission of Matters to a Vote of Security Holders................ 18
6 Exhibits........................................................... 19
-- Signatures......................................................... 19
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands)
June 30, December 31,
2005 2004
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 1,469 $ 3,784
Marketable securities............................................... 28,161 32,321
Accounts receivable:
Accrued oil sales................................................. 416 335
Joint interest and other receivables.............................. 1,369 1,013
Inventory........................................................... 97 92
Other current assets................................................ 225 224
------------------ -----------------
Total current assets.............................................. 31,737 37,769
------------------ -----------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved............................................................ 16,292 15,574
Unproved.......................................................... 442 355
Other property and equipment...................................... 4,179 3,992
------------------ -----------------
Gross property and equipment.................................... 20,913 19,921
Less accumulated depreciation, depletion and amortization......... (5,280) (5,087)
------------------ -----------------
Net property and equipment...................................... 15,633 14,834
------------------ -----------------
Other assets:
Certificates of deposit............................................. 356 356
Other............................................................... 3 3
------------------ -----------------
Total other assets................................................ 359 359
------------------ -----------------
Total assets.......................................................... $ 47,729 $ 52,962
================== =================
-- Continued --
The accompanying notes are an integral part of the consolidated financial statements.
3
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
-- Continued --
June 30, December 31,
2005 2004
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 715 $ 2,436
Accrued liabilities................................................. 217 1,556
----------------- ------------------
Total current liabilities......................................... 932 3,992
----------------- ------------------
Long-term liabilities:
Asset retirement obligation ....................................... 437 414
----------------- ------------------
Total liabilities................................................. 1,369 4,406
----------------- ------------------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no
shares issued as of June 30, 2005 and December 31, 2004........... -- --
Common stock, $0.001 par value, 100,000,000 shares authorized,
34,669,520 and 34,398,109 issued as of June 30, 2005 and
December 31, 2004, respectively................................... 35 34
Additional paid-in capital.......................................... 118,626 117,376
Accumulated other comprehensive loss................................ (325) (339)
Accumulated deficit................................................. (71,976) (68,515)
----------------- ------------------
Total stockholders' equity........................................ 46,360 48,556
----------------- ------------------
Total liabilities and stockholders' equity ........................... $ 47,729 $ 52,962
================= ==================
The accompanying notes are an integral part of the consolidated financial statements.
4
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(in thousands, except per share amounts)
For the three months For the six months
ended June 30, ended June 30,
--------------------------------- --------------------------------
2005 2004 2005 2004
---------------- ---------------- --------------- ----------------
Revenues:
Oil and gas sales................................. $ 898 $ 693 $ 1,736 $ 1,327
Oilfield services................................ 105 57 155 310
---------------- ---------------- --------------- ----------------
Total revenues.................................. 1,003 750 1,891 1,637
---------------- ---------------- --------------- ----------------
Operating costs and expenses:
Lease operating expenses.......................... 600 428 1,229 811
Geological and geophysical costs.................. 518 837 1,215 1,213
Oilfield services costs........................... 98 130 187 262
Depreciation, depletion and amortization (DD&A)... 176 152 340 290
Accretion expense................................. 11 10 22 21
Stock compensation (G&A).......................... 20 5,829 38 5,829
General and administrative (G&A).................. 1,304 1,195 2,781 2,094
---------------- ---------------- --------------- ----------------
Total operating costs and expenses.............. 2,727 8,581 5,812 10,520
---------------- ---------------- --------------- ----------------
Operating loss...................................... (1,724) (7,831) (3,921) (8,883)
---------------- ---------------- --------------- ----------------
Other income (expense):
Interest and other income (expense), net.......... 154 95 460 117
---------------- ---------------- --------------- ----------------
Total other income (expense).................... 154 95 460 117
---------------- ---------------- --------------- ----------------
Net loss (1,570) (7,736) (3,461) (8,766)
Other comprehensive income (loss)
Increase (decrease) in market value of
available for sale marketable securities.......... 157 (123) 14 (123)
---------------- ---------------- --------------- ----------------
Comprehensive loss $ (1,413) $ (7,859) $ (3,447) $ (8,889)
================ ================ =============== ================
Basic and diluted net loss per common share......... $ (0.05) $ (0.26) $ (0.10) $ (0.31)
================ ================ =============== ================
Basic and diluted weighted average number of
shares outstanding................................ 34,643 29,710 34,583 28,570
================ ================ =============== ================
The accompanying notes are an integral part of the consolidated financial statements.
