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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: June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE
ACT
Commission file number 0-26321
GASCO ENERGY, INC.
(Exact name of small business 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 (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 August 2, 2002: 35,188,800 shares
ITEM I - FINANCIAL INFORMATION
PART 1 - FINANCIAL STATEMENTS
GASCO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,478,015 $ 12,296,585
Restricted cash 250,000 -
Accounts receivable and prepaid expenses 221,989 157,099
--------- -- -------
Total 2,950,004 12,453,684
--------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Proved mineral interests 5,596,322 -
Unproved mineral interests 30,452,083 9,152,740
Furniture, fixtures and other 144,291 59,445
---------- ---------
Total 36,192,696 9,212,185
---------- ---------
Less accumulated depreciation, depletion,
amortization and property impairment (693,107) (7,344)
--------- ---------
Total 35,499,589 9,204,841
---------- ---------
TOTAL ASSETS $ 38,449,593 $ 21,658,525
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,881,126 $ 593,100
----------- ---------
Series A Convertible Redeemable Preferred stock - $.001 par value; 5,000,000
shares authorized; 500 shares issued and outstanding in
2002; and 1,000 shares issued and outstanding in 2001 1 1
Common stock - $.0001 par value; 100,000,000 shares authorized;
41,512,500 shares issued and 41,438,800 shares outstanding in
2002; and 27,252,500 shares issued and 27,178,800 shares
outstanding in 2001 4,151 2,725
Additional paid in capital 57,093,498 38,569,923
Deferred compensation (174,250) (261,375)
Accumulated deficit (20,224,638) (17,115,554)
Less cost of treasury stock of 73,700 common shares (130,295) (130,295)
---------- ----------
Total 36,568,467 21,065,425
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,449,593 $ 21,658,525
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
2
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
------------------------------------------
------------------ ------ ----------------
2002 2001
REVENUES
Oil and gas $ 23,426 $ -
Interest 6,501 9,906
------ -----
Total 29,927 9,906
------ -----
OPERATING EXPENSES
General and administrative 1,390,079 847,939
Lease operating 18,249 -
Depletion, depreciation and amortization 29,549 1,256
Impairment 69,125 -
Interest 36,335
--------- ------
Total 1,507,002 885,530
--------- -------
NET LOSS $ (1,477,075) $(875,624)
============= ==========
NET LOSS PER COMMON SHARE BASIC AND DILUTED $ (0.04) $ (0.04)
========== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 35,087,971 24,857,500
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
3
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GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
------------------------------------------
---------------- ------ ------------------
2002 2001
REVENUES
Oil and gas $ 51,932 $ -
Interest 43,164 25,567
------ ------
Total 95,096 25,567
------ ------
OPERATING EXPENSES
General and administrative 2,475,102 1,526,468
Lease operating 43,315 -
Depletion, depreciation and amortization 144,638 2,501
Impairment 541,125 -
Interest 57,358
--------- ---------
-
Total 3,204,180 1,586,327
--------- ---------
NET LOSS $ (3,109,084) $(1,560,760)
============= ============
NET LOSS PER COMMON SHARE BASIC AND DILUTED $ (0.09) $ (0.07)
========== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 33,250,955 22,587,083
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
4
>
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------------------------------
------------------ ------ -----------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,109,084) $ (1,560,760)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation, depletion and impairment expense 685,763 2,501
Value of stock options issued - 336,342
Amortization of deferred compensation 87,125 -
Changes in assets and liabilities provided (used) cash net
of noncash activity
Accounts receivable and prepaid expenses (64,890) 6,988
Accounts payable and accrued expenses 1,288,026 (242,627)
Deferred offering costs (32,281)
-------------- ----------
Net cash used in operating activities (1,113,060) (1,489,837)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for furniture, fixtures and other (84,846) (27,440)
Cash paid for oil and gas properties (8,370,664) (4,335,115)
----------- -----------
Net cash used in investing activities (8,455,510) (4,362,555)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash designated as restricted (250,000) -
Proceeds from sale of common stock - 6,825,000
Cash paid for offering costs - (574,835)
Repayment of short-term borrowings - (315,265)
Cash received upon recapitalization and merger - 265,029
Distribution of Rubicon Oil and Gas, Inc. (247,969)
----------- ---------
Net cash (used in) provided by financing activities (250,000) 5,951,960
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (9,818,570) 99,568
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 12,296,585 874,433
---------- -------
END OF PERIOD $ 2,478,015 $ 974,001
=========== =========
The accompanying notes are an integral part of the
consolidated financial statements.
