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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 JUNE 30, 2004
Commission File No. 000-25386
FX ENERGY, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0504461
-------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
----------------------------------------
(Address of principal executive offices)
(801) 486-5555
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The number of shares
of $0.001 par value common stock outstanding as of August 6, 2004, was
30,492,415.
FX ENERGY, INC. AND SUBSIDIARIES
Form 10-Q for the Three Months Ended and as of June 30, 2004
TABLE OF CONTENTS
Item Page
- ---------- -------
Part I. Financial Information
1 Financial Statements
Consolidated Balance Sheets............................... 3
Consolidated Statements of Operations and
Comprehensive Loss....................................... 5
Consolidated Statements of Cash Flows..................... 7
Notes to the Consolidated Financial Statements............ 8
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 11
3 Quantitative and Qualitative Disclosures about Market Risk.... 17
4 Controls and Procedures....................................... 18
Part II. Other Information
4 Submission of Matters to a Vote of Security Holders........... 18
6 Exhibits and Reports on Form 8-K.............................. 19
-- Signatures.................................................... 20
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2004 2003
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 1,840,525 $ 17,370,531
Marketable securities.................................................. 28,268,973 --
Accounts receivable:
Accrued oil sales.................................................... 323,105 245,511
Joint interest owners and others..................................... 279,418 137,479
Inventory.............................................................. 87,259 79,318
Other current assets................................................... 40,206 126,007
------------- -------------
Total current assets................................................. 30,839,486 17,958,846
------------- -------------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved............................................................... 6,367,140 5,752,518
Unproved............................................................. 327,326 173,969
Other property and equipment......................................... 3,899,395 3,598,137
------------- -------------
Gross property and equipment....................................... 10,593,861 9,524,624
Less: accumulated depreciation, depletion and amortization........... (4,741,079) (4,451,168)
------------- -------------
Net property and equipment......................................... 5,852,782 5,073,456
------------- -------------
Other assets:
Certificates of deposit ............................................... 356,500 356,500
Other.................................................................. 5,659 379,743
------------- -------------
Total other assets................................................... 362,159 736,243
------------- -------------
Total assets............................................................. $ 37,054,427 $ 23,768,545
============= =============
-- Continued --
The accompanying notes are an integral part of the consolidated financial statements.
3
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
-- Continued --
June 30, December 31,
2004 2003
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 697,692 $ 621,414
Accrued liabilities.................................................. 1,257,521 1,305,735
-------------- --------------
Total current liabilities.......................................... 1,955,213 1,927,149
Asset retirement obligation .......................................... 369,291 382,696
-------------- --------------
Total liabilities.................................................. 2,324,504 2,309,845
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no
shares issued as of June 30, 2004 and December 31, 2003............ -- --
Common stock, $0.001 par value, 100,000,000 shares authorized;
30,455,378 and 27,300,063 shares issued as of June 30, 2004 and
December 31, 2003, respectively.................................... 30,455 27,300
Additional paid-in capital........................................... 99,483,716 77,326,046
Other comprehensive loss............................................. (123,128) --
Accumulated deficit.................................................. (64,661,120) (55,894,646)
-------------- --------------
Total stockholders' equity......................................... 34,729,923 21,458,700
-------------- --------------
Total liabilities and stockholders' equity ............................ $ 37,054,427 $ 23,768,545
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
4
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
For the three months For the six months
ended June 30, ended June 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
Oil and gas sales................................. $ 693,535 $ 506,575 $ 1,327,330 $ 1,118,518
Oilfield services................................. 56,763 23,200 310,087 32,528
------------ ------------ ------------ ------------
Total revenues.................................. 750,298 529,775 1,637,417 1,151,046
------------ ------------ ------------ ------------
Operating costs and expenses:
Lease operating expenses.......................... 427,599 396,343 811,187 756,804
Geological and geophysical costs.................. 837,213 223,980 1,213,369 290,859
Oilfield services costs........................... 129,849 53,633 262,418 128,774
Depreciation, depletion and amortization (DD&A)... 152,521 155,890 289,911 255,420
Accretion expense................................. 10,311 9,286 20,621 18,572
Stock compensation (G&A).......................... 5,829,353 -- 5,829,353 --
General and administrative (G&A).................. 1,194,637 556,372 2,093,476 1,053,888
------------ ------------ ------------ ------------
Total operating costs and expenses.............. 8,581,483 1,395,504 10,520,335 2,504,317
------------ ------------ ------------ ------------
Operating loss...................................... (7,831,185) (865,729) (8,882,918) (1,353,271)
------------ ------------ ------------ ------------
Other income (expense):
Interest and other income (expense), net.......... 95,355 (294) 116,444 9,319
Interest expense.................................. -- (240,053) -- (469,861)
------------ ------------ ------------ ------------
Total other income (expense).................... 95,355 (240,347) 116,444 (460,542)
------------ ------------ ------------ ------------
Loss before cumulative effect of change in
accounting principle.............................. (7,735,830) (1,106,076) (8,766,474) (1,813,813)
Cumulative effect of change in accounting principle. -- -- -- 1,799,494
------------ ------------ ------------ ------------
Net loss (7,735,830) (1,106,076) (8,766,474) (14,319)
Comprehensive loss
Decrease in market value of available for
sale marketable securities........................ (123,128) -- (123,128) --
------------ ------------ ------------ ------------
Comprehensive loss.................................. $ (7,858,958) $ (1,106,076) $ (8,889,602) $ (14,319)
============ ============ ============ ============
-- Continued --
The accompanying notes are an integral part of the consolidated financial statements.
