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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal Year Ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-26321
GASCO ENERGY, INC.
(Exact name of registrant as specified in its charter)
NEVADA 98-0204105
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Inverness Drive East, Building H, Suite 236, Englewood, CO 80112
(Address of principal executive offices) (ZipCode)
Registrant's telephone number, including area code: (303) 483-0044
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.0001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes __ No X
As of June 28, 2002, approximately 41,438,800 shares of Common Stock, par value
$0.0001 per share were outstanding and the aggregate market value of the
outstanding shares of Common Stock of the Company held by non-affiliates was
approximately $61,813,882.
As of March 26, 2003, approximately 40,288,800 shares of Common Stock, par value
$0.0001 per share were outstanding.
Documents incorporated by reference:
None.
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
Business of Gasco
Gasco Energy, Inc. ("Gasco" or "the Company") is a natural gas and petroleum
exploitation and development company engaged in locating and developing
hydrocarbon prospects, primarily in the Rocky Mountain region. The Company's
mission is to enhance shareholder value by using new technologies to generate
and develop high-potential exploitation prospects in this area. The Company's
principal business is the acquisition of leasehold interests in petroleum and
natural gas rights, either directly or indirectly, and the exploitation and
development of properties subject to these leases.
History
Gasco (formerly known as San Joaquin Resources Inc. ("SJRI")) was incorporated
on April 21, 1997 under the laws of the State of Nevada, as "LEK International,
Inc." The Company operated as a "shell" company until December 31, 1999, when
the Company combined with San Joaquin Oil & Gas Ltd., a Nevada corporation ("Oil
& Gas"). Prior to closing of this transaction, the Company had a total of
3,700,000 shares of common stock issued and outstanding. The Company issued
8,069,000 new shares of common stock in exchange for all of the issued and
outstanding common stock of Oil & Gas. As a result of that transaction, Oil &
Gas became a wholly owned subsidiary of Gasco.
On February 1, 2001, a subsidiary of the Company merged with Pannonian Energy,
Inc. ("Pannonian"), a private corporation incorporated under the laws of the
State of Delaware. In connection with this merger, the Company issued 14,000,000
shares of common stock to the stockholders of Pannonian. 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 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
non-Riverbend assets located outside of the United States were held by Pannonian
International Ltd. ("PIL"), the shares of which were distributed to the
Pannonian stockholders. The net book value of PIL 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.
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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.
Acquisition, Exploration and Development Expenses
During the year ended December 31, 2001, the Company spent $7,395,867
identifying and acquiring petroleum and natural gas leases and prospect rights,
and during the year ended December 31, 2002, the Company spent an additional
$32,962,855, including the issuance of 9,500,000 shares of common stock valued
at $18,525,000, in the acquisition of additional leases and in the development
and exploitation of the properties subject to these leases. As of December 31,
2002, the Company held working interests in 227,991 gross acres (109,327 net
acres) located in Utah, Wyoming and California. As of December 31, 2002, the
Company held an interest in 13 gross (5.2 net) producing gas wells and 4 gross
(4.0 net) shut-in gas wells located on these properties. We currently operate 10
wells, of which 6 are currently producing. See "Item 2 - Description of
Properties".
Principal Products or Services and Markets
Gasco focuses its exploitation activities on locating natural gas and crude
petroleum. The principal markets for these commodities are natural gas
transmission pipeline companies, utilities, refining companies and private
industry end-users. Historically, nearly all of the Company's sales have been to
a few customers. However, Gasco is not confined to, nor dependent upon, any one
purchaser or small group of purchasers. Accordingly, the loss of a single
purchaser would not materially affect the Company's business because there are
numerous other purchasers in the areas in which Gasco sells it production. For
the years ended December 31, 2002 and 2001, purchases by the following companies
exceeded 10% of the total oil and gas revenues of the Company. Gasco had no oil
and gas sales during the year ended December 31, 2000.
For the Year Ended December 31,
-------------------------------------------
-------------------- ----------------------
2002 2001
---- ----
ConocoPhillips Company 98% 60%
Wasatch Energy Corporation 37%
Competitive Business Conditions, Competitive Position in the Industry and
Methods of Competition
The Company's natural gas and petroleum exploration activities take place in a
highly competitive and speculative business atmosphere. In seeking suitable
natural gas and petroleum properties for acquisition, Gasco competes with a
number of other companies operating in its areas of interest, including large
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oil and gas companies and other independent operators with greater financial
resources. Management does not believe that Gasco's competitive position in the
petroleum and natural gas industry will be significant.
Management anticipates a competitive market for obtaining drilling rigs and
services, and the manpower to run them. The current high level of drilling
activity in Gasco's areas of exploration may have a significant adverse impact
on the timing and profitability of Gasco's operations. In addition, as discussed
under Risk Factors, Gasco will be required to obtain drilling permits for its
wells, and there is no assurance that such permits will be available timely or
at all.
The prices of the Company's products are controlled by domestic and world
markets. However, competition in the petroleum and natural gas exploration
industry also exists in the form of competition to acquire the most promising
acreage blocks and obtaining the most favorable prices for transporting the
product. Gasco, and ventures in which it participates, are relatively small
compared to other petroleum and natural gas exploration companies and may have
difficulty acquiring additional acreage and/or projects, and may have difficulty
arranging for the transportation of product, in the event Gasco, or a venture in
which it participates, is successful in its exploration efforts.
Governmental Regulations and Environmental Laws
Gasco and any venture in which it participates, is required to obtain state
and/or federal and other permits for drilling oil or gas wells.
Exploration and production activities relating to oil and gas leases are subject
to numerous environmental laws, rules and regulations. The Federal Clean Water
Act requires Gasco to construct a fresh water containment barrier between the
surface of each drilling site and the underlying water table.
Various federal, state and local laws and regulations covering the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, may affect the Company's operations and costs through their effect
on oil and gas exploration, development and production operations. Environmental
laws and regulations have changed substantially and rapidly over the last 30
years, and Gasco anticipates that there will be continuing changes. Laws and
regulations protecting the environment have generally become more stringent in
recent years, and may in certain circumstances impose "strict liability,"
rendering a corporation liable for environmental damages without regard to
negligence or fault on the part of such corporation. Such laws and regulations
may expose Gasco to liability for the conduct of operations or conditions caused
by others, or for acts of Gasco that were in compliance with all applicable laws
at the time such acts were performed. Increasingly strict environmental
restrictions and limitations have resulted in increased operating costs for
Gasco and other businesses throughout the United States, and it is possible that
the costs of compliance with environmental laws and regulations will continue to
increase. The modification of existing laws or regulations or the adoption of
new laws or regulations relating to environmental matters could have a material
adverse effect on Gasco's operations. In addition, Gasco's existing and proposed
operations could result in liability for fires, blowouts, oil spills, discharge
of hazardous materials into surface and subsurface aquifers and other
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environmental damage, any one of which could result in personal injury, loss of
life, property damage or destruction or suspension of operations.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, requires payments for cleanup of
certain abandoned waste disposal sites, even though such waste disposal
activities were undertaken in compliance with regulations applicable at the time
of disposal. Under the Superfund law, one party may, under certain
circumstances, be required to bear more than its proportional share of cleanup
costs at a site where it has responsibility pursuant to the legislation, if
payments cannot be obtained from other responsible parties. Other legislation
mandates cleanup of certain wastes at facilities that are currently being
operated. States also have regulatory programs that can mandate waste cleanup.
CERCLA authorizes the Environmental Protection Agency ("EPA") and, in some
cases, third parties to take actions in response to threats to the public health
or the environment and to seek to recover from the responsible classes of
persons the costs they incur. The scope of financial liability under these laws
involves inherent uncertainties.
It is not anticipated that the Company will be required in the near future to
expend material amounts because of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate future cost of compliance. It is anticipated that
before full field development can occur the Company will be required to conduct
Environmental Assessments and/or Environmental Impact Statements which may
result in material delays and/or limitations to developing all or part of the
Company's leasehold. The Company believes it is presently in compliance with all
applicable federal, state or local environmental laws, rules or regulations;
however, continued compliance (or failure to comply) and future legislation may
have an adverse impact on the Company's present and contemplated business
operations. No assurance can be given as to what effect these present and future
laws, rules and regulations will have on Gasco's current and future operations.
Number of Total Employees and Number of Full-Time Employees
As of March 26, 2003, Gasco has ten full-time employees.
Risk Factors
Due to the nature of the Company's business and the present stage of exploration
on its oil and gas prospects, the following risk factors apply to Gasco's
operations:
Accumulated Losses
To date the Company's operations have not generated sufficient operating cash
flows to provide working capital for the Company's ongoing overhead, the funding
of its lease acquisitions and the exploration and development of these
properties. Without adequate financing, the Company may not be able to
successfully develop any prospects that it acquires or achieve profitability
from its operations in the near future or at all.
5
During the year ended December 31, 2002, Gasco incurred a loss of $5,649,682,
and has an accumulated deficit of $22,765,236 since inception, including the
Series A Convertible Redeemable Preferred Stock deemed distribution of
$11,400,000 as further described in Note 11 of the accompanying financial
statements.
Uncertainty of Reserve Estimates
Estimating accumulations of gas and oil is complex and is not exact because of
the numerous uncertainties inherent in the process. The process relies on
interpretations of available geological, geophysical, engineering and production
data. The extent, quality and reliability of this technical data can vary. The
process also requires certain economic assumptions, some of which are mandated
by the Securities and Exchange Commission ("SEC"), such as gas and oil prices,
drilling and operating expenses, capital expenditures, taxes and availability of
funds. The accuracy of a reserve estimate is a function of:
o the quality and quantity of available data;
o the interpretation of that data;
o the accuracy of various mandated economic assumptions; and
o the judgment of the persons preparing the estimate.
The proved reserve information included herein is based on estimates prepared by
James R. Stell, independent petroleum engineer. Estimates prepared by others
could differ materially from these estimates.
The most accurate method of determining proved reserve estimates is based upon a
decline analysis method, which consists of extrapolating future reservoir
pressure and production from historical pressure decline and production data.
The accuracy of the decline analysis method generally increases with the length
of the production history. Since most of the Company's wells have been producing
less than two months, their production history is relatively short, so other
(generally less accurate) methods such as volumetric analysis and analogy to the
production history of wells of other operators in the same reservoir were used
in conjunction with the decline analysis method to determine the Company's
estimates of proved reserves. As the Company's wells are produced over time and
more data is available, the estimated proved reserves will be redetermined on an
annual basis and may be adjusted based on that data.
Actual future production, gas and oil prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable gas and oil
reserves most likely will vary from the Company's estimates. Any significant
variance could materially affect the quantities and present value of the
Company's reserves. In addition, the Company may adjust estimates of proved
reserves to reflect production history, results of exploration and development
and prevailing gas and oil prices. The Company's reserves may also be
susceptible to drainage by operators on adjacent properties.
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It should not be assumed that the present value of future net cash flows
included herein is the current market value of the Company's estimated proved
gas and oil reserves. In accordance with SEC requirements, the Company generally
bases the estimated discounted future net cash flows from proved reserves on
prices and costs on the date of the estimate. Actual future prices and costs may
be materially higher or lower than the prices and costs as of the date of the
estimate.
Potential Future Impairment
The Company may be required to writedown the carrying value of its gas and oil
properties when gas and oil prices are low or if there is substantial downward
adjustments to the estimated proved reserves, increases in the estimates of
development costs or deterioration in the exploration results.
The Company follows the full cost method of accounting, under which, capitalized
gas and oil 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 gas and oil 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 gas and oil to
estimated future production of proved gas and oil 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.
Once an impairment of gas and oil properties is recognized, is not reversible at
a later date even if oil or gas prices increase.
Absence of a Mature Public Market
The Company's common stock is highly speculative and has only been trading in
the public markets since January 2001. The Company's common stock trades on the
over-the-counter market. Holders of Gasco's common stock may not be able to
liquidate their investment in a short time period or at the market prices that
currently exist at the time a holder decides to sell. Because of this limited
liquidity, it is unlikely that Gasco's common stock will be accepted by lenders
as collateral for loans.
Exploration and Production Risks
The business of exploring for and producing oil and gas involves a substantial
risk of investment loss that even a combination of experience, knowledge and
careful evaluation may not be able to overcome. Drilling oil and gas wells
involves the risk that the wells will be unproductive or that, although
productive, the wells do not produce oil and/or gas in economic quantities.
Other hazards, such as unusual or unexpected geological formations, pressures,
fires, blowouts, loss of circulation of drilling fluids or other conditions may
substantially delay or prevent completion of any well. Adverse weather
conditions can also hinder drilling operations.
A productive well may become uneconomic in the event water or other deleterious
substances are encountered, which impair or prevent the production of oil and/or
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gas from the well. In addition, production from any well may be unmarketable if
it is impregnated with water or other deleterious substances.
Financing Risks
Gasco has relied in the past primarily on the sale of equity capital and
farm-out and other similar types of transactions to fund working capital and the
acquisition of its prospects and related leases. Failure to generate operating
cash flow or to obtain additional financing for the development of the Company's
properties could result in substantial dilution of Gasco's property interests,
or delay or cause indefinite postponement of further exploration and development
of its prospects with the possible loss of such properties. For example, the
Company entered into an agreement with ConocoPhillips Petroleum
("ConocoPhillips") to conduct drilling operations on approximately 60,000 acres
within the Riverbend project. ConocoPhillips will fund its share of drilling and
completion costs of wells that it drills within that area. This agreement was
subsequently amended to reduce the area that it covers to 30,000 acres. In order
to maximize its interests in any future Riverbend wells drilled by
ConocoPhillips, the Company must fund its proportionate share of the drilling
and completion costs of such wells. Generally, if Gasco funds its proportionate
share of drilling and completion costs in a well drilled by ConocoPhillips, it
will retain a 14% working interest (which becomes a 10.5% working interest after
payout) in the well drilled by ConocoPhillips and the spacing unit surrounding
the well. If Gasco does not fund its proportionate share of drilling and
completion costs in a well drilled by ConocoPhillips, its interests will be
reduced to a 0.35% overriding interest in the well and spacing unit before
payout, which will convert to a 2.10% working interest after such well reaches
payout.
This project and other projects will require significant new funding. Gasco has
not yet secured specific sources of adequate financing forthis and other
projects, and it may be unable to timely secure financing on terms that are
favorable to the Company or at all. Any future financing through the issuance of
Company common stock will likely result in substantial dilution to Gasco's
stockholders.
Uninsurable Risks
Although management believes the operator of any properties in which Gasco may
acquire interests will acquire and maintain appropriate insurance coverage in
accordance with standard industry practice, Gasco may suffer losses from
uninsurable hazards or from hazards which the operator or Gasco has chosen not
to insure against because of high premium costs or other reasons. Gasco may
become subject to liability for pollution, fire, explosion, blowouts, cratering
and oil spills against which the Company cannot insure or against which the
Company may elect not to insure. Such events could result in substantial damage
to oil and gas wells, producing facilities and other property and personal
injury. The payment of any such liabilities may have a material adverse effect
on Gasco's financial position.
No Assurance of Titles
If an examination of the title history of property that the Company has
purchased reveals that a petroleum and natural gas lease has been purchased in
error from a person who is not the owner of the mineral interest desired, the
8
Company's interest would be worthless. In such an instance, the amount paid for
such petroleum and natural gas lease or leases would be lost.
It is Gasco's practice, in acquiring petroleum and natural gas leases, or
undivided interests in petroleum and natural gas leases, not to undergo the
expense of retaining lawyers to examine the title to the mineral interest to be
placed under lease or already placed under lease. Rather, Gasco will rely upon
the judgment of petroleum and natural gas lease brokers or landmen who perform
the fieldwork in examining records in the appropriate governmental office before
attempting to place under lease a specific mineral interest.
Prior to the drilling of a petroleum and natural gas well, however, it is the
normal practice in the petroleum and natural gas industry for the person or
company acting as the operator of the well to obtain a preliminary title review
of the spacing unit within which the proposed petroleum and natural gas well is
to be drilled to ensure there are no obvious deficiencies in title to the well.
Frequently, as a result of such examinations, certain curative work must be done
to correct deficiencies in the marketability of the title, and such curative
work entails expense. The work might include obtaining affidavits of heirship or
causing an estate to be administered.
