U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE
ACT
Commission file number 0-26321
GASCO ENERGY, INC.
(Exact name of registrant issuer as specified in its charter)
Nevada 98-0204105
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14 Inverness Drive East, Suite H-236, Englewood, Colorado 80112
(Address of principal executive offices)
(303) 483-0044
(Issuer's telephone number)
No Change
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act). Yes [ ] No [X]
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 require to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of Common shares outstanding as of May 15, 2002: 40,288,800
1
ITEM I - FINANCIAL INFORMATION
PART 1 - FINANCIAL STATEMENTS
GASCO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,003,824 $ 2,089,062
Restricted cash 250,000 250,000
Prepaid expenses 324,772 198,491
Accounts receivable 201,922 96,144
--------- ---------
Total 3,780,518 2,633,697
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Well in progress - 1,138,571
Proved mineral interests 13,138,815 10,283,488
Unproved mineral interests 14,217,249 13,984,536
Furniture, fixtures and other 165,379 162,787
---------- ----------
Total 27,521,443 25,569,382
---------- ----------
Less accumulated depreciation, depletion,
amortization and property impairment (764,902) (697,578)
---------- ----------
Total 26,756,541 24,871,804
---------- ----------
TOTAL ASSETS $ 30,537,059 $ 27,505,501
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,648,316 $ 1,910,974
Accrued expenses 2,689,811 2,180,262
Note payable - 1,400,000
---------- ---------
Total 4,338,127 5,491,236
---------- ---------
NONCURRENT LIABILITES
Asset retirement obligation 152,286 -
--------- ---------
STOCKHOLDERS' EQUITY
Series B Convertible Preferred stock - $.001 par value; 20,000
Shares authorized; 10,952 shares issued and outstanding in 2003 11 -
Common stock - $.0001 par value; 100,000,000 shares authorized;
40,362,500 shares issued and 40,288,800 shares outstanding in
2003 and 2002 4,036 4,036
Additional paid in capital 49,711,991 44,958,593
Deferred compensation (26,396) (52,833)
Accumulated deficit (23,512,701) (22,765,236)
Less cost of treasury stock of 73,700 common shares (130,295) (130,295)
----------- -----------
Total 26,046,646 22,014,265
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,537,059 $ 27,505,501
============ ============
The accompanying notes are an
integral part of the consolidated financial statements.
2
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2003 2002
REVENUES
Oil and gas $ 158,850 $ 28,506
Interest 3,212 36,663
------- ------
Total 162,062 65,169
------- ------
OPERATING EXPENSES
General and administrative 733,171 1,085,023
Lease operating 66,448 25,066
Depletion, depreciation and amortization 76,748 115,089
Impairment - 472,000
Interest 23,473 -
------- ---------
Total 899,840 1,697,178
------- ---------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (737,778) (1,632,009)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (9,687) -
--------- ----------
NET LOSS (747,465) (1,632,009)
Preferred stock dividends (43,436) -
--------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (790,901) $ (1,632,009)
=========== =============
PER COMMON SHARE DATA - BASIC AND DILUTED:
Loss before cumulative effect of change in accounting principle $ (0.02) $ (0.06)
Cumulative effect of change in accounting principle - -
-------- ---------
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.02) $ (0.06)
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 40,288,800 28,308,056
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
3
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(747,465) $ (1,632,009)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation, depletion and impairment expense 73,396 587,089
Accretion of asset retirement obligation 3,352 -
Amortization of deferred compensation 26,437 43,562
Cumulative effect of change in accounting principle 9,687
Changes in operating assets and liabilities:
Prepaid expenses (126,281) 39,526
Accounts receivable (105,778) (18,391)
Accounts payable (262,658) (243,635)
Accrued expenses 509,549 276,529
-------- ---------
Net cash used in operating activities (619,761) (947,329)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for furniture, fixtures and other (2,592) (28,787)
Cash paid for development and exploration (1,816,294) (5,140,054)
----------- -----------
Net cash used in investing activities (1,818,886) (5,168,841)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash designated as restricted - (2,000,000)
Proceeds from sale of preferred stock 4,818,880 -
Cash paid for offering costs (65,471) -
Repayment of note payable (1,400,000) -
----------- -----------
Net cash provided by (used) in financing activities 3,353,409 (2,000,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 914,762 (8,116,170)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 2,089,062 12,296,585
----------- ----------
END OF PERIOD $ 3,003,824 $ 4,180,415
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
4
GASCO ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NOTE 1 - ORGANIZATION
Gasco Energy, Inc. ("Gasco" or the "Company") is an independent energy company
engaged in the exploration, development and acquisition of crude oil and natural
gas reserves in the western United States.