5
GASCO ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
NOTE 1 - ORGANIZATION
Gasco Energy, Inc. ("Gasco" or the "Company") (formerly known as San Joaquin
Resources Inc. ("SJRI")) 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 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, 2001. Prior to January
1, 2002, the Company was considered a development stage enterprise as defined by
Statement of Accounting Standards No. 7. The current interim period reported
herein should be read in conjunction with the Company's Form 10-K for the year
ended December 31, 2001.
The results of operations for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
On February 1, 2001, SJRI, a Nevada corporation, and Pannonian Energy, Inc.
("Pannonian"), a Delaware corporation, entered into an Agreement and Plan of
Reorganization (the "Pannonian Agreement") whereby a subsidiary of SJRI merged
into Pannonian and SJRI issued 14,000,000 shares of its common stock to the
former shareholders of Pannonian in exchange for all of the outstanding shares
and warrants of Pannonian. Certain shareholders of SJRI surrendered for
cancellation 2,438,930 common shares of the Company's capital in connection with
the transaction, and as a result the existing shareholders of Pannonian acquired
control of the combined company. For financial reporting purposes this business
combination is accounted for as a reverse acquisition with Pannonian as the
accounting acquirer.
The reverse acquisition was valued at $572,344 and was allocated as follows:
Oil and gas properties $ 265,836
Receivables, prepaid and other, net 41,479
Cash 265,029
------------------
Net assets acquired $ 572,344
==================
Under the terms of the Pannonian Agreement, Pannonian was required, prior to
closing of the merger on March 30, 2001, to divest itself of all assets not
associated with its "Riverbend" area of interest (the non-Riverbend assets). The
"spin-offs" were accounted for at the recorded amounts. The net book value of
the non-Riverbend assets in the United States transferred, including cash of
$1,000,000 and liabilities of $555,185, was approximately $1,850,000. The
6
non-Riverbend assets located outside the United States were held by Pannonian
International Ltd. ("PIL"), the shares of which were distributed to the
Pannonian stockholders. The book value of PIL as of the date of distribution was
approximately $174,000.
The following unaudited pro forma information presents the financial information
of the Company as if the consolidation of Gasco and Pannonian had taken place on
January 1 of each period presented. The pro forma results, which are the same as
the actual results for the quarters ended June 30, 2002 and 2001 are not
indicative of future results.
For the Six Months Ended June 30, 2001
--------------------------------------
As Reported Pro Forma
Oil and gas revenue $ - $ -
Net loss (1,560,760) (1,760,387)
Net loss per share basic
and diluted $ (0.07) $ (0.08)
========= ========
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include Gasco and its wholly
owned subsidiaries, Pannonian and San Joaquin Oil and Gas, Ltd. for all periods
subsequent to February 1, 2001. Periods prior to February 1, 2001 include
Pannonian and its wholly owned subsidiary PIL. All significant intercompany
transactions have been eliminated upon consolidation.
All share and per share amounts included in these financial statements have been
restated to show the retroactive effect of the conversion of Pannonian shares
into SJRI/Gasco shares.
Cash and Cash Equivalents
All highly liquid investments purchased with an initial maturity of three months
or less are considered to be cash equivalents.
Restricted Cash
In connection with its drilling projects, the Company entered into a $2,000,000
letter of credit during February 2002, which was amended to $250,000 during May
2002. The letter of credit is collateralized with cash and terminates in January
2003. The portion of the Company's cash that collateralizes this letter of
credit is classified as restricted cash in the accompanying financial
statements.
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
7
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.
Computation of Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
attributable to the common shareholders 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 6 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.
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.
8
Recent Accounting Pronouncements
In June 2001, SFAS No. 141, "Business Combinations" was issued by the FASB. SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The Company's adoption of SFAS No.
141 on July 1, 2001 had no impact on its financial position or results of
operations.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by
the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, ceased upon adoption of this
statement. Goodwill and certain intangible assets will remain on the balance
sheet and not be amortized. On an annual basis, and when there is reason to
suspect that their values have been diminished or impaired, these assets must be
tested for impairment, and write-downs may be necessary. The Company's
implementation of SFAS No. 142 on January 1, 2002 had no impact on its financial
position or results of operations.
