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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE
ACT
Commission file number 0-26321
GASCO ENERGY, INC.
(Exact name of registrant issuer as specified in its charter)
Nevada 98-0204105
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14 Inverness Drive East, Suite H-236, Englewood, Colorado 80112
(Address of principal executive offices)
(303) 483-0044
(Issuer's telephone number)
No Change
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was require to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act). Yes [ ] No [X]
Number of Common shares outstanding as of August 13, 2003: 40,288,800
1
ITEM I - FINANCIAL INFORMATION
PART 1 - FINANCIAL STATEMENTS
GASCO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2003 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,442,252 $ 2,089,062
Restricted cash 250,000 250,000
Prepaid expenses 308,666 198,491
Accounts receivable 235,576 96,144
--------- ---------
Total 2,236,494 2,633,697
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Well in progress - 1,138,571
Proved mineral interests 13,352,085 10,283,488
Unproved mineral interests 14,499,568 13,984,536
Furniture, fixtures and other 165,379 162,787
---------- ----------
Total 28,017,032 25,569,382
---------- ----------
Less accumulated depreciation, depletion,
amortization and property impairment (958,442) (697,578)
---------- ----------
Total 27,058,590 24,871,804
---------- ----------
TOTAL ASSETS $ 29,295,084 $ 27,505,501
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,142,453 $ 1,910,974
Accrued expenses 2,388,443 2,180,262
Note payable - 1,400,000
---------- ---------
Total 3,530,896 5,491,236
---------- ---------
NONCURRENT LIABILITES
Asset retirement obligation 155,638 -
------- ---------
STOCKHOLDERS' EQUITY
Series B Convertible Preferred stock - $.001 par value; 20,000
Shares authorized; 11,339 shares issued and outstanding in 2003 11 -
Common stock - $.0001 par value; 100,000,000 shares authorized;
40,362,500 shares issued and 40,288,800 shares outstanding in
2003 and 2002 4,036 4,036
Additional paid in capital 49,755,991 44,958,593
Deferred compensation - (52,833)
Accumulated deficit (24,021,193) (22,765,236)
Less cost of treasury stock of 73,700 common shares (130,295) (130,295)
----------- -----------
Total 25,608,550 22,014,265
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,295,084 $ 27,505,501
============- ============
The accompanying notes are an integral part of the
consolidated financial statements.
2
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
-------------------------------------------
2003 2002
REVENUES
Gas $ 471,988 $ 23,426
Oil 27,539 -
Interest 2,514 6,501
------- ------
Total 502,041 29,927
------- ------
OPERATING EXPENSES
General and administrative 703,205 1,390,079
Lease operating 110,436 18,249
Depletion, depreciation and amortization 196,892 29,549
Impairment - 69,125
--------- --------
Total 1,010,533 1,507,002
--------- ---------
NET LOSS (508,492) (1,477,075)
Preferred stock dividends (84,682) -
-------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (593,174) $ (1,477,075)
=========== =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.02) $ (0.04)
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 40,288,800 35,087,971
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
3
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
-------------------------------------------
2003 2002
REVENUES
Gas $ 630,838 $ 51,932
Oil 27,539 -
Interest 5,726 43,164
-------- ------
Total 664,103 95,096
------- ------
OPERATING EXPENSES
General and administrative 1,436,376 2,475,102
Lease operating 176,884 43,315
Depletion, depreciation and amortization 273,640 144,638
Impairment - 541,125
Interest 23,473 -
--------- ----------
Total 1,910,373 3,204,180
--------- ---------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (1,246,270) (3,109,084)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (9,687) -
----------- -----------
NET LOSS (1,255,957) (3,109,084)
Preferred stock dividends (128,118) -
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,384,075) $ (3,109,084)
============= =============
PER COMMON SHARE DATA - BASIC AND DILUTED:
Loss before cumulative effect of change in accounting principle $ (0.03) $ (0.09)
Cumulative effect of change in accounting principle - -
--------- --------
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.03) $ (0.09)
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 40,288,800 33,250,955
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
4
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
---------------------------------------
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,255,957) $ (3,109,084)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation, depletion and impairment expense 266,936 685,763
Accretion of asset retirement obligation 6,704 -