The unaudited financial statements included herein were prepared from the
records of the Company in accordance with generally accepted accounting
principles in the United States 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 Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2002. The current interim period reported herein should be read in
conjunction with the Company's Form 10-K for the year ended December 31, 2002.
The results of operations for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include Gasco and its wholly
owned subsidiaries, Pannonian Energy, Inc. and San Joaquin Oil and Gas, Ltd. All
significant intercompany transactions have been eliminated upon consolidation.
Property, Plant and Equipment
The Company follows the full cost method of accounting whereby all costs related
to the acquisition and development of oil and gas properties are capitalized
into a single cost center ("full cost pool"). Such costs include lease
acquisition costs, geological and geophysical expenses, overhead directly
related to exploration and development activities and costs of drilling both
productive and non-productive wells. Proceeds from property sales are generally
credited to the full cost pool without gain or loss recognition unless such a
sale would significantly alter the relationship between capitalized costs and
the proved reserves attributable to these costs. A significant alteration would
typically involve a sale of 25% or more of the proved reserves related to a
single full cost pool.
Depletion of exploration and development costs and depreciation of production
equipment is computed using the units of production method based upon estimated
proved oil and gas reserves. The costs of unproved properties are withheld from
the depletion base until such time as they are either developed or abandoned.
The properties are reviewed periodically for impairment. Total well costs are
transferred to the depletable pool even when multiple targeted zones have not
been fully evaluated. For depletion and depreciation purposes, relative volumes
of oil and gas production and reserves are converted at the energy equivalent
rate of six thousand cubic feet of natural gas to one barrel of crude oil.
5
Under the full cost method of accounting, capitalized oil and gas property costs
less accumulated depletion and net of deferred income taxes may not exceed an
amount equal to the present value, discounted at 10%, of estimated future net
revenues from proved oil and gas reserves plus the cost, or estimated fair
value, if lower of unproved properties. Should capitalized costs exceed this
ceiling, an impairment is recognized. The present value of estimated future net
revenues is computed by applying current prices of oil and gas to estimated
future production of proved oil and gas reserves as of period-end, less
estimated future expenditures to be incurred in developing and producing the
proved reserves assuming the continuation of existing economic conditions.
Well in Progress
Well in progress at December 31, 2002 represented the costs associated with the
drilling of a well in the Riverbend area of Utah. Since the well had not reached
total depth, it was classified as a well in progress and was withheld from the
depletion calculation until the first quarter of 2003 when the well reached
total depth and was cased. The costs associated with this well were classified
as proved property and became subject to depletion and the impairment
calculation, during the first quarter of 2003, as described above.
Asset Retirement Obligation
In June 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations, " which required that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it was incurred if a
reasonable estimate of fair value could be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
The asset retirement liability will be allocated to operating expense by using a
systematic and rational method. The Company adopted this statement as of January
1, 2003 and recorded a net asset of $139,247, a related liability of $148,934
(using a 9% discount rate and a 2% inflation rate) and a cumulative effect on
change in accounting principle on prior years of $9,687. For the three months
ended March 31, 2003, the company recognized accretion expense of $3,352 related
to the asset retirement obligation, which was recorded as additional depletion
expense. The information below reconciles the value of the asset retirement
obligation from the date the liability was recorded.
Asset
Retirement
Obligation
Balance 1/1/03 $148,934
Liabilities incurred -
Liabilities settled -
Revisions in estimated cash flows -
Accretion expense 3,352
---------
Balance 3/31/03 $ 152,286
=========
6
Computation of Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
attributable to the common stockholders by the weighted average number of common
shares outstanding during the reporting period. Diluted net income per common
share includes the potential dilution that could occur upon exercise of the
options to acquire common stock computed using the treasury stock method which
assumes that the increase in the number of shares is reduced by the number of
shares which could have been repurchased by the Company with the proceeds from
the exercise of the options (which were assumed to have been made at the average
market price of the common shares during the reporting period). The options
described in Note 7 have not been included in the computation of diluted net
income (loss) per share during all periods because their inclusion would have
been anti-dilutive.