Natural Gas and Oil Prices
A sharp decline in natural gas and oil prices would result in a commensurate
reduction in Gasco's income for the production of oil and gas. In the event
prices fall substantially, Gasco may not be able to realize a profit from its
production and would continue to operate at a loss. In recent decades, there
have been periods of both worldwide overproduction and underproduction of
hydrocarbons and periods of both increased and relaxed energy conservation
efforts. Such conditions have resulted in periods of excess supply of, and
reduced demand for, crude oil on a worldwide basis and for natural gas on a
domestic basis. These periods have been followed by periods of short supply of,
and increased demand for, crude oil and natural gas. The excess or short supply
of crude oil and natural gas has resulted in dramatic price fluctuations even
during relatively short periods of seasonal market demand. Among the factors
that can cause the price volatility are:
o Worldwide or regional demand for energy, which is affected by economic
conditions;
o The domestic and foreign supply of natural gas and oil;
o Weather conditions;
o Domestic and foreign governmental regulations;
o Political conditions in natural gas or oil producing regions;
o The ability of members of the Organization of Petroleum Exporting
Countries to agree upon and maintain oil prices and production levels;
and
o The price and availability of alternative fuels.
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All of Gasco's production is currently located in, and all of Gasco's future
production is anticipated to be located in, the Rocky Mountain Region of the
United States. The gas prices that the Company and other operators in the Rocky
Mountain region have received and are currently receiving are at a steep
discount to gas prices in other parts of the country. Factors that can cause
price volatility for crude oil and natural gas within this region are:
o The availability of gathering systems with sufficient capacity to
handle local production;
o Seasonal fluctuations in local demand for production;
o Local and national gas storage capacity;
o Interstate pipeline capacity; and
o The availability and cost of gas transportation facilities from the
Rocky Mountain region.
In addition, because of Gasco's size the Company does not own or lease firm
capacity on any interstate pipelines. As a result, the Company's transportation
costs are particularly subject to short-term fluctuations in the availability of
transportation facilities. The Company's management believes that the steep
discount in the prices it receives may be due to pipeline constraints out of the
region, but there is no assurance that increased capacity will improve the
prices to levels seen in other parts of the country in the future. Even if the
Company acquires additional pipeline capacity, conditions may not improve due to
other factors listed above.
It is impossible to predict natural gas and oil price movements with certainty.
Lower natural gas and oil prices may not only decrease our revenues on a per
unit basis but also may reduce the amount of natural gas and oil that we can
produce economically. A substantial or extended decline in natural gas and oil
prices may materially and adversely affect Gasco's future business, financial
condition, results of operations, liquidity and ability to finance planned
capital expenditures. Further, oil prices and natural gas prices do not
necessarily move together.
Marketing
Several factors beyond the control of Gasco may adversely affect the Company's
ability to market the oil and gas that it may discover. These factors include
the proximity and capacity of oil and gas pipelines and processing equipment,
market fluctuations of prices, taxes, royalties, land tenure, allowable
production and environmental protection. The extent of these factors cannot be
accurately predicted, but any one or a combination of these factors may result
in Gasco's inability to sell its oil and gas at prices that would result in an
adequate return on the Company's invested capital. For example, the Company
currently distributes the gas that it produces through a single pipeline. If
this pipeline were to become unavailable, the Company would incur additional
costs to secure a substitute facility in order to deliver the gas that the
Company produces. Gasco relies upon the services of third party gathering
companies to transport its natural gas to market. A disruption in this service
could materially limit Gasco's ability to move its natural gas to market until
alternative transportation can be arranged which may take an extended period of
time.
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Environmental Regulations
The Company's exploration and proposed production activities are subject to
certain federal, state and local laws and regulations relating to environmental
quality and pollution control. These laws and regulations increase the costs of
these activities and may prevent or delay the commencement or continuance of a
given operation. Specifically, Gasco is subject to legislation regarding
emissions into the environment, water discharges, and storage and disposition of
hazardous wastes. In addition, legislation has been enacted which requires well
and facility sites to be abandoned and reclaimed to the satisfaction of state
authorities. However, such laws and regulations have been frequently changed in
the past and Gasco is unable to predict the ultimate cost of compliance as a
result of any future changes. It is anticipated that before full field
development can occur the Company will be required to conduct Environmental
Assessments and/or Environmental Impact Statements which may result in material
delays and/or limitations to developing all or part of the Company's leasehold.
Governmental Regulations
Petroleum and natural gas exploration, development and production are subject to
various types of regulation by local, state and federal agencies. The Company
may be required to make large expenditures to comply with these regulatory
requirements. Legislation affecting the petroleum and natural gas industry is
under constant review for amendment and expansion. Also, numerous departments
and agencies, both federal and state, are authorized by statute to issue and
have issued rules and regulations binding on the petroleum and natural gas
industry and its individual members, some of which carry substantial penalties
for failure to comply. Any increases in the regulatory burden on the petroleum
and natural gas industry created by new legislation would increase Gasco's cost
of doing business and, consequently, adversely affect its profitability. A major
risk inherent in drilling is the need to obtain drilling permits from state and
federal authorities. Delays in obtaining drilling permits, the failure to obtain
a drilling permit for a well, or a permit with unreasonable conditions or costs
could have a materially adverse effect on Gasco's ability to effectively develop
its properties.
Competition
The petroleum and natural gas industry is intensely competitive and Gasco
competes with other companies, which have greater resources. Many of such
companies not only explore for and produce crude petroleum and natural gas but
also carry on refining operations and market petroleum and other products on a
regional, national or worldwide basis. Such companies may be able to pay more
for productive petroleum and natural gas properties and exploratory prospects to
define, evaluate, bid for and purchase a greater number of properties and
prospects than Gasco's financial or human resources permit. In addition, such
companies may have a greater ability to continue exploration activities during
periods of low hydrocarbon market prices. Gasco's ability to acquire additional
properties and to discover reserves in the future will be dependent upon its
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.
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Risks Associated with Management of Growth
Because of its small size, Gasco's growth in accordance with its business plans,
if achieved, will place a significant strain on Gasco's financial, technical,
operational and management resources. As Gasco expands its activities and
increases the number of projects it is evaluating or in which it participates,
there will be additional demands on Gasco's financial, technical and management
resources. The failure to continue to upgrade Gasco's technical, administrative,
operating and financial control systems or the occurrence of unexpected
expansion difficulties, including the recruitment and retention of experienced
managers, geoscientists and engineers, could have a material adverse effect on
Gasco's business, financial condition and results of operations and its ability
to timely execute its business plan.
Dependence upon Key Personnel
The success of Gasco's operations and activities is dependent to a significant
extent on the efforts and abilities of its management. The loss of services of
any of its key managers could have a material adverse effect on Gasco. Gasco has
not obtained "key man" insurance for any of its management. Mr. Erickson is the
President and CEO and Mr. Decker is an executive vice president and Chief
Operating Officer of Gasco. The loss of their services may adversely affect the
business and prospects of Gasco.
Conflicts of Interest
Certain of the officers and directors of Gasco will also serve as directors of
other companies or have significant shareholdings in other companies. To the
extent that such other companies participate in ventures in which Gasco may
participate, or compete for prospects or financial resources with Gasco, these
officers and directors of Gasco will have a conflict of interest in negotiating
and concluding terms relating to the extent of such participation. In the event
that such a conflict of interest arises at a meeting of the board of directors,
a director who has such a conflict must disclose the nature and extent of his
interest to the board of directors and abstain from voting for or against the
approval of such participation or such terms.
In accordance with the laws of the State of Nevada, the directors of Gasco are
required to act honestly and in good faith with a view to the best interests of
Gasco. In determining whether or not Gasco will participate in a particular
program and the interest therein to be acquired by it, the directors will
primarily consider the degree of risk to which Gasco may be exposed and its
financial position at that time.
Enforcement of Legal Process
Two of the directors of Gasco reside outside the United States and maintain a
substantial portion of their assets outside the United States. As a result it
may be difficult or impossible to effect service of process within the United
States upon such persons, to bring suit in the United States or to enforce, in
the U.S. courts, any judgment obtained there against such persons predicated
upon any civil liability provisions of the U.S. federal securities laws.
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Foreign courts may not entertain original actions against Gasco's directors or
officers predicated solely upon U.S. federal securities laws. Furthermore,
judgments predicated upon any civil liability provisions of the U.S. federal
securities laws may not be directly enforceable in foreign countries.
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-K 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-K 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
in this report under the caption "Risk Factors", above. 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 2 - DESCRIPTION OF PROPERTY
Petroleum and Natural Gas Properties
Gasco is a natural gas and petroleum exploitation and development company
engaged in locating and developing hydrocarbon prospects primarily in the Rocky
Mountain Region. Gasco's strategy is to enhance stockholder value by using new
technologies to generate high-potential exploitation prospects in this area. The
Company's principal business is the acquisition of leasehold interests in
petroleum and natural gas rights, either directly or indirectly, and the
exploitation and development of properties subject to these leases.
Riverbend Project
The Riverbend project is comprised of approximately 105,598 gross acres in the
Uinta Basin of northeastern Utah, of which the Company holds an interest in
approximately 31,199 net acres as December 31, 2002. Additionally, Gasco has an
13
opportunity to earn or acquire an interest in approximately 40,135 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. Significant acquisitions and
agreements related to this area are discussed below.
In December 2000, Gasco entered into an agreement with ConocoPhillips Company
("ConocoPhillips") that defined a 60,000-acre Area of Mutual Interest ("AMI")
within the Riverbend project, not all of which is currently leased by either
Gasco or ConocoPhillips. This agreement was subsequently amended to reduce the
area that it covers to 30,000 acres. Under the terms of this agreement,
ConocoPhillips paid $1,000,000 to Gasco upon execution of the agreement, and
later expended $8,000,000 in connection with the drilling and completion of
three producing wells. As a result of ConocoPhillips' drilling, Gasco earned
additional acreage under certain farm-out agreements during 2001. Under the
agreement, ConocoPhillips also has the right to acquire an 80% interest in all
of Gasco's leases and farm-out agreements within the AMI by assigning to Gasco
leasehold interests in two leases within the AMI in which Gasco had no ownership
interest. As of December 31, 2002, these assignments of interest were completed
and are reflected in the total acreage positions in this area described above.
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 Wasatch/Mesaverde wells. The Company and Halliburton will also
share technical information through the formation of a joint technical team.
Gasco began drilling the first well under this agreement during February 2002.
Approximately $1,000,000 was spent on this well, which began selling gas in the
beginning of July 2002. In April 2002, the Company drilled its second operated
well in this immediate area for a total cost of approximately $1,300,000. Sales
of production from this well began during the middle of August 2002. Compressor
capacity limitations on a third party gathering system in this area caused one
of these wells to be shut-in and have significantly restricted the production
rate of the other well through the end of 2002. 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. During January 2003, the Company incurred approximately $94,000
for installation and operation costs of the compressor for the next twelve
months.
Gasco began drilling its third operated well in this area during September 2002.
The well reached total depth in October 2002, was completed during the fourth
quarter of 2002 and began selling gas during February 2003. The Company's share
of the drilling costs for this well was approximately $1,200,000. 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
14
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 March 27, 2003, Halliburton has exercised its option to participate in the
first two wells and is evaluating the remaining three wells.
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
this area during late 2001 and through the fourth quarter of 2002. Gasco did not
particpate in a sixth well drilled by ConocoPhillips. Four of these wells are
currently selling gas, and one has been drilled and is awaiting completion.
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 December 31, 2002, the Company has a leasehold
interest in approximately 118,325 gross acres and 75,096 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. As of December 31,
2002, Burlington has completed shooting the 180 miles of 2-D seismic and has
drilled and completed both of the wells, both of which are currently selling
gas. The Company participated in the drilling of a well in Sublette County
Wyoming, which was spudded during September 2002. Gasco has a 31.5% interest in
this well, which is operated by Burlington. The well is currently selling gas,
and the Company's total cost for this well was approximately $700,000. Gasco
also participated in another Burlington-operated well in this area during
October 2002. The Company has a 31.5% interest in this well, which was recently
completed. The Company's share of the drilling and completion costs is expected
to be approximately $900,000.
During 2001, three shallow wells were drilled in this area for the purpose of
holding acreage and earning expiring leasehold. All of these wells have been
cased and are in various stages of completion, however none of these are
currently producing.
During February 2002, the Company purchased at a Bureau of Land Management
("BLM") sale a 45% interest in 21,614 acres (9,726 net acres) for approximately
$1,428,000. After this 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 Energy Corporation ("Brek"), as further discussed
below, resulting in the Company's net acres in this transaction being reduced
from 9,726 to 7,295 net acres. As of December 31, 2002, 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. Currently, 15,914 gross acres (5,371 net
acres) remain in suspense and are excluded from the acreage totals above. The
value of the remaining suspended leases is recorded as unproved mineral
interests in the accompanying financial statements.
15
On February 19, 2002, the Company purchased leasehold interests in Sublette
County, Wyoming covering approximately 18,451 gross acres (16,421 net acres) for
a total purchase price of $1,500,000. Effective July 16, 2002 the Company
assigned 25% of its interest to Brek resulting in the Company's interest in this
property being reduced from 16,421 to 12,316 net acres.
During February 2002, Gasco 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 2002. The net dry hole cost of the well was $541,125
and was recorded as impairment expense during 2002 because the Company believed
that the total costs for this well exceeded the present value, discounted at
10%, of the future net revenues from its proved oil and gas reserves.
On May 1, 2002, the Company issued 9,500,000 shares of its common stock to the
Shama Zoe Limited Partnership ("Shama Zoe"), a private oil and gas company, for
the acquisition of 53,095 gross (47,786 net) acres plus other assets and
consideration in the Greater Green River Basin in Sublette County Wyoming. The
acquisition was valued at $18,525,000 using a stock price of $1.95 per common
share, which represented the closing price of the Company's common stock on
April 23, 2002; the date the agreement was executed. The original Property
Purchase Agreement governing this 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, as described under Item 5, below, 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. On
December 31, 2002 Shama Zoe exercised the option and sold 1,400,000 shares of
Gasco common stock back to the Company 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% and had a maturity date of March 14,
2003. On February 20, 2003, the Company repaid this note plus accrued interest
in full.
In connection with this transaction, the Board of Directors of the Company
authorized the payment to an employee of the Company, who was instrumental in
securing the Company's agreement with Shama Zoe, of $300,000 in cash and the
issuance of options to purchase 250,000 shares of Gasco common stock at an
exercise price of $1.95 per share, which was equal to the fair market of the
common stock on April 23, 2002. Prior to the end of 2002 the Company had paid
$150,000 of the total cash bonus to the employee; therefore, the remaining cash
payment of $150,000 was accrued in the accompanying financial statements as of
December 31, 2002.
During May 2002, the Company elected to participate in a 3D seismic shoot
covering 100 square miles in Sublette County, Wyoming. The Company's share of
the costs for the seismic data, which is currently being processed, was
$850,000.
16
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.
Repurchase of Stock for Acreage
On July 16, 2002, Gasco executed and closed a purchase agreement with Brek, and
certain other Gasco stockholders (the "Other Stockholders"), pursuant to which
Brek and the Other Stockholders purchased from Gasco an undivided 25% of Gasco's
working interests in all undeveloped acreage owned by Gasco, representing 35,169
net undeveloped acres, in exchange for 6,250,000 shares of Gasco common stock
and 500 shares of Gasco preferred stock held by Brek and the Other Stockholders.
The Other Stockholders 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 was recorded at $16,709,000 based on the average trading price
of the Company's common stock when the transaction was consummated The
transaction was recorded as a reduction to the Company's unproved properties and
a reduction to the Company's additional paid in capital, preferred and common
stock.
Company Reserve Estimates by Region
The following table summarizes the Company's estimated reserve data by region as
of December 31, 2002, as estimated by James R. Stell, independent petroleum
engineer.
Proved Reserve Quantities Present Value of Future Net Cash Flows
Proved Proved
Mcf of Gas Bbls of Oil Undeveloped Developed Total
Utah 19,849,210 141,652 $ 5,391,953 $ 6,727,209 $ 12,119,162
Wyoming 773,056 - 192,840 192,840
------------- -------------- ----------------- -------------- --------------
Total 20,622,266 141,652 $ 5,391,953 $ 6,920,049 $ 12,312,002
=========== ======== ============ ============ ============
17
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. The Company had no
sales of gas production prior to October 2001.
