Quarterly Report For Small Business Issuers Subject
to the 1934 Act Reporting Requirements
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 333-47699
FAN ENERGY INC.
--------------------------------------------
(Name of Small Business Issuer in its charter)
Nevada 77-0140428
------------------------------ -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1801 Broadway Suite 720, Denver, Colorado 80202
- ----------------------------------------- --------
(Address of principal executive officers) (Zip Code)
Issuer's telephone number: (602) 483-8848
Check whether the issuer (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 [ ].
Number of shares outstanding for each of the issuer's classes of common
equity, as of the latest practicable date.
$.01 par value common stock:10,051,705 shares as of September 30, 1998.
<PAGE>
FAN ENERGY INC.
FORM 10-QSB
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 1998 and December 31, 1997 3
Statements of Operations - Quarter ended and nine months ended
September 30, 1998 and September 30, 1997 4
Statements of Cash Flows - Nine months ended September 30, 1998
and September 30, 1997 5
Notes to Financial Statements 6
Item 2. Management's Plan of Operation 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
September 30, 1998
(Unaudited) December 31, 1997
------------------ -----------------
<S> <C> <C>
CURRENT ASSETS
Cash ............................................................. $ 353,560 $ 424,717
---------- ----------
Total Current Assets .......................................... 353,560 424,717
UNDEVELOPED OIL AND GAS PROPERTIES ............................... 1,702,441 1,275,491
Accumulated valuation allowances ................................. (849,260) --
NET CAPITALIZED PROPERTY COSTS ................................... 853,181 1,275,491
DEFERRED OFFERING COSTS .......................................... 57,029 10,383
---------- ----------
$ 1,263,770 $ 1,710,591
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................. $ 70,237 $ 5,315
---------- ----------
Total Current Liabilities ..................................... 70,237 5,315
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value
Authorized - 5,000,000 shares
Issued - None
Common Stock, $.001 par value
Authorized - 95,000,000 shares
Issued and outstanding
10,051,705 shares (1998) and
7,771,704 shares (1997) ................................... 10,052 7,772
Additional paid-in capital ....................................... 2,314,456 1,796,236
Deficit accumulated during the development stage ................. (1,231,475) (199,232)
Additional paid-in capital stock options ......................... 100,500 100,500
---------- ----------
1,193,533 1,705,276
---------- ----------
1,263,770 1,710,591
========== ==========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Unaudited
Cumulative
Three Months Ended September 30 Nine Months Ended September 30 Amounts from
------------------------------- ------------------------------ Jan. 1, 1997 to
1998 1997 1998 1997 Sept. 30, 1998
---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES ...................................... $ -- $ -- $ -- $ -- $ --
----------- --------- ----------- -------- ----------
Impairment of Undeveloped Oil and Gas
Properties ................................... 849,260 -- 849,260 -- 849,260
OPERATING EXPENSES
General and administrative expenses ........... 25,315 72,632 188,778 75,973 381,763
Interest ...................................... -- -- -- -- 6,247
----------- --------- ----------- -------- -----------
25,315 72,632 188,778 75,973 388,010
----------- --------- ----------- -------- -----------
OTHER INCOME
Interest ...................................... 1,042 2,513 5,795 3,142 5,795
----------- --------- ----------- -------- -----------
NET (LOSS) .................................... $ (873,533) $ (70,119) (1,032,243) (72,831) (1,231,475)
=========== ========= =========== ======== ===========
NET (LOSS) PER COMMON SHARE ................... $ (.09) $ (.01) (.10) (.01) (.12)
=========== ========= =========== ======== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ..................... 10,051,705 10,051,705 10,051,705 10,051,705 10,051,705
=========== ========= =========== ======== ===========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(Unaudited)
Cumulative
For the nine months ended Sept. 30 Amounts from
---------------------------------- Jan. 1, 1997 to
1998 1997 Sept. 30, 1998
---- ---- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) .......................................................... $(1,032,243) $ (72,401) $(1,231,475)
Adjustments to reconcile net (loss)
to net cash provided by operating activities ................... -- -- --
Stock options ....................................................... -- -- 102,832
Valuation Allowances ................................................ 849,260 -- 849,260
Stock for services .................................................. 107,500 50,000 157,500
Changes in assets and liabilities ................................... -- -- --