Stock Based Compensation
The Company accounts for its stock-based compensation using Accounting
Principles Board's Opinion No. 25 ("APB No. 25"). Under APB 25, compensation
expense is recognized for stock options with an exercise price that is less than
the market price on the grant date of the option. For stock options with
exercise prices at or above the market value of the stock on the grant date, the
Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation
("SFAS 123") for the stock options granted to the employees and directors of the
Company. Accordingly, no compensation cost has been recognized for these
options. Had compensation expense for the options granted been determined based
on the fair value at the grant date for the options, consistent with the
provisions of SFAS 123, the Company's net loss and net loss per share for the
quarters ended March 31, 2003 and 2002 would have been increased to the pro
forma amounts indicated below:
For the Quarters Ended March 31,
2003 2002
---- ----
Net loss attributable to
common shareholders: As reported $(790,901) $ (1,632,009)
Pro forma (1,071,722) (2,059,316)
Net loss per share: As reported $ (0.02) $(0.06)
Pro forma (0.03) (0.07)
The fair value of the common stock options granted during 2001 and 2002, for
disclosure purposes was estimated on the grant dates using the Black Scholes
Pricing Model and the following assumptions. The stock options granted during
2003 were not included in this calculation for the three months ended March 31,
2003 because none of these options were vested during this period.
7
For the Year Ended December 31,
2002 2001
---- ----
Expected dividend yield -- --
Expected price volatility 90% 89%
Risk-free interest rate 3.5% - 4.1% 3.8% - 4.9%
Expected life of options 5 years 5 years
Use of Estimates
The preparation of the financial statements for the Company 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Recent Accounting Pronouncements
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantee of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The Company's adoption of FIN 45 on
January 1, 2003 did not effect its financial position or results of operations.
In December 2002, the FASB approved Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an amendment of FASB Statement No. 123" (SFAS No. 148). SFAS No. 148 amends
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for financial statements for fiscal years ending after
December 15, 2002. The Company will continue to account for stock based
compensation using the methods detailed in the stock-based compensation
accounting policy.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to
the classifications used in the current year.
8
NOTE 3 - STOCK OFFERING
The Company sold through a private placement, 11,052 shares of Series B
Convertible Preferred Stock ("Preferred Stock") to a group of accredited
investors, including members of Gasco's management. The Company sold 10,952
shares during February 2003 and an additional 100 shares of Preferred Stock
during April 2003. The Preferred Stock was sold for $440 per share resulting in
net proceeds of approximately $4,753,000 during the first quarter of 2003 and
net proceeds of approximately $44,000 during the second quarter of 2003.
Dividends on the Preferred Stock accrue at the rate of 7% per annum payable
semi-annually in cash, additional shares of Preferred Stock or shares of common
stock at the Company's option. The conversion price of the Preferred Stock is
$0.70 per common share, which was greater than the market price on the issuance
date, making each share of Preferred Stock convertible into approximately 629
shares of Gasco common stock. Shares of the Preferred Stock are convertible into
Gasco common shares at any time at the holder's election. Gasco may redeem
shares of the Preferred Stock at a price of 105% of the purchase price at any
time after February 10, 2006. The Preferred Stock votes as a class on issues
that affect the Preferred Stockholder's interests and votes with shares of
common stock on all other issues on an as-converted basis. Additionally, the
holders of the Preferred Stock exercised their right to elect one member to
Gasco's board of directors during March 2003.
During February 2003, $1,400,000 of the proceeds from this sale were used to
repay the note that was issued to Shama Zoe in connection with the Company's
repurchase of 1,400,000 shares of common stock at $1.00 per share as further
described in Note 4. The remaining proceeds from this sale will be used for the
development and exploitation of the Company's Riverbend Project in the Uinta
Basin in Utah and to fund the general corporate purposes of the Company.
NOTE 4 - NOTE PAYABLE
The original Property Purchase Agreement governing the Shama Zoe transaction
prevented the Company from issuing additional shares of its common stock at
prices below $1.80 per share and from granting registration rights in connection
with the issuance of shares of its common stock. In connection with the August
14, 2002 issuance of 6,500,000 shares of common stock, the original Property
Purchase Agreement was amended to allow for the issuance of these shares at a
price of $1.00 per share and Shama Zoe was granted an option to sell to the
Company 1,400,000 shares of the Gasco common stock that it acquired in the
transaction at $1.00 per share at any time prior to December 31, 2002. The value
of this option, using the Black Scholes model, of $250,000 has been recorded as
additional noncash offering costs associated with the Company's sale of common
stock .