For the Years Ended December 31,
-----------------------------------------
2002 2001
---------------- ---------------------
Natural gas production (Mcf) 66,444 17,545
Average sales price per Mcf $ 2.47 $2.10
Expenses per Mcf:
Lease operating $ 1.80 $ 0.72
General and administrative $ 76.46 $ 246.57
Depletion and impairment $ 9.73 --
Development, Exploration and Acquisition Capital Expenditures
During the year ended December 31, 2001, the Company spent $7,395,867
identifying and acquiring petroleum and natural gas leases and prospect rights,
and during the year ended December 31, 2002, the Company spent an additional
$32,962,855 , including the issuance of 9,500,000 shares of common stock valued
at $18,525,000, in the acquisition of additional leases and in the development
and exploitation of the properties subject to these leases. As of December 31,
2002, the Company held working interests in 227,991 gross acres (109,327 net
acres) located in Utah, Wyoming and California. As of December 31, 2002, the
Company held an interest in 13 gross (5.2 net) producing gas wells and 4 gross
(4.0 net) shut-in gas wells located on these properties. We currently operate 10
wells, of which 6 are currently producing.
The following table presents information regarding the Company's net costs
incurred in the purchase of proved and unproved properties and in exploration
and development activities:
For the Years Ended December 31,
-------------------------------------------------
2002 2001 2000
--------------- ------------------- --------------
Property acquisition costs:
Unproved $22,324,547 $ 7,161,450 $425,797
Proved -- -- --
Exploration costs (a) 3,319,124 -- 297,865
Development costs 7,319,1844 -- --
------------------ ------------------- ------------
Total costs incurred $ 32,962,855 $ 7,161,450 $723,652
================== =================== ============
(a) Includes seismic data acquisitions of $850,000 during the year ended
December 31, 2002.
18
Productive Gas Wells
The following summarizes the Company's productive and shut-in gas wells as of
December 31, 2002. Productive wells are producing wells and wells capable of
production. Shut-in wells are wells that are capable of production but are
currently not producing. Gross wells are the total number of wells in which the
Company has an interest. Net wells are the sum of the Company's fractional
interests owned in the gross wells.
Productive Gas Wells
Gross Net
Producing gas wells 13 5.2
Shut-in gas wells 4 4.0
-- ---
17 9.2
== ===
As of March 26, 2003, the Company was in the process of drilling one
developmental well in the Riverbend area of Utah; however, the Company's net
interest in this well has not been determined.
The Company operates six of the producing wells and all of the shut-in wells.
Five of the remaining seven producing properties in the above table were drilled
by ConocoPhillips within Gasco's and ConocoPhillip's Area of Mutual Interest in
the Riverbend Project and are operated by ConocoPhillips. The two remaining
producing wells are located in Sublette County Wyoming and were drilled and are
operated by Burlington.
Oil and Gas Acreage
The following table sets forth the undeveloped and developed leasehold acreage,
by area, held by the Company as of December 31, 2002. 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. Developed acres are acres,
which are spaced or assignable to productive wells. 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, or any other acreage for which the Company has not
yet received leasehold assignments. These acquisitions or agreements, which are
significant to the Company's acreage position, are summarized below the
following tables. 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 Gasco's ownership in the primary objective formation.
19
Undeveloped Acres Developed Acres
--------------------------- -----------------------------
-------------- ------------ ------------- -----------
Gross Net Gross Net
Utah 105,038 30,919 560 280
Wyoming 118,085 74,909 240 187
California 4,068 3,032 -- --
-------------- ------------ ------------- -----------
Total acres 227,191 108,860 800 467
============== ============ ============= ===========
The following table summarizes the gross and net undeveloped acres by area that
will expire in each of the next three years.
Expiring in 2003 Expiring in 2004 Expiring in 2005
Gross Net Gross Net Gross Net
Utah 1,746 277 6,381 2,254 8,506 1,462
Wyoming 12,204 6,214 18,194 12,485 6,074 4,100
California 200 391 -- -- 1,072 545
------- ----- ------ ------ ----- -----
Total 14,150 6,882 24,575 14,739 15,652 6,107
====== ===== ====== ====== ====== =====
During February 2002, the Company purchased at a 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 December 31, 2002, 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. Currently, 15,914 gross acres (5,371 net acres)
remain in suspense and this acreage is not included in the above table. The
value of the remaining suspended leases is recorded as unproved mineral
interests in the accompanying financial statements.
As of December 31, 2002, the Company has purchased or earned 26,496 gross (7,003
net) acres in the Uinta Basin in Utah and in Sublette County, Wyoming but has
not yet received leasehold assignments. The Company also has the contractual
right to earn or acquire 40,135 gross (21,849 net) acres within the Uinta Basin
and 3,042 gross (770 net) acres in Sublette County through future drilling
projects that must be completed at various dates through the end of May 2006.
All of this acreage is excluded from the table above.
20
As of December 31, 2002, approximately 79% of the acreage that Gasco holds is
located on federal lands and approximately 19% of the acreage is located on
state lands. It has been Gasco's experience that the permitting process related
to the development of acreage on federal lands is more time consuming and
expensive than the permitting process related to acreage on state lands. The
Company has generally been able to obtain state permits within 30 days, while
obtaining federal permits has taken several months or longer. Accordingly, if
the development of the Company's acreage located on federal lands is delayed
significantly by the permitting process, the Company may have to operate at a
loss for an extended period of time.
Drilling Activity
The following table sets forth the Company's drilling activity during the years
ended December 31, 2002 and 2001. The Company had no drilling activity during
the year ended December 31, 2000.
For the Year Ended December 31,
2002 2001
-------------------- ------------------------
Gross Net Gross Net
Exploratory Wells:
Productive 2 0.7 3 3.0
Dry 1 1.0 - --
-- --- - --
Total wells 3 6.7 3 3.0
== === = ===
Development Wells:
Productive 6 3.3 3 0.6
Dry - -- - -
-- --- -- ---
Total wells 6 3.3 3 0.6
== === == ===
Office Space
The Company leases approximately 3,255 square feet of office space in Englewood,
Colorado for approximately $46,000 per year under two leases, both of which
terminate on August 30, 2004. The Company's management believes that this space
will be adequate for its operations during the next year.
ITEM 3 - LEGAL PROCEEDINGS
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was initially admitted for trading on the OTC
Bulletin Board on August 25, 2000 under the trading symbol "SJQR" and trading
did not commence until January 2001. On March 30, 2001, SJRI changed its name to
Gasco and began trading under the symbol "GASE". As of March 26, 2003, the
Company had 73 registered shareholders of its common stock. During the last two
fiscal years, no cash dividends were declared on Gasco's common stock. The
Company's management does not anticipate that dividends will be paid on its
common stock in the near future.
The following table sets forth, for the periods indicated, the high and low
sales prices per share of the Company's common stock as reported on the OTC
bulletin board for the periods indicated.
High Low
2001
First Quarter $4.06 $0.03
Second Quarter 4.00 2.05
Third Quarter 3.20 1.00
Fourth Quarter 2.85 1.15
2002
First Quarter 2.24 1.55
Second Quarter 2.55 1.57
Third Quarter 1.75 0.68
Fourth Quarter 1.15 0.53
Equity Compensation Plans
The table below provides information relating to the Company's equity
compensation plans as of December 31, 2002:
Number of securities
remaining available
Number of securities Weighted-average for future issuance
to be issued exercise price of under compensation
upon exercise of outsanding plans (excluding
outstanding options, options, securities reflected
Plan Category warrants and rights warrants and rights in first column)
- ------------- ------------------- ------------------- ----------------
Equity compensation plans
approved by security holders 258,000 $ 1.66 918,900
Equity compensation plans
not approved by security holders 6,097,250 2.19 (a)
--------- --------- --------
Total 6,355,250 $ 2.17 918,900
========= ==== =======
22
(a) These options have been issued in individual option agreements, rather
than under a specific option plan, therefore, there is not an
established number of options available for future issuance. See Item
11. Executive Compensation - Employment Agreements for information
regarding the material terms of these options.
Equity Transactions
The Company's equity transactions during the year ended December 31, 2002 are
described as follows:
During 2002, the Company issued options to purchase 500,000 shares of common
stock to employees and directors of the Company, at exercise prices ranging from
$1.58 to $1.95 per share. The options vest quarterly over a two-year period and
expire within ten years from the grant date.
On May 1, 2002, the Company issued 9,500,000 shares of its common stock to the
Shama Zoe Limited Partnership ("Shama Zoe"), a private oil and gas company, for
the acquisition of 53,095 gross (47,786 net) acres plus other assets and
consideration in the Greater Green River Basin in Sublette County Wyoming. The
acquisition was valued at $18,525,000 using a stock price of $1.95 per common
share, which represented the closing price of the Company's common stock on
April 23, 2002; the date the agreement was executed. The original Property
Purchase Agreement governing this 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, as described below, 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. On December 31, 2002
Shama Zoe exercised the option and sold 1,400,000 shares of Gasco common stock
back to the Company 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 bears interest at 12% and has a maturity date of March 14, 2003. As of
February 20, 2003, the Company has repaid this note plus accrued interest in
full.
On July 16, 2002, Gasco executed and closed a purchase agreement with Brek, and
certain other Gasco stockholders (the "Other Stockholders"), pursuant to which
Brek and the Other Stockholders purchased from Gasco an undivided 25% of Gasco's
working interests in all undeveloped acreage owned by Gasco, representing 35,169
net undeveloped acres, in exchange for 6,250,000 shares of Gasco common stock
and 500 shares of Gasco preferred stock held by Brek and the Other Stockholders.
The Other Stockholders 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
23
first installment in order to maintain the option to acquire the additional 2.5%
interest with the second installment.
The Brek transaction was recorded at $16,709,000 based on the average trading
price of the Company's common stock when the transaction was consummated. In
accordance with Securities and Exchange Commission Regulation S-X rule 4.10, the
transaction was recorded as a reduction to the Company's unproved properties and
a reduction to the Company's additional paid in capital, preferred and common
stock.
On August 14, 2002, the Company issued 6,500,000 shares of common stock for cash
at $1.00 per share, pursuant to private placements for gross proceeds of
$6,500,000. The cost of this offering was $526,020, $350,000 of which was paid
to Energy Capital Solutions and $65,000 of which was paid to Enercom Inc. as
financial advisory fees. These shares were subsequently registered for resale on
a Form S-1 Registration Statement filed on August 27, 2002.
Unless otherwise noted, each of the above sales of securities by the Company
were exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof, inasmuch as each such sale was conducted as a private
placement to a limited number of sophisticated buyers.
The aggregate net proceeds from the equity offering during 2002 were
approximately $5,974,000. These proceeds were used to fund the Company's capital
budget during the third and fourth quarters of 2002, which included the drilling
of two Gasco operated wells and participating the drilling of two ConocoPhillips
operated wells in the Riverbend area of Utah and the drilling of two wells in
Sublette County Wyoming.
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data, derived from the
consolidated financial statements, regarding Gasco's financial position and
results of operations as the dates indicated. 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.
As of and for the Year Ended December 31,
-----------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Summary of Operations
Revenue $ 164,508 $ 36,850 - - -
General & administrative expense 5,080,287 4,326,065 $951,734 $738,153 $6,000
Net loss (5,649,682) (4,129,459) (843,261) (736,834) (6,000)
Net loss per share (0.16) (0.63) (0.06) (.06) -
As of and for the Year Ended December 31,
-----------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet
Working capital (deficit) $ (2,857,539) $11,860,584 $ (420,370) $(65,798) $(6,000)
Cash and cash equivalents 2,089,062 12,296,585 881,041 163,490 -
Oil and gas properties, net 24,760,149 9,152,740 1,991,290 2,484,919 -
Total assets 27,505,501 21,658,525 3,007,259 2,688,826 -
Stockholders' equity (deficit) 22,014,265 21,065,425 1,578,905 2,422,166 (6,000)
24
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Critical Accounting Policies
Gasco is an independent natural gas and oil company engaged in locating and
developing hydrocarbon prospects, primarily located in the Rocky Mountain region
of the United States. 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 referred to as a 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.
Gasco's wells began producing in late October of 2001; therefore, the Company
did not have sufficient production information by which reserves could be
estimated as of December 31, 2001. Because of this, and because the costs
associated with the Company's oil and gas properties related to projects which
had not yet been associated with proved reserves, the Company did not record
depletion expense during the year ended December 31, 2001.
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 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.
25
The asset retirement liability will be allocated to operating expense by using a
systematic and rational method. The statement is effective as of January 1,
2003. The Company has not yet determined the impact of the adoption of this
statement.
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.
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.
Forward Looking Statements
Please refer to the section entitled "Cautionary Statement Regarding Forward
Looking Statements" under Item 1. For a discussion of factors which could affect
the outcome of forward looking statements used by the Company.
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.
26
2002 Compared to 2001
During the year ended December 31, 2002, the Company owned interests in fourteen
producing wells, two of which began producing in late October of 2001 and the
remainder of which began producing during 2002. The oil and gas revenue and
lease operating expense during 2002 relate to these wells and is comprised of
66,444 mcf of gas at an average price of $2.47 per mcf, compared to 17,545 mcf
of gas at an average price of $2.10 per mcf during the year ended December 31,
2001. Lease operating expense increased from $12,679 during 2001 to $119,809
during 2002 due to the increase in the number of producing wells during 2002.
Interest income during 2002 and 2001 represents the interest earned on the
Company's combined cash and cash equivalents and restricted cash balances.
Interest income decreased from $193,352 during 2001 to $76,410 during 2002. The
decrease is primarily the result of a higher average cash balance during the
2001 primarily due to the sale of preferred and common stock during the second
half of 2001.
General and administrative expense increased by $754,222 from $4,326,065 during
2001 to $5,080,287 during 2002. The increase during 2002 is primarily comprised
of a $550,000 increase in compensation expense due to an increase in full-time
staff and consultants associated with the increase in the Company's operational
activity, a one-time expense of $110,266 in consulting fees paid on behalf of a
company of which two of Gasco's directors have a combined 66.67% ownership, and
numerous other miscellaneous fluctuations, none of which was individually
significant.
Depletion, depreciation and amortization expense during 2002 is comprised of
$105,321 of depletion expense related to the Company's proved oil and gas
properties and $43,788 of depreciation related to the Company's furniture,
fixtures and other assets, respectively. The corresponding expense during 2001
consists of the depreciation expense related to the Company's furniture,
fixtures and other assets.
The impairment expense during the year ended December 31, 2002 represents the
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 year ended December 31, 2002
because the Company believed that the total costs 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 year ended December 31, 2001 represents the
interest incurred on the Company's outstanding notes payable, which were repaid
during 2001.
2001 Compared to 2000
During 2001, the Company owned interests in two wells that began producing in
late October. The oil and gas revenue and lease operating expense during 2001
related to these wells and were comprised of approximately 17,545 mcf of gas at
27
an average price of $2.10 per mcf. The Company had no producing wells during
2000 and 1999. Interest income during 2001 represented the interest earned on
the Company's cash balance, which increased from $881,041 in 2000 to $12,296,585
primarily due to the sale of preferred and common stock during 2001. General and
administrative expense increased from $951,734 in 2000 to $4,326,065 in 2001,
primarily due to the increase in staff and professional fees associated with the
commencement of its own operations. The interest expense during 2001 and 2000
represented the amounts incurred on the Company's outstanding notes payable
which were paid off during 2001. Other income during 2000 consisted primarily of
a $200,000 gain on the sale of a drilling permit offset by miscellaneous
expenses. Other income during 2001 was comprised of numerous miscellaneous
items, none of which was individually significant.
Schedule of Contractual Obligations
The following table summarizes the Company's obligations and commitments to make
future payments under its note payable, operating leases, employment contracts
and consulting agreement for the periods specified as of December 31, 2002.
Payments due by Period
----------------------------------------------------------------------------
Contractual Obligations Total 1 year 2-3 years 4-5 years After 5 years
- ----------------------- ----- ------ --------- --------- -------------
Note payable $ 1,400,000 $ 1,400,000
Operating Lease - office space 79,698 47,503 $ 32,195
Employment Contracts 1,449,167 470,000 470,000 $ 470,000 $ 39,167
Consulting Agreement 370,000 120,000 120,000 120,000 10,000
--- ------- -- ------- ------- ------- ------
Total Contractual Cash Obligations $ 3,298,865 $ 2,037,503 $ 622,195 $ 590,000 $ 13,167
========= ========= ======= ======= ======
Financial Condition and Plan of Operations
At December 31, 2002, the Company had cash and cash equivalents of $2,089,062
compared to $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 $1,390,306, which is partially
offset by the net proceeds of approximately $6,000,000 from the sale of common
stock during August 2002.