5
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
For the Six Months Ended June 30,
------------------------------------
2005 2004
----------------- ------------------
Cash flows from operating activities:
Net loss........................................................... $ (3,461) $ (8,766)
Adjustments to reconcile net loss to net cash used in
operating activities:
Accretion expense.............................................. 22 21
Depreciation, depletion and amortization....................... 340 290
Stock issued for services...................................... 263 104
Stock compensation (G&A)....................................... 37 5,829
Loss on asset disposal......................................... 18 1
Increase (decrease) from changes in working capital items:
Accounts receivable.............................................. (111) (220)
Inventory........................................................ (4) (8)
Other current assets............................................. 124 86
Accounts payable and accrued liabilities......................... (944) (6)
----------------- ------------------
Net cash used in operating activities.......................... (3,716) (2,669)
----------------- ------------------
Cash flows from investing activities:
Additions to oil and gas properties................................ (3,246) (391)
Additions to other property and equipment.......................... (353) (302)
Additions to marketable securities................................. (326) (28,392)
Proceeds from maturities of marketable securities.................. 4,500 --
(Increase) decrease in other assets................................ -- (3)
----------------- ------------------
Net cash provided by (used in) investing activities.............. 575 (29,088)
----------------- ------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants............... 826 1,879
Proceeds from common stock offering, net........................... -- 14,348
----------------- ------------------
Net cash provided by financing activities........................ 826 16,227
----------------- ------------------
Decrease in cash and cash equivalents................................ (2,315) (15,530)
Cash and cash equivalents at beginning of period..................... 3,784 17,371
----------------- ------------------
Cash and cash equivalents at end of period........................... $ 1,469 $ 1,841
================= ==================
The accompanying notes are an integral part of the consolidated financial statements.
6
FX ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1: Basis of Presentation
The interim financial data are unaudited; however, in the opinion of
the management of FX Energy, Inc. and subsidiaries ("FX Energy" or the
"Company"), the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. The interim financial statements should be read in conjunction
with FX Energy's annual report on Form 10-K for the year ended December 31,
2004, and Form 10-Q for the quarter ended March 31, 2005, including the
financial statements and notes thereto.
The consolidated financial statements include the accounts of FX Energy
and its wholly-owned subsidiaries and FX Energy's undivided interests in Poland.
All significant intercompany accounts and transactions have been eliminated in
consolidation. At June 30, 2005, FX Energy owned 100% of the voting stock of all
of its subsidiaries.
Note 2: Net Income (Loss) Per Share
Basic earnings per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing net income (loss) by the sum of the weighted
average number of common shares and the effect of dilutive unexercised stock
options and warrants. Options to purchase 3,642,332 and 3,426,649 shares of
common stock, at prices ranging from $2.40 to $10.65 per share with a weighted
average exercise price of $5.53 and $4.34 per share, were outstanding at June
30, 2005 and 2004, respectively. Warrants to purchase 3,517,873 and 6,231,410
shares of common stock, at prices ranging from $3.60 to $3.75 per share with a
weighted average exercise price of $3.65 and $3.70 per share, were outstanding
at June 30, 2005 and 2004, respectively. No options or warrants were included in
the computation of diluted net loss per share for the periods ended June 30,
2005 and 2004, 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 six months of 2005 and 2004. Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," requires that a
valuation allowance be provided if it is more likely than not that some portion
or all of a deferred tax asset will not be realized. The Company's ability to
realize the benefit of its deferred tax asset will depend on the generation of
future taxable income through profitable operations and the expansion of
exploration and development activities. The market and capital risks associated
with achieving the above requirement are considerable, resulting in the
Company's conclusion that a full valuation allowance be provided.
Note 4: Business Segments
FX Energy operates within two segments of the oil and gas industry: the
exploration and production segment ("E&P") and the oilfield services segment.
Identifiable net property and equipment are reported by business segment for
management reporting and reportable business segment disclosure purposes.