On December 31, 2002 the Company repurchased and cancelled 1,400,000 shares of
Gasco common stock from Shama Zoe for $1.00 per share. The Company issued a
$1,400,000 promissory note to Shama Zoe for the purchase of these shares. The
promissory note beared interest at 12%, had a maturity date of March 14, 2003
and was recorded as a short-term note payable in the accompanying financial
statements as of December 31, 2002. On February 20, 2003, the Company repaid
this note plus accrued interest of $23,473.
NOTE 5 - SUSPENDED LEASES
During February 2002, the Company purchased at a Bureau of Land Management
("BLM") sale a 45% interest in 21,614 gross acres (9,726 net acres) in Wyoming
for approximately $1,428,000. After the sale, the Company was notified by the
9
BLM in Wyoming that several environmental agencies filed a protest against the
BLM offering numerous parcels of land for oil and gas leasing. All of the
parcels (leases) purchased by the Company were placed in suspense pending the
resolution of this protest. If the protest is deemed to have merit, the lease
purchases will be rejected and the money paid for the leases will be returned to
the Company. If the protest is deemed to be without merit, the leases will be
released from suspense and issued to the Company. Effective July 16, 2002, the
Company sold 25% of its interest in these suspended leases resulting in the
Company's total net acres being reduced from 9,726 to 7,295 net acres. As of
March 31, 2003, the BLM has released from suspension and issued leases covering
5,700 gross acres representing 1,924 net acres to the Company. The value of the
remaining suspended leases is recorded as unproved mineral interests in the
accompanying financial statements.
NOTE 6 - PROPERTY IMPAIRMENT
During the quarter ended March 31, 2002, the Company drilled a well in the
Southwest Jonah field located in the Greater Green River Basin in Sublette
County, Wyoming. The well was drilled to a total depth of 11,000 feet. The well
encountered natural gas, however not of sufficient quantities to be deemed
economic. The well was plugged and abandoned during March of 2002. The Company
recognized impairment expense of $472,000 associated with this well during the
first quarter of 2002 because the Company believed that the costs incurred for
this well exceeded the present value, discounted at 10%, of the future net
revenues from its proved oil and gas reserves.
NOTE 7 - STOCK OPTIONS
During the first quarter of 2003, the Company granted an additional 1,258,000
options to purchase shares of common stock to employees and directors of the
Company, at an exercise price of $1.00 per share. The options vest 16 2/3% at
the end of each four-month period after the issuance date. Additionally, the
Company cancelled 2,260,000 options to purchase shares of common stock during
the first quarter of 2003. The exercise price of the cancelled options ranged
from $1.95 to $3.15 per share. None of the 1,258,000 options granted during the
first quarter of 2003 were issued to the individuals whose options were
cancelled.
NOTE 8 - STATEMENT OF CASH FLOWS
During the three months ended March 31, 2003, the Company's non-cash investing
activity consisted of the following transaction:
Recognition of an asset retirement obligation for the plugging and
abandonment costs related to the Company's oil and gas properties valued at
$148,934.
During the three months ended March 31, 2002, the Company's non-cash investing
activity consisted of the following transaction:
Conversion of 500 shares of Preferred Stock into 4,750,000 shares of common
stock.
Cash paid for interest during the three months ended March 31, 2003 was $23,473.
There was no cash paid for interest during the three months ended March 31,
2002.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the results of operations of Gasco for the periods
ended March 31, 2003 and 2002 should be read in conjunction with the
consolidated financial statements of Gasco and related notes included therein.
Critical Accounting Policies
The Company follows the full cost method of accounting whereby all costs related
to the acquisition and development of oil and gas properties are capitalized
into a single cost center ("full cost pool"). Such costs include lease
acquisition costs, geological and geophysical expenses, overhead directly
related to exploration and development activities and costs of drilling both
productive and non-productive wells. Proceeds from property sales are generally
credited to the full cost pool without gain or loss recognition unless such a
sale would significantly alter the relationship between capitalized costs and
the proved reserves attributable to these costs. A significant alteration would
typically involve a sale of 25% or more of the proved reserves related to a
single full cost pool.
Depletion of exploration and development costs and depreciation of production
equipment is computed using the units of production method based upon estimated
proved oil and gas reserves. The costs of unproved properties are withheld from
the depletion base until such time as they are either developed or abandoned.
The properties are reviewed periodically for impairment. Total well costs are
transferred to the depletable pool even when multiple targeted zones have not
been fully evaluated. For depletion and depreciation purposes, relative volumes
of oil and gas production and reserves are converted at the energy equivalent
rate of six thousand cubic feet of natural gas to one barrel of crude oil.