Amortization of deferred compensation 52,833 87,125
Cumulative effect of change in accounting principle 9,687
Changes in operating assets and liabilities:
Prepaid expenses (110,175) 54,041
Accounts receivable (139,432) (118,931)
Accounts payable (768,521) 322,081
Accrued expenses 208,181 965,945
----------- -----------
Net cash used in operating activities (1,729,744) (1,113,060)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for furniture, fixtures and other (2,592) (84,846)
Cash paid for development and exploration (2,311,883) (8,370,664)
----------- -----------
Net cash used in investing activities (2,314,475) (8,455,510)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash designated as restricted - (250,000)
Proceeds from sale of preferred stock 4,862,840 -
Cash paid for offering costs (65,431) -
Repayment of note payable (1,400,000) -
----------- ----------
Net cash provided by (used) in financing activities 3,397,409 (250,000)
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (646,810) (9,818,570)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 2,089,062 12,296,585
--------- ----------
END OF PERIOD $ 1,442,252 $ 2,478,015
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
5
GASCO ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
NOTE 1 - ORGANIZATION
Gasco Energy, Inc. ("Gasco" or the "Company") is an independent energy company
engaged in the exploration, development and acquisition of crude oil and natural
gas reserves in the western United States.
The unaudited financial statements included herein were prepared from the
records of the Company in accordance with generally accepted accounting
principles in the United States and reflect all adjustments which are, in the
opinion of management, necessary to provide a fair statement of the results of
operations and financial position for the interim periods. Such financial
statements generally conform to the presentation reflected in the Company's Form
10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2002. The current interim period reported herein should be read in
conjunction with the Company's Form 10-K for the year ended December 31, 2002.
The results of operations for the six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include Gasco and its wholly
owned subsidiaries, Pannonian Energy, Inc. and San Joaquin Oil and Gas, Ltd. All
significant intercompany transactions have been eliminated upon consolidation.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. For the six months ended June 30,
2003 the Company incurred operating losses of $1,246,270 and used cash in
operating activities of $1,729,744. During the six months ended June 30, 2003
the Company's working capital deficit decreased to $1,294,402 from $2,857,539
while its cash balance decreased to $1,442,252 from the December 31, 2002
balance of $2,089,062. Also, as discussed in Note 9, in the quarter ended June
30, 2003 a trade creditor has filed suit against the Company for the collection
of $1,007,894 in trade payables. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. 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 or that any asset sale transaction will
close. Any financing obtained through the sale of Gasco equity will likely
result in substantial dilution to the Company's stockholders. If the Company is
forced to sell an asset to meet its current liquidity needs, it may not realize
the full market value of the asset and the sales price could be less than the
Company's carrying value of the asset.
6
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.
Under the full cost method of accounting, capitalized oil and gas property costs
less accumulated depletion and net of deferred income taxes may not exceed an
amount equal to the present value, discounted at 10%, of estimated future net
revenues from proved oil and gas reserves plus the cost, or estimated fair
value, if lower of unproved properties. Should capitalized costs exceed this
ceiling, an impairment is recognized. The present value of estimated future net
revenues is computed by applying current prices of oil and gas to estimated
future production of proved oil and gas reserves as of period-end, less
estimated future expenditures to be incurred in developing and producing the
proved reserves assuming the continuation of existing economic conditions.
Well in Progress
Well in progress at December 31, 2002 represented the costs associated with the
drilling of a well in the Riverbend area of Utah. Since the well had not reached
total depth, it was classified as a well in progress and was withheld from the
depletion calculation until the first quarter of 2003 when the well reached
total depth and was cased. The costs associated with this well were classified
as proved property and became subject to depletion and the impairment
calculation, during the first quarter of 2003, as described above.
