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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NO. 0-21841
3DX TECHNOLOGIES INC.
(Exact name registrant as specified in Charter)
DELAWARE 76-0386601
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
12012 WICKCHESTER, SUITE 250
HOUSTON, TEXAS 77079
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 579-3398
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING
----- -----------
Common Stock, par value $0.01 per share 9,685,761 shares as of May 12, 1999
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3DX TECHNOLOGIES INC.
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Balance Sheet
March 31, 1999 (unaudited) and December 31, 1998................ 3
Statement of Operations for the
Three Months Ended March 31, 1999 and 1998 (unaudited).......... 4
Statement of Changes in Stockholders' Equity
for the Year Ended December 31, 1998 and for the Three Months
Ended March 31, 1999 (unaudited).................................5
Statement of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 (unaudited).......... 6
Notes to Financial Statements (unaudited)....................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................15
Item 2. Changes in Securities and Use of Proceeds.......................15
Item 3. Defaults Upon Senior Securities.................................15
Item 4. Submission of Matters to a Vote of Security Holders.............15
Item 5. Other Information...............................................15
Item 6. Exhibits and Reports on Form 8-K................................15
SIGNATURES...............................................................17
Index to Exhibits........................................................18
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3DX TECHNOLOGIES INC.
BALANCE SHEET
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents........................ $ 784,355 $ 1,447,756
Accounts receivable.............................. 1,082,178 1,039,331
Prepaid expenses................................. 101,061 83,892
------------ ------------
Total current assets............................ 1,967,594 2,570,979
------------ ------------
Property and equipment:
Oil and gas properties, full-cost method:
Evaluated....................................... 32,645,847 32,664,307
Unevaluated..................................... 4,575,138 4,450,731
Technical interpretation equipment............... 2,734,149 2,734,149
Other property and equipment..................... 273,780 273,780
------------ ------------
40,228,914 40,122,967
Less accumulated depletion, depreciation and
amortization................................... (30,986,004) (29,256,556)
9,242,910 10,866,411
Other assets....................................... 63,771 63,771
------------ ------------
$ 11,274,275 $ 13,501,161
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 956,148 $ 1,301,828
Accrued liabilities.............................. 492,139 468,028
------------ ------------
Total current liabilities....................... 1,448,287 1,769,856
Borrowings on credit agreement .................... 750,000 1,200,000
------------ ------------
Total liabilities ............................. 2,198,287 2,969,856
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000
shares authorized, none issued ................. - -
Common stock, $.01 par value, 20,000,000 shares
authorized, 9,399,353 and 9,379,209 shares
issued and outstanding, respectively............ 93,994 93,792
Paid-in capital.................................. 39,993,637 39,989,951
Deferred compensation............................ (110,523) (136,304)
Accumulated deficit.............................. (30,901,120) (29,416,134)
------------ ------------
Total stockholders' equity...................... 9,075,988 10,531,305
------------ ------------
$ 11,274,275 $ 13,501,161
============ ============
The accompanying notes are an integral part of these financial statements.
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3DX TECHNOLOGIES INC.
STATEMENT OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
Revenues:
Oil and gas................................ $ 554,943 $ 861,377
Interest and other......................... 12,624 10,462
----------- -----------
Total revenues........................... 567,567 871,839
----------- -----------
Costs and expenses:
Lease operating............................ 44,879 106,849
Production taxes........................... 40,451 64,675
Impairment of oil and gas properties...... 990,809 878,346
Depletion, depreciation, and amortization
of oil and gas properties............... 592,771 659,489
Interest expense........................... 924 8,166
General and administrative................. 382,719 691,075
----------- -----------
Total costs and expenses................. 2,052,553 2,408,600
----------- -----------
Net loss applicable to common stockholders... $(1,484,986) $(1,536,761)
=========== ===========
Basic and diluted net loss per common share.. $(0.16) $(0.21)
===== =====
Weighted average number of common shares
outstanding................................ 9,380,328 7,272,106
========= =========
The accompanying notes are an integral part of these financial statements.
