UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
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
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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 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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The number of shares
of $0.001 par value common stock outstanding as of May 5, 2006, was 35,097,279.
FX ENERGY, INC. AND SUBSIDIARIES
Form 10-Q for the Three Months Ended March 31, 2006
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.......................................... 10
3 Quantitative and Qualitative Disclosures about Market Risk....... 15
4 Controls and Procedures.......................................... 15
Part II. Other Information
1A Risk Factors..................................................... 16
6 Exhibits......................................................... 16
-- Signatures....................................................... 17
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2006 2005
(Unaudited)
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 5,270 $ 2,390
Marketable securities............................................... 17,730 26,479
Accounts receivable:
Accrued oil and gas sales......................................... 601 626
Joint interest and other receivables.............................. 1,659 1,449
Input VAT receivable.............................................. 2,217 1,965
Inventory........................................................... 95 96
Other current assets................................................ 227 270
------------------ -----------------
Total current assets.............................................. 27,799 33,275
------------------ -----------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved............................................................ 16,399 15,918
Unproved.......................................................... 305 304
Other property and equipment...................................... 4,359 4,262
------------------ -----------------
Gross property and equipment.................................... 21,063 20,484
Less accumulated depreciation, depletion and amortization......... (6,058) (5,844)
------------------ -----------------
Net property and equipment.................................... 15,005 14,640
------------------ -----------------
Other assets:
Certificates of deposit............................................. 356 356
------------------ -----------------
Total assets.......................................................... $ 43,160 $ 48,271
================== =================
-- Continued --
The accompanying notes are an integral part of the consolidated financial statements.
3
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
-- Continued --
March 31, December 31,
2006 2005
(Unaudited)
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 2,814 $ 4,110
Accrued liabilities................................................. 1,098 1,450
----------------- ------------------
Total current liabilities......................................... 3,912 5,560
----------------- ------------------
Long-term liabilities:
Asset retirement obligation ....................................... 443 431
----------------- ------------------
Total liabilities................................................. 4,355 5,991
----------------- ------------------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no
shares issued as of March 31, 2006 and December 31, 2005.......... -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 35,097,279 issued as of March 31, 2006 and
December 31, 2005, respectively................................... 35 35
Additional paid-in capital.......................................... 122,938 125,216
Deferred compensation............................................... -- (2,975)
Accumulated other comprehensive loss................................. (40) (58)
Accumulated deficit................................................. (84,128) (79,938)
----------------- ------------------
Total stockholders' equity........................................ 38,805 42,280
----------------- ------------------
Total liabilities and stockholders' equity ........................... $ 43,160 $ 48,271
================= ==================
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 Ended March 31,
------------------------------------
2006 2005
----------------- ------------------
Revenues:
Oil and gas sales.................................................. $ 1,061 $ 838
Oilfield services................................................... 23 50
----------------- ------------------
Total revenues.................................................... 1,084 888
----------------- ------------------
Operating costs and expenses:
Lease operating costs............................................... 687 629
Exploration costs................................................... 2,042 697
Oilfield services costs............................................. 132 89
Depreciation, depletion and amortization............................ 214 164
General and administrative costs (G&A).............................. 1,680 1,477
Stock compensation (G&A)............................................ 697 18
Accretion expense................................................... 12 11
----------------- ------------------
Total operating costs and expenses................................ 5,464 3,085
----------------- ------------------
Operating loss........................................................ (4,380) (2,197)
----------------- ------------------
Other income:
Interest and other income........................................... 190 306
----------------- ------------------
Net loss.............................................................. (4,190) (1,891)
Other comprehensive loss:
Increase (decrease) in market value of available for sale marketable
securities........................................................ 18 (143)
----------------- ------------------
Comprehensive loss.................................................... $ (4,172) $ (2,034)