In June 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations, " which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can 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 statement is effective for fiscal years
beginning June 15, 2002. The Company has not yet determined the impact of the
adoption of this statement.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets be
measured at the lower of carrying amount or fair value less costs to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. The
Company's adoption of SFAS No. 144 on January 1, 2002 had no impact on its
financial position or results of operations.
In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
FASB No. 4 required all gains or losses from extinguishment of debt to be
classified as extraordinary items net of income taxes. SFAS No. 145 requires
that gains and losses from extinguishment of debt be evaluated under the
provisions of Accounting Principles Board Opinion No. 30, and be classified as
ordinary items unless they are unusual or infrequent or meet the specific
criteria for treatment as an extraordinary item. This statement is effective
January 1, 2003. The Company does not anticipate that the adoption of this
statement will have a material effect on its financial position or results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". This Statement requires recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit plan
under EITF No. 94-3. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company has not yet
determined the impact of the adoption of this statement.
9
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to
the classifications used in the current year.
NOTE 3 - PROPERTY ACQUISITION
On May 1, 2002, the Company issued 9,500,000 shares of its common stock for the
acquisition of 62,276 net acres in the Greater Green River Basin in Sublette
County Wyoming plus other assets and consideration. The acquisition is valued at
$18,525,000 using a price of $1.95 per common share, which represents the
closing price of the Company's common stock on April 23, 2002, the date the
agreement was executed. This transaction replaces the previously described cash
option structure and eliminates the $300,000 per month option payment as
referred to in the Company's Form 10-K for the year ended December 31, 2001.
NOTE 4 - SUSPENDED LEASES
During February 2002, the Company was notified by the Bureau of Land Management
("BLM") in Wyoming that several environmental agencies filed a protest against
the BLM offering numerous parcels of land for oil and gas leasing. Approximately
9,726 net acres valued at approximately $1,428,000 which were purchased by the
Company are being held 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. The value
of the suspended leases is recorded as unproved mineral interests in the
accompanying financial statements.
NOTE 5 - PROPERTY IMPAIRMENT
During the six months ended June 30, 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 costs
associated with this well of $541,125, were charged to impairment expense during
the six months ended June 30, 2002 because the Company believes that the total
costs for this well exceed the present value, discounted at 10%, of the future
net revenues from its proved oil and gas reserves.
NOTE 6 - PROPERTY DISPOSITIONS
On March 30, 2001, the Company divested itself of all assets not associated with
its "Riverbend" area of interest (the non-Riverbend assets), as required by the
Pannonian Agreement described in Note 1. The divestiture is summarized below.
Oil and gas properties $ 1,405,242
Cash 1,000,000
Liabilities transferred (555,185)
---------
$ 1,850,057
10
The oil and gas properties, cash and liabilities were transferred to a newly
formed entity Rubicon Oil and Gas, Inc. ("Rubicon"). The Pannonian shareholders
were allocated shares in Rubicon on a one for one basis with their Pannonian
shares.
The Company held, through PIL, non-United States oil and gas properties. In
accordance with the Agreement, the Company distributed, as a dividend in kind,
all of the outstanding shares of PIL to the shareholders of the Company on a one
to one basis with their Pannonian shares. The book value of the PIL shares as of
the date of distribution was approximately $174,000.
NOTE 7 - STOCK OPTIONS
During the first quarter of 2002, the Company issued an additional 250,000
options to purchase shares of common stock to employees of the Company, at
exercise prices ranging from $1.58 to $1.73 per share. The exercise prices of
the stock options equaled the trading price of the Company's common stock on the
grant date. The options vest quarterly over a two-year period and expire within
ten years from the grant date.
NOTE 8 - STATEMENT OF CASH FLOWS
During the six months ended June 30, 2002, the Company's non-cash investing
activity consisted of the following transactions:
Conversion of 500 shares of Preferred Stock into 4,750,000 shares of common
stock.
Issuance of 9,500,000 shares of common stock, valued at $18,525,000 in
exchange for oil and gas properties.
Cash paid for interest during the six months ended June 30, 2001 was $57,358.
There was no cash paid for interest during the six months ended June 30, 2002.