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3DX TECHNOLOGIES INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited from January 1, 1999 through March 31, 1999)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------ ------ ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1997......... 7,225,462 $72,255 $38,085,357 $(512,132) $(19,827,592) $17,817,888
Shares issued for
exercise of
stock options.... 401,703 4,017 127,226 - - 131,243
Deferred
compensation
related to
restricted stock
award............ 50,000 500 97,938 (98,438) - -
Compensation
expense related
to restricted
stock award...... - - - 41,016 - 41,016
Compensation
expense related
to certain stock
options.......... - - - 180,905 - 180,905
Reversal of
compensation
expense for
former employees
related to
certain stock
options.......... - - (628,488) 252,345 - (376,143)
Shares issued (net
of offering
costs)........... 1,702,044 17,020 2,307,918 - - 2,324,938
Net Loss........... - - - - (9,588,542) (9,588,542)
--------- ------- ----------- --------- ------------ -----------
Balance at
December 31, 1998 9,373,209 93,792 39,989,951 (136,304) (29,416,134) 10,531,305
Shares issued for
exercise of
stock options.... 20,144 202 3,686 - - 3,888
Compensation
expense related
to restricted
stock award...... - - - 12,305 - 12,305
Compensation
expense related
to certain stock
options.......... - - - 13,476 - 13,476
Net Loss........... - - - - (1,484,986) (1,484,986)
--------- ------- ----------- --------- ------------ -----------
Balance at March
31, 1999......... 9,393,353 $93,994 $39,993,637 $(110,523) $(30,901,120) $ 9,075,988
========= ======= =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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3DX TECHNOLOGIES INC.
STATEMENT OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(1,484,986) $(1,536,761)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depletion, depreciation and amortization. 738,639 845,094
Impairment of oil and gas properties..... 990,809 878,346
Compensation expense related to certain
stock options and restricted stock... 25,781 76,138
(Increase) decrease in accounts
receivable............................. (42,847) 295,705
(Increase) decrease in prepaid expenses.. (17,169) (7,287)
Increase (decrease) in accounts payable.. (65,766) 54,169
Increase (decrease) in accrued
liabilities............................ 24,111 (70,153)
----------- -----------
Net cash provided by operating activities... 168,572 535,251
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties......... (993,913) (1,845,431)
Sales of oil and gas properties............. 608,052 -
Purchases of technical and other equipment.. - (117,631)
Other assets................................ - 1,888
----------- -----------
Net cash used in investing activities....... (385,861) (1,961,074)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on borrowings on credit agreement... (450,000) -
Common stock proceeds, net of issuance costs - 12,571
Proceeds from exercise of stock options..... 3,888 -
----------- -----------
Net cash provided by (used in) financing
activities................................ (446,112) 12,571
----------- -----------
Net change in cash and cash equivalents....... (663,401) (1,413,252)
Cash and cash equivalents at beginning of the
period...................................... 1,447,756 1,568,091
----------- -----------
Cash and cash equivalents at end of the period $ 784,355 $ 154,839
=========== ===========
The accompanying notes are an integral part of these financial statements.
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3DX TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by 3DX
Technologies Inc. ("the Company") in accordance with generally accepted
accounting principles, and are unaudited. In the opinion of management, all
necessary adjustments have been made for a fair presentation of the financial
position of the Company at March 31, 1999 and the results of operations for the
interim periods presented. All such adjustments made are of a normal and
recurring nature. Results of operations for this period are not necessarily
indicative of results to be expected for the year ending December 31, 1999.
Reference is made to the Company's December 31, 1998 audited financial
statements, including the notes thereto. Certain reclassifications have been
made to amounts reported in previous periods to conform to the current
presentation.