Under the full cost method of accounting, capitalized oil and gas property costs
less accumulated depletion and net of deferred income taxes may not exceed an
amount equal to the present value, discounted at 10%, of estimated future net
revenues from proved oil and gas reserves plus the cost, or estimated fair
value, if lower of unproved properties. Should capitalized costs exceed this
ceiling, an impairment is recognized. The present value of estimated future net
revenues is computed by applying current prices of oil and gas to estimated
future production of proved oil and gas reserves as of period-end, less
estimated future expenditures to be incurred in developing and producing the
proved reserves assuming the continuation of existing economic conditions.
Recent Accounting Pronouncements
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantee of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The Company's adoption of FIN 45 on
January 1, 2003 did not effect its financial position or results of operations.
11
In December 2002, the FASB approved Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an amendment of FASB Statement No. 123" (SFAS No. 148). SFAS No. 148 amends
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for financial statements for fiscal years ending after
December 15, 2002. The Company will continue to account for stock based
compensation using the methods detailed in the stock-based compensation
accounting policy.
Petroleum and Natural Gas Properties
The following is a description of the current status of the Company's projects.
Riverbend Project
The Riverbend project is comprised of approximately 104,773 gross acres in the
Uinta Basin of northeastern Utah, of which the Company holds an interest in
approximately 31,353 net acres as March 31, 2003. Additionally, Gasco has an
opportunity to earn or acquire an interest in approximately 35,831 gross acres
in this area under farm-out and other agreements. Gasco's geologic and
engineering focus is concentrated on three tight-sand formations in the basin:
the Wasatch, Mesaverde and Blackhawk formations.
During January 2002, Gasco entered into an agreement with Halliburton Energy
Services ("Halliburton") under which Halliburton has the option to earn a
participation interest proportionate to its investment by funding the
completions of wells in the Wasatch, Mesaverde and Blackhawk formations. The
Company and Halliburton also share technical information through the formation
of a joint technical team.
During 2002 Gasco drilled three operated wells, which are currently producing.
Gasco's share of the costs for each of these wells ranged from $1,000,000 to
$1,300,000 per well. Gasco's fourth operated well in this area reached total
depth during December 2002 and is currently awaiting completion. The total
drilling costs for this well are expected to be approximately $1,200,000.
Gasco's fifth operated well in this area was spudded in October 2002 with a
small rig that has been moved off the drill site. A larger rig was moved onto
the site in March 2003 to complete the drilling of this well at a total
estimated cost of approximately $1,200,000. As of May 15, 2003, Halliburton has
exercised its option to participate in the first two wells and has declined to
participate in the remaining three wells under the current terms of the
contract.
During 2002, compressor capacity limitations on a third party gathering system
in this area caused the Company's wells to be shut-in or to have significantly
restricted production rates. During January 2003, Gasco entered into a contract
with the system operator to put a new compressor in place. The compressor began
operating during the beginning of February 2003 and is expected to meet the
Company's projected compression needs for the next twelve months.
In addition to the Gasco-operated wells described above, the Company also owns a
14 to 20% working interest in five wells that were drilled by ConocoPhillips in
12
this area during late 2001 and through the fourth quarter of 2002. Gasco did not
particpate in a sixth well drilled by ConocoPhillips. All of these wells are
currently selling gas.
Greater Green River Basin Project
In Wyoming, Gasco established an AMI with Burlington Resources ("Burlington")
covering approximately 330,000 acres in Sublette County, Wyoming within the
Greater Green River Basin. As of March 31, 2003, the Company has a leasehold
interest in approximately 114,848 gross acres and 72,428 net acres in this area.
During 2002, the Company participated in the drilling of two wells in Sublette
County Wyoming. Gasco has a 31.5% interest in each of these wells, which are
currently producing and are operated by Burlington.