NOTE 9 - SUBSEQUENT EVENT
On July 16, 2002, Gasco executed and closed a purchase agreement with Brek
Energy Corporation ("Brek"), and certain other Gasco shareholders (the "Other
Shareholders"), pursuant to which Brek and the Other Shareholders purchased from
Gasco an undivided 25% of Gasco's working interests in all undeveloped acreage
owned by Gasco in exchange for 6,250,000 shares of Gasco common stock and 500
shares of Gasco preferred stock held by Brek and the Other Shareholders. The
Other Shareholders assigned their right to receive their share of such working
interests to Brek, so that Brek acquired title to all of the working interests
conveyed by Gasco in the transaction. Brek also has the option to acquire an
additional 5% undivided interest in Gasco's undeveloped acreage by paying a
total of $10.5 million in two equal installments on or before January 1, 2004
and January 1, 2005, respectively. A 2.5% interest will be conveyed to Brek upon
receipt of each installment. Brek must make timely payment of the first
installment in order to maintain the option to acquire the additional 2.5%
interest with the second installment.
11
The transaction, previously announced as a letter of intent on May 24, 2002,
simplifies the Company's capital structure by eliminating all preferred stock
(which was convertible into 4,750,000 common shares) and the associated
preferential voting rights. Following consummation of the transaction, the
Company's capitalization consists of 35,188,800 outstanding common shares.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the results of operations of Gasco for the periods
ended June 30, 2002 and 2001 should be read in conjunction with the consolidated
financial statements of Gasco and related notes included therein.
Business Combination
On February 1, 2001, the Company entered into an Agreement and Plan of
Reorganization (the "Pannonian Agreement") whereby it issued 14,000,000 shares
of its common stock and warrants to the former stockholders of Pannonian Energy,
Inc. ("Pannonian"), a private corporation incorporated under the laws of the
State of Delaware, in connection with the merger of Pannonian with a subsidiary
of the Company (the "Pannonian Merger"). Pannonian was an independent energy
company engaged in the exploration, development and acquisition of crude oil and
natural gas reserves in the western United States.
Under the terms of the Pannonian Agreement, Pannonian was required, prior to
closing of the merger transaction on March 30, 2001, to divest itself of all
assets not associated with its "Riverbend" area of interest (the "non-Riverbend
assets"). The "spin-offs" were accounted for at the recorded amounts. The net
book value of the non-Riverbend assets in the United States transferred,
including cash of $1,000,000 and liabilities of $555,185, was approximately
$1,850,000. The net book value of PIL (which owned the non-Riverbend assets
located outside the United States) as of the date of distribution was
approximately $174,000.
Certain shareholders of SJRI surrendered for cancellation 2,438,930 common
shares of the Company's capital stock on completion of the transaction
contemplated by the Pannonian Agreement.
Upon completion of the transaction, Pannonian became a wholly owned subsidiary
of the Company. However, since this transaction resulted in the existing
shareholders of Pannonian acquiring control of the Company, for financial
reporting purposes the business combination is accounted for as a reverse
acquisition with Pannonian as the accounting acquirer. All information presented
for periods prior to March 30, 2001 represents the historical information of
Pannonian.
Overview
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.
13
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.
Petroleum and Natural Gas Properties
The following is a description of the current status of the Company's projects.
Riverbend Project
The Riverbend project comprises approximately 97,098 gross acres in the Uinta
Basin of northeastern Utah, of which the Company holds an interest in
approximately 39,724 net acres as of June 30, 2002. Additionally, the Company
has an opportunity to earn approximately 23,458 acres in this area under farmout
and other agreements. Gasco's geologic and engineering focus is concentrated on
three tight-sand formations in the basin: the Wasatch, Mesaverde and Mancos
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 their investment by funding the
completions of Wasatch/Mesa Verde wells. The Company and Halliburton will also
share technical information through the formation of a joint technical team.
Gasco began drilling the first well in this area during February 2002.
Approximately $1,000,000 was spent on this well, which has been drilled, cased
and facilities have been built. This well began selling gas in the beginning of
July 2002. In April 2002, the Company began drilling its second operated well in
this immediate area. The total cost of this well, which has been drilled, cased
and the facilities are currently in place, is approximately $1,030,000. Sales of
production from this well are anticipated to begin during the first week of
August 2002. Gasco also has a 20% working interest in a well that was drilled by
another operator in this area during April 2002. This well began selling gas
during the first week of July 2002.