5
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
-- Continued --
For the three months For the six months
ended June 30, ended June 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Basic and diluted loss per common share before
cumulative effect of change in accounting principle..... $ (0.26) $ (0.06) $ (0.31) $ (0.10)
Cumulative effect of change in accounting principle....... -- -- -- 0.10
------------ ------------ ------------ ------------
Basic and diluted net loss per common share............... $ (0.26) $ (0.06) $ (0.31) $ --
============ ============ ============ ============
Basic and diluted weighted average number of shares
outstanding............................................. 29,710,486 17,714,099 28,570,747 17,683,180
The accompanying notes are an integral part of the consolidated financial statements.
6
FX ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the six months
ended June 30,
----------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities:
Net loss........................................................... $ (8,766,474) $ (14,319)
Adjustments to reconcile net loss to net
cash used in operating activities:
Cumulative effect of change in accounting principle............ -- (1,799,494)
Accretion expense.............................................. 20,621 18,572
Depreciation, depletion and amortization....................... 289,911 255,420
Loss on asset disposition...................................... 1,174 --
Amortization of loan fees...................................... -- 38,255
Stock compensation (G&A)....................................... 5,829,353 --
Common stock issued for services............................... 104,000 72,515
Increase (decrease) from changes in working capital items:
Accounts receivable.............................................. (219,533) (445)
Inventory........................................................ (7,941) 5,119
Other current assets............................................. 85,801 73,016
Accounts payable and accrued liabilities......................... (5,962) (69,291)
-------------- --------------
Net cash used in operating activities.......................... (2,669,050) (1,420,652)
-------------- --------------
Cash flows from investing activities:
Additions to oil and gas properties................................ (391,024) (119,711)
Additions to other property and equipment.......................... (302,432) (35,608)
Additions to marketable securities................................. (28,392,101) --
(Increase) decrease in other assets................................ (2,870) 15,283
-------------- --------------
Net cash used in investing activities............................ (29,088,427) (140,036)
-------------- --------------
Cash flows from financing activities:
Proceeds from preferred stock offering, net........................ -- 5,593,872
Payment of loan fees............................................... -- (100,000)
Proceeds from common stock offering, net........................... 14,347,969 --
Proceeds from stock option exercises............................... 1,879,502 --
Payments on notes payable.......................................... -- (1,675,000)
-------------- --------------
Net cash provided by financing activities........................ 16,227,471 3,818,872
-------------- --------------
Increase in cash and cash equivalents............................... (15,530,006) 2,258,184
Cash and cash equivalents at beginning of period..................... 17,370,531 705,012
-------------- --------------
Cash and cash equivalents at end of period........................... $ 1,840,525 $ 2,963,196
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
7
FX ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1: Basis of Presentation
The interim financial data are unaudited; however, in the opinion of
the management of FX Energy, Inc. and subsidiaries ("FX Energy" or the
"Company"), the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. The interim financial statements should be read in conjunction
with FX Energy's annual report on Form 10-K for the year ended December 31,
2003, and the Form 10-Q for the quarter ended March 31, 2004, including the
financial statements and notes thereto.
The consolidated financial statements include the accounts of FX Energy
and its wholly-owned subsidiaries and FX Energy's undivided interests in Poland.
