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, 2005
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 [X] No [ ]
Indicate by check mark whether the registrant is a shell company (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 3, 2005, was
34,961,613.
FX ENERGY, INC. AND SUBSIDIARIES
Form 10-Q for the Quarterly Period Ended September 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
6 Exhibits........................................................... 18
-- Signatures......................................................... 18
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands)
September 30, December 31,
2005 2004
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 3,660 $ 3,784
Marketable securities.................................................. 25,067 32,321
Accounts receivable:
Accrued oil sales.................................................... 437 335
Joint interest owners and others..................................... 2,339 1,013
Inventory.............................................................. 95 92
Other current assets................................................... 481 224
------------------ ------------------
Total current assets................................................. 32,079 37,769
------------------ ------------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved............................................................... 17,542 15,574
Unproved............................................................. 304 355
Other property and equipment......................................... 4,206 3,992
------------------ ------------------
Gross property and equipment....................................... 22,052 19,921
Less: accumulated depreciation, depletion and amortization........... (5,455) (5,087)
------------------ ------------------
Net property and equipment......................................... 16,597 14,834
------------------ ------------------
Other assets:
Certificates of deposit ............................................... 356 356
Other.................................................................. 3 3
------------------ ------------------
Total other assets................................................... 359 359
------------------ ------------------
Total assets............................................................. $ 49,035 $ 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 --
September 30, December 31,
2005 2004
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,443 $ 2,436
Accrued liabilities.................................................. 274 1,556
------------------ ------------------
Total current liabilities.......................................... 1,717 3,992
Asset retirement obligation ......................................... 448 414
------------------ ------------------
Total liabilities.................................................. 2,165 4,406
------------------ ------------------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no
shares issued as of September 30, 2005 and December 31, 2004....... -- --
Common stock, $0.001 par value, 100,000,000 shares authorized;
34,881,613 and 34,398,109 shares issued as of September 30, 2005 35 34
and December 31, 2004, respectively................................
Additional paid-in capital........................................... 120,280 117,376
Accumulated other comprehensive loss................................. (83) (339)
Accumulated deficit.................................................. (73,362) (68,515)
------------------ ------------------
Total stockholders' equity......................................... 46,870 48,556
------------------ ------------------
Total liabilities and stockholders' equity ............................ $ 49,035 $ 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 nine months
ended September 30, ended September 30,
--------------------------------- --------------------------------
2005 2004 2005 2004
---------------- ---------------- --------------- ----------------
Revenues:
Oil and gas sales................................. $ 1,063 $ 869 $ 2,800 $ 2,197
Oilfield services................................ 1,428 101 1,582 411
---------------- ---------------- --------------- ----------------
Total revenues.................................. 2,491 970 4,382 2,608
---------------- ---------------- --------------- ----------------
Operating costs and expenses:
Lease operating expenses.......................... 613 510 1,842 1,321
Exploration costs................................. 760 648 1,975 1,861
Oilfield services costs........................... 874 93 1,062 355
Depreciation, depletion and amortization (DD&A)... 175 167 515 457
Accretion expense................................. 11 10 33 31
Stock compensation (G&A).......................... 242 12 279 5,841
General and administrative (G&A).................. 1,294 1,102 4,075 3,196
---------------- ---------------- --------------- ----------------
Total operating costs and expenses.............. 3,969 2,542 9,781 13,062
---------------- ---------------- --------------- ----------------
Operating loss...................................... (1,478) (1,572) (5,399) (10,454)
---------------- ---------------- --------------- ----------------
Other income:
Interest and other income, net.................... 92 167 552 283
---------------- ---------------- --------------- ----------------
Total other income.............................. 92 167 552 283
---------------- ---------------- --------------- ----------------
Net loss (1,386) (1,405) (4,847) (10,171)
Other comprehensive loss
Increase (decrease) in market value of available
for sale marketable securities...................... 243 (129) 257 (213)
---------------- ---------------- --------------- ----------------
Comprehensive loss $ (1,143) $ (1,534) $ (4,590) $ (10,384)
================ ================ =============== ================
Basic and diluted net loss per common share......... $ (0.04) $ (0.05) $ (0.13) $ (0.35)
================ ================ =============== ================
Basic and diluted weighted average number of
shares outstanding................................ 34,719 31,179 34,629 29,080
================ ================ =============== ================
The accompanying notes are an integral part of the consolidated financial statements.