- During February 2002, the Company acquired leasehold interests
covering approximately 18,451 gross acres (16,421 net acres) in the
Greater Green River Basin located in west-central Wyoming for
$1,500,000.
- The Company acquired a 45% interest in 21,614 acres in Sublette County
Wyoming for approximately $1,428,000 during February 2002. Effective
July 16, 2002, the Company assigned 25% of its interest to Brek.
28
- 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 August 2004.
- The Company drilled five productive operated wells in Uintah County,
Utah for approximately $6,000,000 and one well, which was a dry hole
in Sublette County, Wyoming for $541,125.
- The Company participated in the drilling of five productive wells in
Uintah County, Utah and two wells in Sublette County, Wyoming, all of
which are operated by other companies, for approximately $2,900,000.
- During the year ended December 31, 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.
During February 2003, the Company sold through a private placement, 11,052
shares of convertible preferred stock ("Convertible Stock") to a group of
accredited investors, including members of Gasco's management, as further
described in Note 18 of the accompanying financial statements. The Convertible
Stock was sold for $440 per share resulting in net proceeds of approximately
$4,800,000. Dividends on the Convertible Stock accrue at the rate of 7% per
annum payable semi-annually in cash, additional shares of Convertible Stock or
shares of common stock at the Company's option. The conversion price of the
Convertible Stock is $0.70 per common share making each share of Convertible
Stock convertible into approximately 629 shares of Gasco common stock. Shares of
the Convertible Stock are convertible into Gasco common shares at any time at
the holder's election. 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 7 of the accompanying financial statements.
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. As of March 25, 2003, the
Company's balance in cash and cash equivalents is $3,539,900.
Working capital decreased from $11,860,584 at December 31, 2001 to a working
capital deficit of $2,857,539 at December 31, 2002, primarily due to the
decrease in cash and the increase in accounts payable resulting from the
Company's operational and drilling activities during 2002 and the current note
payable issued for the purchase of 1,400,000 shares of common stock at $1.00 per
share, as further described in Note 7 of the accompanying financial statements.
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
29
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.
During the next twelve months, the operational plans for Gasco entail conducting
the following:
a. Drill and complete one gross well in the Riverbend Project.
b. Perform two or three recompletions in the Riverbend Project in an
attempt to increase the zones of production on the Company's producing
wells.
c. Continue the permitting process for several future drilling locations
within the Riverbend Project.
d. Continue paying leasehold rentals and other expenses to preserve the
Company's acreage positions.
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 the
Riverbend Project, the Company will need to expend significant additional
capital to drill and complete wells. The Company will use approximately
$3,400,000 of the proceeds from its February 2003 Convertible 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.
ITEM 7A - 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.
30
ITEM 8 - FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports 32-33
Consolidated Balance Sheets at December 31, 2002 and 2001 34
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 35
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000 36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 37
Notes to Consolidated Financial Statements 38-58
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Gasco Energy, Inc.:
We have audited the consolidated balance sheets of Gasco Energy, Inc. and its
subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 2002. These financial statements are
the responsibility of the Corporations' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies at December 31, 2002
and 2001, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
March 27, 2003
32
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Stockholders GASCO ENERGY, INC.
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of Gasco Energy, Inc. and subsidiaries (formerly known as
Pannonian Energy Inc.) for the year ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Gasco Energy, Inc. and subsidiaries for the year ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
Wheeler Wasoff, P.C.
Denver, Colorado
September 20, 2001
33
GASCO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2002 2001
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,089,062 $ 12,296,585
Restricted cash 250,000 -
Accounts receivable and prepaid expenses 294,635 157,099
--------- ----------
Total 2,633,697 12,453,684
--------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Well in progress 1,138,571 -
Proved mineral interests 10,283,488 -
Unproved mineral interests 13,984,536 9,152,740
Furniture, fixtures and other 162,787 59,445
-- ------- -- ------
Total 25,569,382 9,212,185
---------- ---------
Less accumulated depreciation, depletion,
amortization and property impairment (697,578) (7,344)
- ----------
Total 24,871,804 9,204,841
---------- ----------
TOTAL ASSETS $ 27,505,501 $ 21,658,525
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,910,974 $ 548,853
Accrued expenses 2,180,262 44,247
Note payable 1,400,000 -
--------- --------
Total 5,491,236 5 93,100
--------- --------
STOCKHOLDERS' EQUITY
Series A Convertible Redeemable Preferred stock - $.001 par value;
5,000,000shares authorized; 1,000 shares issued and
outstanding in 2001 - 1
Common stock - $.0001 par value; 100,000,000 shares authorized;
40,362,500 shares issued and 40,288,800 shares outstanding in
2002; and 27,252,500 shares issued and 27,178,800 shares
outstanding in 2001 4,036 2,725
Additional paid in capital 44,958,593 38,569,923
Deferred compensation (52,833) (261,375)
Accumulated deficit (22,765,236) (17,115,554)
Less cost of treasury stock of 73,700 common shares (130,295) (130,295)
---------- -----------
Total 22,014,265 21,065,425
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,505,501 $ 21,658,525
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
34
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
2002 2001 2000
REVENUES
Oil and gas $ 164,508 $ 36,850 $ -
Gain on sale of permit - - 200,000
Interest 76,140 193,352 -
-------- -------- --------
240,648 230,202 200,000
--------- --------- --------
OPERATING EXPENSES
General and administrative 5,080,287 4,326,065 951,734
Lease operating 119,809 12,679 -
Depletion, depreciation and amortization 149,109 5,760 -
Impairment 541,125 - -
Interest 67,363 61,776
--------- --------- --------
5,649,682 4,411,867 1,013,510
---------- --------- ---------
OTHER INCOME (EXPENSES) 52,206 (29,751)
---------- --------- ---------
NET LOSS (5,649,682) (4,129,459) (843,261)
----------- ----------- ---------
Series A Convertible Redeemable
Preferred Stock deemed distribution - (11,400,000) -
------------- ----------- ---------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (5,649,682) $ (15,529,459) $(843,261)
============= ============== ==========
NET LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.16) $ (0.63) $ (0.06)
========== ========== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 36,439,074 24,835,144 13,800,595
=========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
35
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Preferred Stock Common Stock Paid in Deferred Accumulated Treasury
Shares Value Shares Value Capital Compensation Deficit Stock Total
Balance, December 31, 1999 13,800,595 $ 1,380 $3,163,620 $ $ (742,834) $ $ 2,422,166
Net loss (843,261) (843,261)
------ ----- ----------- -------- ----------- ----------- ---------- --------- ----------
Balance, December 31, 2000 13,800,595 1,380 3,163,620 (1,586,095) 1,578,905
Distribution of assets (2,023,568) (2,023,568)
Issuance of common shares in
connection with reverse
acquisition of San Joaquin
Resources, Inc. 9,549,405 955 571,389 572,344
Issuance of 1,000 convertible
redeemable preferred Shares 1,000 $ 1 17,430,366 17,430,367
Issuance of common shares 3,902,500 390 7,343,147 7,343,537
Options issued for services 684,969 (684,969)
Amortization of deferred
compensation expense 423,594 423,594
Deemed distribution 11,400,000 (11,400,000)
Repurchase of common stock (130,295) (130,295)
Net loss (4,129,459) (4,129,459)
--------- --- --------- ------- ---------- ------------ ---------- --------- ----------
Balance, December 31, 2001 1,000 1 27,252,500 2,725 38,569,923 (261,375) (17,115,554) (130,295) 21,065,425
Conversion of preferred shares
to common shares 4,760,000 476 (476)
Issuance of common shares
for acreage 9,500,000 950 18,524,050 18,525,000
Amortization of deferred
compensation expense 208,542 208,542
Redemption of preferred and
common stock for acreage (1,000) (1) (6,250,000) (625) (16,708,374) (16,709,000)
Issuance of common stock 6,500,000 650 5,973,330 5,973,980
Repurchase of common stock (1,400,000) (140) 1,399,860) (1,400,000)
Net loss (5,649,682) (5,649,682)
-------- --- ---------- ------ ---------- ------ ----------- -------- ------------
Balance, December 31, 2002 - $ - 40,362,500 $4,036 $44,958,593 $ (52,833) $ (22,765,236) $(130,295) $22,014,265
======== ==== ========== ======= =========== ========== ============= ========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
36
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,649,682) $ (4,129,459) $ (843,261)
Adjustments to reconcile net loss to net cash used by operating
activities
Depreciation, depletion and impairment expense 690,234 5,760 16,347
Amortization of deferred compensation 208,542 423,594 -
Non-cash charges for legal and interest expense - - 213,831
Gain on sale of permit - - (200,000)
Changes in assets and liabilities provided (used) cash
Accounts receivable and prepaid expenses (137,536) 11,323 23,449
Accounts payable 1,362,121 (51,872) 609,249
Accrued expenses 2,136,015 - -
--------- ----------- ----------
Net cash used in operating activities (1,390,306) (3,740,654) (180,385)
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for furniture, fixtures and other (103,342) (49,876)
Cash paid for oil and gas properties (14,437,855) (7,395,867) (566,204)
Cash received upon recapitalization and merger - 265,029 -
Proceeds from sale of oil and gas interests 1,394,797
------------ ------------ ----------
Net cash provided by (used in) investing activities (14,541,197) (7,180,714) 828,593
------------ ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash designated as restricted (250,000) - -
Proceeds from sale of common stock 6,500,000 6,826,218
Proceeds from sale of preferred stock - 19,000,000
-
Repurchase of common shares - (130,295) -
Cash paid for offering costs (526,020) (2,144,468)
Proceeds from short-term borrowings - 500,000 252,871
Repayments of short-term borrowings - (714,543) (183,528)
Distribution to Rubicon Oil and Gas, Inc. (1,000,000)
----------- ----------- ---------
Net cash provided by financing activities 5,723,980 22,336,912 69,343
----------- ------------ ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,207,523) 11,415,544 717,551
BEGINNING OF PERIOD 12,296,585 881,041 163,490
----------- ------------- ---------
END OF PERIOD $2,089,062 $ 12,296,585 $881,041
=========== ============ ========
The accompanying notes are an integral part of the
consolidated financial statements.
37
GASCO ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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. Prior to January 1, 2002, the Company
was considered a development stage enterprise as defined by Statement of
Financial Accounting Standards No. 7.
On February 1, 2001, San Joaquin Resources, Inc. ("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
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.
38
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 year presented. The pro forma results are not indicative of
future results.
For the Year Ended December 31,
-------------------------------
2001 2000
------------------------------------ ----------------------------------
As Reported Pro Forma As Reported Pro Forma
Revenue $ 36,850 $ 36,850 $ - $ -
Net loss (15,529,459) (15,572,061) (843,261) (1,047,888)
Net loss per share attributable to
common shareholders basic and diluted
$ (0.63) $ (0.63) $ (0.06) $ (0.09)
========= ========= ========= ========
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. as of December
31, 2002 and 2001. The consolidated financial statements as of and for the year
ended December 31, 2000 include Pannonian and its wholly owned subsidiary
Pannonian International, Inc. ("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 Gasco shares.
The Company has incurred net losses from continuing operations of $5,649,682,
$4,129,459 and $843,261 for the years ended December 31, 2002, 2001 and 2000.
Additionally, the Company has a negative working capital of $2,857,539 and is
involved in a capital-intensive business. The Company's management believes that
it has adequate resources to meet its obligations during the next year. However,
the Company is considering various options for obtaining additional financing
during 2003 such as the sale of equity, indebtedness or the sale of some of its
assets.
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 August
39
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
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.
Gasco's wells began producing in late October of 2001; therefore, the Company
did not have sufficient production information by which reserves could have be
estimated as of December 31, 2001. Because of this, and because the costs
associated with the Company's oil and gas properties related to projects which
have not yet been associated with proved reserves, the Company did not record
depletion expense during the year ended December 31, 2001.
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 represents the costs associated with the
drilling of a well in the Riverbend area of Utah. Since the well has not reached
total depth, it is classified as a well in progress and is withheld from the
depletion calculation until it has been completed. Once the well has been
completed, it will be classified as proved property and will become subject to
depletion and the impairment calculation as described above.
40
Impairment of Long-lived Assets
The Company's unproved properties are evaluated periodically for the possibility
of potential impairment. Other than oil and gas properties, the Company has no
other long-lived assets and to date has not recognized any impairment losses.
Revenue Recognition
Oil and gas revenue is recognized as income when the oil or gas is produced and
sold.
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 11 have not been included in the computation of diluted income
(loss) per share during all periods because their inclusion would have been
anti-dilutive.
Significant Customers
Although the Company sells the majority of its production to a few purchasers,
there are numerous other purchasers in the areas in which Gasco sells it
production; therefore, the loss of its significant customers would not adversely
affect the Company's operations. For the years ended December 31, 2002 and 2001,
purchases by the following companies exceeded 10% of the total oil and gas
revenues of the Company. Gasco had no oil and gas sales during the year ended
December 31, 2000.
For the Year Ended December 31,
-----------------------------------------
2002 2001
---- ----
ConocoPhillips Company 98% 60%
Wasatch Energy Corporation -- 37%
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.
41
Other Comprehensive Income
The Company does not have any items of other comprehensive income for the years
ended December 31, 2002, 2001 and 2000. Therefore, total comprehensive income
(loss) is the same as net income (loss) for these periods.
Income Taxes
The Company uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the accounting bases and the tax
bases of the Company's assets and liabilities. The deferred tax assets and
liabilities are computed using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.
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
years ended December 31, 2001 and 2002 would have been increased to the pro
forma amounts indicated below:
For the Year Ended December 31,
2002 2001
---- ----
Net loss attributable to
common shareholders: As reported $ (5,649,682) $(15,529,459)
Pro forma (7,358,908) (21,211,727)
Net loss per share: As reported $ (0.16) $(0.63)
Pro forma (0.20) (0.85)
42
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.
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
Concentration of Credit Risk
The Company's cash equivalents are exposed to concentrations of credit risk. The
Company manages and controls this risk by investing these funds with a major
financial institution.
Recent Accounting Pronouncements
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 as of January 1,
2003. The Company has not yet determined the impact of the adoption of this
statement.
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.
43
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.
NOTE 3 - OIL AND GAS PROPERTY
The following table presents information regarding the Company's net costs
incurred in the purchase of proved and unproved properties and in exploration
and development activities:
For the Years Ended December 31,
------------------------------------------------------
2002 2001 2000
------------ ---------- -------
Property acquisition costs:
Unproved $22,324,547 $ 7,161,450 $425,797
Proved -- -- --
Exploration costs (a) 3,319,124 -- 297,865
Development costs 7,319,184 -- --
---------- ----------- --------
Total costs incurred $ 32,962,855 $ 7,161,450 $723,652
=========== =========== =========
(a) Includes seismic data acquisitions of $850,000 during twelve months ended
December 31, 2002.
Depletion and impairment expense related to proved properties per equivalent mcf
of production for the year ended December 31, 2002 was $9.73. There was no
depletion or impairment expense during the years ended December 31, 2001 and
2000.
44
At December 31, the Company's unproved properties consist of leasehold costs in
the following areas:
2002 2001
---- ----
Utah $2,163,524 $3,843,270
Wyoming 11,681,875 5,034,930
California 139,137 274,540
----------- ----------
$13,984,536 $9,152,740
=========== ==========
NOTE 4 - SALE OF COMMON STOCK
On August 14, 2002, the Company issued 6,500,000 shares of common stock for net
proceeds of approximately $6.0 million in a private offering. These shares were
subsequently registered for resale on a Form S-1 Registration Statement filed on
August 27, 2002. The Company used the net proceeds from this offering to fund
its remaining 2002 capital budget.
NOTE 5 - REPURCHASE OF COMMON AND PREFERRED STOCK
On July 16, 2002, Gasco executed and closed a purchase agreement with Brek
Energy Corporation ("Brek"), and certain other Gasco stockholders (the "Other
Stockholders"), pursuant to which Brek and the Other Stockholders 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 Stockholders. The
Other Stockholders 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 was recorded at $16,709,000 based on the average trading price
of the Company's common stock when the transaction was consummated. In
accordance with Securities and Exchange Commission Regulation S-X rule 4.10, the
transaction was recorded as a reduction to the Company's unproved properties and
a reduction to the Company's additional paid in capital, preferred stock and
common stock.
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.