OIL AND GAS PROPERTIES
Under the rules of the full-cost accounting method as prescribed by the
Securities and Exchange Commission, the Company is required to compare the net
costs of its evaluated properties to the net present value of its proved
reserves, using the prices and costs in effect at the end of each quarterly
period unless the Company believes that post period prices are more
representative of what might be received in future periods. If such evaluated
costs, net of accumulated depreciation, depletion and amortization, exceed the
present value of proved reserves, an impairment charge is required to writedown
those excess costs. At March 31, 1999, the Company recognized oil and gas
impairments of $990,809 using post period pricing increases. Using March 31,
1999 prices, the Company would have recognized an oil and gas impairment of
$1,860,429. During the 1998 quarter, an oil and gas impairment of $878,346 was
recorded. The writedown for the 1999 period was principally a result of
mechanical difficulties in the wellbores of certain wells in the Ramrod project
in Matagorda county, Texas which resulted in the sale of the remaining interest
in the project.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. Based on the Company's current operations, SFAS No. 133 will
not impact the Company's disclosure or reporting.
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2. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company expects that its projected
net cash flows from currently producing properties will be sufficient to fund
its projected minimum levels of general and administrative expenditures through
December 31, 1999, including technical employee and related costs which are
capitalized under full-cost accounting. However, these projections do not
consider any cash expenditures which could be required by the Company's planned
capital and exploration program discussed below. Available cash could also be
limited by declines in oil and gas prices and unanticipated declines in oil and
gas production from existing properties. These matters could adversely affect
the Company's ability to pay its obligations as they become due.
The Company has made and will be required to make oil and gas capital
expenditures substantially in excess of its net cash flow from operations in
order to complete the exploration and development of its existing properties.
The company will also need to acquire exploration prospects and find additional
oil and gas reserves in order for its asset base not to be depleted by current
oil and gas production. The level of capital spending in 1999 and thereafter
will be highly dependent upon the Company's ability to obtain additional
capital.
The Company will require additional sources of financing to fund drilling
expenditures on properties currently owned by the Company and to fund leasehold
costs and geological and geophysical costs on its active exploration projects.
The Company's 1999 expenditure plans currently include up to twelve exploratory
and development wells and various lease and seismic data acquisitions. The
Company generally has the right, but not the obligation, to participate for its
percentage interest in drilling wells and can decline to participate if it does
not have sufficient capital resources at the time such drilling operations are
proposed. The Company can also potentially transfer its right to participate in
drilling wells in exchange for cash, a reversionary interest, or some
combination thereof. To recover its investment in unevaluated properties, it is
necessary for the Company to either participate in drilling which finds
commercial oil and gas production and produce such reserves or receive
sufficient value through the sale or transfer of all or a portion of its
interests.
Management of the Company will continue to seek financing for its capital
program from a variety of sources. The Company's inability to obtain additional
financing would have a material adverse effect on the Company. Without raising
additional capital, the Company anticipates that it will be required to limit or
defer its planned oil and gas exploration and development program, which could
adversely affect the recoverability and ultimate value of the Company's oil and
gas properties.
Management intends to pursue exploration and development opportunities to
the extent additional capital becomes available in the current oil and gas
environment. However, the uncertainties about the Company's future cash flows
and the lack of firm commitments to attract additional capital at this time
raise substantial doubt about the ability of the Company to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
The Company has recently entered into a Plan and Agreement of Merger with
Esenjay Exploration, Inc. ("Esenjay") which provides for the merger of 3DX into
Esenjay. See Note 5 of Notes to Financial Statements.
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3. CREDIT AGREEMENT
On December 18, 1997, the Company executed a credit agreement with a
commercial bank which provides for advances under a borrowing base periodically
determined by the Bank and set initially at $5 million. The credit agreement
expires on December 31, 2000. During April 1998, the bank redetermined the
borrowing base and established an availability of $2 million which was reduced
to $1.2 million in November 1998 and to $750,000 in March 1999. The credit
agreement is secured by substantially all of the Company's producing oil and gas
properties. Advances carry an interest rate, at the Company's option, of either
the London Interbank Offered Rate ("LIBOR") plus 2% or the lender's base rate.
The credit agreement contains restrictions on dividends and additional liens and
indebtedness and requires the maintenance of a minimum current ratio and net
worth, each as defined in the credit agreement. At March 31, 1999, the
outstanding balance under this credit agreement was $750,000 at an interest rate
of 7.0 percent. There were no additional borrowings under the credit agreement
during the first quarter of 1999.