Current assets, other assets, current liabilities and long-term debt are not
allocated to business segments for management reporting or business segment
7
disclosure purposes. Reportable business segment information for the three
months ended June 30, 2005, the six months ended June 30, 2005, and as of June
30, 2005, is as follows (in thousands):
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P(1) Services Items(2) Total
--------------- --------------- --------------- ---------------
Three months ended June 30, 2005:
Revenues......................................... $ 898 $ 105 $ -- $ 1,003
Net loss(1, 2)................................... (322) (49) (1,199) (1,570)
Six months ended June 30, 2005:
Revenues......................................... $ 1,736 $ 155 $ -- $ 1,891
Net loss(1, 2)................................... (892) (143) (2,426) (3,461)
As of June 30, 2005:
Identifiable net property and equipment(3)....... $ 14,770 $ 510 $ 352 $ 15,632
- ----------------
(1) E&P operating costs for the second quarter include $517 in geological and
geophysical costs, $1 in lease operating costs, and $122 in general and
administrative costs incurred in Poland. E&P operating costs for the first
six months include $1,209 in geological and geophysical costs, $1 in lease
operating costs, and $244 in general and administrative costs incurred in
Poland.
(2) Net loss reconciling items for the second quarter include $1,304 of general
and administrative costs, $11 of non-cash stock compensation expense, $153
of other income, and $37 of corporate DD&A. Net loss reconciling items for
the first six months include $2,781 of general and administrative costs,
$38 of non-cash stock compensation expense, $460 of other income, and $67
of corporate DD&A.
(3) Identifiable net property and equipment includes $352 of corporate office
equipment, hardware and software.
Reportable business segment information for the three months ended June 30,
2004, the six months ended June 30, 2004, and as of June 30, 2004, is as follows
(in thousands):
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P(1) Services Items(2) Total
--------------- --------------- --------------- ---------------
Three months ended June 30, 2004:
Revenues......................................... $ 694 $ 56 $ -- $ 750
Net loss(1, 2)................................... (643) (147) (6,946) (7,736)
Six months ended June 30, 2004:
Revenues......................................... $ 1,327 $ 310 $ -- $ 1,637
Net loss(1, 2)................................... (839) (95) (7,832) (8,766)
As of June 30, 2004:
Identifiable net property and equipment(3)....... $ 5,029 $ 474 $ 349 $ 5,853
- ----------------
(1) E&P operating costs for the second quarter include $831 in geological and
geophysical costs, $2 in lease operating costs, and $30 in general and
administrative costs incurred in Poland. E&P operating costs for the first
six months include $1,154 in geological and geophysical costs, $5 in lease
operating costs, and $114 in general and administrative costs incurred in
Poland.
(2) Net loss reconciling items for the second quarter include $1,195 of general
and administrative costs, $5,829 of non-cash stock compensation expense,
$95 of other income, and $17 of corporate DD&A. Net loss reconciling items
for the first six months include $2,094 of general and administrative
costs, $5,829 of non-cash stock compensation expense, $117 of other income,
and $26 of corporate DD&A.
(3) Identifiable net property and equipment includes $349 of corporate office
equipment, hardware and software.
8
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. Non-employee 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 June 30, 2005 and 2004, would have
been as follows (in thousands):
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
(in thousands, except for per share data)
Net loss:
Net loss, as reported.................................... $ (1,570) $ (7,736) $ (3,461) $ (8,766)
Add: Stock-based employee compensation expense included
in reported net loss................................... -- 5,820 -- 5,820
Less: Total stock-based employee compensation expense
determined under the fair value based method for all
awards................................................. (498) (277) (991) (527)
------------- ------------- ------------- -------------
Pro forma net income loss........................... $ (2,068) $ (2,193) $ (4,452) $ (3,473)
============= ============= ============= =============
Basic and diluted net loss per share:
As reported......................................... $ (0.05) $ (0.26) $ (0.10) $ (0.31)
Pro forma........................................... $ (0.06) $ (0.27) $ (0.13) $ (0.33)
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. The ten-year options were
due to expire on June 9, 2004. In connection with this cashless exercise, the
Company recorded a stock compensation charge in the amount of approximately $5.8
million in the second quarter, which was 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 non-cash transaction
had no impact on the Company's working capital, cash flows or stockholders'
equity. There were no corresponding transactions in 2005.
Note 6: Stockholders' Equity
During the first six months of 2005, warrant holders exercised warrants
to purchase 35,500 shares of common stock, resulting in proceeds to the Company
of $133,000. In addition, during the first six months of 2005, option holders
exercised options to purchase 227,734 shares, resulting in additional proceeds
of $693,000.