NOTE 6 - PROPERTY ACQUISITION
On May 1, 2002, the Company issued 9,500,000 shares of its common stock to the
Shama Zoe Limited Partnership ("Shama Zoe"), a private oil and gas company, for
the acquisition of 53,095 gross (47,786 net) acres plus other assets and
45
consideration in the Greater Green River Basin in Sublette County Wyoming. The
acquisition was valued at $18,525,000 using a stock price of $1.95 per common
share, which represented the closing price of the Company's common stock on
April 23, 2002; the date the agreement was executed. The original Property
Purchase Agreement governing this 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, as described in Note 4, 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. On December 31, 2002
Shama Zoe sold 1,400,000 shares of Gasco common stock back to the Company 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 is further described in
Note 7.
In connection with this transaction, the Board of Directors of the Company
authorized the payment to an employee of the Company, who was instrumental in
securing the Company's agreement with Shama Zoe, of $300,000 in cash and the
issuance of options to purchase 250,000 shares of Gasco common stock at an
exercise price of $1.95 per share, which is equal to the fair market of the
common stock on April 23, 2002. Prior to the end of 2002 the Company had paid
$150,000 of the total cash bonus to the employee, therefore, the remaining cash
payment of $150,000 was included in accrued expenses in the accompanying
financial statements as of December 31, 2002.
NOTE 7 - NOTE PAYABLE
The original Property Purchase Agreement governing the Shama Zoe transaction
described in Note 6 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, as described in Note 4, 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 as described in Note 4.
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 in full.
46
NOTE 8 - 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
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 assigned 25% of its interest in these suspended leases to Brek resulting
in the Company's total net acres being reduced from 9,726 to 7,295 net acres. As
of December 31, 2002, 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 9 - PROPERTY IMPAIRMENT
During the first quarter of 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 year ended December 31, 2002 because the Company believed that the total
costs for this well exceeded the present value, discounted at 10%, of the future
net revenues from its proved oil and gas reserves at the time the well was
plugged and abandoned.
NOTE 10 - 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
The oil and gas properties, cash and liabilities were transferred to a newly
formed entity Rubicon Oil and Gas, Inc. ("Rubicon"). The Pannonian stockholders
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,
47
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 11 - STOCKHOLDERS' EQUITY
The Company's capital stock as of December 31, 2002 and 2001 consists of
100,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000
shares of preferred stock, par value $0.001 per share.
Series A Convertible Redeemable Preferred Stock - As of December 31, 2001, Gasco
had 1,000 shares of Series A Convertible Redeemable Preferred Stock ("Preferred
Stock") issued and outstanding. The Preferred Stock was convertible into
9,500,000 shares of Gasco Common Stock, had no fixed dividend rate and was
entitled to a $1.00 per share liquidation preference. The Preferred Stock was
entitled to vote along with the Gasco common stock and, for so long as at least
half of the Preferred Stock remained outstanding and was entitled to 26% of the
combined voting power of all the common stock and preferred stock. The Preferred
Stock was also entitled to vote as a class on certain matters.
In July 2001, Brek purchased 1,000 shares of the Company's Preferred Stock for
$19,000,000. Costs of the sale, including 1,025,000 shares of common stock
valued at $3,280,000 ($3.20 per share), were $4,849,633. The total costs of the
sale included $1,500,000 and the issuance of 125,000 shares of common stock
valued at $400,000 paid to Canaccord International Ltd. and the issuance of
900,000 shares of common stock valued at $2,880,000 paid to Wet Coast Management
Corp. as brokerage commissions.
The Company recognized $11,400,000 as a deemed distribution to the holders of
the Preferred Stock upon issuance due to a beneficial conversion feature into
the Company's common stock in accordance with Emerging Issues Task Force
("EITF") 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios to Certain Convertible
Instruments" and EITF 00-27 "Application of EITF Issue 98-5". The deemed
distribution was the difference between the market price on the date of issuance
($3.20) and the conversion rate.
On July 16, 2002, as further described in Note 5, Gasco executed and closed a
purchase agreement with Brek, and Other Stockholders, pursuant to which Brek and
the Other Stockholders 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 Stockholders. As a result of this transaction, there were no
outstanding shares of Preferred Stock outstanding as of December 31, 2002.
Common Stock - Gasco has 40,362,500 shares of Common Stock issued and 40,288,800
shares outstanding as of December 31, 2002. The common shareholders are entitled
to one vote per share on all matters to be voted on by the shareholders;
however, there are no cumulative voting rights. Additionally, as long as 50% of
the Preferred Stock was outstanding, the holders of Preferred Stock were
48
entitled to vote as a class equal to 26%; therefore, the common shareholders
were effectively entitled to 0.74 votes per share when 50% of the Preferred
Stock was outstanding. The common shareholders are entitled to dividends and
other distributions as may be declared by the board of directors. Upon
liquidation or dissolution, the common shareholders will be entitled to share
ratably in the distribution of all assets remaining available for distribution
after satisfaction of all liabilities and payment of the liquidation preference
of any outstanding preferred stock.
The Company's common stock equity transactions during 2002 and 2001 are
described as follows:
On May 1, 2002, the Company issued 9,500,000 shares of its common stock to Shama
Zoe, a private oil and gas company, for the acquisition of 53,095 gross (47,786
net) acres plus other assets and consideration in the Greater Green River Basin
in Sublette County Wyoming. The acquisition was valued at $18,525,000 using a
stock price of $1.95 per common share, which represented the closing price of
the Company's common stock on April 23, 2002; the date the agreement was
executed. The original Property Purchase Agreement governing this 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, as described below, 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. On December 31, 2002 Shama Zoe sold 1,400,000 shares of Gasco common stock
back to the Company for $1.00 per share. The Company issued a $1,400,000
promissory note to Shama Zoe for the purchase of these shares.
On July 16, 2002, Gasco executed and closed a purchase agreement with Brek and
the Other Stockholders, pursuant to which Brek and the Other Stockholders
purchased from Gasco an undivided 25% of Gasco's working interests in all
undeveloped acreage owned by Gasco, representing 35,169 net undeveloped acres,
in exchange for 6,250,000 shares of Gasco common stock and 500 shares of Gasco
preferred stock held by Brek and the Other Stockholders.
The transaction was recorded at $16,709,000 based on the average trading price
of the Company's common stock when the transaction was executed.
On August 14, 2002, the Company issued 6,500,000 shares of common stock for cash
at $1.00 per share, pursuant to private placements for gross proceeds of
$6,500,000. The cost of this offering was $526,020, $350,000 of which was paid
to Energy Capital Solutions and $65,000 of which was paid to Enercom Inc. as
financial advisory fees. These shares were subsequently registered for resale on
a Form S-1 Registration Statement filed on August 27, 2002.
In connection with the Pannonian/SJRI merger, SJRI issued an option to a
Pannonian officer, to purchase 1,000,000 shares of the Company's common stock at
$1.00 per share. The $269,000 fair market value of the option determined using
the Black Scholes Pricing model, was charged to operations of the combined
company during the year ended December 31, 2001.
49
During January and May 2001, the Company issued 2,275,000 shares of common stock
for cash at $3.00 per share, pursuant to private placements for gross proceeds
of $6,825,000. The costs of these offerings were $574,835, $191,250 of which was
paid to Canaccord International Ltd. and $150,000 of which was paid to DMD
Investments as broker commissions. In September 2001, the Company issued an
additional 227,500 shares of common stock for no additional consideration to the
holders of the original shares in accordance with the terms of the offering. The
offering was conducted in accordance with the provisions of Regulation S under
the Securities Act of 1933, and all purchasers were residents of foreign
countries.
In April 2001, the Company paid cash of $200,808 and issued 75,000 shares of its
common stock, valued at $247,500 ($3.30 per share), for unproved oil and gas
properties from an unrelated entity.
In July 2001, the Company acquired unproved oil and gas properties from an
entity for $700,000 cash and 300,000 shares of the Company's common stock,
valued at $846,000 ($2.82 per share). See related party discussion in Note 14
for further discussion.
During December 2001, the Company repurchased 73,700 shares of its own stock on
the open market at prices ranging from $1.12 to $2.46 per share.
Stock Options - As of December 31, 2002 the Company had options to purchase an
aggregate 6,355,250 shares of the Company's common stock outstanding. These
options were granted during 2001 and 2002 to the Company's employees, directors
and consultants at exercise prices ranging from $1.58 to $3.70 per share. The
options vest at varying schedules within three years of their grant date and
expire within ten years from the grant date. The aggregate fair market value of
options, determined using the Black Scholes Pricing Model, granted to
consultants, including the Pannonian officer issuance above, of $208,542 and
$423,594 was charged to operations during the years ended December 31, 2002 and
2001, respectively.
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 2,760,000 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.
50
A summary of the options granted to purchase common stock and the changes
therein during the years ended December 31, 2002 and 2001 is presented below.
There were no options issued during the years ended December 31, 2000.
2002 2001
------------------------------ ------------------------------
-------------- --------------- ---------------- -------------
Weighted Weighted
Average Average
Number of Exercise Price Number of Exercise
Options Options Price
Outstanding at beginning of year 6,392,750 $ 2.23 -- $ --
Granted 500,000 1.80 6,519,000 2.25
Cancelled (537,500) 2.56 (126,250) 3.03
--------- ------ --------- ----
Outstanding at end of year 6,355,250 $ 2.17 6,392,750 $ 2.23
========= ====== ========= ======
Exercisable at December 31, 6,027,085 $ 2.06 5,137,250 $ 2.01
--------- ------ --------- ------
Weighted average fair value of options granted $ 1.28 $ 1.37
====== ======
Weighted average remaining contractual life of
options outstanding as of December 31, 2002 7.7 years
=========
NOTE 12 - STATEMENT OF CASH FLOWS
The following transactions represent the non-cash investing and financing
activities of the Company during the years ended December 31, 2002.
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.
Repurchase of 500 shares of preferred stock and 6,250,000 shares of common
stock in exchange for an undivided 25% working interest in the Company's
undeveloped acreage valued at $16,709,000.
Repurchase of 1,400,000 shares of common stock in exchange for a promissory
note as described in Note 7.
Noncash stock offering costs of $250,000 incurred in connection with
redeemable common stock as described in Note 7.
The following transactions represent the non-cash investing and financing
activities of the Company during the years ended December 31, 2001.
51
The Company issued 375,000 shares of common stock for oil and gas
properties, valued at $1,093,500 ($2.82 to $3.30 per share).
The Company issued 1,025,000 shares of common stock in conjunction with the
sale of preferred stock, valued at $3,280,000 ($3.20 per share).
The following transactions represent the non-cash investing and financing
activities of the Company during the year ended December 31, 2000.
Certain individuals paid legal fees on behalf of the Company for which they
were issued promissory notes in the aggregate amount of $198,193.
The Company entered into notes for the acquisition of oil and gas
properties in the aggregate amount of $781,917. The Company assumed an
18.75% interest in the notes, which was $143,609. The notes and the related
properties were spun off as part of the Pannonian Agreement as described in
Notes 1 and 10.
Cash paid for interest was $67,363 and $11,072 for the years ended December 31,
2001 and 2000, respectively. There was no cash paid for interest during the year
ended December 31, 2002.
NOTE 13 - INCOME TAXES
A provision (benefit) for income taxes for the years ended December 31, 2002 and
2001 consists of the following:
Current taxes: 2002 2001
------------- -------------
Federal $ - $ -
State - -
Deferred taxes:
Federal (74,128) (1,333,826)
State (68,422) (191,435)
Less: valuation allowance 142,550 1,525,261
------- ---------
Net income tax provision (benefit) $ - $ -
========= ==========
There is no current or deferred tax expense for the year ended December 31,
2000. The Company, in 2000, utilized net operating loss carryforwards to offset
taxable income.
A reconciliation of the provision (benefit) for income taxes computed at the
statutory rate to the provision for income taxes as shown in the statements of
operations for the years ended December 31, 2002 and 2001 is summarized below:
52
2002 2001
------------ -----------
Tax provision (benefit) at federal statutory rate ($1,920,892) ($1,404,016)
State taxes, net of federal tax effects (45,159) (126,347)
Valuation adjustment on assets distributed in
stock redemption 1,798,941
Other Permanent items 24,560
5,102
Valuation allowance 142,550 1,525,261
----------- ---------
Net income tax provision (benefit) $ - $ -
============ =========
The components of the deferred tax assets and liabilities as of December 31,
2002 and 2001 are as follows:
Deferred tax assets: 2002 2001
------------- --------------
Federal and state net operating loss carryovers $1,529,644 $3,452,095
Other property, plant & equipment - 41,019
Oil and gas property 869,272 -
Deferred compensation 335,534 165,202
----------- ------------
Total deferred tax assets 2,734,450 3,658,316
Less: valuation allowance (2,564,963) (2,422,413)
----------- -----------
169,487 1,235,903
Deferred tax liabilities:
Other property, plant & equipment 97,169 -
Oil and gas property - 1,152,344
Other 72,318 83,559
----------- -----------
Total deferred tax liabilities 169,487 1,235,903
---------- ---------
Net deferred tax asset $ - $ -
=============== =============
The Company has a $3,885,681 and $9,152,671 net operating loss carryover for
federal income tax purposes and a $4,549,237 and $7,182,732 net operating loss
carryover for state income tax purposes as of December 31, 2002 and 2001,
respectively. The net operating losses may offset against taxable income through
the year ended December 31, 2021. The company provided a valuation allowance
against its deferred tax asset of $2,564,963 and $2,422,413 as of December 31,
2002 and 2001, respectively, since it believes that it is more likely than not
that it may not be able to fully utilize it on its future tax returns.
NOTE 14 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2002, the Company paid $110,266 in consulting
fees to an unrelated third party. The obligation to pay these fees was a joint
and several liability of Gasco and a Company of which two of Gasco's directors
have a combined 66.67% ownership.
A director of the Company earned consulting fees of $16,000, $52,000 and $50,000
from the Company during the years ended December 31, 2002, 2001 and 2000,
53
respectively. During both of the years ended December 31, 2002 and 2001, the
Company paid $240,000 in consulting fees to a company owned by a director of
Gasco. During January 2003, the future annual fees that will be paid to the
director's company were reduced to $120,000 per year and are committed through
January 31, 2006.
During 2001, an officer of the Company earned a $28,000 fee and 12,500 shares of
Gasco's common stock for consulting services provided in connection with a
property acquisition described in Note 11. This same officer was paid $22,879 in
consulting fees prior to his appointment.
An officer of the Company, who retired effectively December 31, 2002, was an
employee of and owned a less than 1% interest in an entity from which Gasco
purchased acreage in Utah and Wyoming during 2001 and 2002. Additionally, the
Company recorded a payable to this officer of $213,000 as of December 31, 2002
representing a bonus of $150,000 and severance payments of $63,000. These
amounts will be paid to this officer on or before June 30, 2003.
One of the Company's directors earned a combined total of $9,000 in consulting
fees from Rubicon and PIL during 2001.
During 2000, the Company incurred debt to related parties in the aggregate
amount of $366,657 for cash loans, expenses paid on behalf of the Company and
conversion of interest to debt. Repayments made during 2000 aggregated $63,000.
At December 31, 2000 the Company had four outstanding notes totaling $529,280
payable to directors or officers of the Company and one note payable of $15,000
to an entity owned by a director of the Company with similar terms bearing
interest at rates ranging from 5% to 10%. These notes were repaid during 2001.
The Board of Directors approved the payment of bonuses and directors fees to the
officers and directors of the Company in the aggregate amount of $455,000, of
which $32,000 was paid as of December 31, 2000. The remaining balance was paid
during 2001.
During 2000, the Company paid consulting and professional fees to officers,
directors and related parties of $96,000.
Certain of the Company's directors and officers have working and/or overriding
royalty interests in oil and gas properties in which the Company has an
interest. It is expected that the directors and officers may participate with
the Company in future projects. All participation by directors and officers will
continue to be approved by the disinterested members of the Company's Board of
Directors.
The Company's management believes that the above transactions and services were
provided in the normal course of business with terms that could be obtained from
non-related sources.
54
NOTE 15 - COMMITMENTS
The Company leases office facilities in Englewood, Colorado for approximately
$46,000 per year under two leases that expire on August 30, 2004. Remaining
commitments under these leases mature as follows:
Year Ending December 31, Annual Rentals
2003 $47,503
2004 32,195
------
$79,698
Rent expense for the years ending December 31, 2002, 2001 and 2000 was $42,055,
$46,476 and $52,573, respectively.
As is customary in the oil and gas industry, the Company may at times have
commitments in place to reserve or earn certain acreage positions or wells. If
the Company does not pay such commitments, the acreage positions or wells may be
lost.