All significant intercompany accounts and transactions have been eliminated in
consolidation. At June 30, 2004, FX Energy owned 100% of the voting stock of all
of its subsidiaries.
Note 2: Net Income (Loss) Per Share
Basic earnings per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing net income (loss) by the sum of the weighted
average number of common shares and the effect of dilutive unexercised stock
options and warrants and convertible preferred stock. Options to purchase
3,426,649 and 4,431,017 shares of common stock at prices ranging from $2.40 to
$10.25 per share with a weighted average exercise price of $4.34 per share and
$5.52 per share were outstanding at June 30, 2004 and 2003, respectively.
Warrants to purchase 6,231,410 and 2,250,000 shares of common stock at prices
ranging from $3.60 to $3.75 per share with a weighted average exercise price of
$3.70 per share and $3.60 per share were outstanding at June 30, 2004 and 2003,
respectively. No options or warrants were included in the computation of diluted
net loss per share for the periods ended June 30, 2004 and 2003, because the
effect would have been antidilutive.
Note 3: Income Taxes
FX Energy recognized no income tax benefit from the net loss generated
in the first six months of 2004 and the first six months of 2003. Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires
that a valuation allowance be provided if it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The Company's
ability to realize the benefit of its deferred tax asset will depend on the
generation of future taxable income through profitable operations and the
expansion of exploration and development activities. The market and capital
risks associated with achieving the above requirement are considerable,
resulting in the Company's conclusion that a full valuation allowance be
provided.
Note 4: Business Segments
FX Energy operates within two segments of the oil and gas industry: the
exploration and production segment ("E&P") and the oilfield services segment.
Identifiable net property and equipment are reported by business segment for
management reporting and reportable business segment disclosure purposes.
Current assets, other assets, current liabilities and long-term debt are not
allocated to business segments for management reporting or business segment
disclosure purposes. Reportable business segment information for the three
8
months ended June 30, 2004, the six months ended June 30, 2004, and as of June
30, 2004, is as follows:
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P(1) Services Items(2) Total
--------------- --------------- --------------- ---------------
Three months ended June 30, 2004:
Revenues(1)...................................... $ 693,535 $ 56,763 $ -- $ 750,298
Net loss(2)...................................... (643,211) (146,550) (6,946,069) (7,735,830)
Six months ended June 30, 2004:
Revenues(1)...................................... 1,327,330 310,087 -- 1,637,417
Net loss(2)...................................... (839,450) (94,618) (7,832,406) (8,766,474)
As of June 30, 2004:
Identifiable net property and equipment(3)....... 5,029,387 474,222 349,172 5,852,782
- --------------------
(1) E&P operating costs for the second quarter include $831,206 in geological
and geophysical costs, $2,074 in lease operating costs, and $30,022 in
general and administrative costs incurred in Poland. E&P operating costs
for the first six months include $1,154,335 in geological and geophysical
costs, $4,864 in lease operating costs, and $113,867 in general and
administrative costs incurred in Poland.
(2) Net loss reconciling items for the second quarter include $1,194,637 of
general and administrative costs, $5,829,353 of noncash stock compensation
expense, $95,355 of other income and expense, and $17,434 of corporate
DD&A. Net loss reconciling items for the first six months include
$2,093,476 of general and administrative costs, $5,829,353 of noncash stock
compensation expense, $116,444 of other income and expense, and $26,021 of
corporate DD&A.
(3) Identifiable net property and equipment consists of $349,172 of corporate
office equipment, hardware and software.
Reportable business segment information for the three months ended June
30, 2003, the six months ended June 30, 2003, and as of June 30, 2003, excluding
the cumulative effect of change in accounting principle, is as follows:
Reportable Segments
-------------------------------- Non-
Oilfield Segmented
E&P(1) Services Items(2) Total
--------------- --------------- --------------- ---------------
Three months ended June 30, 2003:
Revenues(1)...................................... $ 506,575 $ 23,200 $ -- $ 529,775
Net loss(2)...................................... (202,242) (105,729) (798,105) (1,106,076)
Six months ended June 30, 2003:
Revenues(1)...................................... 1,118,518 32,528 -- 1,151,046
Net loss(2)...................................... (50,079) (243,924) (1,519,818) (1,813,821)
As of June 30, 2003:
Identifiable net property and equipment(3)....... 5,204,824 655,969 90,528 5,951,321
- --------------------
(1) E&P operating costs for the second quarter include $121,372 in geological
and geophysical costs, $3,474 in lease operating costs, $20,723 in general
and administrative costs, and $108,545 in interest costs incurred in
Poland. E&P operating costs for the first six months include $138,349 in
geological and geophysical costs, $5,107 in lease operating costs, and
$81,314 in general and administrative costs.