During the first six months of 2004, the Company completed a registered
offering of 2,152,778 shares of common stock, resulting in proceeds after
offering costs of $14.3 million. In addition, during the first six months of
2004, nonexecutive option holders exercised options to purchase 331,000 shares,
resulting in additional proceeds of $1,879,000.
9
Note 7: Investments
The cost and estimated market value of marketable securities at June
30, 2005, are as follows (in thousands):
Gross Estimated
Unrealized Market
Cost Losses Value
---------- ----------- -----------
Marketable securities.......... $ 28,486 $ (325) $ 28,161
The investments consist primarily of U.S. government agency bonds and
notes, whose value fluctuates with changes in interest rates. The Company
believes the gross unrealized losses are temporary. The investments have been
classified as available-for-sale, and are reported at fair value with unrealized
gains and losses, if any, recorded as a component of other comprehensive income
(loss).
Note 8: Gain and Loss Contingencies
Throughout the Company's operating history in Poland, it has been
unable to obtain a refund of most of the value-added taxes paid in connection
with goods and services purchased (Input VAT). Polish tax laws have restricted
the refund of Input VAT for exploration activities to concession holders. In the
Company's case, the Polish Oil and Gas Company, or POGC, has traditionally been
the concession holder, while the Company is a working interest owner by virtue
of its agreements with POGC.
During 2004, Poland joined the European Union. In connection with this
activity, certain tax laws have changed, and the Company believes it may now be
entitled to obtain a refund of some or all of the Input VAT paid since 1998.
In April 2005, the Company filed a refund application for approximately
13.7 million Polish zlotys (equal to approximately $4.1 million at June 30, 2005
exchange rates). We estimate that the review and refund process may take up to
approximately 180 days from the date the refund application was filed. Should
the Company be successful in reclaiming its Input VAT paid in prior periods, the
Company would reduce capital costs for the related Input VAT, and record a gain
for the Input VAT related to past geological, geophysical, and other costs.
During the first half of 2005, POGC applied approximately $1.3 million
in unused cash-call proceeds against the Company's outstanding accrued liability
related to its spending commitments in the Fences I area. There was a
corresponding reduction in previously capitalized costs. The Company continues
to work towards a formal settlement of the financial issues surrounding its
Fences I commitment, including the retention of the Kleka 11 well, past gas
sales that are owed to the Company, and other items. Once the settlement is
finalized, the Company will begin accruing its share of gas sales from the Kleka
11 well. The Company will recognize a gain or loss on the settlement depending
on whether the final amounts agreed to with POGC are less than or greater than
the $1.3 million liability.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations by Business Segment
We operate within two segments of the oil and gas industry: the
exploration and production segment, or E&P, and the oilfield services segment.
Depreciation, depletion and amortization costs, or DD&A, and general and
administrative costs, or G&A, directly associated with the respective segments
are detailed within the following discussion. G&A, interest income, other income
and other costs that are not allocated to individual operating segments for
management or segment reporting purposes, are discussed in their entirety
following the segment discussion. A comparison of the results of operations by
business segment and the information regarding nonsegmented items for the three
months and six months ended June 30, 2005 and 2004, follows.
Quarter Ended June 30, 2005, Compared to the Same Period of 2004
Exploration and Production Segment
Our oil and gas revenues are comprised primarily of oil production in
the United States. A summary of the percentage change in oil revenues, average
prices and production volumes for the second quarters of 2005 and 2004 is set
forth in the following table:
Quarter Ended June 30,
------------------------------
2005 2004
-------------- --------------
Revenues........................................ $ 898,000 $ 694,000
Percent change versus prior year's quarter.... +29% +37%
Average price per barrel of oil ................ $ 44.22 $ 33.49
Percent change versus prior year's quarter.... +32% +41%
Production volumes (barrels of oil)............. 20,318 20,710
Percent change versus prior year's quarter.... -2% -3%
Oil Revenues. Oil revenues were $898,000 during the second quarter of
2005, a 29% increase compared to the same period of 2004. During the second
quarter of 2005, our average oil prices rose 32%, from $33.49 per barrel in 2004
to $44.22 per barrel in 2005, while oil production quantities decreased by 2%.
Oil revenues in 2005 increased from 2004 levels by approximately $218,000 due to
higher oil prices, offset by approximately $14,000 related to production
declines.