The Company has entered into employment agreements with certain key officers
through January 31, 2006. These agreements were revised during the first quarter
of 2003 to reduce the total compensation for the officers covered by the
employment agreements from $560,000 per annum to $470,000 per annum. The
agreements contain clauses regarding termination and demotion of the officer
that would require payment of an amount ranging from one times annual
compensation to up to approximately five times annual compensation plus a cash
payment from $250,00 to $500,000. Included in the employment agreements is a
bonus calculation for each of the covered officers totaling 2.125% of a defined
cash flow figure based on net after tax earnings adjusted for certain expenses.
NOTE 16 - EMPLOYEE BENEFIT PLANS
The Company adopted a 401(k) profit sharing plan (the "Plan") in October 2001,
available to employees who meet the Plan's eligibility requirements. The Plan is
a defined contribution plan. The Company may make discretionary contributions to
the Plan and is required to contribute 3% of the participating employee's
compensation to the Plan. The contributions made by the Company totaled $41,726
and $6,270 during the years ended December 31, 2002 and 2001, respectively.
55
NOTE 17 - SELECTED QUARTERLY INFORMATION (Unaudited)
The following represents selected quarterly financial information for the years
ended December 31, 2002 and 2001.
2002 For the Quarter Ended
----- ----------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Gross revenue $28,506 $23,426 $ 43,611 $68,965
Net revenue from oil and
gas operations 3,440 5,177 10,869 25,213
Net income (loss) (1,639,009) (1,477,075) (1,482,467) (1,051,131) a
Net loss per share
basic and diluted (0.06) (0.04) (0.04) (0.02)
a - During the fourth quarter, depletion expense was calculated for the entire
year using the December 31, 2002 reserve report.
2001 For the Quarter Ended
----------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Gross revenue $ -- $ -- $ -- $36,850 b
Net revenue from oil
and gas operations -- -- -- 24,171 b
Net loss (653,369) (875,624) (744,516) (1,855,950) c
Net loss per share
basic and diluted (0.03) (0.04) (0.45) d (0.07)
b - The increase in gross revenue and net revenue from oil and gas operations
during the fourth quarter is due to the revenue and lease operating expenses
from two wells that were drilled during the third and fourth quarters.
c - The increase in the net loss during the fourth quarter of 2001 is primarily
due to increased general and administrative expenses resulting from the
increased level of operating activity associated with the commencement of the
Company's own operations.
d - The increase in the net loss per share during the third quarter of 2001 is
due to the recognition of $11,400,000 in a deemed distribution to the holders of
the Preferred Stock as further described in Note 11.
NOTE 18 - SUBSEQUENT EVENTS
During February 2003, the Company sold through a private placement, 11,052
shares of convertible preferred stock ("Convertible Stock") to a group of
accredited investors, including members of Gasco's management. The Convertible
Stock was sold for $440 per share resulting in net proceeds of approximately
$4,800,000. Dividends on the Convertible Stock accrue at the rate of 7% per
56
annum payable semi-annually in cash, additional shares of Convertible Stock or
shares of common stock at the Company's option. The conversion price of the
Convertible Stock is $0.70 per common share making each share of Convertible
Stock convertible into approximately 629 shares of Gasco common stock. Shares of
the Convertible Stock are convertible into Gasco common shares at any time at
the holder's election. Gasco may redeem shares of the Convertible Stock at a
price of 105% of the purchase price at any time after February 10, 2006. The
Convertible Stock votes as a class on issues that affect the Convertible
Stockholder's interests and votes with shares of common stock on all other
issues on an as-converted basis. Additionally, the holders of the Convertible
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 7. 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.
During the first quarter of 2003, the Company issued 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 quarterly
over a two-year period and expire within ten years from the grant date.
Additionally, the Company cancelled 2,760,000 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 19 - SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (Unaudited)
The following reserve quantity and future net cash flow information for the
Company represents proved reserves located in the United States. The reserves
have been estimated by James R. Stell, independent petroleum engineer. The
determination of oil and gas reserves is based on estimates, which are highly
complex and interpretive. The estimates are subject to continuing change as
additional information becomes available.
The standardized measure of discounted future net cash flows is prepared under
the guidelines set forth by the Securities and Exchange Commission (SEC) that
require the calculation to be performed using year-end oil and gas prices. The
oil and gas prices used as of December 31, 2002 were $29.60 per bbl of oil and
$3.39 per mcf of gas. Future production costs are based on year-end costs and
include severance taxes. The present value of future cash inflows is based on a
10% discount rate.
57
Reserve Quantities
Gas Oil
Mcf Bbls
Proved Reserves:
Balance, December 31, 2001 -- --
Extensions and discoveries 20,688,710 141,652
Revisions of previous estimates -- --
Sales of reserves in place -- --
Purchases of reserves in place -- --
Production (66,444) --
-------- -------
Balance, December 31, 2002 20,622,266 141,652
========== =======
Proved Developed Reserves
Balance, December 31, 2002 5,889,981 34,493
========= ======
Standardized Measure of Discounted Future Net Cash Flows
Future cash flows $ 73,763,406
Future production and development costs (38,958,416)
Future net cash flows before discount 34,804,990
10% discount to present value (22,492,988)
------------
Standardized measure of discounted future
net cash flows as of December 31, 2002 $ 12,312,002
============
Changes in the Standardized Measure of Discounted Future Net Cash Flows
Standardized measure of discounted future net cash flows
at beginning of year $ -
Sales of oil and gas produced, net of production costs (44,699)
Net changes in prices and production costs -
Extensions and discoveries, net of future production and
development costs 21,007,459
Development costs incurred 7,319,184
Changes in estimated future development costs (31,717,307)
Revisions of previous quantity estimates -
Purchases of reserves in place -
Sales of reserves in place -
Accretion of discount -
Changes in production rates and other 15,747,365
----------
Standardized measure of discounted future net cash
flows at December 31, 2002 $ 12,312,002
============
58
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Age as
of
3/26/03
Name Principal Occupation and Directorships
Marc Bruner.....................Director of Gasco since 2001; Chairman of the Board of 53
Directors and Strategic Consultant for the Company
Mark A. Erickson................Director of Gasco since 2001; Chief Executive Officer and 43
President
Michael K. Decker...............Director of Gasco since 2001; Executive Vice President and 48
Chief Operating Officer
W. King Grant...................Chief Financial Officer; Director of Gasco from 2001 through 39
2003
Carmen Lotito...................Director of Gasco since 2001; Treasurer, Chief Financial 58
Officer and Director ofGalaxy Investments, Inc. Corporation;
Member of Equistar Capital LLC
Carl Stadelhofer................Director of Gasco since 2001; Partner of the law firm of 49
Rinderknecht Klein & Stadelhofer
Charles B. Crowell..............Director of Gasco since 2002 60
Richard S. Langdon..............Director of Gasco since 2003 52
Our Board of Directors has seven members who are elected annually. The following
sets forth certain biographical information concerning each of the Company's
directors and executive officers.
Marc Bruner. Mr. Bruner has served as the Chairman of the Board of Directors of
Gasco and as a member of Gasco's Executive Committee since February 2001. From
January 1996 to January 1999, Mr. Bruner was founding Chairman of the Board of
Ultra Petroleum, a Toronto Stock Exchange and American Stock Exchange listed
natural gas company. Ultra's business is focused on tight sand development in
the Green River Basin of Wyoming. In late 1997, Mr. Bruner co-founded Pennaco
Energy, Inc., a coal bed methane company. In 1996, Mr. Bruner co-founded RIS
Resources International, a natural gas company, and served as a Director until
late 1997.
Mark A. Erickson. Mr. Erickson has served as a Director, Chief Executive Officer
and President of Gasco since February 2001. Mr. Erickson served as President of
Pannonian Energy Inc. from mid-1999 until our merger with Pannonian Energy in
February 2001. In late 1997, Mr. Erickson co-founded Pennaco Energy, Inc., an
59
AMEX listed oil and gas company with properties in the Powder River basin of
Wyoming. He served as an officer and Director of Pennaco from its inception
until mid-1999. Mr. Erickson served as President of RIS Resources (USA), a
natural gas company from late 1997 to the end of 1998. Mr. Erickson is a
Registered Petroleum Engineer with 18 years of experience in business
development, finance, strategic planning, marketing, project management and
petroleum engineering. He holds a MS in Mineral Economics from the Colorado
School of Mines.
Michael K. Decker. Mr. Decker has served as Director, Executive Vice President
and Chief Operating Officer of Gasco since July 2001. From August 1999 until
July 2001, Mr. Decker founded and served as the President of Black Diamond
Energy, LLC. From 1990 to August 1999 Mr. Decker served as the Vice President of
Exploitation of Prima Energy Corporation, a Nasdaq traded oil and gas company.
Prima was recognized by the Denver Business Journal as the "top performing
Colorado based company of the 1990's," with a market return of 1857%. From 1988
to 1990, Mr. Decker was employed by Bonneville Fuels Corporation as a Senior
Geologist. From 1977 to 1988, Mr. Decker was employed by Tenneco Exploration and
Production Company as a Senior Project Geological Engineer. Mr. Decker has
twenty-six years of oil and gas prospecting, development, operations and mergers
and acquisitions experience. He holds a BS degree in Geological Engineering from
the Colorado School of Mines and is the Chairman of the Potential Gas Committee,
an independent natural gas resource assessment organization.
W. King Grant. Mr. Grant has served as Chief Financial Officer of Gasco since
July 2001 and as Director from July 2001 until March 2003. From November 1999 to
May 2001, Mr. Grant served as Executive Vice President and Chief Financial
Officer for KEH.com, a catalog/internet retailer of new and used camera
equipment. From February 1997 to March 1999, Mr. Grant was a Senior Vice
President in the Natural Resources Group of ING Baring, LLC where he was
responsible for providing financing and advisory services to mid-cap and smaller
energy companies. For the previous eleven years, Mr. Grant held several
positions at Chase Manhattan Bank and its affiliates, most recently as a Vice
President in the Oil & Gas group. Mr. Grant holds a BSE in Chemical Engineering
from Princeton University and an MBA from the Wharton School at the University
of Pennsylvania.
Carmen (Tony) Lotito. Mr. Lotito became the Chief Financial Officer, Treasurer
and a director of Galaxy Investments, Inc., a publicly traded gas and coalbed
methane exploration and development company upon its acquisition of Dolphin
Energy Corporation in November 2002. Mr. Lotito has served as the Chief
Financial Officer, Treasurer and a Director of Dolphin Energy Corporation since
September 2002. Mr. Lotito has served as a Director of Gasco and as the Chairman
of Gasco's Audit and Compensation Committee since April 2001. Mr. Lotito has
served as Vice President, Chief Financial Officer and a Director of Coriko
Corporation, a private business development company from November 2000 to May
2002. Mr. Lotito has been a member of Equistar Capital LLC, an investment
banking firm since December 1999. From March 2000 to the present, Mr. Lotito
serves as a Director for Impact Web Development. Prior to joining Coriko from
Utah Clay Technology, Inc., Mr. Lotito was self employed as a financial
consultant. In 1988, Mr. Lotito joined ConAgra, Inc., in San Antonio, Texas as a
brand manager. In 1966, Mr. Lotito joined the firm of Pannell, Kerr Forester &
Co. as a senior accountant in management and audit services for the company's
60
Los Angeles and San Diego, California offices. Mr. Lotito holds a BS degree in
Accounting from the University of Southern California.
Carl Stadelhofer. Mr. Stadelhofer has served as a Director since February 2001
and a member of the Audit Committee and the Compensation Committee of Gasco
since April 2001. Mr. Stadelhofer is a partner with the law firm of Rinderknecht
Klein & Stadelhofer in Zurich, Switzerland, where he has practiced law for over
twenty years. He was admitted to the practice of law in Switzerland in 1982. He
took his law degree in 1979 in Switzerland and studied law in the United States
at Harvard Law School and at Georgetown University Law School. His practice
specializes in banking and financing, mergers and acquisitions, investment funds
and international securities transactions.
Charles B. Crowell. Mr. Crowell has served as a director and a member of the
audit, compensation and executive committees of Gasco since July 2002. Since
1993, Mr. Crowell has been a practicing attorney and a consultant to oil and gas
companies, and was a senior member of Crowell & Bishop, PLLC, Attorneys from
November 1995 through June 1998. From September, 1996 until June 2000, Mr.
Crowell held the position of Manager at Enigma Engineering Company, LLC. Mr.
Crowell also worked at Triton Energy Corporation where he held the positions of
Executive Vice President, Administration from November 1991 to May 1993, Senior
Vice President and General Counsel from August 1989 to October 1991 and Vice
President and General Counsel from November 1981 to July 1989. From June 1999 to
February 2001, Mr. Crowell served as a director of Comanche Energy, Inc. He has
also held public directorships at Arakis Energy Corporation from June 1997 to
October 1998, at Aero Services International, Inc. from December 1989 to May
1993 (where he was Chairman of the Board from August 1990 to December 1992) and
at Triton Europe, plc. from October 1989 to May 1993. Mr. Crowell holds a BA
degree from John Hopkins and a JD from University of Arkansas. He was admitted
to the practice of law in Texas in 1974.
Richard S. Langdon. Mr. Langdon became a Director of Gasco and a member of the
audit committee in March 2003. From 1997 until December 2002, Mr. Langdon served
as Executive Vice President and Chief Financial Officer of EEX Corporation, a
NYSE-listed exploration and production company that was acquired by Newfield
Exploration in late 2002. Before joining EEX Corporation, Mr. Langdon was an oil
and gas consultant from August 1996 to March 1997. Prior to that, he held
various positions with the Pennzoil Companies since 1991, including Executive
Vice President--International Marketing--Pennzoil Products Company, from June
1996 to August 1996; Senior Vice President--Business Development & Shared
Services--Pennzoil Company from January 1996 to June 1996; and Senior Vice
President--Commercial & Control--Pennzoil Exploration & Production Company from
December 1991 to December 1995. Mr. Langdon holds a B.S. in Mechanical
Engineering and a Masters of Business Administration, both from the University
of Texas at Austin.
Committees of the Board of Directors
The Board of Directors of Gasco has formed an Executive Committee and an Audit
Committee and a Compensation Committee. The Executive Committee currently
consists of Messrs. Bruner Erickson and Crowell. The Audit Committee currently
consists of Messrs. Lotito, Stadelhofer, Langdon and Crowell. The Compensation
61
Committee currently consists of Messrs. Lotito, Stadelhofer and Crowell. The
report of the Compensation Committee with regard to compensation matters is set
forth under Item 11.
Section 16 (A) Beneficial Ownership Reporting Requirements
Section 16 (a) of the Securities Exchange Act of 1934 requires the officers,
directors and persons who own more than ten percent of the Company's stock, to
file reports of ownership and changes in ownership with the Securities Exchange
Commission ("SEC"). Officers, directors and greater than ten percent owners are
required by SEC regulations to furnish the Company with copies of all Section 16
(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that each of its officers, directors and greater than ten
percent owners complied with all Section 16 (a) filing requirements applicable
to them during the year ended December 31, 2002, except for the following:
Carmen(Tony)Lotito Form 4, dated 9/9/02 filed late
Marc Bruner Form 4, dated 12/2001 filed late
Mark Erickson Form 4, dated 2/2002 filed late
Charles Crowell Form 4, dated 7/16/02 filed late
62
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our President and Chief
Executive Officer and each of our next highly compensated executive officers and
other officer for services rendered during the years ended December 31, 2002,
2001 and 2000.
Long Term
Annual Compensation Compensation
Securities
Underlying
Options/ All Other
Name & Principal Position Year Salary Bonus SARs (#) Compensation (1)
- ------------------------- ---- ------ ----- --------- ------------
Mark A. Erickson (2) 2002 $ 240,000 $ 7,335
President 2001 220,000 2,160,000 1,080
Chief Executive Officer 2000 $125,000 (2)
W. King Grant 2002 $ 262,002 $ 7,011
Executive Vice President 155,780 437,000 2,220
2001
Chief Financial Officer
Michael K. Decker 2002 $ 200,000 $ 6,135
Executive Vice President 2001 72,000 414,000 1,080
Chief Operations Officer
Howard O. Sharpe 2002 $ 116,178 $ 150,000 250,000 $ 3,437
Vice President (3) 2001 96,000 750,000 720
2000 100,000
- ----------------------
(1) Amount represents the employer contribution to the 401(k) plan of the
individual.
(2) Includes amounts paid to the individual by Pannonian Energy
Corporation prior to the merger of Pannonian into a subsidiary of
Gasco.