(2) Net loss reconciling items for the second quarter include $556,372 of
general and administrative costs, $240,347 of other income and expense, and
$1,386 of corporate DD&A. Net loss reconciling items for the first six
months include $1,053,888 of general and administrative costs, $460,542 of
other income and expense, and $5,388 of corporate DD&A.
(3) Identifiable net property and equipment consists of $90,528 of corporate
office equipment, hardware and software.
9
Note 5: Stock-Based Compensation
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25 and related interpretations. Nonemployee stock-based compensation is
accounted for using the fair value method in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation."
Had compensation cost for the Company's stock options been recognized
based on the estimated fair value on the grant date under the fair value
methodology prescribed by SFAS No. 123, as amended, the Company's net earnings
and earnings per share for the periods ended June 30, 2004 and 2003, would have
been as follows:
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
(in thousands, except for per share data)
Net loss:
Net loss, as reported.................................... $ (7,736) $ (1,106) $ (8,766) $ (14)
Add: Stock based employee compensation expense included
in reported net loss................................... 5,820 -- 5,820 --
Less: Total stock-based employee compensation expense
determined under the fair value based method for all
awards................................................. (277) (207) (527) (413)
------------- ------------- ------------- -------------
Pro forma net income loss........................... $ (2,193) $ (1,313) $ (3,473) $ (427)
============= ============= ============= =============
Basic and diluted net loss per share:
As reported......................................... $ (0.26) $ (0.06) $ (0.31) $ 0.00
Pro forma........................................... (0.27) (0.07) $ (0.33) $ (0.02)
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 is equal to the difference between the
exercise price and fair value of the options on the date of exercise, and a
corresponding increase in additional paid in capital. This noncash transaction
had no impact on the Company's working capital, cash flows or stockholders'
equity.
Note 6: Stockholders' Equity
During the first half of 2004, the Company completed a registered
offering of 2,152,778 shares of common stock, resulting in proceeds after
offering costs of $14.3 million. In addition, during the first half of 2004,
nonexecutive option holders exercised options for a total of 331,000 shares,
resulting in additional proceeds of $1,879,000.
10
Note 7: Investments
Investments in marketable securities as of June 30 are reflected in the
balance sheets as follows:
2004 2003
---------------- -----------------
Marketable securities, available-for-sale, at fair value............. $28,268,973 $ --
The cost and estimated market value of marketable securities,
available-for-sale at June 30, 2004, are as follows:
Gross Estimated
Unrealized Market
Cost Losses Value
------------------ ---------------- ----------------
Marketable securities.............................. $28,392,101 $ (123,128) $28,268,973
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations by Business Segment
We operate within two segments of the oil and gas industry: the
exploration and production segment, or E&P, and the oilfield services segment.
Depreciation, depletion and amortization costs, or DD&A, and general and
administrative costs, or G&A, directly associated with their respective segments
are detailed within the following discussion. G&A, interest income, other income
and other costs that are not allocated to individual operating segments for
management or segment reporting purposes, are discussed in their entirety
following the segment discussion. A comparison of the results of operations by
business segment and the information regarding nonsegmented items for the three
months and six ended June 30, 2004 and 2003, follows.
Comparison of the Second Quarter of 2004 to the Second Quarter of 2003
Exploration and Production
Our oil and gas revenues are comprised of oil production in the United
States in 2004 and 2003. A summary of the percentage change in oil revenues,
average price and production volumes for the second quarter of 2004 and 2003 is
set forth in the following table:
Quarter Ended June 30,
--------------------------
2004 2003
------------- -----------
Revenues............................................. $694,000 $507,000
Percent change versus prior year's quarter....... +37% +2%
Average price (per barrel of oil).................... $ 33.49 $ 23.81
Percent change versus prior year's quarter....... +41% +10%
Production volumes (barrels of oil).................. 20,710 21,286
Percent change versus prior year's quarter....... -3% -8%
Oil Revenues. Oil revenues were $694,000 during the second quarter of
2004, a 37% increase compared to the same period of 2003. During the second
quarter of 2004, our average oil prices rose 41%, from $23.81 per barrel in 2003
11
to $33.49 per barrel in 2004, while oil production quantities declined by 3%.