During February 2002, the Company purchased at a Bureau of Land Management
("BLM") sale a 45% interest in 21,614 gross acres (9,726 net acres) for
approximately $1,428,000. After the sale, the Company was notified by the BLM in
Wyoming that several environmental groups filed a protest against the BLM
offering numerous parcels of land for oil and gas leasing. All of the parcels
(leases) purchased by the Company were placed in suspense pending the resolution
of this protest. If the protest is deemed to have merit, the lease purchases
will be rejected and the money paid for the leases will be returned to the
Company. If the protest is deemed to be without merit, the leases will be
released from suspense and issued to the Company. Effective July 16, 2002, the
Company assigned 25% of this suspended interest to Brek resulting in the
Company's net acres being reduced from 9,726 to 7,295 net acres. As of March 31,
2003, the BLM has released from suspension and issued leases covering 5,700
gross acres representing 1,924 net acres to the Company. These issued leases are
reflected in the Company's total acreage position stated above. To date, 15,914
gross acres (5,371 net acres) remain in suspense and this leasehold interest is
not included in the totals above. The value of the remaining suspended leases is
recorded as unproved mineral interests in the accompanying financial statements.
Southern California Project
The Company has a leasehold interest in approximately 4,068 gross acres (3,032
net acres) on two oil prospects in Kern and San Luis Obispo Counties of Southern
California. The Company has no drilling or development plans for this acreage
during 2003, but plans to continue paying leasehold rentals and other minimum
geological expenses to preserve the Company's acreage positions on these
prospects. The Company may consider selling these positions in the future.
Sale of Preferred Stock
The Company sold through a private placement, 11,052 shares of Series B
Convertible Preferred Stock ("Preferred Stock") to a group of accredited
investors, including members of Gasco's management. The Company sold 10,952
shares during February 2003 and an additional 100 shares of Preferred Stock
during April 2003. The Preferred Stock was sold for $440 per share resulting in
net proceeds of approximately $4,753,000 during the first quarter of 2003 and
net proceeds of approximately $44,000 during the second quarter of 2003.
Dividends on the Preferred Stock accrue at the rate of 7% per annum payable
semi-annually in cash, additional shares of Preferred Stock or shares of common
stock at the Company's option. The conversion price of the Preferred Stock is
$0.70 per common share, making each share of Preferred Stock convertible into
13
approximately 629 shares of Gasco common stock. Shares of the Preferred Stock
are convertible into Gasco common shares at any time at the holder's election.
Gasco may redeem shares of the Preferred Stock at a price of 105% of the
purchase price at any time after February 10, 2006. The Preferred Stock votes as
a class on issues that affect the Preferred Stockholder's interests and votes
with shares of common stock on all other issues on an as-converted basis.
Additionally, the holders of the Preferred Stock exercised their right to elect
one member to Gasco's board of directors during March 2003.
During February 2003, $1,400,000 of the proceeds from this sale were used to
repay the note that was issued to Shama Zoe in connection with the Company's
repurchase of 1,400,000 shares of common stock at $1.00 per share. The remaining
proceeds from this sale will be used for the development and exploitation of the
Company's Riverbend Project in the Uinta Basin in Utah and to fund the general
corporate purposes of the Company.
Results of Operations
Volumes, Prices and Operating Expenses
The following table presents information regarding the production volumes,
average sales prices received and average production costs associated with the
Company's sales of natural gas for the periods indicated.
For the Three Months Ended March 31,
2003 2002
Natural gas production (Mcf) 38,222 9,788
Average sales price per Mcf $ 4.16 $2.91
Expenses per Mcf:
Lease operating $ 1.74 $ 2.56
Depletion and impairment $ 1.60 59.26
The Three Months Ended March 31, 2003 Compared to the Three Months Ended March
31, 2002
The Company's oil and gas revenue was $158,850 during 2003 and $28,506 during
2002. The increase in revenue is comprised of an increase in the average gas
price from $2.91 per mcf in 2002 to $4.16 per mcf in 2003 and an increase in gas
production from 9,788 mcf in 2002 to 38,222 mcf in 2003. The increased
production is the result of the Company's drilling activity during 2002. The
Company owned interests in thirteen producing wells during 2003 and owned
interests in three producing wells during 2002. The $41,382 increase in lease
operating expense during 2003 as compared with 2002 is also the result of the
2002 drilling activity.
Interest income during 2003 and 2002 represents the interest earned on the
Company's combined cash and cash equivalents and restricted cash balances.
Interest income decreased $33,451 from the first quarter of 2002 to the first
quarter of 2003 primarily due to a lower average cash balance during the first
quarter of 2003.