4. LISTING ON NASDAQ
In September 1998, the Company received a letter from The Nasdaq Stock
Market, Inc. notifying the Company that it failed to maintain a closing bid
price of greater than or equal to $1.00 and that the Company's common stock
failed to maintain a market value of public float greater than or equal to $5
million, as required by Nasdaq rules. The Company met with officials from The
Nasdaq Stock Market, Inc. on February 12, 1999, at which time the Company
presented several alternatives to regain compliance with the minimum bid price
and market value of public float requirements. On March 22, 1999, The Nasdaq
Stock Market Inc. responded to the meeting with the decision to transfer the
listing of the Company's securities to The Nasdaq SmallCap Market ("SmallCap"),
effective with the open of business on March 24, 1999, pursuant to the following
exception. On or before April 5, 1999, the Company must evidence a minimum
closing bid price of $1.00 per share for a minimum of ten consecutive trading
days. In order to fully comply with the terms of this exception, the Company
must be able to demonstrate compliance with all requirements for continued
listing on SmallCap. Accordingly, effective, March 24, 1999, the trading symbol
of the Company's securities was changed from TDXT to TDXTC. As the Company was
unable to comply with the requirement, at the close of business on April 7, 1999
the Company's securities were removed from conditional listing on SmallCap.
Trading of the common stock will now be conducted in the over-the-counter
market. As a result, a holder of the common stock may find it more difficult to
dispose of or to obtain accurate price quotations about the common stock.
When common stock is not listed on Nasdaq and has a market price of less
than $5.00 per share, it may be classified as a "penny stock". SEC regulations
define a "penny stock" to be any non-Nasdaq equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the Securities and Exchange Commission ("SEC") relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and to provide current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
The shares are subject to Section 15(b)(6) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which gives the SEC the authority to
prohibit any person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the SEC finds that such a
restriction would be in the public interest. Because the common stock is subject
to the rules on penny stocks, the market liquidity for the common stock could be
severely adversely affected.
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5. PROPOSED MERGER
On May 11, 1999 the Company entered into a Plan and Agreement of Merger
with Esenjay Exploration, Inc., an oil and gas exploration company listed on the
Nasdaq Small Cap Market. The terms of the merger provide for the issuance of, at
the 3DX shareholder's option, either one share of Esenjay common stock for each
3.25 shares of 3DX common stock or one share of a new Esenjay convertible
preferred stock for each 2.75 shares of 3DX common stock. The preferred stock is
redeemable during the first year at $1.925 per share and automatically converts
into one share of Esenjay common if not redeemed during the first year and the
average closing price of Esenjay common stock during the twelfth month is
greater than $1.875. If the average is less than $1.875 the preferred may be
"put" to Esenjay for, at Esenjay's option, either $1.65 per share or the number
of common shares determined by dividing 1.875 by the average closing price
during the twelfth month not to exceed 3.75 shares.
The Plan and Agreement of Merger has been approved by the board of
directors of both companies and is subject to the consent of the shareholders of
both companies and satisfaction of certain other conditions set forth in the
Plan and Agreement of Merger. Voting agreements have been entered into by
Esenjay shareholders accounting for about 61% of the total outstanding shares of
Esenjay and by 3DX shareholders accounting for about 21% of 3DX outstanding
shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a knowledge-based oil and gas exploration company whose
core competence and strategic focus is the utilization of 3-D imaging and other
advanced technologies in the search for commercial quantities of hydrocarbons.
The Company enters into arrangements that enable it to combine its expertise and
exploration capabilities with the operating skills of other oil and gas
companies. The Company participates in selected exploration projects as a
non-operating working interest owner, sharing both risks and rewards with its
partners. The Company commenced operations in January 1993 to take advantage of
perceived opportunities emerging from changes in the domestic oil and gas
industry, including the divestiture of domestic oil and gas properties, advances
in technology and the outsourcing of specialized technical capabilities. By
reducing drilling risk through 3-D imaging and analysis, the Company seeks to
improve the expected return on investment in its oil and gas projects.