Oil revenues in 2004 increased from 2003 levels by approximately $201,000 due to
higher oil prices, offset by approximately $14,000 related to production
declines.
Lease Operating Costs. Lease operating costs were $428,000 during the
second quarter of 2004, an increase of $32,000, or 8%, compared to the same
period of 2003. The increase was due primarily to higher production taxes
incurred during the second quarter of this year. Our 2004 operating costs
increased approximately $79,000 due to higher production taxes, offset by
approximately $47,000 related to lower oil production and lifting costs.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$837,000 during the second quarter of 2004, compared to $224,000 during the same
period of 2003, an increase of 274%. The successful completion of financing
activities in 2003 and 2004 has given us the funds necessary to increase both
the amount and pace of our exploration activities in Poland in 2004, which
during the second quarter of 2004 were composed primarily of seismic
acquisition, reprocessing, and reinterpretation.
DD&A Expense - E&P. DD&A expense for producing properties was $62,000
during the second quarter of 2004, a decrease of $17,000 compared to $79,000
during the same period of 2003.
Accretion Expense. Accretion expense for both years reflects the
increase in our Asset Retirement Obligation under Statement of Financial
Accounting Standards 143, which we adopted on January 1, 2003, and was
essentially flat from 2003 to 2004.
Oilfield Services
Oilfield Services Revenues. Oilfield services revenues were $57,000
during the second quarter of 2004, an increase of $34,000 compared to $23,000
for the second quarter of 2003. During most of the second quarter of 2003, our
drilling rig was idle. Drilling activity where we operate increased
significantly during the first half of 2004. Oilfield servicing revenues were
generated primarily by performing drilling services for third parties. These
revenues will continue to fluctuate from period to period based on market
demand, weather, the number of wells drilled, downtime for equipment repairs,
the degree of emphasis on utilizing our oilfield servicing equipment on our
company-owned properties, and other factors.
Oilfield Services Costs. Oilfield services costs were $130,000 during
the second quarter of 2004, up from the $54,000 incurred in the same period of
2003, reflecting the increased pace of drilling activities this year. Oilfield
services costs will also continue to fluctuate from period to period based on
revenues generated, market demand, weather, the number of wells drilled,
downtime for equipment repairs, the degree of emphasis on utilizing our oilfield
servicing equipment on our company-owned properties, and other factors.
DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $73,000 during the second quarter of 2004, compared to $75,000 during the
same period of 2003. The quarter to quarter decrease was primarily due to
capital additions from prior years being fully depreciated during 2003.
Nonsegmented Information
G&A Costs. G&A costs were $1,195,000 during the first quarter of 2004,
compared to $556,000 during the second quarter of 2003, an increase of 115%.
During the second quarter of 2003, as part of our cost-cutting measures,
executive salaries were reduced by 50%. All executive salaries have since been
increased to their full amounts. In addition, we have increased our headcount in
2004, making additions to our technical team. We have also experienced higher
12
levels of spending in 2004 associated with investor relations activities,
consulting fees, and legal and accounting fees associated with Sarbanes-Oxley
Act compliance.
Stock Compensation Expense. During the second quarter of 2004, we
recorded a stock compensation charge in the amount of approximately $5.8 million
in connection with the cashless exercise of certain stock options as described
in Note 5 to the financial statements.
Interest and Other Income. Interest and other income during the second
quarter was $95,000, reflecting our higher cash balances available for
investment. Interest and other income was negligible during the second quarter
of 2003.
Interest Expense. Interest expense was $0 during the second quarter of
2004, compared to $240,000 during the same period of 2003. All interest expense
in 2003 was related to our note payable to Rolls-Royce Power Ventures Limited,
or RRPV, which was satisfied in full by conversion to common stock in December
2003.
Comparison of the First Half of 2004 to the First Half of 2003
Exploration and Production
Our oil and gas revenues are comprised of oil production in the United
States during 2004 and 2003. A summary of the percentage change in oil revenues,
average price and production volumes for the first half of 2004 and 2003 is set
forth in the following table:
Six Months Ended June 30,
----------------------------
2004 2003
-------------- ------------
Revenues........................................... $1,327,000 $1,119,000
Percent change versus prior year's quarter..... +19% 31%
Average price (per barrel of oil).................. $ 31.96 $ 26.51
Percent change versus prior year's quarter..... +21% 42%
Production volumes (barrels of).................... 41,533 42,186
Percent change versus prior year's quarter..... -2% -8%
Oil Revenues. Oil revenues were $1,327,000 during the first half of
2004, a 19% increase compared to the same period of 2003. During the first half
of 2004, our average oil prices were 21% higher than in the same period of the
prior year, while oil production quantities declined by 2%. Oil revenues in 2004
increased from 2003 levels by approximately $226,000 due to higher oil prices,
offset by approximately $18,000 related to production declines.