Asset Retirement Obligation
In June 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations, " which required that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it was incurred if a
reasonable estimate of fair value could be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
The asset retirement liability will be allocated to operating expense by using a
systematic and rational method. The Company adopted this statement as of January
1, 2003 and recorded a net asset of $139,247, a related liability of $148,934
(using a 9% discount rate and a 2% inflation rate) and a cumulative effect of
7
change in accounting principle on prior years of $9,687. For the six months
ended June 30, 2003, the company recognized accretion expense of $6,704 related
to the asset retirement obligation, which was recorded as additional depletion
expense. The information below reconciles the value of the asset retirement
obligation from the date the liability was recorded.
Asset
Retirement
Obligation
Balance 1/1/03 $148,934
Liabilities incurred -
Liabilities settled -
Revisions in estimated cash flows -
Accretion expense 6,704
----------
Balance 6/30/03 $ 155,638
=========
Computation of Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
attributable to the common stockholders by the weighted average number of common
shares outstanding during the reporting period. Diluted net income per common
share includes the potential dilution that could occur upon exercise of the
options to acquire common stock computed using the treasury stock method which
assumes that the increase in the number of shares is reduced by the number of
shares which could have been repurchased by the Company with the proceeds from
the exercise of the options (which were assumed to have been made at the average
market price of the common shares during the reporting period). The Series B
Convertible Preferred Stock ("Preferred Stock") described in Note 3 and the
options described in Note 7 and have not been included in the computation of
diluted net income (loss) per share during all periods because their inclusion
would have been anti-dilutive.
Stock Based Compensation
The Company accounts for its stock-based compensation using Accounting
Principles Board's Opinion No. 25 ("APB No. 25"). Under APB 25, compensation
expense is recognized for stock options with an exercise price that is less than
the market price on the grant date of the option. For stock options with
exercise prices at or above the market value of the stock on the grant date, the
Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation
("SFAS 123") for the stock options granted to the employees and directors of the
Company. Accordingly, no compensation cost has been recognized for these
options. Had compensation expense for the options granted been determined based
on the fair value at the grant date for the options, consistent with the
provisions of SFAS 123, the Company's net loss and net loss per share for the
quarters and six months ended June 30, 2003 and 2002 would have been increased
to the pro forma amounts indicated below:
8
For the Quarters Ended For the Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss attributable
to common
shareholders:
As reported $(593,174) $ (1,477,075) $ (1,348,075) $ (3,109,084)
Pro forma (669,359) (1,904,381) (1,536,445) (3,963,697)
Net loss per share:
As reported $ (0.02) $ (0.04) $ (0.03) $ (0.09)
Pro forma (0.02) (0.05) $ (0.04) (0.12)
The fair value of the common stock options granted during 2003, 2002 and 2001,
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,
-------------------------------
2003 2002 2001
---- ---- ----
Expected dividend yield -- -- --
Expected price volatility 82% 90% 89%
Risk-free interest rate 2.9% 3.5% - 4.1% 3.8% - 4.9%
Expected life of options 5 years 5 years 5 years
Use of Estimates
The preparation of the financial statements for the Company in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 141, "Business Combinations"
(FAS 141) and Statement of Financial Accounting Standards No. 142, "Goodwill and
Intangible Assets" (FAS 142), were issued by the Financial Accounting Standards
Board (FASB) in June 2001 and became effective for the Company on July 1, 2001
and January 1, 2002, respectively. The FASB, the Securities and Exchange
Commission (SEC) and others are engaged in deliberations on the issue of whether
FAS 141 and 142 require interests held under oil, gas and mineral leases or
other contractual arrangements to be classified as intangible assets. If such
interests were deemed to be intangible assets, mineral interest use rights for
both undeveloped and developed leaseholds would be classified separate from oil
and gas properties as intangible assets on the Company's balance sheets only,
but these costs would continue to be aggregated with other costs of oil and gas
properties in the notes to the financial statements in accordance with Statement
of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas
Producing Activities" (FAS 69). Additional disclosures required by FAS 141 and
9
142 would also be included in the notes to financial statements. Historically,
and to the Company's knowledge, we and all other oil and gas companies have
continued to include these oil and gas leasehold interests as part of oil and
gas properties after FAS 141 and 142 became effective. The Company believes that
few oil and natural gas companies have adopted this interpretation or changed
their balance sheet presentation for oil and gas leaseholds since the
implementation of FAS 141 and 142.