As a working interest partner, the Company shares all project costs in
proportion to its working interest percentage. In instances in which exploration
and development activities are unsuccessful, the Company incurs an economic loss
equal to its proportionate share of project costs prior to the time the project
is abandoned. Similarly, the Company incurs an economic loss if the Company's
proportionate share of revenues generated from production is insufficient to
cover the Company's share of project costs.
The Company's future financial results will depend primarily on: (i) the
Company's ability to continue to source and screen potential projects; (ii) the
Company's ability to discover commercial quantities of hydrocarbons; (iii) the
market price for oil and gas; and (iv) the Company's ability to fully implement
its exploration and development program, which is dependent on the availability
of capital resources. There can be no assurance that the Company will be
successful in any of these respects, that the prices of oil and gas prevailing
at the time of production will be at a level allowing for profitable production,
or that the Company will be able to obtain additional funding to increase its
currently limited capital resources.
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RESULTS OF OPERATIONS
The following table sets forth certain operating information of the
Company during the periods indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
PRODUCTION:
Gas (MMcf)........................... 281.1 368.8
Oil and condensate (MBbls)........... 5.8 6.6
Total equivalent (MMcfe)............. 315.9 408.3
AVERAGE SALES PRICE:
Gas (per Mcf)........................ $1.77 $2.09
Oil and condensate (per Bbl)......... $9.63 $13.78
AVERAGE EXPENSES (PER MCFE):
Lease operating (1).................. $0.27 $0.42
Depletion of oil and gas properties.. $1.88 $1.62
(1) Includes all direct expenses of operating the Company's properties, as
well as production and ad valorem taxes.
OIL AND GAS REVENUES. Oil and gas revenues decreased to $554,943 for the three
months ended March 31, 1999 (the "1999 quarter") from $861,377 for the three
months ended March 31, 1998 (the "1998 quarter"). The decrease was primarily
attributable to lower oil and gas production levels. Production decreased by
over 23% to 315.9 MMcfe for the 1999 quarter, from 408.3 MMcfe for the 1998
quarter. The decreased production resulted principally from the sale of
producing properties during the third and fourth quarter of 1998 and first
quarter of 1999. These properties represented approximately 20% and 34% of the
oil and gas production, respectively, for the 1998 quarter. The decrease in
production was partially offset by successful wells which began production
during the second and third quarters of 1998. The average sales price for
natural gas, which accounted for 89% of equivalent production during the 1999
quarter, decreased by 15% to $1.77 per Mcf from $2.09 per Mcf for the 1998
quarter. The average sales price for oil decreased to $9.63 per barrel during
the 1999 quarter versus $13.78 per barrel for the 1998 quarter.
LEASE OPERATING EXPENSE. Total lease operating expenses, including production
taxes, decreased to $85,330 for the 1999 quarter from $171,524 for the 1998
quarter. This decrease was primarily attributable to the sale of producing
properties with a partial offset from the additional costs of operating new
producing wells. Lease operating expenses per Mcfe of production decreased to
$0.27 per Mcfe for the 1999 quarter from $0.42 per Mcfe for the 1998 quarter.
DEPLETION, DEPRECIATION AND AMORTIZATION OF OIL AND GAS PROPERTIES. Depletion of
oil and gas properties for the 1999 quarter decreased to $592,771 from $659,489
for the 1998 quarter. The decrease in depletion of oil and gas properties
resulted primarily from the reduction in oil and gas producing properties during
the 1999 period, as discussed above, with a partial offset from the change in
the depletion rate for this period. Depletion of oil and gas properties per Mcfe
for the 1999 quarter increased to $1.88 per Mcfe, or 16%, from the rate of $1.62
per Mcfe in the corresponding period in 1998. The increase in the rate resulted
from a reduction in proved reserves due to the sale of the Ramrod project (see
"Liquidity and Capital Resources).