Lease Operating Costs. Lease operating costs were $811,000 during the
first half of 2004, an increase of 7% compared to $757,000 during the same
period of 2003. The increase was due primarily to higher production taxes
incurred during the first half of this year. Our 2004 operating costs increased
approximately $79,000 due to higher production taxes, offset by $13,000 due to
lower lifting costs and by approximately $12,000 related to lower oil
production.
Exploration Costs. Our exploration costs consist of geological and
geophysical costs and the costs of exploratory dry holes. Exploration costs were
$1,213,000 during the first half of 2004, compared to $291,000 during the same
period of 2003, an increase of 317%. The successful completion of financing
activities in 2003 and 2004 has given us the funds necessary to increase both
13
the amount and pace of our exploration activities in Poland in 2004, which
during the first half of 2004 were composed primarily of seismic acquisition,
reprocessing, and reinterpretation.
DD&A Expense - E&P. DD&A expense for producing properties was $122,000
during the first half of 2004, an increase of $20,000 compared to $102,000
during the same period of 2003. Essentially all of the increase in DD&A is
associated with higher property costs incurred in 2003 and 2004.
Accretion Expense. Accretion expense for both years reflects the
increase in our Asset Retirement Obligation under SFAS 143, which we adopted on
January 1, 2003, and was essentially flat from 2003 to 2004.
Oilfield Services
Oilfield Services Revenues. Oilfield services revenues were $310,000
during the first half of 2004, an increase of $277,000 compared to $33,000 for
the first half of 2003. During most of the first half of 2003, our drilling rig
was idle. Drilling activity where we operate increased significantly during the
first half of 2004. Oilfield servicing revenues were generated primarily by
performing drilling services for third-party companies. These revenues will
continue to fluctuate from period to period based on market demand, weather, the
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 $262,000 during
the first half of 2004, up from the $129,000 incurred in the same period of
2003, reflecting the increased pace of drilling activities this year. Oilfield
services costs will also continue to fluctuate from period to period based on
revenues generated, market demand, weather, the number of wells drilled,
downtime for equipment repairs, the degree of emphasis on utilizing our oilfield
servicing equipment on our company-owned properties, and other factors.
DD&A Expense - Oilfield Services. DD&A expense for oilfield services
was $142,000 during the first half of 2004, compared to $148,000 during the same
period of 2003. The year to year decrease was primarily due to capital additions
from prior years being fully depreciated during 2003.
Nonsegmented Information
G&A Costs. G&A costs were $2,093,000 during the first half of 2004,
compared to $1,054,000 during the same period of 2003, an increase of 99%.
During the first half of 2003, as part of our cost-cutting measures, executive
salaries were reduced by 50%. All executive salaries have since been increased
to their full amounts. In addition, we have increased our headcount in 2004,
making additions to our technical team. We have also experienced higher levels
of spending in 2004 associated with investor relations activities, consulting
fees, and legal and accounting fees associated with Sarbanes-Oxley Act
compliance.
Stock Compensation Expense. During the second quarter of 2004, we
recorded a stock compensation charge in the amount of approximately $5.8 million
in connection with the cashless exercise of certain stock options as described
in Note 5 to the financial statements.
Interest and Other Income. We recorded $116,000 in interest and other
income during the first half of 2003, compared to $9,000 during the first half
of 2003. The year to year increase is a direct reflection of our higher cash
balances available for investment
14
Interest Expense. Interest expense was $0 during the first half of
2004, compared to $470,000 during the same period of 2003. All interest expense
in 2003 was related to our note payable to RRPV, which was satisfied in full by
conversion to common stock in December 2003.
Liquidity and Capital Resources
To date, we have financed our operations principally through the sale
of equity securities, issuance of debt securities, and agreements with industry
participants that funded our share of costs in certain exploratory activities in
return for an interest in our properties. The continuation of our exploratory
efforts in Poland may be dependent on our ability to raise additional capital.