================= ==================
Basic and diluted net loss per common share........................... $ (0.12) $ (0.05)
================= ==================
Basic and diluted weighted average number
of shares outstanding............................................... 35,097 34,523
================= ==================
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 Three Months Ended March 31,
------------------------------------
2006 2005
----------------- ------------------
Cash flows from operating activities:
Net loss........................................................... $ (4,190) $ (1,891)
Adjustments to reconcile net loss to net cash used in
operating activities:
Accretion expense.............................................. 12 11
Depreciation, depletion and amortization....................... 214 164
Stock issued for services...................................... -- 166
Stock compensation (G&A)....................................... 697 18
Increase (decrease) from changes in working capital items:
Accounts receivable.............................................. (437) 98
Inventory........................................................ 1 (2)
Other current assets............................................. 43 31
Accounts payable and accrued liabilities......................... (1,645) (574)
----------------- ------------------
Net cash used in operating activities.......................... (5,305) (1,979)
----------------- ------------------
Cash flows from investing activities:
Additions to oil and gas properties................................ (482) (2,189)
Additions to other property and equipment.......................... (100) (75)
Additions to marketable securities................................. (233) (372)
Proceeds from maturities of marketable securities.................. 9,000 2,000
----------------- ------------------
Net cash provided by (used in) investing activities.............. 8,185 (636)
----------------- ------------------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants............... -- 646
----------------- ------------------
Net cash provided by financing activities........................ -- 646
----------------- ------------------
Increase (decrease) in cash and cash equivalents..................... 2,880 (1,969)
Cash and cash equivalents at beginning of period..................... 2,390 3,784
----------------- ------------------
Cash and cash equivalents at end of period........................... $ 5,270 $ 1,815
================= ==================
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 include 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,
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 March 31, 2006, 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 3,491,083 and 3,683,332 shares of
common stock, at prices ranging from $0.00 to $10.25 per share with a weighted
average exercise price of $4.72 and $5.50 per share, were outstanding at March
31, 2006 and 2005, respectively. Warrants to purchase 3,505,373 and 3,517,873
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, were outstanding at March
31, 2006 and 2005, respectively. No options or warrants were included in the
computation of diluted net loss per share for the periods ended March 31, 2006
and 2005, 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 three months ended March 31, 2006 and 2005. 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.
7
Reportable business segment information for the three months ended March 31,
2006, and as of March 31, 2006, is as follows (in thousands):
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P Services Items Total
--------------- --------------- --------------- ---------------
Three months ended March 31, 2006:
Revenues......................................... $ 1,061 $ 23 $ -- $ 1,084
Net income (loss)(1, 2).......................... (1,819) (141) (2,230) (4,190)
As of March 31, 2006:
Identifiable net property and equipment(3)....... 14,250 457 298 15,005
- --------------------------
(1) E&P revenues include $66,000 of gas sales in Poland. E&P operating costs
include $1,163 in geological and geophysical costs and $841 in dry hole
costs incurred in Poland.
(2) Net loss reconciling items include $1,680 of general and administrative
expenses, $697 of noncash stock compensation expense, $190 of other income,
and $43 of corporate DD&A. Nonsegmented expenses include $91 in general and
administrative costs incurred in Poland.
(3) Identifiable net property and equipment not associated with a segment
consists of $298 of corporate office equipment, hardware and software.
Reportable business segment information for the three months ended March 31,
2005, and as of March 31, 2005, is as follows (in thousands):
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P Services Items Total
--------------- --------------- --------------- ---------------
Three months ended March 31, 2005:
Revenues......................................... $ 838 $ 50 $ -- $ 888
Net loss(1, 2)................................... (578) (93) (1,220) (1,891)
As of March 31, 2005:
Identifiable net property and equipment(3)....... 13,795 360 337 14,492
- -----------------------
(1) E&P operating costs include $692 in geological and geophysical costs
incurred in Poland.
(2) Net loss reconciling items include $1,477 of general and administrative
costs, $18 of noncash stock compensation expense, $306 of other income, and
$31 of corporate DD&A. Nonsegmented expenses include $122 in general and
administrative costs incurred in Poland.
(3) Identifiable net property and equipment not associated with a segment
consists of $337 of corporate office equipment, hardware and software.
Note 5: Share-Based Compensation
Our Company maintains several share-based incentive plans. Under these
plans, options are granted at an option price equal to the market value of the
stock at the date of grant. The granted options have terms ranging from five to
seven years and vest over periods ranging from the date of grant to three years.
Under terms of the stock option award plans, the Company may also issue
restricted stock.