Greater Green River Basin Project
In Wyoming, Gasco established an Area of Mutual Interest ("AMI") with Burlington
Resources ("Burlington") covering approximately 330,000 acres in Sublette
County, Wyoming within the Greater Green River Basin. As of June 30, 2002, the
Company leased approximately 109,412 gross acres and 99,002 net acres in this
area.The exploration agreement governing the AMI requires Burlington to drill
two wells and to shoot 180 miles of high-resolution 2-D seismic. Burlington has
14
drilled two wells and has shot 80 miles of seismic. Currently, both of the wells
drilled are completed; one is selling gas and the other is waiting on pipeline
connection. During July 2002, the Company elected to participate in the drilling
of a well in Sublette County Wyoming. Gasco will have a 35% interest in this
well which will be operated by Burlington. If the well is not completed, Gasco's
share of the drilling costs will be approximately $400,000. If the well is
completed, Gasco's share of the drilling and completion costs will be
approximately $900,000.
During February 2002, the Company purchased a 50% interest in 21,613 acres for
approximately $1,428,000 and a 20% interest in 4,098 acres for approximately
$107,000 in Sublette County, Wyoming. The Company also purchased additional
leasehold interests in Sublette County, Wyoming covering approximately 16,606
acres for a total purchase price of $1,500,000 on February 19, 2002.
During February 2002, the Company was notified by the Bureau of Land Management
("BLM") in Wyoming that several environmental agencies filed a protest against
the BLM offering numerous parcels of land for oil and gas leasing. Approximately
9,726 net acres valued at approximately $1,428,000 which were purchased by the
Company are being held 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. The value
of the suspended leases is recorded as unproved mineral interests in the
accompanying financial statements.
On May 1, 2002, the Company issued 9,500,000 shares of its common stock for the
acquisition of 53,095 gross acres plus other assets and consideration in the
Greater Green River Basin in Sublette County Wyoming. The acquisition is valued
at $18,525,000 using a stock price of $1.95 per common share, which represents
the closing price of the Company's common stock on April 23, 2002; the date the
agreement was executed. This transaction replaces the previously described cash
option structure and eliminates the $300,000 per month option payment as
referred to in the Company's Form 10-K for the year ended December 31, 2001.
During February 2002, Gasco drilled a well in the Southwest Jonah field located
in the Greater Green River Basin in Sublette County, Wyoming. This was the first
well drilled within a newly created AMI with Cabot Oil and Gas, consisting of
nine sections (5,760 gross acres, 1,440 net acres). 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 2002. The net dry hole cost of the well was $541,125 and was
recorded as impairment expense during the six months ended June 30, 2002.
During May 2002, the Company elected to participate in 3D seismic shoot covering
100 square miles in Sublette County, Wyoming. The Company's share of the costs
for the seismic data was $850,000.
15
Southern California Project
The Company currently leases approximately 4,043 net acres in the Kern and San
Luis Obispo Counties of southern California. The Company has no drilling or
development plans for this acreage during 2002, but plans to continue paying
leasehold rentals and other minimum geological expenses to preserve the
Company's acreage positions on these three oil prospects. The Company may
consider selling these positions in the future.
Subsequent Event
On July 16, 2002, Gasco executed and closed a purchase agreement with Brek
Energy Corporation ("Brek"), and certain other Gasco shareholders (the "Other
Shareholders"), pursuant to which Brek and the Other Shareholders purchased from
Gasco an undivided 25% of Gasco's working interests in all undeveloped acreage
owned by Gasco in exchange for 6,250,000 shares of Gasco common stock and 500
shares of Gasco preferred stock held by Brek and the Other Shareholders. The
Other Shareholders assigned their right to receive their share of such working
interests to Brek, so that Brek acquired title to all of the working interests
conveyed by Gasco in the transaction. Brek also has the option to acquire an
additional 5% undivided interest in Gasco's undeveloped acreage by paying a
total of $10.5 million in two equal installments on or before January 1, 2004
and January 1, 2005, respectively. A 2.5% interest will be conveyed to Brek upon
receipt of each installment. Brek must make timely payment of the first
installment in order to maintain the option to acquire the additional 2.5%
interest with the second installment.