As applied to companies like Gasco that have adopted full cost accounting for
oil and gas activities, the Company understands that this interpretation of FAS
141 and 142 would only affect its balance sheet classification of proved oil and
gas leaseholds acquired after June 30, 2001 and its unproved oil and gas
leaseholds. The Company's results of operations would not be affected, since
these leasehold costs would continue to be amortized in accordance with full
cost accounting rules. At December 31, 2002 and June 30, 2003, the Company had
undeveloped leaseholds of approximately $10,283,488 and $13,352,085,
respectively, that would be classified on the balance sheet as "intangible
undeveloped leasehold" if the Company applied the interpretation currently being
deliberated. This classification would require the Company to make the
disclosures set forth under FAS 142 related to these interests. The Company's
current disclosures are those required by FAS 69. The Company will continue to
classify its oil and gas leaseholds as tangible oil and gas properties until
further guidance is provided. Although most of the Company's oil and gas
property interests are held under oil and gas leases, it is not expected that
this interpretation, if adopted, would have a material impact on the Company's
financial condition or results of operations.
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantee of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The Company's adoption of FIN 45 on
January 1, 2003 did not effect its financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. FIN 46 requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. All companies with
variable interests in variable interest entities created after January 31, 2003,
shall apply the provisions of FIN 46 to those entities immediately. FIN 46 is
effective for the first fiscal year or interim period beginning after June 15,
2003, for variable interest entities created before February 1, 2003. The
Company will prospectively apply the provisions of FIN 46 that were effective
January 31, 2003.
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
10
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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" to amend and clarify financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
The changes in this statement require that contracts with comparable
characteristics be accounted for similarly to achieve more consistent reporting
of contracts as either derivative or hybrid instruments. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and will be
applied prospectively. The Company does not believe that adoption of this
Statement will have a material impact on the financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" to classify
certain financial instruments as liabilities in statements of financial
position. The financial instruments are mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets,
put options and forward purchase contracts, instruments that do or may require
the issuer to buy back some of its shares in exchange for cash or other assets,
and obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. Most of the guidance in
Statement 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not believe
that adoption of this Statement will have a material impact on the financial
statements.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to
the classifications used in the current year.
NOTE 3 - STOCK OFFERING
The Company sold through a private placement, 11,052 shares of Preferred Stock
to a group of accredited investors, including members of Gasco's management. The
Company sold 10,952 shares during February 2003 and an additional 100 shares of
Preferred Stock during April 2003. The Preferred Stock was sold for $440 per
share resulting in net proceeds of approximately $4,753,000 during the first
quarter of 2003 and net proceeds of approximately $44,000 during the second
quarter of 2003. Dividends on the Preferred Stock accrue at the rate of 7% per
annum payable semi-annually in cash, additional shares of Preferred Stock or
shares of common stock at the Company's option. The Board of Directors of the
Company authorized the payment of the June 30, 2003 Preferred Stock dividend in
shares of Preferred Stock. The dividend was payable to shareholders of record of
June 15, 2003 and was paid by the issuance of 287 shares of Preferred Stock and
11
a cash payment of $1,370. The conversion price of the Preferred Stock is $0.70
per common share, which was greater than the market price on the issuance date,
making each share of Preferred Stock convertible into approximately 629 shares
of Gasco common stock. Shares of the Preferred Stock are convertible into Gasco
common shares at any time at the holder's election. Gasco may redeem shares of
the Preferred Stock at a price of 105% of the purchase price at any time after
February 10, 2006. The Preferred Stock votes as a class on issues that affect
the Preferred Stockholder's interests and votes with shares of common stock on
all other issues on an as-converted basis. Additionally, the holders of the
Preferred Stock exercised their right to elect one member to Gasco's board of
directors during March 2003.
During February 2003, $1,400,000 of the proceeds from this sale were used to
repay the note that was issued to Shama Zoe in connection with the Company's
repurchase of 1,400,000 shares of common stock at $1.00 per share as further
described in Note 4. The remaining proceeds from this sale will be used for the
development and exploitation of the Company's Riverbend Project in the Uinta
Basin in Utah and to fund the general corporate purposes of the Company.