Effective January 1, 2006, the Company adopted the provisions of SFAS
No. 123R, "Share-Based Payment" ("SFAS No. 123R"). Under SFAS No. 123R,
share-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
employee's requisite service period. The Company adopted SFAS No. 123R using the
8
modified prospective transition method. Under this method, prior periods are not
revised for comparative purposes. The provisions of SFAS No. 123R apply to new
awards and to awards that are outstanding on the effective date that are
subsequently modified or cancelled. Compensation expense for unvested awards at
the effective date will be recognized over the remaining requisite service
period using the compensation cost calculated for pro forma disclosure purposes
under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
The following table summarizes option activity for the first quarter of
2006:
Weighted
Average
Remaining
Weighted Contractual Aggregate
Number of Average Life (in Intrinsic
Options Exercise Price years) Value
------------------------------------------------------------
Fixed Options outstanding:
Beginning of year................................ 3,492,283 $4.72
Cancelled........................................ (1,200) 0.00
---------------
End of period.................................... 3,491,083 $4.72 3.92 $2,308,219
===============
The aggregate intrinsic value in the table above represents the total
pretax intrinsic value, based on the Company's average stock price of $5.38
during the quarter ended March 31, 2006, which would have been received by the
restricted stock purchase right and the option holders had all restricted stock
purchase rights and options been exercised as of that date.
Prior to the adoption of SFAS No. 123R, the Company recorded
compensation expense for employee stock options based on their intrinsic value
on the date of grant pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations and provided the pro forma disclosures required by SFAS No. 123.
The pro forma effects of recognizing compensation expense under the fair value
method required by SFAS No. 123 on net loss and net loss per common share were
as follows (in thousands, except per share data):
2005
------------
Net loss:
Net loss, as reported.................................... $ (1,891)
Less: Total stock-based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effects..................... (493)
------------
Pro forma net loss.................................. $ (2,384)
============
Basic and diluted net loss per share:
As reported......................................... $ (0.05)
Pro forma........................................... (0.07)
As a result of adopting SFAS No. 123R, for the three months ended March
31, 2006, the Company recognized $443,000 of stock compensation expense, equal
to $0.01 per basic and diluted share, related to the amortization of unvested
options as of January 1, 2006. In addition, for the three months ended March 31,
2006, the Company recognized $254,000 of stock compensation expense related to
the amortization of restricted stock purchase rights granted in November 2005.
Effective January 1, 2006, the Company reclassified $2,975,000 of deferred
compensation related to the restricted stock
9
purchase rights to additional paid-in capital. As of March 31, 2006, deferred
compensation to be amortized in future periods totaled $2,721,000.
Note 6: Stockholders' Equity
During the three months ended March 31, 2005, warrant holders exercised
warrants for 35,500 shares of common stock, resulting in proceeds to the Company
of $133,000. In addition, during the three months ended March 31, 2005, option
holders exercised options for a total of 183,401 shares, resulting in additional
proceeds of $513,000. No options or warrants were exercised during the three
months ended March 31, 2006.
Note 7: Investments
The cost and estimated market value of marketable securities at March
31, 2006, are as follows (in thousands):
Gross Estimated
Unrealized Market
Cost Losses Value
---------- ----------- -----------
Marketable securities........ $17,770 $ (40) $ 17,730
The marketable securities consist primarily of U.S. government agency
bonds and notes, whose values fluctuate with changes in interest rates. The
marketable securities increased in value during the three months ended March 31,
2006. The Company believes the gross unrealized losses are temporary. The
marketable securities 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 loss.
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 expense, or DD&A, and general and
administrative expense, or G&A, directly associated with their respective
segments are detailed within the following discussion. G&A, interest and other
income, and other costs that are not allocated to individual operating segments
for management reporting or reportable business segment disclosure purposes are
discussed in their entirety following the segment discussion. A comparison of
the results of operations by business segment and the information regarding
nonsegmented items for the three months ended March 31, 2006 and 2005, follows.
10
Quarter Ended March 31, 2006, Compared to the Same Period of 2005
Exploration and Production Segment
Our oil revenues are comprised primarily of oil production in the
United States. A summary of the percentage change in oil revenues, average
prices and production for the first quarter of 2006 and 2005, from year to year,
is set forth in the following table:
Quarter Ended March 31,
-----------------------
2006 2005
---------- -----------
Oil revenues.................................. $995,000 $ 838,000
Percent change versus prior year's quarter.. 19% 32%
Average price per barrel of oil .............. $ 53.80 $ 40.87
Percent change versus prior year's quarter.. 32% 34%
Production volumes (barrels of oil)........... 18,493 20,507
Percent change versus prior year's quarter.. -10% -2%
Oil Revenues. Oil revenues were $995,000 during the first quarter of
2006, a 19% increase compared to the same period of 2005. During the first
quarter of 2006, our average oil prices rose 32%, from $40.87 per barrel in 2005
to $53.80 per barrel in 2006, while oil production quantities decreased by 10%.