The availability of such capital may affect the timing, pace, scope and amount
of our future capital expenditures. There is no assurance that we will be able
to secure additional equity or debt financing or complete other industry cost-
and risk-sharing arrangements, particularly if we fail to make additional
discoveries. Such events would materially and adversely affect our financial
position and results of operations.
We may seek to obtain additional funds for future capital investments
from 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 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 $28,884,000 as of June 30, 2004, an increase of $12,852,000 from our
working capital at December 31, 2003, of $16,032,000. As of June 30, 2004, our
cash and cash equivalents balance was approximately $30.1 million. We have no
outstanding long-term debt. Our current liabilities include $1.1 million payable
to the Polish Oil and Gas Company that is to be settled later in the year, for
the most part by a transfer of our interest in the Kleka 11 well. We believe
that we now have cash on hand to fund our exploration and overhead costs as
contemplated through the end of 2006.
Operating Activities. Net cash used in operating activities was
$2,792,000 during the first half of 2004, an increase of $1,371,000 compared to
$1,421,000 in net cash used during the same period of 2003. This increase in
cash used is a direct reflection of our increased exploration activities and
higher geological and geophysical costs in Poland, as well as increased employee
costs.
Investing Activities. We spent $696,000 in investing activities during
the first half of 2004, including $238,000 related to our proved properties in
the United States, $113,000 in Polish concession costs, $302,000 for office and
drilling equipment, and $40,000 in undeveloped leasehold costs in the United
States. In 2003, we used $140,000 in investing activities during the first half
of the year, primarily related to our proved properties in the United States.
In late 2003, we paid $376,000 to CalEnergy Gas (Holdings) Ltd. as a
deposit towards drilling costs of the Zaniemysl-3 well, which would be applied
by CalEnergy towards drilling costs in the event that gross costs for the well
exceeded approximately $2.2 million. During the second quarter of 2004, we
agreed to final drilling costs for the well in an amount that enabled CalEnergy
to keep the entire deposit. Accordingly, the total deposit amount has been
reclassified from other assets to proved property costs.
Financing Activities. During the first half of 2004, we completed a
registered offering of 2,152,778 shares of common stock, resulting in proceeds
after offering costs of $14.3 million. In addition, during the first half of
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2004, nonexecutive option holders exercised options for a total of 331,000
shares, resulting in proceeds to us of $1,879,000. During the first half of
2003, we completed a private placement of convertible preferred stock resulting
in proceeds after offering costs of approximately $5,594,000. We used $1,675,000
of the proceeds to pay down our RRPV note and incurred loan fees relating to our
new agreement with RRPV of $100,000.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standard Board ("FASB")
issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," and addresses consolidation by business
enterprises of variable interest entities (more commonly known as Special
Purpose Entities or SPEs). In December 2003, FASB issued FIN No. 46R, which
replaced FIN 46 and clarified ARB 51. This interpretation provides guidance on
how to identify a variable interest entity and determine when the assets,
liabilities, noncontrolling interests and results of operations of a variable
interest entity should be consolidated by the primary beneficiary. The primary
beneficiary is the enterprise that will absorb a majority of the variable
interest entity's expected losses or receive a majority of the expected residual
returns as a result of holding variable interests. FIN No. 46R requires the
consolidation of results of variable interest entities in which we are the
primary beneficiary of the variable interest entity. As of June 30, 2004, we did
not own an interest in a variable interest entity that met the consolidation
requirements and as such the adoption of FIN No. 46R did not have any effect on
our financial condition, results of operations, or liquidity. New interests in
entities acquired or created will be evaluated based on FIN No. 46R criteria and
consolidated, if required.
We have reviewed all other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on our results
of operations or financial position. Based on our review, we believe that none
of these pronouncements will have a significant effect on our current or future
financial position or results of operations.
Critical Accounting Policies
A summary of our significant accounting policies is included in Note 1
of our Consolidated Financial Statements contained in the annual report on Form
10-K for the year ended December 31, 2003. We believe the application of these
accounting policies on a consistent basis enables us to provide financial
statement users with useful, reliable and timely information about our earnings
results, financial condition and cash flows.
The preparation of financial statements in accordance with generally
accepted accounting principles 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.