NOTE 4 - NOTE PAYABLE
The original Property Purchase Agreement governing the Shama Zoe transaction
prevented the Company from issuing additional shares of its common stock at
prices below $1.80 per share and from granting registration rights in connection
with the issuance of shares of its common stock. In connection with the August
14, 2002 issuance of 6,500,000 shares of common stock, the original Property
Purchase Agreement was amended to allow for the issuance of these shares at a
price of $1.00 per share and Shama Zoe was granted an option to sell to the
Company 1,400,000 shares of the Gasco common stock that it acquired in the
transaction at $1.00 per share at any time prior to December 31, 2002. The value
of this option, using the Black Scholes model, of $250,000 has been recorded as
additional noncash offering costs associated with the Company's sale of common
stock.
On December 31, 2002 the Company repurchased and cancelled 1,400,000 shares of
Gasco common stock from Shama Zoe for $1.00 per share. The Company issued a
$1,400,000 promissory note to Shama Zoe for the purchase of these shares. The
promissory note beared interest at 12%, had a maturity date of March 14, 2003
and was recorded as a short-term note payable in the accompanying financial
statements as of December 31, 2002. On February 20, 2003, the Company repaid
this note plus accrued interest of $23,473.
NOTE 5 - SUSPENDED LEASES
During February 2002, the Company purchased at a Bureau of Land Management
("BLM") sale a 45% interest in 21,614 gross acres (9,726 net acres) in Wyoming
for approximately $1,428,000. After the sale, the Company was notified by the
BLM in Wyoming that several environmental agencies filed a protest against the
BLM offering numerous parcels of land for oil and gas leasing. All of the
parcels (leases) purchased by the Company were placed in suspense pending the
resolution of this protest. If the protest is deemed to have merit, the lease
purchases will be rejected and the money paid for the leases will be returned to
the Company. If the protest is deemed to be without merit, the leases will be
released from suspense and issued to the Company. Effective July 16, 2002, the
Company sold 25% of its interest in these suspended leases resulting in the
Company's total net acres being reduced from 9,726 to 7,295 net acres. As of
March 31, 2003, the BLM has released from suspension and issued leases covering
5,700 gross acres representing 1,924 net acres to the Company. The value of the
12
remaining suspended leases is recorded as unproved mineral interests in the
accompanying financial statements.
NOTE 6 - PROPERTY IMPAIRMENT
During the six months ended June 30, 2002, the Company drilled a well in the
Southwest Jonah field located in the Greater Green River Basin in Sublette
County, Wyoming. The well was drilled to a total depth of 11,000 feet. The well
encountered natural gas, however not of sufficient quantities to be deemed
economic. The well was plugged and abandoned during March of 2002. The Company
recognized impairment expense of $541,125 associated with this well during the
first six months of 2002 because the Company believed that the costs incurred
for this well exceeded the present value, discounted at 10%, of the future net
revenues from its proved oil and gas reserves.
NOTE 7 - STOCK OPTIONS
During the first quarter of 2003, the Company granted an additional 1,258,000
options to purchase shares of common stock to employees and directors of the
Company, at an exercise price of $1.00 per share. The options vest 16 2/3% at
the end of each four-month period after the issuance date. Additionally, the
Company cancelled 2,260,000 options to purchase shares of common stock during
the first quarter of 2003. The exercise price of the cancelled options ranged
from $1.95 to $3.15 per share. None of the 1,258,000 options granted during the
first quarter of 2003 were issued to the individuals whose options were
cancelled.
NOTE 8 - STATEMENT OF CASH FLOWS
During the six months ended June 30, 2003, the Company's non-cash investing
activity consisted of the following transaction:
Recognition of an asset retirement obligation for the plugging and
abandonment costs related to the Company's oil and gas properties valued at
$148,934.
Issuance of 287 shares of Preferred Stock in payment of the June 30, 2003
Preferred Stock dividend.
During the six months ended June 30, 2002, the Company's non-cash investing
activity consisted of the following transactions:
Conversion of 500 shares of Preferred Stock into 4,750,000 shares of common
stock.