Oil revenues in 2006 increased from 2005 levels by approximately $239,000 due to
higher oil prices, offset by approximately $82,000 related to production
declines.
Gas Revenues. Gas revenues were $66,000 during the first quarter of
2006 as revenues from the Kleka gas well in Poland were recognized beginning
January 1, 2006. No gas revenues were recognized during the same period of 2005.
Our net production for the first quarter of 2006 was approximately 35,800 Mcf at
an average price of $1.85 per Mcf.
Lease Operating Costs. Lease operating costs were $687,000 during the
first quarter of 2006, an increase of $58,000, or 9%, compared to the same
period of 2005. Lease operating costs increased primarily due to costs
associated with the Kleka gas well in Poland and higher personnel costs.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$2,042,000 during the first quarter of 2006, compared to $697,000 during the
same period of 2005, an increase of 193%. First quarter 2006 exploration costs
include approximately $841,000 associated with the Drozdowice-1 dry hole, and
approximately $1 million for new two-dimensional, 2-D seismic.
DD&A Expense - Exploration and Production. DD&A expense for producing
properties was $141,000 for the first quarter of 2006, an increase of 78%
compared to $79,000 during the same period of 2005. Essentially all of the
increase in DD&A is associated with new property costs incurred in late 2005 at
our Montana producing properties.
Accretion Expense. Accretion expense for both years reflects the
increase in our Asset Retirement Obligation under SFAS 143, and was essentially
flat from 2005 to 2006.
11
Oilfield Services Segment
Oilfield Services Revenues. Oilfield services revenues were $23,000
during the first quarter of 2006, a decrease of $27,000 compared to $50,000 for
the first quarter of 2005. During most of the first quarter of both years, our
drilling rig was idle due to winter weather. 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 $132,000 during
the first quarter of 2006, compared to $89,000 during the same period of 2005.
The quarter to quarter increase was primarily due to increased repairs to our
service equipment. Oilfield services costs will also continue to fluctuate
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.
DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $32,000 during the first quarter of 2006, compared to $53,000 during the
same period of 2005. The quarter to quarter decrease was primarily due to
capital additions from prior years being fully depreciated during 2005.
Nonsegmented Information
G&A Costs. G&A costs were $1,680,000 during the first quarter of 2006,
compared to $1,477,000 during the first quarter of 2005, an increase of
$203,000, or 14%. The increase was primarily due to foreign currency translation
losses on end of period cash balances held in Poland.
Stock Compensation (G&A). As discussed above, we adopted the provisions
of SFAS No. 123R on January 1, 2006, using the modified prospective method.
Under this method, prior periods are not revised for comparative purposes.
Stock-based awards that are granted prior to the effective date should continue
to be accounted for in accordance with SFAS No. 123, except that stock option
expense for unvested options must be recognized in the consolidated statement of
operations. Stock compensation expense recorded for the first quarter of 2006
represents $254,000 of amortization related to restricted stock purchase rights
granted in November 2005 and $443,000 of amortization of unvested stock options
granted prior to 2005 using the compensation cost calculated for pro forma
disclosure purposes under SFAS No. 123. Stock compensation expense recorded in
2005 represents the amortization of stock and options issued to consultants.
Interest and Other Income. Interest and other income was $190,000
during the first quarter of 2006, a decrease of $116,000 compared to $306,000
during the same period of 2005. The decrease was a reflection of lower 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. Our cash resources and marketable
securities at March 31, 2006, together with revenues from gas sales in 2006,
should allow us to carry out our planned exploration program for the remainder
of 2006 without selling additional equity or interests in our properties.
12
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 may change the allocation
of capital among the categories of our 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 $23,887,000 as of March 31, 2006, a decrease of $3,828,000 from our
working capital at December 31, 2005, of $27,715,000. As of March 31, 2006, our
cash and cash equivalents and marketable securities totaled approximately $23.0
million. We have no outstanding long-term debt.
Operating Activities. Net cash used in operating activities was
$5,305,000 during the first quarter of 2006, an increase of 168% compared to
$1,979,000 in net cash used during the same period of 2005. 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 quarter of 2006, we received
$8,185,000 from investing activities. We received proceeds of $9,000,000 from
maturities of marketable securities, purchased marketable securities of
$233,000, used $356,000 for current year capital additions in Poland and
$126,000 related to our proved properties in the United States, and used
$100,000 for capital additions in our office and drilling equipment. During the
first quarter of 2005, we spent $636,000 in investing activities. We received
proceeds of $2,000,000 from maturities of marketable securities, purchased
marketable securities of $372,000, used $1,076,000 to pay accounts payable
related to prior-year capital costs, used $958,000 for current year capital
additions in Poland and $155,000 related to our proved properties in the United
States, and used $75,000 for capital additions in our office and drilling
equipment.