(3) Mr. Sharpe, who is not an executive officer, retired from the Company
effective December 31, 2002, at which time; all of his outstanding
options were cancelled.
63
The following table sets forth information with respect to all stock options
granted during the year ended December 31, 2002 to the named Executive Officers
and other officer.
Option/SAR Grants in Last Fiscal Year
Potential Realized
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term (1)
----------------- ------------
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARs Employees in Price Expiration 5% 10%
Name Granted Fiscal Year ($/Share) Date (2) Share Price Share Price
---- -------- ----------- --------- ---- ----------- -----------
Howard O. Sharpe 250,000 50 1.95 12/31/02 $20,000 $40,000
(1) Securities and Exchange Commission Rules require calculation of
potential realizable value assuming that the market price of the
Common Stock appreciates in value at 5% and 10% annualized rates from
the date of grant to the expiration date of the option. No gain to an
executive officer is possible without an appreciation in Common Stock
value, which will benefit all holders of Common Stock. The actual
value an executive officer may receive depends on market prices for
the Common Stock, and there can be no assurance that the amounts
reflected will actually be realized.
(2) The options granted to Mr. Sharpe during 2002 were cancelled effective
December 31, 2002, in connection with his retirement.
No options were exercised by executive officers or other officer during either
of the years ended December 31, 2002 or 2001. The following table sets forth the
value of options held by the executive officers at December 31, 2002. All of the
options granted to Mr. Sharpe during the years ended December 31, 2002 and 2001
were cancelled effective December 31, 2002.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs at In-the-Money Options/SARs at
FY-End (#) FY-End ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ---- -------------------------- ----------------------------
Mark A. Erickson 2,097,500/62,500 0/0
W. King Grant 387,000/50,000 0/0
Michael K. Decker 339,000/75,000 0/0
(1) The value of in-the-money options is equal to the fair market value of
a share of Common Stock on December 31, 2002 of $0.69, less the
exercise price.
64
Compensation of Directors
During 2002, each director of the Company who was not a full-time employee was
paid a monthly director's fee of $2,500. In addition, each director was
reimbursed for reasonable travel expenses incurred in connection with such
director's attendance at Board of Directors and Committee meetings. For 2003,
each director of the Company who is not a full-time employee will receive a
monthly director's fee of $2,500.
Employment Agreements
Michael K. Decker Employment Agreement. Mr. Decker's 2002 and 2001
compensation was determined under the terms of an employment agreement,
effective July 1, 2001, between Gasco and Mr. Decker that expired on June 30,
2004. Mr. Decker's employment agreement was amended and restated effective
January 2, 2003 and is effective until January 31, 2006. Mr. Decker serves as
Chief Operating Officer and Executive Vice President of Gasco. Mr. Decker's
previous employment agreement entitled him to an annual salary of $200,000,
subject to increase at the discretion of the Board of Directors, and an annual
bonus equal to 0.75% of Gasco's cash flow from wells drilled by or on behalf of
the Company. The original employment agreement provided for the award to Mr.
Decker of options to purchase 300,000 shares of common stock of the Company
pursuant to the terms of the Company's Stock and Option and Incentive Award Plan
at an exercise price of $3.15 per share. Options to purchase 100,000 shares
vested upon the execution of the agreement and the remaining options vest in
equal amounts over the following eight fiscal quarters. Mr. Decker's amended and
restated employment agreement reduced his annual salary to $175,000 and provided
for the award of options to purchase 350,000 shares of common stock at $1.00 per
share. The options vest 16 2/3% at the end of each four month period after the
issuance date, February 14, 2003, until they are fully vested on February 14,
2005. Mr. Decker is also entitled to receive 10% of all option grants made by
the Company each calendar year during the term of the agreement. In addition,
the employment agreement provides that each year Mr. Decker and the Company
shall mutually agree on a performance-based bonus plan for Mr. Decker.The
employment agreement also contains non-compete provisions in the event of Mr.
Decker's termination of employment.
Mr. Decker's employment agreement also includes provisions governing the payment
of severance benefits if his employment is terminated for any other reason other
than his voluntary resignation, death, disability or discharge for cause. In the
event that Mr. Decker's employment is terminated by the Company without cause or
due to certain change of control events, Mr. Decker is entitled to receive an
amount equal to his salary for the remaining term of the agreementplus an
additional cash payment of $250,000. If the termination occurs at anytime when
the average closing price for the Company's common stock for the 30 trading days
prior to termination is equal to between $1.50 per share and $1.99 per share,
the additional cash payment will increase to $500,000. This payment will be
further increased as such average closing price increases, up to a maximum of
$1,750,000 if such average closing price is greater than $3.50 per share. If the
termination is because of a change of control of the Company, the additional
cash payment will be based on the consideration per share paid to the Company's
shareholders in connection with the change of control instead of the market
price of the Company's common stock.
65
Mark A. Erickson Employment Agreement. Mr. Erickson's 2002 and 2001
compensation was determined under the terms of an employment agreement,
effective February 1, 2001, between Gasco and Mr. Erickson that expired on
January 31, 2006. Mr. Erickson's employment agreement was amended and restated
effective January 2, 2003 and is effective until January 31, 2006. Mr. Erickson
serves as Chief Executive Officer and President of Gasco. Mr. Erickson's
employment agreement entitled him to an annual salary of $240,000, subject to
increase at the discretion of the Board of Directors, and an annual bonus equal
to 0.875% of Gasco's cash flow from wells drilled by or on behalf of the
Company. The original employment agreement provided for the award to Mr.
Erickson of options to purchase 1,000,000 shares of common stock of the Company
pursuant to the terms of the Company's Stock and Option and Incentive Award Plan
at an exercise price of $1.00 per share and options to purchase 250,000 shares
of common stock of the Company pursuant to such plan at an exercise price of
$2.50 per share. Options to purchase 1,000,000 shares have vested and the
remaining options vest in equal amounts over the eight fiscal quarters following
the effective date of the agreement. Mr. Erickson's amended and restated
employment agreement reduced his annual salary to $120,000 and provides for the
issuance of 187,500 shares of common stock from a restricted stock plan in
exchange for the surrender by Mr. Erickson of vested options to purchase 250,000
shares of common stock at $3.00 per share and 875,000 shares of common stock at
$2.00 per share. Mr. Erickson also has the right to receive 25% of all option
grants made by the Company each calendar year during the term of the agreement.
In addition, the employment agreement provides that each year Mr. Erickson and
the Company shall mutually agree on a performance-based bonus plan for Mr.
Erickson.. The employment agreement also contains non-compete provisions in the
event of Mr. Erickson's termination of employment.
Mr. Erickson's employment agreement also includes provisions governing the
payment of severance benefits if his employment is terminated for any other
reason other than his voluntary resignation, death, disability or discharge for
cause. In the event that Mr. Erickson's employment is terminated by the Company
without cause or due to certain change of control events, Mr. Erickson is
entitled to receive an amount equal to his salary for the remaining term of the
agreement plus an additional cash payment of $500,000. If the termination occurs
at anytime when the average closing price for the Company's common stock for the
30 trading days prior to termination is equal to between $1.50 per share and
$1.99 per share, the additional cash payment will increase to $1,000,000. This
payment will be further increased as such average closing price increases, up to
a maximum of $3,500,000 if such average closing price is greater than $3.50 per
share. If the termination is because of a change of control of the Company, the
additional cash payment will be based on the consideration per share paid to the
Company's shareholders in connection with the change of control instead of the
market price of the Company's common stock.
W. King Grant III Employment Agreement. Mr. Grant's 2002 and 2001
compensation was determined under the terms of an employment agreement,
effective June 1, 2001, between Gasco and Mr. Grant that expired on May 31,
2004. Mr. Grant's employment agreement was amended and restated effective
January 2, 2003 and is effective until January 31, 2006. Mr. Grant serves as
Chief Financial Officer and Executive Vice President of Gasco. Mr. Grant's
employment agreement entitled him to an annual salary of $120,000, subject to
increase at the discretion of the Board of Directors, and an annual bonus equal
66
to 0.5% of Gasco's cash flow from wells drilled by or on behalf of the Company.
The employment agreement provides for the award to Mr. Grant of options to
purchase 200,000 shares of common stock of the Company pursuant to the terms of
the Company's Stock and Option and Incentive Award Plan at an exercise price of
$3.00 per share and options to purchase 100,000 shares of common stock of the
Company pursuant to such plan at an exercise price of $3.15. Options to purchase
100,000 shares at an exercise price of $3.00 per share vested upon the execution
of the agreement and the remaining options vest in equal amounts over the
following eight fiscal quarters. Mr. Grant's amended and restated employment
agreement reduced his annual salary to $175,000 and provided for the award of
options to purchase 200,000 shares of common stock at $1.00 per share. The
options vest 16 2/3% at the end of each four month period after the issuance
date, February 14, 2003, until they are fully vested on February 14, 2005. Mr.
Grant is also entitled to receive 10% of all option grants made by the Company
each calendar year during the term of the agreement. In addition, the employment
agreement provides that each year Mr. Grant and the Company shall mutually agree
on a performance-based bonus plan for Mr. Grant.The employment agreement also
contains non-compete provisions in the event of Mr. Grant's termination of
employment.
Mr. Grant's employment agreement also includes provisions governing the payment
of severance benefits if his employment is terminated for any other reason other
than his voluntary resignation, death, disability or discharge for cause. In the
event that Mr. Grant's employment is terminated by the Company without cause or
due to certain change of control events, Mr. Grant is entitled to receive an
amount equal to his salary for the remaining term of the agreement plus an
additional cash payment of $250,000. If the termination occurs at anytime when
the average closing price for the Company's common stock for the 30 trading days
prior to termination is equal to between $1.50 per share and $1.99 per share,
the additional cash payment will increase to $500,000. This payment will be
further increased as such average closing price increases, up to a maximum of
$1,750,000 if such average closing price is greater than $3.50 per share. If the
termination is because of a change of control of the Company, the additional
cash payment will be based on the consideration per share paid to the Company's
shareholders in connection with the change of control instead of the market
price of the Company's common stock.
Anti-Dilution Provisions of Employment Agreements and Consulting Agreement
Each of the above original Employment Agreements for Messrs. Decker, Erickson
and Grant and the Strategic Consulting Agreement for Mr. Bruner described under
"Item 13 - Certain Relationships and Related Transactions" contained the
following described anti-dilution provision during the year 2002. Upon the
completion of any subsequent transaction involving the issuance of common stock
of the Company, or the issuance of any security which is convertible, by its
terms into common stock of the Company (a "Financing"), the Company shall grant
the person additional options to purchase shares of the Company's common stock
at the same per share price as that involved in the Financing. The number of
options granted to the person shall be sufficient to maintain his ownership
interest in the Company (the ratio of (a) the sum of the number of his
unexercised options (both vested and unvested) plus the number of shares owned
by him as result of exercising options to (b) the total number of outstanding
shares of the Company's common stock plus the number of shares represented by
all unexercised options) at the level that existed immediately prior to such
Financing. Messrs. Decker, Erickson, Grant and Bruner waived their rights under
67
this anti-dilution provision with respect to (1) the issuance by the Company of
9,500,000 shares of common stock to Shama Zoe on May 1, 2002, and (2) the
issuance by the Company of 6,500,000 shares of common stock for cash in a
private placement on August 14, 2002. The amended and restated employment
agreements that became effective January 2, 2003 as described above, do not
contain any anti-dilution provisions.
Compensation Committee Interlocks and Insider Participation
During 2002, the Compensation Committee of the Board was comprised of three
directors, Mr. Lotito, Mr. Crowell and Mr. Stadelhofer. None of these directors
is or was an officer of the Company or any of its subsidiaries at any time now
or in the past.
Report of the Compensation Committee of the Company
The Compensation Committee ("Committee") of the Board of Directors is
responsible for setting and administering the policies that govern the annual
compensation and the long-term compensation for the Company's executive
officers. The Committee is currently composed of Mr. Lotito, Mr. Crowell and Mr.
Stadelhofer, neither of whom is employed by the Company or any of its
subsidiaries. The Committee makes all decisions concerning the compensation of
executive officers who receive annual compensation in excess of $100,000,
determines the total amount of bonuses, if any, to be paid and grants all awards
of stock options. The Committee's compensation practices are designed to
attract, motivate and retain key personnel by recognizing individual
contributions, as well as the overall performance of the Company.
The current executive compensation consists of base salary, potential cash bonus
awards and long-term incentive opportunities in the form of stock options.
Although the Committee has not adopted a formal compensation plan, executive
compensation is reviewed by the Committee and is set for individual executive
officers based on subjective evaluations of each individual's performance, the
Company's performance, and a comparison to salary ranges for similar positions
in other companies within the oil and gas industry. The goal of the Committee is
to ensure that the Company retains qualified executives and whose financial
interests are aligned with those of the shareholders.
Base Salaries: The base salary for each executive officer is determined based on
the individual's performance, industry experience and the compensation levels of
industry competitors. The Committee reviews various surveys and publicly filed
documents to determine comparable salary levels within the industry.
Potential Cash Bonus Awards: The Committee does not currently have a formal cash
bonus plan. Cash bonuses may be awarded from time to time for exceptional effort
and performance. The Committee considers the achievements of the Company to
determine the level of the cash bonus, if any, to be awarded. The Committee
focuses the earnings of the Company, the return on stockholders' equity, the
growth in proved oil and gas reserves and the successful completion of specific
projects of the Company to determine the level of bonus awards, if any.
68
Stock Options: The Committee utilizes stock option awards as a method of
aligning the executives' interests with those of the stockholders by giving the
key employees a direct stake in the performance of the Company. The Committee
uses the same criteria described above to determine the level of stock option
awards. During 2001, 3,011,000 common stock options were granted to the
Company's executive officers. There were no common stock options granted to the
executive officers during the year ended December 31, 2002.
Compensation of the Chief Executive Officer: During the year ended December 31,
2002, Mark Erickson, President and Chief Executive Officer received total
compensation of $247,335 which is comprised of an annual salary of $240,000,
which Mr. Erickson is entitled to under his employment agreement, and deferred
compensation pursuant to the Company's 401(k) plan of $7,335. The Committee
considered the factors described above to determine that the compensation paid
to Mr. Erickson during 2002 was appropriate.
The foregoing report is made by the Compensation Committee of the Company's
Board of Directors. The members of the Committee during 2002 were Mr. Lotito,
Mr. Crowell and Mr. Stadelhofer.
CARMEN LOTITO
CHARLES B. CROWELL
CARL STADELHOFER
Performance Chart
The following chart shows the changes in the value of $100, over the period of
January, 2001, when the Company began trading, until December 31, 2002, invested
in: (1) Gasco Energy, Inc.; (2) the NASDAQ Market Index; and (3) a peer group
consisting of all the publicly-held companies within SIC code 1311, Crude
Petroleum and Natural Gas, consisting of approximately 190 companies. The
year-end value of each investment is based on share price appreciation and
assumes that $100 was invested on January 1, 2000 and that all dividends were
reinvested. Calculations exclude trading commissions and taxes. The comparison
of past performance in the graph is required by the SEC and is not intended to
forecast or be indicative of possible future performance of the Company's Common
Stock.
January 1, December 31, December 31,
2001 2001 2002
---- ---- ----
Gasco Energy, Inc. $100.00 $46.30 $ 18.25
Peer Group Index 100.00 104.72 104.72
NASDAQ Market Index 100.00 73.86 73.86
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table shows information with respect to the beneficial ownership
of the Company's common stock as of March 15, 2003 by: any individual,
partnership or corporation that is known to the Company, solely by reason of its
examination of Schedule 13D and 13G filings made with the SEC, to be the
beneficial owner of more than 5% of each class of shares issued and outstanding
69
and each executive officer, director and all executives, officers and directors
as a group. As of March 15, 2003, the Company had 40,288,800 shares of common
stock issued and outstanding and 11,052 shares of Series B Convertible Preferred
stock issued and outstanding. If a person or entity listed in the following
table is the beneficial owner of less than one percent of the Company's common
stock outstanding, this fact is indicated by an asterisk in the table. Unless
otherwise noted, each person listed has sole voting and dispositive power over
the shares indicated, and the address of each stockholder is the same as the
Company's address. The number of shares beneficially owned by a person includes
the common shares that are issuable upon conversion of the Series B Convertible
Preferred Stock. These shares are deemed outstanding for the purpose of
computing their percentage ownership but are not outstanding for the purposes of
computing the percentage ownership of any other person. The number of shares
beneficially owned by a person also includes shares that are subject to stock
options or warrants that are exercisable within 60 days of March 15, 2003. These
shares are also deemed outstanding for the purpose of computing their percentage
ownership. These shares are not outstanding for the purpose of computing the
percentage ownership of any other person.