Lease Operating Expenses. Lease operating expenses were $600,000 during
the second quarter of 2005, an increase of $172,000, or 40%, compared to the
same period of 2004. Higher oil revenues have allowed us to work over and
recomplete several wells in Montana, which increased our operating costs by
approximately $130,000. In addition, the higher oil revenues in 2005 resulted in
higher value-based production taxes of approximately $26,000.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$518,000 during the second quarter of 2005, compared to $837,000 during the same
period of 2004, a decrease of 38%. These activities consisted primarily of
seismic acquisition, reprocessing and reinterpretation in Poland.
11
DD&A Expense - Exploration and Production. DD&A expense for producing
properties was $82,000 for the second quarter of 2005, an increase of 32%
compared to $62,000 during the same period of 2004. Essentially all of the
increase in DD&A is associated with higher property costs incurred in 2004 and
2005.
Accretion Expense. Accretion expense for both years reflects the
increase in our Asset Retirement Obligation under SFAS 143, and was essentially
flat from 2004 to 2005.
Oilfield Services Segment
Oilfield Services Revenues. Oilfield services revenues were $105,000
during the second quarter of 2005, an increase of $48,000 compared to $57,000
for the second 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 $98,000 during
the second quarter of 2005, down from the $130,000 incurred in the same period
of 2004, reflecting a decrease from the prior year in the repair costs for
certain equipment. 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 $56,000 during the second quarter of 2005, compared to $73,000 during the
same period of 2004. The quarter-to-quarter decrease was primarily due to
capital additions from prior years being fully depreciated during 2004.
Nonsegmented Information
G&A Costs. G&A costs were $1,304,000 during the second quarter of 2005,
compared to $1,195,000 during the second quarter of 2004, an increase of
$109,000, or 9%. Approximately $37,000 of the increase is related to higher
accounting fees associated with Sarbanes-Oxley compliance; $25,000 of the
increase is related to higher insurance costs, and approximately $45,000 of the
increase is related to higher consulting fees. As we increase the pace and scope
of our exploration activities in Poland, we are engaging the services of
additional consultants to assist in our efforts.
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. There were no corresponding transactions
in 2005.
Interest and Other Income. Interest and other income was $153,000
during the second quarter of 2005, an increase of $58,000 compared to $95,000
during the same period of 2004. The increase was a reflection of higher cash
balances available for investment and higher interest rates.
12
Comparison of the First Half of 2005 to the First Half of 2004
Exploration and Production
Our oil and gas revenues are comprised of oil production in the United
States. A summary of the percentage change in oil revenues, average price and
production volumes for the first halves of 2005 and 2004 is set forth in the
following table:
Six Months Ended June 30,
--------------------------
2005 2004
------------- -----------
Revenues............................................. $1,736,000 $1,327,000
Percent change versus prior year's period........ +31% +19%
Average price (per barrel of oil).................... $ 42.53 $ 31.96
Percent change versus prior year's period........ +33% +21%
Production volumes (barrels of)...................... 40,825 41,533
Percent change versus prior year's period........ -2% -2%
Oil Revenues. Oil revenues were $1,736,000 during the first half of
2005, a 31% increase compared to the same period of 2004. During the first half
of 2005, our average oil prices were 33% higher than in the same period of the
prior year, while oil production quantities declined by 2%. Oil revenues in 2005
increased from 2004 levels by approximately $432,000 due to higher oil prices,
offset by approximately $23,000 related to production declines.
Lease Operating Expenses. Lease operating expenses were $1,229,000
during the first half of 2005, an increase of 52% compared to $811,000 during
the same period of 2004. Higher oil revenues have allowed us to work over and
recomplete several wells in Montana, which increased our operating costs by
approximately $250,000. In addition, the higher oil revenues in 2005 resulted in
higher value-based production taxes of approximately $120,000.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$1,215,000 during the first half of 2005, essentially flat compared to
$1,213,000 during the same period of 2004. Expenses for both periods were
composed primarily of seismic acquisition, reprocessing, and reinterpretation in
Poland.
DD&A Expense - E&P. DD&A expense for producing properties was $162,000
during the first half of 2005, an increase of $40,000 compared to $122,000
during the same period of 2004. Essentially all of the increase in DD&A is
associated with higher property costs incurred in 2004 and 2005.
Accretion Expense. Accretion expense for both years reflects the
increase in our Asset Retirement Obligation under SFAS 143 and was essentially
flat from 2004 to 2005.