Financing Activities. During the first quarter of 2005, option and
warrant holders exercised options and warrants for a total of 219,000 shares,
resulting in proceeds of $646,000. No options or warrants were exercised during
the first quarter of 2006.
New Accounting Pronouncements
We have reviewed all recently issued, but not yet adopted, accounting
standards in order to determine their effects, if any, on our results of
operations or financial position. Based on that review, we believe that none of
these pronouncements will have a significant effect on 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, 2005. 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.
13
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires our
management to make judgments, estimates and assumptions regarding uncertainties
that affect the reported amounts presented and disclosed in the financial
statements. Our management reviews these estimates and assumptions based on
historical experience, changes in business conditions and other relevant factors
that it believes to be reasonable under the circumstances. In any given
reporting period, actual results could differ from the estimates and assumptions
used in preparing our financial statements.
Critical accounting policies are those that may have a material impact
on our financial statements and also require management to exercise significant
judgment due to a high degree of uncertainty at the time the estimate is made.
Our senior management has discussed the development and selection of our
accounting policies, related accounting estimates and the disclosures set forth
below with the Audit Committee of our Board of Directors. We believe our
critical accounting policies include those addressing the recoverability and
useful lives of assets, the retirement obligations associated with those assets,
and the estimates of oil and gas reserves.
Forward-Looking Statements
This report contains statements about the future, sometimes referred to
as "forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "could," "should,"
"expect," "anticipate," "estimate," "project," "propose," "plan," "intend" and
similar words and expressions. We intend that the forward-looking statements
will be covered by the safe harbor provisions for forward-looking statements
contained in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements that describe our future strategic
plans, goals or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking
statements, including those regarding us or our management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as the future 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.
14
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.
The limited volume and sources of our gas production in Poland means we
cannot assure uninterruptible production or production in amounts that would be
meaningful to industrial users, which may depress the price we may be able to
obtain. The Polish Oil and Gas Company is the primary purchaser of domestic gas
in Poland. We expect that the prices we receive for the gas we produce will be
lower than would be the case in a more competitive setting and may be lower than
prevailing western European prices, at least until a fully competitive market
develops in Poland.
We currently do not engage in any hedging activities or have any
derivative financial instruments to protect ourselves against market risks
associated with oil and gas price fluctuations, although we may elect to do so
if we achieve a significant amount of production in Poland.
Foreign Currency Risk
We have entered into various agreements in Poland denominated in the
Polish zloty. The Polish zloty is subject to exchange rate fluctuations that are
beyond our control. We do not currently engage in hedging transactions to
protect ourselves against foreign currency risks, nor do we intend to do so in
the foreseeable future; 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
March 31, 2006, pursuant to Rule 13a-15(b) under the Securities Exchange Act.
Based upon that evaluation, our Certifying Officers concluded that, as of March
31, 2006, 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.
15
PART II--OTHER INFORMATION
ITEM 1A. RISK FACTORS
Information regarding risk factors appears in "Management's Discussion
and Analysis of Financial Condition and Results of Operations --Forward-Looking
Statements," in Part I -- Item 2 of this Form 10-Q and in Part I -- Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2005. There have
been no material changes from the risk factors previously disclosed in our
Annual Report on Form 10-K. The risks described in our Annual Report on Form
10-K for the year ended December 31, 2005, are not the only risks we face.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially and adversely affect our
business, financial condition, or operating results.
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 13a-14 Attached
31.02 Certification of Chief Financial Officer Pursuant to Rule 13a-14 Attached
Item 32 Section 1350 Certifications
- ------------------- ---------------------------------------------------------------------- --------------------
32.01 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Attached
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.02 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Attached
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.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FX ENERGY, INC.
(Registrant)
Date: May 9, 2006 By: /s/ David N. Pierce
----------------------------
David N. Pierce, President,
Chief Executive Officer
Date: May 9, 2006 By: /s/ Thomas B. Lovejoy
----------------------------
Thomas B. Lovejoy,
Chief Financial Officer
17