Number of Shares
Name Beneficially Owned Percent of Class
5% or Greater Holders
Shama Zoe Limited Partnership Common 8,100,000 20.1%
7128 South Poplar Lane
Englewood, Colorado 80112
Richard C. McKenzie, Jr. (2) (6) Common 9,504,636 21.3%
114 John Street Preferred 6,818 61.7%
Greenwich, Connecticut 06831
Wellington Management Company, LLP (1) Common 3,000,000 7.5%
75 State Street
Boston, Massachusetts 02109
Directors and Executive Officers
Marc Bruner (3) (4) Common 4,072,834 9.9%
Mark A. Erickson (3) (5) (6) Common 3,427,908 8.3%
Preferred 200 1.8%
Michael K. Decker (3) (6) Common 488,900 1.2%
Preferred 100 *
W. King Grant (3) (6) Common 704,900 1.7%
Preferred 100 *
Carmen (Tony) Lotito (3) Common 394,250 1.0%
Carl Stadelhofer (3) Common 50,000 *
70
Charles B. Crowell (6) Common 125,800 *
Preferred 200 1.8%
Richard S. Langdon (6) Common 62,900 *
Preferred 100 *
All Directors and Executive Officers as a Group (8 Common 9,327,492 21.3%
persons) (3) (4) (5) (6) Preferred 700 6.3%
- ---------------
(1) Wellington Management Company, LLP act as advisor to and has the
power to vote share owned by J. Caird Partners, L.P., which owns
1,800,000 shares of the Company's common stock, and J. Caird
Investors (Bermuda) L.P., which owns 1,200,000 shares of the
Company's common stock. Wellington Management is considered a
beneficial owner of the shares set forth in the table solely by
reason of its voting power.
(2) Includes 15,000 shares of the Company's common stock directly held
by Mr. McKenzie's wife, Margaret Byrne McKenzie, 440,500 shares of
the Company's common stock directly held by Mr. and Mrs. McKenzie
as trustees for the Charitable Lead Annuity Trust 2000, 159,100
shares of the Company's common stock directly held by Mr. and Mrs.
McKenzie as trustees for the Charitable Lead Annuity Trust 2001
and 10,000 shares of the Company's common stock directly held by
Seven Bridges Foundation, a charitable foundation of which Mr.
McKenzie is the controlling member.
(3) The following number of shares of common stock issuable upon the
exercise of options that are exercisable within 60 days of March
15, 2003 are included in the amounts shown: Mr. Bruner, 1,025,000
shares; Mr. Erickson, 1,025,000 shares; Mr. Decker, 389,000
shares; Mr. Grant, 412,000 shares; Mr. Lotito, 93,700 shares; and
Mr. Stadelhofer, 50,000 shares. Mr. Lotito shares voting and
investment power with respect to 130,000 of the common shares
listed as held by him with Equistar Capital, a company in which he
is a member.
(4) The common stock held by Mr. Bruner includes 8,707 shares of
common stock that is held by Resource Venture Management, which
is a company owned by Mr. Bruner.
(5) The common stock held by Mr. Erickson includes 56,084 shares of
common stock owned by his wife as custodian for their children.
(6) The following number of shares of common stock issuable upon the
conversion of the Series B Convertible Preferred stock are
included in the amounts shown: Mr. McKenzie, 4,288,636 shares;
Mr. Erickson, 125,800 shares; Mr. Decker, 62,900 shares; Mr.
Grant, 62,900 shares; Mr. Crowell, 125,800 shares and Mr.
Langdon, 62,900 shares.
71
Equity Compensation Plans
The table below provides information relating to the Company's equity
compensation plans as of December 31, 2002:
Number of securities
remaining available
Number of securities Weighted-average for future issuance
to be issued exercise price of under compensation
upon exercise of outsanding plans (excluding
outstanding options, options, securities reflected
Plan Category warrants and rights warrants and rights in first column)
- ------------- ------------------- ------------------- ----------------
Equity compensation plans
approved by security holders 258,000 $ 1.66 918,900
Equity compensation plans
not approved by security holders 6,097,250 2.19 (a)
--------- --------- --------
Total 6,355,250 $ 2.17 918,900
========= ==== =======
(a) The equity compensation plan not approved by shareholders is comprised of
individual common stock option agreements issued to directors, consultants
and employees of the Company, as summarized below. The common stock options
vest between zero and two years of the date of issue and expire within ten
years of the vesting date. The exercise prices of these options range from
$1.00 per share to $3.70 per share. Since these options are issued in
individual compensation arrangements, there are no options available under
any plan for future issuance. The material terms of these options are as
follows:
Options Issued to: Number of Options Exercise Price Vesting Dates Expiration Dates
Employees 5,674,750 $1.00 - $3.15 2001 - 2003 2006 - 2008
Consultants 272,500 $3.00 - $3.70 2001 - 2003 2006 - 2008
Directors 150,000 $3.00 - $3.15 2001 - 2003 2006 - 2008
---------
Total Issued 6,097 250
=========
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Marc A. Bruner Strategic Consulting Agreement The Company has entered into a
Strategic Consulting Agreement with Mr. Bruner, effective January 2, 2003, that
expires on January 31, 2006. The Consulting Agreement was amended and restated
effective January 2, 2003. The amended and restated agreement entitles Mr.
Bruner to an annual fee of $120,000 and an annual bonus payment equal to 0.875%
of Gasco's cash flow from wells drilled by or on behalf of the Company. The
agreement provides for the award to Mr. Bruner of 187,500 shares of common stock
of the Company from a restricted stock plan in exchange for the surrender by Mr.
Bruner of vested options to purchase 150,000 shares of common stock at $3.15 per
72
share, 50,000 shares of common stock at $3.00 per share and 925,000 shares of
common stock at $2.00 per share. Mr. Bruner also has the right to receive 25% of
all option grants made by the Company each calendar year during the term of the
agreement. In addition, the employment agreement provides that each year Mr.
Bruner and the Company shall mutually agree on a performance-based bonus plan
for Mr. Bruner. The employment agreement also contains non-compete provisions in
the event of the termination of the agreement.
Mr. Bruner's agreement also provides for certain payments in the event that the
agreement is terminated for any reason other than his voluntary termination,
death, disability or termination for cause. In the event that Mr. Bruner's
agreement is terminated by the Company without cause or due to certain change of
control events, Mr. Bruner is entitled to receive an amount equal to his annual
fee for the remaining term of the agreement plus an additional cash payment of
$500,000. If the termination occurs at anytime when the average closing price
for the Company's common stock for the 30 trading days prior to termination is
equal to between $1.50 per share and $1.99 per share, the additional cash
payment will increase to $1,000,000. This payment will be further increased as
such average closing price increases, up to a maximum of $3,500,000 if such
average closing price is greater than $3.50 per share. If the termination is
because of a change of control of the Company, the additional cash payment will
be based on the consideration per share paid to the Company's shareholders in
connection with the change of control instead of the market price of the
Company's common stock.
Other Transactions
Mr. Lotito earned consulting fees of $16,000, $52,000 and $50,000 from the
Company during the years ended December 31, 2002, 2001 and 2000, respectively.
During both of the years ended December 2002 and 2001, the Company paid $240,000
in consulting fees to a company owned by Mr. Bruner pursuant to the Strategic
Consulting Agreement described above. During January 2003, the future annual
fees that will be paid to Mr. Bruner's company were reduced to $120,000 per year
and are committed through January 31, 2006.
Mr. Decker earned a $28,000 fee and 12,500 shares of Gasco's common stock for
consulting services provided in connection with a property acquisition in 2001.
Mr. Decker was also paid $22,879 in other consulting fees prior to his
appointment as an officer of the Company.
The Company's management believes that the above transactions and services were
provided in the normal course of business with terms that could be obtained from
non-related sources.
During the year ended December 31, 2002, the Company paid $110,266 in consulting
fees to an unrelated third party. The obligation to pay these fees was a joint
and several liability of Gasco and a Company of which Mr. Lotito and Mr. Bruner
have a combined 66.67% ownership.
ITEM 14 - 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
73
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.
ITEM 15 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
INDEX TO EXHIBITS
2.1 Agreement and Plan of Reorganization dated January 31, 2001 among San
Joaquin Resources Inc., Nampa Oil & Gas, Ltd., and Pannonian Energy, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated
January 31, 2001, filed on February 2, 2001).
2.2 Agreement and Plan of Reorganization dated December 15, 1999 by and between
LEK International, Inc. and San Joaquin Oil & Gas Ltd. (incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K dated December 31, 1999,
filed on January 21, 2000).
2.3 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).
2.4 Purchase Agreement dated as of July 16, 2002, among Gasco, Pannonian Energy
Inc., San Joaquin Oil & Gas Ltd., Brek, Brek Petroleum Inc., Brek Petroleum
(California), Inc. and certain stockholders of Gasco. (incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K dated July 16, 2002,
filed on July 31, 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).
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 Exhibit3.5 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 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).
10.1 Financing Agreement dated January 12, 2001 between the Company and Wet
Coast Management Corp. (incorporated by reference to Exhibit 10.5 to the
Company's Form 10-KSB for the fiscal year ended December 31, 2000, filed on
March 29, 2001).
74
10.2 Consulting Agreement dated January 12, 2001 between the Company and Wet
Coast Management Corp. (incorporated by reference to Exhibit 10.6 to the
Company's Form 10-KSB for the fiscal year ended December 31, 2000, filed on
March 29, 2001).
10.3 Acquisition Agreement dated December 18, 2000 between Phillips Petroleum
Company and Pannonian Energy, Inc. (incorporated by reference to Exhibit
10.7 to the Company's Form 10-KSB for the fiscal year ended December 31,
2000, filed on March 29, 2001).
10.4 Financing Agreement dated March 15, 2001 between the Company and Canaccord
International Ltd. (incorporated by reference to Exhibit 10.8 to the
Company's Form 10-KSB for the fiscal year ended December 31, 2000, filed on
March 29, 2001).
10.5 Financial Services Agreement dated March 15, 2001 between the Company and
Canaccord International Ltd. (incorporated by reference to Exhibit 10.9 to
the Company's Form 10-KSB for the fiscal year ended December 31, 2000,
filed on March 29, 2001).
10.6 Private Placement Agency Agreement dated as of March 22, 2001 between the
Company and Canaccord International Ltd. (incorporated by reference to
Exhibit 10.6 to the Company's Form 10-QSB for the quarter ended June 30,
2001, filed on August 20, 2001).
#10.7Form of Stock Option Agreement under the 1999 Stock Option Plan
(incorporated by reference to Exhibit 10.8 to the Company's Form 10-K for
the fiscal year ended December 31, 2001, filed on March 29, 2002).
#10.8Stock Option Agreement dated January 2, 2001 between Gasco and Mark A.
Erickson (Filed as Exhibit 10.9 to the Company's Form 10-K for the fiscal
year ended December 31, 2001, filed on March 29, 2002).
#10.9Form of Stock Option Agreement dated February 8, 2001 between Gasco and
each of Mark A. Erickson, Marc Bruner, J. Timothy Bowes, Carl Stadelhofer
and Howard O. Sharpe (Filed as Exhibit 10.10 to the Company's Form 10-K for
the fiscal year ended December 31, 2001, filed on March 29, 2002).
*#10.10 W. King Grant Amended and Restated Employment Contract dated February
14, 2003
*#10.11 Michael Decker Amended and Restated Employment Contract dated February
14, 2003
*#10.12 Mark A. Erickson Amended and Restated Employment Contract dated February
14, 2003
*#10.13 Amended and Restated Consulting Agreement dated February 14, 2003,
between Gasco and Marc Bruner
10.14Muddy Creek Exploration Agreement dated August 15, 2001, between Gasco,
Shama Zoe Limited Partnership and Burlington Oil and Gas Company (Filed as
Exhibit 10.15 to the Company's Form 10-K for the fiscal year ended December
31, 2001, filed on March 29, 2002).
10.15CD Exploration Agreement dated August 15, 2001, between Gasco, Shama Zoe
Limited Partnership and Burlington Oil and Gas Company (Filed as Exhibit
10.16 to the Company's Form 10-K for the fiscal year ended December 31,
2001, filed on March 29, 2002).
10.16Gamma Ray Exploration Agreement dated August 15, 2001, between Gasco,
Shama Zoe Limited Partnership and Burlington Oil and Gas Company (Filed as
Exhibit 10.17 to the Company's Form 10-K for the fiscal year ended December
31, 2001, filed on March 29, 2002).
10.17Sublette County, WY AMI Agreement dated August 22, 2001 between Gasco,
Alpine Gas Company and Burlington Oil and Gas Company (Filed as Exhibit
10.18 to the Company's Form 10-K for the fiscal year ended December 31,
2001, filed on March 29, 2002).
75
10.18Lead Contractor Agreement dated January 24, 2002, between Gasco and
Halliburton Energy Services, Inc. (Filed as Exhibit 10.19 to the Company's
Form 10-K for the fiscal year ended December 31, 2001, filed on March 29,
2002).
10.19Property Purchase Agreement, dated as of April 23, 2002, between the
Company and Shama Zoe Limited Partnership (Filed as Exhibit 2.1 to the
Company's Form 8-K dated May 1, 2002, filed on May 9, 2002).
10.20Purchase Agreement, dated as of July 16, 2002, among the Company,
Pannonian Energy Inc., San Joaquin Oil & Gas Ltd., Brek Energy Corporation,
Brek Petroleum Inc., Brek Petroleum (California), Inc. and certain
stockholders (Filed as Exhibit 2.1 to the Company's Form 8-K dated July 16,
2002, filed on July 31, 2002).
10.21Form of Subscription and Registration Rights Agreement, dated as of August
14, 2002 between the Company and certain investors. (Filed as Exhibit 10.21
to the Company's Form S-1 dated November 15, 2002, filed on November 15,
2002)
10.22Amendment No. 1 to Property Purchase Agreement dated as of August 9, 2002
between the Company and Shama Zoe Limited Partnership. (Filed as Exhibit
10.21 to the Company's Form S-1 dated November 15, 2002, filed on November
15, 2002)
10.23Financial Advisory Services Agreement dated August 22, 2002, between the
Company and Energy Capital Solutions LLC. (Filed as Exhibit 10.21 to the
Company's Form S-1 dated November 15, 2002, filed on November 15, 2002)
*99.1Certification of Chief Executive Officer of Gasco Energy, Inc. Pursuant to
18 U.S.C.ss.1350
*99.2Certification of Chief Financial Officer of Gasco Energy, Inc. Pursuant to
18 U.S.C.ss.1350
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
last quarter during the period covered by this report.
76
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GASCO ENERGY, INC. Dated: March 27, 2003
By /s/ Mark Erickson
---------------------------
Mark Erickson, President and CEO
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ Mark Erickson Director and President March 27, 2003
- -------------------- Chief Executive Officer
Mark Erickson
/s/ Marc Bruner Director March 27, 2003
- --------------------
Marc Bruner
/s/ Carl Stadelhofer Director March 27, 2003
- --------------------
Carl Stadelhofer
/s/ Carmen Lotito Director March 27, 2003
- --------------------
Carmen Lotito
/s/ Michael Decker Director and Executive Vice President March 27, 2003
- -------------------- Chief Operating Officer
Michael Decker
/s/ W. King Grant Executive Vice President March 27, 2003
- -------------------- Principal Financial and Accounting Officer
W. King Grant
/s/ Charles Crowell Director March 27, 2003
- --------------------
Charles Crowell
/s/ Richard Langdon Director March 27, 2003
- --------------------
Richard Langdon
77
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Mark A. Erickson, Chief Executive Officer of Gasco Energy, Inc., certify
that:
1. I have reviewed this annual report on Form 10-K of Gasco Energy, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual
report (the Evaluation Date); and (c) presented in this annual
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
annual 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: March 27, 2003 /s/ Mark A. Erickson
-------------- ---------------------
Mark A. Erickson, President and
Chief Executive Officer
78
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, W. King Grant, Chief Financial Officer of Gasco Energy, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Gasco Energy, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual
report (the Evaluation Date); and (c) presented in this annual
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 annual 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: March 27, 2003 /s/ W. King Grant
-------------- ------------------
W. King Grant, ExecutiveVice President and
Chief Financial Officer
79