IMPAIRMENT OF OIL AND GAS PROPERTIES. Under the rules of the full-cost
accounting method as prescribed by the Securities and Exchange Commission, the
Company is required to compare the net costs of its evaluated properties to the
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net present value of its proved reserves, using the prices and costs in effect
at the end of each quarterly period unless the Company believes that post period
prices are more representative of what might be received in future periods. If
such evaluated costs, net of accumulated depreciation, depletion and
amortization, exceed the present value of proved reserves, an impairment charge
is required to writedown those excess costs. At March 31, 1999, the Company
recognized oil and gas impairments of $990,809, using post period pricing
increases. Using March 31, 1999 prices, the Company would have recognized an oil
and gas impairment of $1,860,429. During the 1998 quarter, an oil and gas
impairment of $878,346 was recorded. The writedown for the 1999 period was
principally a result of mechanical difficulties in the wellbores of certain
wells in the Ramrod project in Matagorda county, Texas which resulted in the
sale of the remaining interest in the project.
INTEREST EXPENSE. Interest expense decreased to $924 for the 1999 quarter from
$8,166 for the 1998 quarter. These expenses represent commitment fees and
amortization of set up costs associated with the credit agreement the Company
executed with a commercial bank in December 1997. The Company had outstanding
borrowings of $750,000 under the credit agreement at March 31, 1999. The Company
capitalized interest of approximately $20,000 during the 1999 quarter relating
to unusually significant investments in unproved properties.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense, net of
costs capitalized to exploration and development projects, decreased to $382,719
for the 1999 quarter from $691,075 for the 1998 quarter. This decrease was
primarily attributable to the reduction in personnel that occurred during the
second quarter of 1998.
INTEREST AND OTHER INCOME. Interest and other income increased slightly to
$12,624 for the 1999 quarter from $10,462 for the 1998 quarter. The Company
maintained an equivalent level of short term investments during both quarters.
NET LOSS. As a result of the foregoing, the Company's net loss decreased to
$1,484,986 for the 1999 quarter from $1,536,761 for the 1998 quarter. The most
significant factors which caused the decrease in net loss were the reduction in
general and administrative expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
See further discussion of these issues under Note 2 to the financial
statements, "Going Concern".
To date, net cash provided by operating activities has been limited and
the Company has funded its oil and gas exploration activities principally
through cash provided by the sale of equity securities. On December 26, 1996,
the Company consummated an initial public offering of common stock which
provided approximately $23.6 million in proceeds, net of offering expenses. In
January 1997, the Company's underwriters exercised their over-allotment option
to purchase 375,000 additional shares of common stock, resulting in additional
net proceeds to the Company of approximately $3.8 million. Approximately $7.5
million of the proceeds of the initial public offering was used to redeem all
the issued and outstanding shares of the Series B preferred stock and to pay
accrued dividends on the issued and outstanding Series C preferred stock. The
balance of the net proceeds was designated to fund the Company's exploration and
development capital expenditures and for general corporate purposes, including
expenses associated with hiring additional personnel.
The Company has made and will be required to make oil and gas capital
expenditures substantially in excess of its net cash flow from operations in
order to complete the exploration and development of its existing properties.
The company will also need to acquire exploration prospects and find additional
oil and gas reserves in order for its asset base not to be depleted by current
-12-
<PAGE>
oil and gas production. Cash outlays for capital expenditures for oil and gas
exploration and development activities for the quarters ended March 31, 1999 and
1998 were $993,913 and $1,845,431, respectively. The level of capital spending
in 1999 and thereafter will be highly dependent upon the Company's ability to
obtain additional capital. The Company expects that its projected net cash flows
from currently producing properties will be sufficient to fund its general and
administrative expenditures through December 31, 1999, including technical
employee and related costs which are capitalized under full-cost accounting.
However, such projected cash flows could be adversely affected by declines in
oil and gas prices and unanticipated declines in oil and gas production from
existing properties. This raises substantial doubt about the Company's ability
to pay its obligations as they become due.
On December 18, 1997, the Company executed a credit agreement with a
commercial bank, the borrowing capacity of which was set at $2.0 million in
April 1998. During the quarter ended June 30, 1998 the Company borrowed $2.0
million under the credit agreement and made payments of $200,000 and $600,000,
during the third and fourth quarters of 1998, respectively, and an additional
payment of $450,000 in the first quarter of 1999. The maximum amount currently
available for borrowing under the credit facility is $750,000. The borrowing
capacity is a function of the value of the Company's proved oil and gas
reserves, and is redetermined on a semi-annual basis. The credit agreement is
secured by substantially all of the Company's oil and gas properties and
contains restrictions on dividends and additional liens and indebtedness and
requires the maintenance of a minimum current ratio and net worth, each as
defined in the credit agreement.