Issuance of 9,500,000 shares of common stock, valued at $18,525,000 in
exchange for oil and gas properties.
Cash paid for interest during the six months ended June 30, 2003 was $23,473.
There was no cash paid for interest during the six months ended June 30, 2002.
13
NOTE 9 - LITIGATION
On June 9, 2003, Pannonian was named as a defendant in a lawsuit filed in the
United States District Court of Midland County, Texas. The plaintiffs,
Burlington Resources Oil & Gas Company LP by BROG GP Inc. its sole General
Partner ("Burlington Resources") claim that Pannonian owes them $1,007,894.14 in
unpaid invoices. The Company has accrued these amounts owed within the
accompanying financial statements and fully intends to pay these amounts owed to
Burlington Resources. The Company is currently in negotiations with Burlington
Resources to settle this lawsuit.
NOTE 10 - SUBSEQUENT EVENT
On August 12, 2003, the Company's Board of Directors approved the issuance of
425,000 shares of common stock, under the Gasco Energy, Inc. 2003 Restricted
Stock Plan, to certain of the Company's officers and directors. The restricted
shares vest 20% on the first anniversary, 20% on the second anniversary and 60%
on the third anniversary of the awards. The shares fully vest upon certain
events, such as a change in control of the Company, expiration of the
individual's employment agreement and termination by the Company of the
individual's employment without cause. Any unvested shares are forfeited upon
termination of employment for any other reason.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the results of operations of Gasco for the periods
ended June 30, 2003 and 2002 should be read in conjunction with the consolidated
financial statements of Gasco and related notes included therein.
Critical Accounting Policies
The Company follows the full cost method of accounting whereby all costs related
to the acquisition and development of oil and gas properties are capitalized
into a single cost center ("full cost pool"). Such costs include lease
acquisition costs, geological and geophysical expenses, overhead directly
related to exploration and development activities and costs of drilling both
productive and non-productive wells. Proceeds from property sales are generally
credited to the full cost pool without gain or loss recognition unless such a
sale would significantly alter the relationship between capitalized costs and
the proved reserves attributable to these costs. A significant alteration would
typically involve a sale of 25% or more of the proved reserves related to a
single full cost pool.
Depletion of exploration and development costs and depreciation of production
equipment is computed using the units of production method based upon estimated
proved oil and gas reserves. The costs of unproved properties are withheld from
the depletion base until such time as they are either developed or abandoned.
The properties are reviewed periodically for impairment. Total well costs are
transferred to the depletable pool even when multiple targeted zones have not
been fully evaluated. For depletion and depreciation purposes, relative volumes
of oil and gas production and reserves are converted at the energy equivalent
rate of six thousand cubic feet of natural gas to one barrel of crude oil.
Under the full cost method of accounting, capitalized oil and gas property costs
less accumulated depletion and net of deferred income taxes may not exceed an
amount equal to the present value, discounted at 10%, of estimated future net
14
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
Statement of Financial Accounting Standards No. 141, "Business Combinations"
(FAS 141) and Statement of Financial Accounting Standards No. 142, "Goodwill and
Intangible Assets" (FAS 142), were issued by the Financial Accounting Standards
Board (FASB) in June 2001 and became effective for the Company on July 1, 2001
and January 1, 2002, respectively. The FASB, the Securities and Exchange
Commission (SEC) and others are engaged in deliberations on the issue of whether
FAS 141 and 142 require interests held under oil, gas and mineral leases or
other contractual arrangements to be classified as intangible assets. If such
interests were deemed to be intangible assets, mineral interest use rights for
both undeveloped and developed leaseholds would be classified separate from oil
and gas properties as intangible assets on the Company's balance sheets only,
but these costs would continue to be aggregated with other costs of oil and gas
properties in the notes to the financial statements in accordance with Statement
of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas
Producing Activities" (FAS 69). Additional disclosures required by FAS 141 and
142 would also be included in the notes to financial statements. Historically,
and to the Company's knowledge, we and all other oil and gas companies have
continued to include these oil and gas leasehold interests as part of oil and
gas properties after FAS 141 and 142 became effective. The Company believes that
few oil and natural gas companies have adopted this interpretation or changed
their balance sheet presentation for oil and gas leaseholds since the
implementation of FAS 141 and 142.