5
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months
ended September 30,
----------------------------------
2005 2004
-------------- --------------
Cash flows from operating activities:
Net loss............................................................... $ (4,847) $ (10,171)
Adjustments to reconcile net loss to net
cash used in operating activities:
Accretion expense.................................................. 33 31
Depreciation, depletion and amortization........................... 515 457
Loss on asset disposition.......................................... 18 1
Stock compensation (G&A)........................................... 279 5,841
Common stock issued for services................................... 326 150
Increase (decrease) from changes in working capital items:
Accounts receivable.................................................. (1,102) (354)
Inventory............................................................ (3) (13)
Other current assets................................................. (195) (165)
Asset retirement obligation.......................................... -- (18)
Accounts payable and accrued liabilities............................. (159) 147
-------------- --------------
Net cash used in operating activities.............................. (5,135) (4,094)
-------------- --------------
Cash flows from investing activities:
Additions to oil and gas properties.................................... (4,358) (2,172)
Additions to other property and equipment.............................. (379) (324)
Additions to marketable securities..................................... (489) (32,448)
Proceeds from maturities of marketable securities...................... 8,000 --
-------------- --------------
Net cash provided by (used in) investing activities.................. 2,774 (34,944)
-------------- --------------
Cash flows from financing activities:
Proceeds from common stock offering, net............................... -- 20,724
Proceeds from stock option and warrant exercises....................... 2,237 11,027
-------------- --------------
Net cash provided by financing activities............................ 2,237 31,751
-------------- --------------
Decrease in cash and cash equivalents.................................... (124) (7,287)
Cash and cash equivalents at beginning of period......................... 3,784 17,371
-------------- --------------
Cash and cash equivalents at end of period............................... $ 3,660 $ 10,084
============== ==============
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 statement 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 quarterly reports on Form 10-Q for the quarters ended March 31 and June 30,
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 September 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 3,465,666 and 4,181,966 shares of
common stock at prices ranging from $2.40 to $10.65 per share with a weighted
average exercise price of $5.42 per share and $4.55 per share were outstanding
at September 30, 2005 and 2004, respectively. Warrants to purchase 3,505,373 and
3,866,192 shares of common stock at prices ranging from $3.60 to $3.75 per share
with a weighted average exercise price of $3.65 per share and $3.66 per share
were outstanding at September 30, 2005 and 2004, respectively. No options or
warrants were included in the computation of diluted net loss per share for the
periods ended September 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 nine 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
disclosure purposes. Reportable business segment information for the three
7
months ended September 30, 2005, the nine months ended September 30, 2005, and
as of September 30, 2005, is as follows (in thousands):
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P Services Items Total
--------------- --------------- --------------- ---------------
Three months ended September 30, 2005:
Revenues(1)...................................... $ 1,063 $ 1,428 $ -- $ 2,491
Net income (loss)(2)............................. (395) 494 (1,485) (1,386)
Nine months ended September 30, 2005:
Revenues(1)...................................... 2,800 1,582 -- 4,382
Net income (loss)(2)............................. (1,287) 349 (3,909) (4,847)
As of September 30, 2005:
Identifiable net property and equipment(3)....... 15,807 453 337 16,597
- -------------------
(1) E&P operating costs for the third quarter include $393 in geological and
geophysical costs, $1 in lease operating costs, and $203 in general and
administrative costs incurred in Poland. E&P operating costs for the first
nine months include $1,602 in geological and geophysical costs, $2 in lease
operating costs, and $447 in general and administrative costs incurred in
Poland.
(2) Net loss reconciling items for the third quarter include $1,516 of general
and administrative costs, $20 of noncash stock compensation expense, $92 of
other income, and $41 of corporate DD&A. Net loss reconciling items for the
nine months include $4,297 of general and administrative costs, $57 of
noncash stock compensation expense, $552 of other income, and $107 of
corporate DD&A.
(3) Identifiable net property and equipment not associated with a segment
consists of $337 of corporate office equipment, hardware and software.