The transaction, previously announced as a letter of intent on May 24, 2002,
simplifies the Company's capital structure by eliminating all preferred stock
(which was convertible into 4,750,000 common shares) and the associated
preferential voting rights. Following consummation of the transaction, the
Company's capitalization consists of 35,188,800 outstanding common shares.
Oil and Gas Acreage
The following table sets forth the undeveloped leasehold acreage, by area, held
by the Company as of June 30, 2002 and July 31, 2002. The gross acres are the
same as of June 30 and July 31, 2002, however, the net acres have decreased from
June 30, to July 31, 2002 as a result of the July 16, 2002 property sale
describe above. Undeveloped acres are acres on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage contains
proved reserves. Gross acres are the total number of acres in which Gasco has a
working interest. Net acres are the sum of Gasco's fractional interests owned in
the gross acres. The table does not include acreage that the Company has a
contractual right to acquire or to earn through drilling projects, which is
summarized more completely below the table. In certain leases, the Company's
ownership is not the same for all depths; therefore, the net acres in these
leases are calculated using the greatest ownership interest at any depth.
Generally this greater interest represents Pannonian's ownership in the primary
objective formation.
Net
June 30, 2002 Acres July 31, 2002
---------------------------- Sold -------------
----------- --- ------------ -------------
Gross Net Net
Utah 97,098 39,724 (9,558) 30,166
Wyoming 109,412 99,002 (24,370) 74,632
California 4,068 4,043 (1,011) 3,032
----------- ------------ ------------- -----------
Total acres 210,588 142,769 (34,939) 107,830
=========== ============ ============= ===========
16
Subsequent to December 31, 2001, the Company acquired approximately 40,065 gross
(26,147 net) undeveloped acres in Sublette County, Wyoming. Approximately 21,614
gross acres and 9,726 net acres that were acquired in February 2002 in a lease
sale held by the Wyoming Bureau of Land Management are subject to a protest by
several environmental agencies and therefore these leases will not be issued to
the Company until the protest is resolved in our favor. The Company also has the
contractual right to acquire approximately 22,429 acres in the Uinta basin. This
acquisition is subject to the Company's approval of title, which may effect the
number of actual acres acquired.
In April 2002, the Company purchased an additional 53,095 gross acres in the
Greater Green River Basin through the issuance of common stock. The Company can
also earn a 37.5% interest in an additional 21,760 acres in Sublette County,
Wyoming if it participates in the drilling of one well prior to October 1, 2002.
The Company also has the right to earn a 20% interest in approximately 22,000
gross acres within the Uinta Basin by participating in the drilling of four
wells prior to February 2004.
Results of Operations
All information for periods prior to March 30, 2001 represents the historical
information of Pannonian because Pannonian was considered the acquiring entity
for accounting purposes.
The Three and Six Months Ended June 30, 2002 Compared to the Three and Six
Months Ended June 30, 2001
During the quarter and six months ended June 30, 2002, the Company owned
interests in three producing wells, two of which began producing in late October
of 2001 and one began producing in February 2002. The oil and gas revenue and
lease operating expense during 2002 relate to these wells and is comprised of
approximately 8,712 mcf of gas at an average price of $2.69 per mcf during the
second quarter of 2002 and 18,500 mcf of gas at an average price of $2.81 per
mcf during the first six months of 2002. The Company had no producing wells
during the second quarter or the first six months of 2001.
Interest income during 2002 and 2001 represents the interest earned on the
Company's combined cash and cash equivalents and restricted cash balances. The
decrease in interest income of $3,405 from the second quarter of 2001 to the
second quarter of 2002 is primarily the result of lower interest rates partially
offset by a higher average cash balance during the second quarter of 2002. The
increase in interest income of $17,597 during the first six months of 2002 as
compared with the first six months of 2001 is primarily due to a higher average
cash balance primarily due to the sale of preferred and common stock during the
second half of 2001.
General and administrative expense increased from $847,939 to $1,390,079 during
the second quarter of 2002 compared to the second quarter of 2001, and from
$1,526,468 to $2,475,102 during the first six months of 2001 compared to the
first six months of 2002. Approximately $350,000 of the increase in general and
administrative expense during the three and six months ended June 30, 2002
relates to the increased legal and consulting fees associated with the Company's
property transactions described above. The remainder of the increase in both
periods is primarily due to the increase in staff and professional fees
associated with the commencement of its own operations.