(Increase) in prepaid expenses .................................. -- (710) --
Increase in accounts payable .................................... 64,922 7,175 70,237
(Increase) in deferred offering costs ........................... (46,646) -- (57,029)
----------- ----------- -----------
Net cash (used) provided by operating activities .................... (57,207) (15,935) (108,675)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for unproved oil and gas properties ................... (426,950) (360,000) (1,402,441)
----------- ----------- -----------
Net cash (used) in investing activities ............................. (426,950) (360,000) (1,402,441)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock .............................. -- 500,000 1,500,000
Cash paid for offering costs .................................... -- (430) (48,324)
Proceeds from exercise of warrants .............................. 413,000 -- 413,000
----------- ----------- -----------
Net cash provided by financing activities ........................... -- 499,570 1,864,676
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH ..................................... (71,157) 123,635 353,560
CASH, BEGINNING OF PERIODS .......................................... 424,717 -- --
----------- ----------- -----------
CASH, END OF PERIODS ................................................ $ 353,560 $ 123,635 $ 353,560
=========== =========== ===========
</TABLE>
5
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
Unaudited
September 30, 1998
The accompanying interim financial statements of FAN Energy, Inc. (the
"Company") are unaudited. In the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for the interim period.
The unaudited financial statements included herein were prepared from the
records of the Company in accordance with Generally Accepted Accounting
Principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's Registration Statement on Form SB-2
(File No. 333-47699) which became effective with the Securities and Exchange
Commission on May 14, 1998. The current interim periods reported herein should
be read in conjunction with the Company's registration statement subject to
independent audit at the end of the year.
The results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers as cash equivalents
all highly liquid investments with a maturity of three months or less at the
time of purchase. At September 30, 1998, there were no cash equivalents.
OIL AND GAS PROPERTIES
The Company follows the full cost method to account for its oil and gas
exploration and development activities. Under the full cost method, all costs
incurred which are directly related to oil and gas exploration and development
are capitalized and subjected to depreciation and depletion. Depletable costs
also include estimates of future development costs of proved reserves. Costs
related to undeveloped oil and gas properties may be excluded from depletable
cost until such properties are evaluated as either proved or unproved. The net
capitalized costs are subject to a ceiling limitation. A single cost center is
maintained for the company's oil and natural gas exploration, development and
production activities in the United States.
6
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Undeveloped oil and gas properties consist of leases and acreage acquired by the
Company for its exploration and development activities as well as geophysical
costs. The cost of these non-producing leases is recorded at the lower cost or
fair market value. As of September 30, 1998, costs related to undeveloped oil
and gas properties consists of costs incurred in conjunction with the Company's
acquisition of the properties, dry hole costs, and geological and geophysical
(seismic) costs. The Company has adopted SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which requires that long-lived assets to be held and used by reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of SFAS 121 has
had an impact on the Company's financial statements, as the Company determined
that an impairment loss of $849,260 needed to be recognized for applicable
assets of continuing operations.
NET CAPITALIZED PROPERTY COSTS
The Company incurred $426,950 in lease payments, drilling, geological and
geophysical costs during the nine months ended September 30, 1998. Also, during
the period, the Company drilled and abandoned three wells in the Fiji prospect
located in the southern part of the Sacramento Basin in California. As a result,
management decided not to pursue further exploration and drilling in the Fiji
prospect. The Company determined the fair market value of Fiji to be $100,000
based upon the value of the geologic, geophysical and seismic information
obtained including leasehold interests owned by the Company. The cost of dry
holes and geological studies since inception on Fiji was $691,589 and $949,260,
respectively, as of December 31, 1997 and September 30, 1998. The total
impairment on Fiji at September 30, 1998 was $849,260.