16
Forward Looking Statements
This report contains statements about the future, sometimes referred to
as "forward-looking" statements. Forward-looking statements are typically
identified by the use of the words "believe," "may," "could," "should,"
"expect," "anticipate," "estimate," "project," "propose," "plan," "intend" and
similar words and expressions. We intend that the forward-looking statements
will be covered by the safe harbor provisions for forward-looking statements
contained in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements that describe our future strategic
plans, goals or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking
statements, including those regarding us or our management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties, such as the future results of drilling
individual wells and other exploration and development activities; future
variations in well performance as compared to initial test data; future events
that may result in the need for additional capital; the prices at which we may
be able to sell oil or gas; fluctuations in prevailing prices for oil and gas;
uncertainties of certain terms to be determined in the future relating to our
oil and gas interests, including exploitation fees, royalty rates and other
matters; future drilling and other exploration schedules and sequences for
various wells and other activities; uncertainties regarding future political,
economic, regulatory, fiscal, taxation and other policies in Poland; the cost of
additional capital that we may require and possible related restrictions on our
future operating or financing flexibility; our future ability to attract
strategic participants to share the costs of exploration, exploitation,
development and acquisition activities; and future plans and the financial and
technical resources of strategic participants.
The forward-looking information is based on present circumstances and
on our predictions respecting events that have not occurred, that may not occur,
or that may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of various factors. The
forward-looking statements included in this report are made only as of the date
of this report. We disclaim any obligation to update any forward-looking
statements whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Price Risk
Realized pricing for our oil production in the United States is
primarily driven by the prevailing worldwide price of oil, subject to gravity
and other adjustments for the actual oil sold. Historically, oil prices have
been volatile and unpredictable. Price volatility relating to our oil production
in the United States is expected to continue in the foreseeable future.
There is currently no competitive market for the sale of gas in Poland.
Accordingly, we expect that the prices we receive for the gas we discover and
produce will be lower than would be the case in a competitive setting and may be
lower than prevailing western European prices, at least until a fully
competitive market develops in Poland.
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.
17
Foreign Currency Risk
We have entered into various agreements in Poland, primarily in U.S.
dollars or the U.S. dollar equivalent of the Polish zloty. We conduct our
day-to-day business on this basis as well. The Polish zloty is subject to
exchange rate fluctuations that are beyond our control. We do not currently
engage in hedging transactions to protect ourselves against foreign currency
risks, nor do we intend to do so in the foreseeable future.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit to the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission's rules and forms, and that information is accumulated and
communicated to our management, including our principal executive and principal
financial officers (whom we refer to in this periodic report as our Certifying
Officers), as appropriate to allow timely decisions regarding required
disclosure. Our management evaluated, with the participation of our Certifying
Officers, the effectiveness of our disclosure controls and procedures as of June
30, 2004, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based
upon that evaluation, our Certifying Officers concluded that, as of June 30,
2004, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting
that occurred during our most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 16, 2004, at the annual meeting of the Company's stockholders,
the stockholders approved the following matters submitted to them for
consideration:
(a) elected Thomas B. Lovejoy, David L. Worrell, and Arnold S.
Grundvig, Jr. as directors of the Company by a plurality as shown below:
Director For Against Abstain
------------------------ -------------- -------------- -----------
Thomas B. Lovejoy 19,640,308 4,313,255 177,420
David L. Worrell 23,919,513 1,446 177,420
Arnold S. Grundvig, Jr. 23,952,513 26,928 177,420
(b) approved the 2004 Stock Option and Award Plan as shown below:
For Against Abstain
----------------- ----------------- -----------------
8,997,097 1,017,987 161,395
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are filed as a part of this report:
Exhibit
Number Title of Document Location
- ----------- ---------------------------------------------------------- ---------
Item 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.
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(b) Reports on Form 8-K
During the quarter ended June 30, 2004, we reported the following items
on Form 8-K:
Date of Event Reported Item(s) Reported
-------------------------- -----------------------------------
April 5, 2004 Item 5. Other Events
April 13, 2004 Item 5. Other Events
Item 7. Exhibits
April 13, 2004 Item 5. Other Events
Item 7. Exhibits
April 19, 2004 Item 7. Exhibits
Item 9. Regulation FD Disclosure
April 27, 2004 Item 7. Exhibits
Item 9. Regulation FD Disclosure
June 28, 2004 Item 7. Exhibits
Item 9. Regulation FD Disclosure
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FX ENERGY, INC.
(Registrant)
Date: August 10, 2004 By /s/ David N. Pierce
-------------------------------
David N. Pierce, President,
Chief Executive Officer
Date: August 10, 2004 By /s/ Thomas B. Lovejoy
-------------------------------
Thomas B. Lovejoy,
Chief Financial Officer
20