17
Depletion, depreciation and amortization expense during the second quarter and
first six months of 2002 is comprised of $17,931 and $125,931 of depletion
expense related to the Company's proved oil and gas properties and $11,618 and
$18,707 of depreciation related to the Company's furniture, fixtures and other
assets, respectively. The corresponding expense during the second quarter and
first six months of 2001 consists of the depreciation expense related to the
Company's furniture, fixtures and other assets.
The impairment expense during the second quarter and first six months 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 natural gas encountered in this well was not of
sufficient quantities to be deemed economic, therefore, the costs associated
with this well were charged to impairment expense during the quarter and six
months ended June 30, 2002.
The interest expense during the three and six months ended June 30, 2001
represents the interest incurred on the Company's outstanding notes payable,
which were repaid during 2001.
Liquidity and Capital Resources
At June 30, 2002, the Company had cash and cash equivalents of $2,478,015
compared to cash and cash of equivalents of $12,296,585 at December 31, 2001.
The decrease in cash and cash equivalents is primarily attributable to the
following significant items combined with the cash used in operations of
$1,113,060 and other oil and gas property related expenditures.
- - During February 2002, the Company acquired leasehold interests covering
approximately 16,606 acres in the Greater Green River Basin located in
west-central Wyoming for $1,500,000.
- - The Company acquired a 50% interest in 21,613 acres in Sublette
County Wyoming for approximately
$1,428,000 during February 2002.
- - In connection with its drilling projects, the Company entered into a
$2,000,000 letter of credit during February 2002, which was
subsequently amended during May 2002, to $250,000. The letter is
collateralized with cash, which is classified as restricted cash in the
accompanying financial statements, and terminates in January 2003.
- - The Company drilled two productive wells in Uintah County, Utah for
approximately $2,030,000 and one well, which was a dry hole in Sublette
County, Wyoming for $541,125.
- - During the six months ended June 30, 2002, the Company incurred
unproved property costs comprised of delay rentals and the purchase of
numerous acreage positions in Wyoming and Utah of $1,300,000.
- - During May 2002, the Company elected to participate in 3D seismic
shoot covering 100 square miles in Sublette County, Wyoming for
$850,000.
Working capital decreased from $11,860,584 at December 31, 2001 to $1,068,878,
primarily due to expenditures 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
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.
18
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 2002 and 2003. The
Company is considering several options for raising additional capital such as
equity offerings, asset sales, the formation of a drilling fund, 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 by Gasco will likely result in substantial dilution to the
Company's stockholders.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the shareholders 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 the
caption "Risk Factors", in the Company's Form 10-K for the year ended December
31, 2001. 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.
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.
19
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes of Securities
On May 1, 2002, the Company issued 9,500,000 shares of common
stock to Shama Zoe Limited Partnership in exchange for 62,276 net
acres plus other assets and consideration in the Greater Green
River Basin in Sublette County, Wyoming. The acquisition is valued
at $18,525,000 using a price of $1.95 per common share, which
represents the closing price of the Company's common stock on
April 23, 2002, the date the agreement was executed. The issuance
of shares of common stock in this transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933,
since the shares were offered and issued to a single purchaser who
is a sophisticated buyer.
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
2.1 Property Purchase Agreement dated as of April 23, 2002, between the
Company and Shama Zoe Limited Partnership (incorporated by reference
to Exhibit 2.1 to the Company's Form 8-K dated May 1, 2002, filed on
May 9, 2002).
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.
20
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).
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).
4.1 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).
99.1 Certification of Chief Executive Officer of Gasco Energy, Inc.
Pursuant to 18 U.S.C.ss.1350
99.2 Certification of Chief Financial Officer of Gasco Energy, Inc.
Pursuant to 18 U.S.C.ss.1350
(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 April 11, 2002 filed Item 7 - Exhibit-Employment Contract,
April 12, 2002 dated June 29, 2001.
Form 8-K dated May 1, 2002 filed Item 2 - Acquisition of Assets
May 9, 2002 Item 7 - Exhibit - Property Purchase
Agreement dated as of April 23, 2002,
between the Company and Shama Zoe Limited
Partnership.
Form 8-K dated June 5, 2002 filed Item 9 - Press Release.
June 5, 2002
21
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: August 2, 2002 By: /s/ W. King Grant
-----------------------------------------
W. King Grant, Executive Vice President
Principal Financial and Accounting Officer
22