As applied to companies like Gasco that have adopted full cost accounting for
oil and gas activities, the Company understands that this interpretation of FAS
141 and 142 would only affect its balance sheet classification of proved oil and
gas leaseholds acquired after June 30, 2001 and its unproved oil and gas
leaseholds. The Company's results of operations would not be affected, since
these leasehold costs would continue to be amortized in accordance with full
cost accounting rules. At December 31, 2002 and June 30, 2003, the Company had
undeveloped leaseholds of approximately $10,283,488 and $13,352,085,
respectively, that would be classified on the balance sheet as "intangible
undeveloped leasehold" if the Company applied the interpretation currently being
deliberated. This classification would require the Company to make the
disclosures set forth under FAS 142 related to these interests. The Company's
current disclosures are those required by FAS 69.
The Company will continue to classify its oil and gas leaseholds as tangible oil
and gas properties until further guidance is provided. Although most of the
Company's oil and gas property interests are held under oil and gas leases, it
is not expected that this interpretation, if adopted, would have a material
impact on the Company's financial condition or results of operations.
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantee of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
15
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The Company's adoption of FIN 45 on
January 1, 2003 did not effect its financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. FIN 46 requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. All companies with
variable interests in variable interest entities created after January 31, 2003,
shall apply the provisions of FIN 46 to those entities immediately. FIN 46 is
effective for the first fiscal year or interim period beginning after June 15,
2003, for variable interest entities created before February 1, 2003. The
Company will prospectively apply the provisions of FIN 46 that were effective
January 31, 2003.
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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" to amend and clarify financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
The changes in this statement require that contracts with comparable
characteristics be accounted for similarly to achieve more consistent reporting
of contracts as either derivative or hybrid instruments. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and will be
applied prospectively. The Company does not believe that adoption of this
Statement will have a material impact on the financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" to classify
certain financial instruments as liabilities in statements of financial
position. The financial instruments are mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets,
put options and forward purchase contracts, instruments that do or may require
the issuer to buy back some of its shares in exchange for cash or other assets,
and obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. Most of the guidance in
Statement 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not believe
that adoption of this Statement will have a material impact on the financial
statements.
16
Petroleum and Natural Gas Properties
The following is a description of the current status of the Company's projects.
Riverbend Project
The Riverbend project is comprised of approximately 104,773 gross acres in the
Uinta Basin of northeastern Utah, of which the Company holds an interest in
approximately 31,353 net acres as of June 30, 2003. Additionally, Gasco has an
opportunity to earn or acquire an interest in approximately 35,211 gross acres
in this area under farm-out and other agreements. Gasco's geologic and
engineering focus is concentrated on three tight-sand formations in the basin:
the Wasatch, Mesaverde and Blackhawk formations.
During January 2002, Gasco entered into an agreement with Halliburton Energy
Services ("Halliburton") under which Halliburton has the option to earn a
participation interest proportionate to its investment by funding the
completions of wells in the Wasatch, Mesaverde and Blackhawk formations. The
Company and Halliburton also share technical information through the formation
of a joint technical team.
During 2002 Gasco drilled three operated wells, which are currently producing.
Gasco's share of the costs for each of the first two wells were approximately
$1,050,000 and $1,312,000 and the costs for the third well, in which the Company
has a 100% working interest, were approximately $2,340,000. Gasco's fourth
operated well in this area reached total depth during December 2002 and is
currently awaiting completion. The total drilling and completion costs for this
well are expected to be approximately $2,150,000. Gasco's fifth operated well in
this area was spudded in October 2002 with a small rig that has been moved off
the drill site. A larger rig was moved onto the site in March 2003 to complete
the drilling of this well. This well is currently being analyzed to determine
the best completion design. The total costs for this well are estimated at
approximately $2,150,000. Halliburton exercised its option to participate in the
first two wells but on August 1, 2003 declined to participate in the remaining
three wells under the current terms of the contract.