DEFERRED OFFERING COSTS
Deferred offering costs consist of costs incurred in connection with a proposed
public offering of the Company's common stock. If the offering is successful,
costs incurred will be charged against the proceeds of the offering. If the
offering is not successful, costs incurred will be charged to operations.
NOTE 2 - STOCKHOLDERS' EQUITY
During September 1998, the Company received $413,000 in cash from the sale of
2,065,000 shares of common stock at $.20 per share from the exercise of
outstanding warrants that expired September 1, 1998. Warrants with the right to
purchase 435,000 common shares were not exercised and expired on September 1,
1998.
NOTE 3 - INCOME TAXES
The Company has adopted the provisions of SFAS No. 109, "Accounting for Income
Taxes". SFAS 109 requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
NOTE 4 - (LOSS) PER COMMON SHARE
(Loss) per common share is computed based on the weighted average number of
common shares outstanding during each period. Common shares issued from
reactivation as a development stage company, and prior to completion of the
Company's proposed initial public offering, are considered outstanding for all
periods presented.
In February 1997 SFAS No. 128, "Earnings Per Share" was issued effective for
periods ending after December 15, 1997. There is no impact on the Company's
financial statements from adoption of SFAS No. 128.
7
<PAGE>
ITEM 2. MANAGEMENT'S PLAN OF OPERATION
The following discussion is intended to provide an analysis of the Company's
financial condition and Plan of Operation and should be read in conjunction with
the Company's financial statements and the notes thereto. The matters discussed
in this section that are not historical or current facts deal with potential
future circumstances and developments. Such forward-looking statements include,
but are not limited to, the drilling plans for natural gas, trends in the
results of the Company's operations, anticipated rates of production, natural
gas prices, operating expenses and the Company's anticipated capital
requirements and capital resources. The Company's actual results could differ
materially from the results discussed in the forward-looking statements.
The Company has not generated revenue from operations during the first nine
months of 1998 or during the previous two fiscal years. The Company plans to
acquire a 20% working interest in oil and gas leases covering approximately
5,760 gross acres and 3,525 net acres in Horsethief Canyon in Sweetwater County,
Wyoming. It also is attempting to sell its 25% working interest in oil and gas
leases in the Bali and Fiji prospects in the Sacramento Basin of Central
California. As of the date of this report, no production has been established on
any of the Company's properties.
The Company has participated in drilling three unsuccessful exploratory wells on
the Fiji prospect during 1998 and is attempting to sell its interest in the
current Fiji leases. The Company's share of the cost of the first three wells
which resulted in dry holes was approximately $185,500, and has been included in
investment for undeveloped oil and gas properties on the September 30, 1998
balance sheet. Management decided not to pursue further exploration and drilling
in the Fiji prospect and to record an impairment of $849,260. The Company
determined the fair market value of Fiji to be $100,000 based upon the value of
the geologic, geophysical and seismic information obtained including leasehold
interests owned by the Company.
During October 1998, the Company participated in drilling an unsuccessful
exploratory well on the Bali prospect which resulted in a dry hole cost of
approximately $12,000. On November 5, 1998, the Company set production casing
on a second well in the Bali prospect. Based on log calculations, the well
encountered 22 net productive feet of 5'th Starkey sand and 11 net productive
feet of Winters sand and the data indicates that the well should be a
commercially productive natural gas well. Completion of this well should be
finalized by December 1, 1998. Management has not determined the gas reserves
for the well at this time.
In October 1998, the Company purchased a 20% working interest in the Horsethief
Canyon prospect for $131,509. The Company plans to drill its first well in the
prospect in November 1998.