Reportable business segment information for the three months ended
September 30, 2004, the nine months ended September 30, 2004, and as of
September 30, 2004, is as follows (in thousands):
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P Services Items Total
--------------- --------------- --------------- ---------------
Three months ended September 30, 2004:
Revenues(1)...................................... $ 869 $ 101 $ -- $ 970
Net loss(2)...................................... (366) (69) (970) (1,405)
Nine months ended September 30, 2004:
Revenues(1)...................................... 2,197 411 -- 2,608
Net loss(2)...................................... (1,206) (159) (8,806) (10,171)
As of September 30, 2004:
Identifiable net property and equipment(3)....... 6,743 411 334 7,488
- -----------------
(1) E&P operating costs for the third quarter include $648 in geological and
geophysical costs, $5 in lease operating costs, and $44 in general and
administrative costs incurred in Poland. E&P operating costs for the first
nine months include $1,861in geological and geophysical costs, $10 in lease
operating costs, and $157 in general and administrative costs incurred in
Poland.
(2) Net loss reconciling items for the third quarter include $1,102 of general
and administrative costs, $12 of noncash stock compensation expense, $167
of other income, and $23 of corporate DD&A. Net loss reconciling items for
the nine months include $3,196 of general and administrative costs, $5,841
of noncash stock compensation expense, $283 of other income, and $52 of
corporate DD&A.
(3) Identifiable net property and equipment not associated with a segment
consists of $334 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. 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, 2005 and 2004, would
have been as follows:
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
(in thousands, except for per share data)
Net loss:
Net loss, as reported.................................... $ (1,386) $ (1,405) $ (4,847) $ (10,171)
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................................................. (485) (338) (1,476) (1,047)
------------- ------------- ------------- -------------
Pro forma net loss.................................. $ (1,871) $ (1,743) $ (6,323) $ (5,398)
============= ============= ============= =============
Basic and diluted net loss per share:
As reported......................................... $ (0.04) $ (0.05) $ (0.13) $ (0.35)
Pro forma........................................... $ (0.05) $ (0.06) $ (0.18) $ (0.19)
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 nine months of 2005, warrant holders exercised
warrants to purchase 48,000 shares of common stock, resulting in proceeds to the
Company of $180,000. In addition, during the first nine months of 2005, option
holders exercised options to purchase 404,400 shares, resulting in additional
proceeds of $2,057,000.
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 $8,907,000. 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 $2,120,000.
9
Note 7: Investments
The cost and estimated market value of marketable securities at
September 30, 2005, are as follows (in thousands):
Gross Estimated
Unrealized Market
Cost Losses Value
---------- ------------ ------------
Marketable securities........ $25,150 $ (83) $ 25,067
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 September 30,
2005 exchange rates). The Polish taxing authorities began their review of the
Company's refund application in October, 2005. As part of the normal course of
the review, and in order to prevent interest accruing on the refund amount, the
taxing authorities deposited 13.7 million zlotys in the Company's bank account
in Poland. This amount is subject to adjustment until the Polish taxing
authorities complete their review of the refund claim, which the Company expects
will be completed by year-end 2005. The amount received will be classified as a
deferred credit until the refund is finalized. At that time the Company would
reduce capital costs for the related Input VAT, and record a gain for 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 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
and nine months ended September 30, 2005 and 2004, follows.
Comparison of the Third Quarter of 2005 to the Third Quarter of 2004
Exploration and Production
Our oil revenues are comprised of oil production in the United States
in 2005 and 2004. A summary of the percentage change in oil revenues, average
price and production volumes for the third quarter of 2005 and 2004 is set forth
in the following table:
Quarter Ended September 30,
-----------------------------
2005 2004
--------------- -------------
Revenues.......................................... $ 1,063,000 $ 869,000
Percent change versus prior year's quarter.... +22% +56%
Average price (per barrel of oil)................. $ 55.54 $ 38.96
Percent change versus prior year's quarter.... +43% +52%
Production volumes (barrels of oil)............... 19,142 22,316
Percent change versus prior year's quarter.... -14% +2%
Oil Revenues. Oil revenues were $1,063,000 during the third quarter of
2005, a 22% increase compared to the same period of 2004. During the third
quarter of 2004, our average oil prices rose 43%, from $38.96 per barrel in 2004
to $55.54 per barrel in 2005, while oil production quantities decreased by 14%.