As a result of the Company's periodic review of each of its oil and gas
exploration and development properties and its available capital, the Company
has occasionally sold partial interests in specific oil and gas projects to
other investors to reduce its total investment commitment to such projects. In
accordance with full-cost accounting rules, no gain or loss has been recognized
on these transactions. In September 1998, the Company sold one of its properties
located in Cove Field, Texas for approximately $440,000 (of which $200,000 was
used to reduce the balance of borrowings on the company's bank credit
agreement). In November 1998, the Company closed a sale of 50% of its working
interest in the Ramrod project in Matagorda county, Texas. Proceeds to the
Company from this sale were $2 million and were used to reduce accounts payable
and the bank loan. In the first quarter of 1999, the Company sold all of the
remaining interest in the Ramrod project for $600,000. As of March 31, 1999, the
Company had working capital of approximately $519,000.
The Company will require additional sources of financing to fund drilling
expenditures on properties currently owned by the Company and to fund leasehold
costs and geological and geophysical costs on its active exploration projects.
The Company's 1999 expenditure plans currently include up to twelve exploratory
and development wells and various lease and seismic data acquisitions. The
Company generally has the right, but not the obligation, to participate for its
percentage interest in drilling wells and can decline to participate if it does
not have sufficient capital resources at the time such drilling operations are
proposed. The Company can also potentially transfer its right to participate in
drilling wells in exchange for cash, a reversionary interest, or some
combination thereof. To recover its investment in unevaluated properties, it is
necessary for the Company to either participate in drilling which finds
commercial oil and gas production and produce such reserves or receive
sufficient value through the sale or transfer of all or a portion of its
interests.
In April 1999, the Company closed an agreement with an independent oil and
gas exploration company whereby the Company sold its interest in five
non-producing prospect areas, including leasehold interests and 3D seismic data,
for $200,000 cash and additionally farmed out one half of its interest in the
Hall Ranch and Gillock projects in return for partial reimbursement of leasehold
costs and a carry through completion of the first well in Hall Ranch and the
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<PAGE>
first four wells in the Gillock project. The Company received $150,000 at
closing and will receive an additional $50,000 on completion of certain
assignments.
Management of the Company will continue to seek financing for its capital
program from a variety of sources. The Company's inability to obtain additional
financing would have a material adverse effect on the Company. Without raising
additional capital, the Company anticipates that it will be required to limit or
defer its planned oil and gas exploration and development program, which could
adversely affect the recoverability and ultimate value of the Company's oil and
gas properties.
Management intends to pursue exploration and development opportunities to
the extent additional capital becomes available in the current oil and gas
environment. However, the uncertainties about the Company's future cash flows
and the lack of firm commitments to attract additional capital at this time
raise substantial doubt about the ability of the Company to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
The Company has recently entered into a Plan and Agreement of Merger with
Esenjay Exploration, Inc. ("Esenjay") which provides for the merger of 3DX into
Esenjay. See Note 5 of Notes to Financial Statements.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by
changing oil and gas prices. If the price of oil and gas increases (decreases),
there could be a corresponding increase (decrease) in the operating cost that
the Company is required to bear for operations, as well as an increase
(decrease) in revenues.
IMPACT OF THE YEAR 2000
Many of the world's computer systems, including those embedded in process
control equipment, currently record years in a two-digit format. On January 1,
2000, all hardware and software which use the two year convention could fail or
create erroneous data because of an inability to properly interpret dates beyond
1999 (the Y2K issue).
The Company's assessment of the Y2K issues that could affect its
operations is not complete. However, based on information assembled to date, the
Company believes that most, if not all, of the Y2K risk to the Company, if any,
will come from third parties, primarily oil and gas operators, pipelines,
banking institutions, governmental entities, communications systems providers
and similar entities.
The Company does not operate any oil and gas properties and relies
minimally on the software of third parties, which consists primarily of
purchased or leased operating system, analysis, accounting and seismic programs.