The estimated annual cash expenditures for general and administrative expenses
of the Company is anticipated to be approximately $220,000 and other capital
costs associated with the existing properties may approximate $700,000. During
the first nine months of 1998, operating expense, consisting primarily of
general and administrative expenses were approximately $189,000, including
non-cash equity compensation to officers and directors. The Company also had
cash expenditures of approximately $57,000 for deferred offering costs for the
offering described below, $188,000 for drilling costs and $239,000 for
geophysical and lease extension costs, all of which were capitalized.
At September 30, 1998 and as of November 11, 1998, the Company had approximately
$354,000 and $112,000, respectively, in cash, compared to $425,000 at December
31, 1997.
During September 1998, the Company received $413,000 in cash from the sale of
2,065,000 shares of common stock at $.20 per share from the exercise of
outstanding warrants that expired September 1, 1998. Warrants with the right to
purchase 435,000 common shares were not exercised and expired on September 1,
1998.
The Company will need to raise additional financing over the next twelve months
to continue exploratory drilling and pay its general and administrative
expenses. In May 1998, the Company commenced a public offering of a minimum of
300,000, up to a maximum of 3 million, common shares at $1.00 per share. The
offering has not been completed as of the date of this report.
8
<PAGE>
Concurrent with the offering, the Company extended to January 31, 1999, the
expiration date for outstanding warrants pursuant to which holders may purchase
up to 1,000,000 shares of common stock at $.60 per share and 180,000 shares at $
.50 per share. The Company anticipates that at least a portion of outstanding
warrants will be exercised by warrant holders. If all outstanding warrants are
exercised, of which there is no assurance, the Company would receive a total of
$690,000 by January 31, 1999, the date of expiration. No assurances can be made
as to whether any of the warrants will be exercised.
Unless a substantial portion of outstanding warrants are exercised, or at least
the minimum offering is completed, the Company may be unable to cover
anticipated general and administrative expenses and capital lease costs over the
next twelve months, and the Company may be unable to participate in drilling
additional exploratory wells. The Company plans to use the proceeds of the
public offering and warrant exercises to participate in drilling natural gas
wells on its prospects in the Horsethief Canyon, Wyoming prospect over the next
one to three years, depending upon whether initial drilling is successful,
future natural gas prices and other factors. When sufficient capital resources
are available, the company will seek to acquire interests in other oil or
natural gas properties. Management of the Company will continue to seek
additional financing for the Company.
Until and unless wells are drilled and completed as successful natural gas
producers or the Company acquires or develops other oil or natural gas
production or reserves, the Company will have no production, no cash flow, and
no oil or natural gas reserves.
The Company does not have any employees and uses consultants for matters
pertaining to drilling, property evaluations and administration. The Company may
hire employees during the next twelve months depending upon its success in
developing production, cash flow and natural gas reserves This report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, and Section 21E of the Exchange Act of 1934. Although the Company
believes that the expectations reflected in the forward-looking statements and
the assumptions upon which the forward-looking statements are based are
reasonable, it can give no assurance that such expectations and assumptions will
prove to have been correct.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27--Financial Data Schedule.
During the quarter ended June 30, 1998, the Registrant did not file
any reports on Form 8-K.
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FAN ENERGY, INC.
Signatures Title Date
- ---------- ----- ----
/s/ George H. Fancher Jr. Chief Operating Officer; and November 13, 1998
- ------------------------- Chairman of the Board
George H. Fancher Jr.
/s/ Rex Utsler Chief Financial Officer November 13, 1998
- -------------------------
Rex Utsler
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTER ENDED SEPTEMBER 30, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 353,560
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 353,560
<PP&E> 1,702,441
<DEPRECIATION> (849,260)
<TOTAL-ASSETS> 1,263,770
<CURRENT-LIABILITIES> 70,237
<BONDS> 0
0
0
<COMMON> 10,052
<OTHER-SE> 1,183,481
<TOTAL-LIABILITY-AND-EQUITY> 1,263,770
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (849,260)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,032,243)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,032,243)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,032,243)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
<FN>
Note 1-- Net capitalized property costs.
</FN>
</TABLE>