Oilfield Services
Oilfield Services Revenues. Oilfield services revenues were $155,000
during the first half of 2005, a decrease of $155,000 compared to $310,000 for
the first half 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
13
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 $187,000 during
the first half of 2005, down from the $262,000 incurred in the same period of
2004, reflecting a decrease from the prior year in the repair costs for certain
equipment. 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 $110,000 during the first half of 2005, compared to $142,000 during the same
period of 2004. The year-to-year decrease was primarily due to capital additions
from prior years being fully depreciated during 2004.
Nonsegmented Information
G&A Costs. G&A costs were $2,780,000 during the first half of 2005,
compared to $2,094,000 during the same period of 2004, an increase of 33%.
Approximately $192,000 of the increase is related to higher accounting fees
associated with Sarbanes-Oxley compliance, $198,000 is related to higher
salaries associated with our higher headcount, $50,000 of the increase is
related to higher insurance costs, and approximately $264,000 of the increase is
related to higher consulting fees. As we increase the pace and scope of our
exploration activities in Poland, we are engaging the services of additional
consultants to assist in our efforts.
Stock Compensation Expense. During the first half 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. There was no corresponding transaction in
2005.
Interest and Other Income. We recorded $460,000 in interest and other
income during the first half of 2005, compared to $117,000 during the first half
of 2004. The year-to-year increase is a direct reflection of our higher cash
balances available for investment.
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
of our existing stockholders or our interest in the specific project financed.
We will allocate our existing capital as well as funds we may obtain in the
future among our various projects in our discretion. 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.
14
Working Capital (current assets less current liabilities). Our working
capital was $30,805,000 as of June 30, 2005, a decrease of $2,972,000 from our
working capital at December 31, 2004, of $33,777,000. As of June 30, 2005, our
cash and cash equivalents and marketable securities totaled approximately $29.6
million. We have no outstanding long-term debt or long-term contractual
commitments. We believe that we have adequate cash resources to fund our planned
exploration and overhead costs through the end of 2006.
Operating Activities. Net cash used in operating activities was
$3,716,000 during the first half of 2005, an increase of $1,047,000 compared to
$2,669,000 in net cash used during the same period of 2004. The increase in cash
used is a direct reflection of our increased exploration activities and higher
geological and geophysical costs in Poland, higher overhead costs and
significant reductions in our current liabilities.
Investing Activities. During the first half of 2005, $575,000 was
provided by investing activities. We received proceeds of $4,500,000 from the
maturities of marketable securities, purchased marketable securities of
$326,000, used $1,076,000 to pay accounts payable related to prior-year capital
costs, used $1,823,000 for current year capital additions in Poland and $347,000
related to our proved properties in the United States, and used $353,000 for
capital additions to our office and drilling equipment. We spent $696,000 on
investing activities during the first half of 2004, including $238,000 related
to our proved properties in the United States, $113,000 in Polish concession
costs, $302,000 for office and drilling equipment, and $40,000 in undeveloped
leasehold costs in the United States.
Financing Activities. During the first half of 2005, option and warrant
holders exercised options and warrants to purchase 263,000 shares, resulting in
proceeds to us of $826,000. During the first half of 2004, we completed a
registered offering of 2,152,778 shares of common stock, resulting in proceeds
after offering costs of $14.3 million. In addition, during the first half of
2004, nonexecutive option holders exercised options to purchase 331,000 shares,
resulting in proceeds to us of $1,879,000.
New Accounting Pronouncements
In December 2004, the FASB issued a revision to SFAS No. 123,
"Accounting for Stock-Based Compensation," SFAS No. 123-R, "Share-Based
Payment." SFAS No. 123-R focuses primarily on transactions in which an entity
exchanges its equity instruments for employee services and generally establishes
standards for the accounting for transactions in which an entity obtains goods
or services in share-based payment transactions. The FASB recently delayed the
implementation date for this statement, and we now expect to adopt SFAS No.
123-R effective January 1, 2006, using the modified prospective application with
no restatement of prior periods.
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 that review, we believe that none
of these pronouncements will have a significant effect on our current or future
financial position or results of operations.
Critical Accounting Policies
A summary of our significant accounting policies is included in Note 1
of our Consolidated Financial Statements contained in our annual report on Form
10-K for the year ended December 31, 2004. 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.
15
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
in our Annual Report on Form 10-K with the Audit Committee of our Board of
Directors. We believe our critical accounting policies include those addressing
the recoverability and useful lives of assets, the retirement obligations
associated with those assets, and the estimates of oil and gas reserves.