Oil revenues in 2005 increased from 2004 levels by approximately $317,000 due to
higher oil prices and decreased by approximately $123,000 related to production
decreases. Production decreased in the third quarter of 2005 due to mechanical
issues at several of our Southwest Cut Bank Sand Unit wells, and will continue
at lower rates as the problems are remediated during the fourth quarter of this
year.
Lease Operating Costs. Lease operating costs were $613,000 during the
third quarter of 2005, an increase of $103,000, or 20%, compared to the same
period of 2004. Higher oil revenues have allowed us to work over and recomplete
several wells in Montana, which contributed to the higher operating costs.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$760,000 during the third quarter of 2005, compared to $648,000 during the same
period of 2004, an increase of 17%. Included in 2005 is $359,000 in dry hole
costs associated with two wells drilled in Nevada in late 2004 and early 2005,
the East Inselberg and Radio wells. In September, 2005, we made the decision to
plug and abandon both wells.
DD&A Expense - E&P. DD&A expense for producing properties was $74,000
during the third quarter of 2005, an increase of $7,000 compared to $67,000
during the same period of 2004.
11
Accretion Expense. Accretion expense for both years reflects the
increase in our asset retirement obligation and was essentially flat from 2004
to 2005.
Oilfield Services
Oilfield Services Revenues. Oilfield services revenues were $1,428,000
during the third quarter of 2005, an increase of $1,327,000 compared to $101,000
for the same quarter of 2004. We drilled five wells for third parties during the
2005 quarter. During much of the third quarter of 2004, our drilling rig was
idle. We expect to drill one additional third party well during the fourth
quarter of 2005. 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 $874,000 during
the third quarter of 2005, up significantly from the $93,000 incurred in the
same period of 2004, reflecting the accelerated pace of third party drilling.
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 $57,000 during the third quarter of 2005 compared to the $77,000 recorded
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 $1,516,000 during the third quarter of 2005,
compared to $1,102,000 during the third quarter of 2004, an increase of 38%,
primarily due to higher salaries, taxes and benefits associated in part with
higher headcount in our new Poland office and in our administrative staff.
Interest and Other Income. Interest and other income during the third
quarter was $92,000, compared to $167,000 during the same quarter of 2004,
reflecting our lower cash balances available for investment.
Comparison of the First Nine Months of 2005 to the First Nine Months of 2004
Exploration and Production
Our oil revenues are comprised of oil production in the United States
during 2005 and 2004. A summary of the percentage change in oil revenues,
average price and production volumes for the first nine months of 2005 and 2004
is set forth in the following table:
12
Nine Months Ended September 30,
-------------------------------
2005 2004
----------- -----------
Revenues.......................................... $ 2,800,000 $ 2,197,000
Percent change versus prior year's quarter.... +27% +31%
Average price (per barrel of oil)................. $ 47.48 $ 34.40
Percent change versus prior year's quarter.... +38% +31%
Production volumes (barrels of)................... 58,966 63,849
Percent change versus prior year's quarter.... -8% 0%
Oil Revenues. Oil revenues were $2,800,000 during the first nine months
of 2005, a 27% increase compared to the same period of 2004. During the first
nine months of 2005, our average oil prices were 38% higher than in the same
period of the prior year, while oil production decreased by 8%. Oil revenues in
2005 increased from 2004 levels by approximately $736,000 due to higher oil
prices, offset by approximately $133,000 related to production declines.
Production decreased in the third quarter of 2005 due to mechanical issues at
several of our Southwest Cut Bank Sand Unit wells, and will continue at lower
rates as the problems are remediated during the fourth quarter of this year.
Lease Operating Costs. Lease operating costs were $1,842,000 during the
first nine months of 2005, an increase of 39% compared to $1,321,000 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 $440,000. In addition, the higher oil revenues in 2005 resulted in
higher value-based production taxes of approximately $81,000.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$1,975,000 during the first nine months of 2005, compared to $1,861,000 during
the same period of 2004, an increase of 6%. Included in 2005 is $359,000 in dry
hole costs associated with two wells drilled in Nevada in late 2004 and early
2005, the East Inselberg and Radio wells. In September, 2005 we made the
decision to plug and abandon both wells.