These programs have been determined to be either Y2K compliant or capable of Y2K
compliance with little cost to the Company.
The Company will continue to assess the ability and timeliness of third
parties becoming Y2K compliant, but presently believes that any cost to the
Company will be minimal.
-14-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to the Registrant.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and section 21E of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act:). Actual results, events and circumstances could
differ materially from those set forth in such statements due to various
factors. Such factors include the possibility that the drilling of wells in
projects in which the Company has a working interest may be delayed or
abandoned, actual rates of production may not reach anticipated levels and
opportunities for the Company to acquire future working interests in additional
projects on terms considered reasonable to the Company may be limited or
unavailable, changing economic, regulatory and competitive conditions, other
technological developments and other risks and uncertainties, including those
set forth herein. The Company's future financial results will depend primarily
on: (i) the Company's ability to continue to source and screen potential
projects; (ii) the Company's ability to discover commercial quantities of
hydrocarbons; (iii) the market price for oil and gas; and (iv) the Company's
ability to implement its exploration and development program, which is dependent
on the availability of capital resources. There can be no assurance that the
Company will be successful in any of these respects or that the prices of oil
and gas prevailing at the time of production will be at a level allowing for
profitable production, or that the Company will be able to obtain additional
funding to increase its currently limited capital resources.
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of Earnings per Share
27. Financial Data Schedule for the three month period ended March
31, 1999
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<PAGE>
(b) Reports on Form 8-K
On January 4, 1999, the Company announced that it exercised its right
to terminate the Letter of Intent to merge with Fortune Natural
Resources Corporation since a signed definitive merger agreement was
not entered into by December 31, 1998. The Company filed a Form 8-K
pursuant to Item 5 thereof on January 12, 1999. No financial statements
were filed or required to be filed in connection with such Form 8-K. No
other reports on Form 8-K were filed during the three months ended
March 31, 1999.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
3DX TECHNOLOGIES INC.
(Registrant)
Date: May 14, 1999 By: /s/ Ronald P. Nowak
--------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 By: /s/ Russell L. Allen
--------------------------------------
Vice President of Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
11.1 Computation of Net Loss per Common Share.
27 Financial Data Schedule for the three month period
ended March 31, 1999
<PAGE>
EXHIBIT 11.1
COMPUTATION OF NET LOSS PER COMMON SHARE
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
Net loss attributable to common
shareholders........................ $(1,484,986) $(1,536,761)
========== ==========
Weighted average shares outstanding... 9,380,328 7,272,106
========= =========
Basic and diluted net loss per common
share................................. $(0.16) $(0.21)
===== =====
COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
ACTUAL WEIGHTED
ISSUE DATE SHARES AVERAGE
---------- ------ -------
1998 Beginning Balance ......... 7,225,462 7,225,462
Option Exercise ................ 01/09/98 31,655 28,841
Option Exercise................. 01/13/98 3,876 3,359
Restricted Stock Award ......... 03/06/98 50,000 14,444
--------- ---------
March 31, 1998 Ending Balance 03/31/98 7,310,993 7,272,106
========= =========
1999 Beginning Balance ......... 9,379,209 9,379,209
Option Exercise ................ 03/26/99 20,144 1,119
--------- ---------
March 31, 1999 Ending Balance 03/31/99 9,399,353 9,380,328
========= =========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF 3DX TECHNOLOGIES INC. FOR THE QUARTER ENDED
MARCH 31, 1999. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 784,355
<SECURITIES> 0
<RECEIVABLES> 1,082,178
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,967,594
<PP&E> 40,228,917
<DEPRECIATION> 30,986,004
<TOTAL-ASSETS> 11,274,275
<CURRENT-LIABILITIES> 1,448,287
<BONDS> 0
0
0
<COMMON> 93,994
<OTHER-SE> 8,981,994
<TOTAL-LIABILITY-AND-EQUITY> 11,274,275
<SALES> 554,943
<TOTAL-REVENUES> 567,567
<CGS> 85,330
<TOTAL-COSTS> 2,052,553
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,484,986)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,484,986)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,484,986)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