Forward-Looking Statements
This report contains statements about the future, sometimes referred to
as "forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "could," "should,"
"expect," "anticipate," "estimate," "project," "propose," "plan," "intend" and
similar words and expressions. We intend that the forward-looking statements
will be covered by the safe harbor provisions for forward-looking statements
contained in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements that describe our future strategic
plans, goals or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking
statements, including those regarding us or our management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as the future timing and results of
drilling individual wells and other exploration and development activities;
future variations in well performance as compared to initial test data; future
events that may result in the need for additional capital; the prices at which
we may be able to sell oil or gas; fluctuations in prevailing prices for oil and
gas; uncertainties of certain terms to be determined in the future relating to
our oil and gas interests, including exploitation fees, royalty rates and other
matters; future drilling and other exploration schedules and sequences for
various wells and other activities; uncertainties regarding future political,
economic, regulatory, fiscal, taxation and other policies in Poland; the cost of
additional capital that we may require and possible related restrictions on our
future operating or financing flexibility; our future ability to attract
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.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Price Risk
Realized pricing for our oil production in the United States is
primarily driven by the prevailing worldwide price of oil, subject to gravity
and other adjustments for the actual oil sold. Historically, oil prices have
been volatile and unpredictable. Price volatility relating to our oil production
in the United States is expected to continue in the foreseeable future.
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 nor have any
derivative financial instruments to protect ourselves against market risks
associated with oil and gas price fluctuations, although we may elect to do so
if we achieve a significant amount of production in Poland.
Foreign Currency Risk
We have entered into various agreements in Poland denominated in the
Polish zloty. The Polish zloty is subject to exchange rate fluctuations that are
beyond our control. We do not currently engage in hedging transactions to
protect ourselves against foreign currency risks, nor do we intend to do so in
the foreseeable future; however, we have decided to reduce currency risk by
transferring dollars to zlotys on or about the occasion of making any
significant commitment payable in Polish currency.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit to the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission's rules and forms, and that information is accumulated and
communicated to our management, including our principal executive and principal
financial officers (whom we refer to in this periodic report as our Certifying
Officers), as appropriate to allow timely decisions regarding required
disclosure. Our management evaluated, with the participation of our Certifying
Officers, the effectiveness of our disclosure controls and procedures as of June
30, 2005, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based
upon that evaluation, our Certifying Officers concluded that, as of June 30,
2005, 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.
17
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 15, 2005, at the annual meeting of our stockholders, the
stockholders voted as indicated on the following matters submitted to them for
consideration:
(a) elect David N. Pierce and Dennis B. Goldstein as our directors by a
plurality as shown below:
Withheld
Director For Authority Abstain
---------------------- --------------- --------------- ----------------
David N. Pierce 27,767,025 383,200 3,111,335
Dennis B. Goldstein 30,179,367 1,000 1,081,193
(b) amend the Articles of Incorporation to conform to Nevada law as
shown below:
For Against Abstain
----------------- ----------------- --------------
30,848,215 383,354 29,992
(c) amend the Bylaws to conform to Nevada law as shown below:
For Against Abstain
----------------- ----------------- --------------
30,683,300 537,569 40,692
(d) approve the 2005 Stock Option and Award Plan as shown below:
For Against Abstain
----------------- ----------------- --------------
6,845,719 8,663,648 110,134
18
ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
Exhibit
Number* Title of Document Location
- ----------- ---------------------------------------------------------- --------
Item 31 Rule 13a-14(a)/15d-14(a) Certifications
- ----------- ---------------------------------------------------------- --------
31.01 Certification of Chief Executive Officer Pursuant to Rule Attached
13a-14
31.02 Certification of Chief Financial Officer Pursuant to Rule Attached
13a-14
Item 32 Section 1350 Certifications
- ----------- ---------------------------------------------------------- --------
32.01 Certification of Chief Executive Officer Pursuant to Attached
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 Attached
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
- ----------
* All exhibits are numbered with the number preceding the decimal indicating
the applicable SEC reference number in Item 601 and the number following
the decimal indicating the sequence of the particular document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FX ENERGY, INC.
(Registrant)
Date: August 8, 2005 By /s/ David N. Pierce
--------------------------------
David N. Pierce, President,
Chief Executive Officer
Date: August 8, 2005 By /s/ Thomas B. Lovejoy
--------------------------------
Thomas B. Lovejoy,
Chief Financial Officer
19