DD&A Expense - E&P. DD&A expense for producing properties was $172,000
during the first nine months of 2005, a decrease of $17,000 compared to $189,000
during the same period of 2004.
Accretion Expense. Accretion expense for both years reflects the
increase in our asset retirement obligation and was essentially flat from 2004
to 2005.
Oilfield Services
Oilfield Services Revenues. Oilfield services revenues were $1,582,000
during the first nine months of 2005, an increase of $1,171,000 compared to
$411,000 for the same period of 2004. Most of the increase occurred during the
third quarter of this year, as we drilled five wells for third parties. During
most of the first nine months of 2004, our drilling rig was idle. We expect to
drill one additional third party well during the fourth quarter of 2005. 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 $1,062,000 during
the first nine months of 2005, up from the $355,000 incurred in the same period
of 2004, reflecting the increased pace of drilling activities this year.
Oilfield services costs will also continue to fluctuate from period to period
13
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 $172,000 during the first nine months of 2005, compared to $215,000 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 $4,297,000 during the first nine months of
2005, compared to $3,196,000 during the same period of 2004, an increase of 34%.
Approximately $179,000 of the increase is related to higher accounting fees
associated with Sarbanes-Oxley compliance, $680,000 is related to higher
salaries, taxes and benefits associated with our higher headcount discussed
earlier, and approximately $217,000 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 nine months 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 $552,000 in interest and other
income during the first nine months of 2005, compared to $283,000 during the
same period of 2004. The year-to-year increase is a direct reflection of higher
cash available for investment and higher interest rates.
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 at 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.
Working Capital (current assets less current liabilities). Our working
capital was $30,362,000 as of September 30, 2005, a decrease of $3,415,000 from
our working capital at December 31, 2004, of $33,777,000. As of September 30,
2005, our cash and cash equivalents and marketable securities totaled
approximately $28.7 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, development and overhead costs through the end of 2006.
14
Operating Activities. Net cash used in operating activities was
$5,135,000 during the first nine months of 2005, an increase of $1,041,000
compared to $4,094,000 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, increases in accounts receivable and reductions of our current
liabilities.
Investing Activities. During the first nine months of 2005, $2,774,000
was provided by investing activities. We received proceeds of $8,000,000 from
the maturities of marketable securities, purchased marketable securities of
$489,000, used $1,076,000 to pay accounts payable related to prior-year capital
costs, used $2,968,000 for current year capital additions in Poland and $216,000
related to our proved properties in the United States, $16,000 for Polish
concession costs, $350,000 for office and drilling equipment, and $111,000 for
undeveloped leasehold costs in the United States. We purchased marketable
securities of $32,448,000 during the same period of 2004, and spent $2,496,000
for other investing activities, including $1,687,000 for drilling costs in
Poland, $317,000 related to our proved properties in the United States, $128,000
for Polish concession costs, $324,000 for office and drilling equipment, and
$40,000 for undeveloped leasehold costs in the United States.
Financing Activities. During the first nine months of 2005, option and
warrant holders exercised options and warrants to purchase 452,400 shares,
resulting in proceeds of $2,237,000. 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, option
and warrant holders exercised options and warrants for 2,756,000 shares of
common stock, resulting in proceeds of $11,027,000.
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. The Company is evaluating the adoption of SFAS
No. 123-R on the financial statements.
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.
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
15
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
September 30, 2005, pursuant to Rule 13a-15(b) under the Securities Exchange
Act. Based upon that evaluation, our Certifying Officers concluded that, as of
September 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 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 Attached
Rule 13a-14
31.02 Certification of Chief Financial Officer Pursuant to Attached
Rule 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: November 7, 2005 By /s/ David N. Pierce
----------------------------------
David N. Pierce,
President, Chief Executive Officer
Date: November 7, 2005 By /s/ Thomas B. Lovejoy
----------------------------------
Thomas B. Lovejoy,
Chief Financial Officer
18