14
General and administrative expense decreased from $1,085,023 to $733,171 during
the first quarter of 2003 compared to the first quarter of 2002, primarily due
to the Company's efforts to decrease its overhead expenses. The $351,852
decrease in these expenses is comprised of approximately $100,000 in salary
reductions due to the implementation, during January 2003, of a 36% annual
reduction in the cash component of the Company's senior management compensation,
a $200,000 reduction in consulting expense primarily due to the termination of
two consulting contracts during the second quarter of 2002 and management's
efforts to reduce these types of expenses, and a $24,000 reduction in travel
expenses due to management's cost cutting efforts. The remaining decrease in
general and administrative expenses is due to the fluctuation in numerous other
expenses, none of which are individually significant.
Depletion, depreciation and amortization expense during first quarter of 2003 is
comprised of $60,000 of depletion expense related to the Company's proved oil
and gas properties, $13,396 of depreciation expense related to the Company's
furniture, fixtures and other assets and $3,352 of accretion expense related the
Company's asset retirement obligation. The corresponding expense during the
first quarter of 2002 consists of $108,000 of depletion expense and $7,089 of
depreciation expense. The decrease in depletion expense during the first quarter
of 2003 as compared with the first quarter of 2002 resulted from the Company
having better estimates of its reserve quantities during 2003 because of its
increased production history. The increase in depreciation expense during 2003
is the result of the additional equipment purchased during 2002.
The impairment expense during the first quarter of 2002 represents costs
associated with a well drilled in the Southwest Jonah field located in the
Greater Green River Basin in Sublette County, Wyoming during the first quarter
of 2002. The well was drilled to a total depth of 11,000 feet. The well
encountered natural gas, however not of sufficient quantities to be deemed
economic. The well was plugged and abandoned during March of 2002. The Company
recognized impairment expense of $472,000 associated with this well during the
first quarter of 2002 because the Company believed that the costs incurred for
this well exceeded the present value, discounted at 10%, of the future net
revenues from its proved oil and gas reserves.
The interest expense during the three months ended March 31, 2003 represents the
interest incurred on the Company's outstanding note payable, which was repaid
during February 2003.
Liquidity and Capital Resources
At March 31, 2003, the Company had cash and cash equivalents of $3,003,824
compared to cash and cash equivalents of $2,089,062 at December 31, 2002. The
increase in cash and cash equivalents is primarily attributable to the net
proceeds from the Preferred Stock offering of $4,753,409 offset by the repayment
of the $1,400,000 note payable, the cash paid for development and exploration
activities of $1,816,294 and the cash used in operations of $619,761.
The Company's working capital deficit decreased from $2,857,539 at December 31,
2002 to $557,609 primarily due to the Preferred Stock offering proceeds and the
repayment of the note payable discussed above
In management's view, given the nature of the Company's operations, which
consist of the acquisition, exploration and evaluation of petroleum and natural
gas properties and participation in drilling activities on these properties, the
most meaningful information relates to current liquidity and solvency. The
Company's financial success will be dependent upon the extent to which Gasco can
15
discover sufficient economic reserves and successfully develop and produce from
the properties containing those reserves. Such development may take years to
complete and the amount of resulting income, if any, is difficult to determine
with any certainty. The sales value of any petroleum or natural gas that is
discovered is largely dependent upon other factors beyond the Company's control.
To date, the Company's capital needs have been met primarily through equity
financings. In order to earn interests in additional acreage and depths in
Riverbend, the Company will need to expend significant additional capital to
drill and complete wells. It will be necessary for Gasco to acquire additional
financing in order to complete its operational plan for 2003. The Company will
use approximately $3,400,000 of the proceeds from its February 2003 Preferred
Stock offering to fund a portion of its 2003 capital budget, however, it will be
necessary for Gasco to acquire additional financing in order to complete its
operational plan for 2003. The Company is considering several options for
raising additional capital to fund its 2003 operational budget such as equity
offerings, asset sales, the farm-out of some of the Company's acreage and other
similar type transactions. There is no assurance that financing will be
available to the Company on favorable terms or at all. Any financing obtained
through the sale of Gasco equity will likely result in substantial dilution to
the Company's stockholders.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the stockholders with certain information regarding
the Company's future plans and operations, certain statements set forth in this
Form 10-Q relate to management's future plans and objectives. Such statements
are forward-looking statements within the meanings of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical
facts included in this report, including, without limitation, statements
regarding the Company's future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "intend," "project," "estimate," "anticipate,"
"believe," or "continue" or the negative thereof or similar terminology.
Although any forward-looking statements contained in this Form 10-Q or otherwise
expressed by or on behalf of the Company are, to the knowledge and in the
judgment of the officers and directors of the Company, believed to be
reasonable, there can be no assurances that any of these expectations will prove
correct or that any of the actions that are planned will be taken.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual performance and financial results in future
periods to differ materially from any projection, estimate or forecasted result.
Important factors that could cause actual results to differ materially from the
Company expectations ("Cautionary Statements") include those discussed under the
caption "Risk Factors", in the Company's Form 10-K for the year ended December
31, 2002. All subsequent written and oral forward-looking statements
attributable to the Company, or persons acting on its behalf, are expressly
qualified in their entirety by the Cautionary Statements. The Company assumes no
duty to update or revise its forward-looking statements based on changes in
internal estimates or expectations or otherwise.
16
ITEM 3A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk relates to changes in the pricing applicable
to the sales of gas production in the Uinta Basin of northeastern Utah and the
Greater Green River Basin of west central Wyoming. This risk will become more
significant to the Company as more wells are drilled and begin producing in
these areas. Although the Company is not using derivatives at this time to
mitigate the risk of adverse changes in commodity prices, it may consider using
them in the future.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be disclosed
in Company reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date this evaluation was conducted.
17
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities and Use of Proceeds
During the first and second quarters of 2003, the Company issued
11,052 shares of Preferred Stock in a private offering for a price
of $440.00 per share, resulting in net proceeds of approximately
$4.8 million. The Company's financial advisor, Energy Capital
Solutions, LLC received an advisory fee of $10,000. The issuance
of shares of Preferred Stock in this transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933,
since the shares were offered and sold to a limited number of
accredited investors as defined in Regulation D under the
Securities Act of 1933, as amended. The Preferred Stock is
convertible into common stock at a price of $0.70 per share of
common stock, making each share of Preferred Stock convertible
into approximately 629 shares of common stock.
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:
Exhibit Number Exhibit
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Form 8-K dated December 31,
1999, filed on January 21, 2000).
3.2 Certificate of Amendment to Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Form 8-K/A dated January 31,
2001, filed on February 16, 2001).
3.3 Certificate of Designation for Series A Preferred Stock (incorporated
by reference to Exhibit 3.5 to the Company's Form 10-Q for the quarter
ended September 30, 2001, filed on November 14, 2001).
18
3.4 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4
to the Company's Form 10-Q for the quarter ended March 31, 2002, filed
on May 15, 2002).
3.5 Certificate of Designation for Series B Preferred Stock (incorporated
by reference to Exhibit 3.5 to the Company's Form S-1 Registration
Statement, File No. 333-104592).
4.1 Stock Purchase Agreement dated July 5, 2001 between Gasco Energy, Inc.
and First Ecom.com, Inc. (incorporated by reference to Exhibit 10.7 to
the Company's Form 10-QSB for the quarter ended September 30,2001,
filed on November 14,2001).
4.2 1999 Stock Option Plan (incorporated by reference to Exhibit 4.1 to
the Company's Form 10-KSB for the fiscal year ended December 31, 1999,
filed on April 14, 2000).
4.3 Form of Subscription and Registration Rights Agreement between the
Company and investors purchasing Series B Preferred Stock in February
2003 (incorporated by reference to Exhibit 4.3 to the Company's Form
S-1 Registration Statement, File No. 333-104592).
*99.1 Section 1350 Certifications
* Filed herewith.
(b) Reports on Form 8-K: The following reports on Form 8-K were
filed during the period covered by this report:
Form 8-K dated January 13, 2003, Item 9, Item 7(c) - Press Release
filed January14, 2003
Form 8-K dated February 5, 2003, Item 9, Item 7(c) - Press Release
filed February 13,2003
Form 8-K dated February 18, 2003, Item 9, Item 7(c) - Press Release
filed February 18, 2003
Form 8-K dated March 4, 2003, Item 9, Item 7(c) - Press Release
filed March 4, 2003
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GASCO ENERGY, INC.
Date: May 15, 2003 By: /s/ W. King Grant
W. King Grant, Executive Vice President
Principal Financial and Accounting Officer
20
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Mark A. Erickson, Chief Executive Officer of Gasco Energy, Inc.,certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gasco Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Mark A. Erickson
------------ ---------------------
Mark A. Erickson, President and
Chief Executive Officer
21
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, W. King Grant, Chief Financial Officer of Gasco Energy, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gasco Energy,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the Evaluation
Date); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: Date: May 15, 2003 /s/ W. King Grant
------------ ------------------
W. King Grant, ExecutiveVice President and
Chief Financial Officer
22