During 2002, compressor capacity limitations on a third party gathering system
in this area caused the Company's wells to be shut-in or to have significantly
restricted production rates. During January 2003, Gasco entered into a contract
with the system operator to put a new compressor in place. The compressor began
operating during the beginning of February 2003 and is expected to meet the
Company's projected compression needs for the next twelve months.
In addition to the Gasco-operated wells described above, the Company also owns a
14 to 20% working interest in five wells that were drilled by ConocoPhillips in
this area during late 2001 and through the fourth quarter of 2002. All of these
wells are currently selling gas.
Greater Green River Basin Project
In Wyoming, Gasco established an AMI with Burlington Resources ("Burlington")
covering approximately 330,000 acres in Sublette County, Wyoming within the
Greater Green River Basin. As of June 30, 2003, the Company has a leasehold
interest in approximately 114,081 gross acres and 72,408 net acres in this area.
During 2002, the Company participated in the drilling of two wells in Sublette
County Wyoming. Gasco has a 31.5% interest in each of these wells, which are
currently producing and are operated by Burlington.
17
During June 2003, the Company announced its plans to dispose certain of its
Wyoming properties in the Greater Green River Basin covering approximately
72,000 acres net to Gasco's interest. The Company intends to use the proceeds
from any such sale to accelerate the drilling in its Riverbend Project and to
increase the production in this area. Preliminary negotiations for the sale of
this property are currently underway, although there can be no assurance that a
transaction will close.
During February 2002, the Company purchased at a Bureau of Land Management
("BLM") sale a 45% interest in 21,614 gross acres (9,726 net acres) for
approximately $1,428,000. After the sale, the Company was notified by the BLM in
Wyoming that several environmental groups filed a protest against the BLM
offering numerous parcels of land for oil and gas leasing. All of the parcels
(leases) purchased by the Company were placed in suspense pending the resolution
of this protest. If the protest is deemed to have merit, the lease purchases
will be rejected and the money paid for the leases will be returned to the
Company. If the protest is deemed to be without merit, the leases will be
released from suspense and issued to the Company. Effective July 16, 2002, the
Company assigned 25% of this suspended interest to Brek resulting in the
Company's net acres being reduced from 9,726 to 7,295 net acres. As of June 30,
2003, the BLM has released from suspension and issued leases covering 5,700
gross acres representing 1,924 net acres to the Company. These issued leases are
reflected in the Company's total acreage position stated above. To date, 15,914
gross acres (5,371 net acres) remain in suspense and this leasehold interest is
not included in the totals above. The value of the remaining suspended leases is
recorded as unproved mineral interests in the accompanying financial statements.
Southern California Project
The Company has a leasehold interest in approximately 4,068 gross acres (2,860
net acres) on two oil prospects in Kern and San Luis Obispo Counties of Southern
California. The Company has no drilling or development plans for this acreage
during 2003, but plans to continue paying leasehold rentals and other minimum
geological expenses to preserve the Company's acreage positions on these
prospects. The Company may consider selling these positions in the future.
Sale of Preferred Stock
The Company sold through a private placement, 11,052 shares of Series B
Convertible Preferred Stock ("Preferred Stock") to a group of accredited
investors, including members of Gasco's management. The Company sold 10,952
shares during February 2003 and an additional 100 shares of Preferred Stock
during April 2003. The Preferred Stock was sold for $440 per share resulting in
net proceeds of $4,797,409 during the first six months of 2003. Dividends on the
Preferred Stock accrue at the rate of 7% per annum payable semi-annually in
cash, additional shares of Preferred Stock or shares of common stock at the
Company's option. The Board of Directors of the Company authorized the payment
of the June 30, 2003 Preferred Stock dividend in shares of Preferred Stock. The
dividend was payable to shareholders of record of June 15, 2003 and was paid by
the issuance of 287 shares of preferred stock and a cash payment of $1,370. The
conversion price of the Preferred Stock is $0.70 per common share, making each
share of Preferred Stock convertible into approximately 629 shares of Gasco
common stock. Shares of the Preferred Stock are convertible into Gasco common
shares at any time at the holder's election. Gasco may redeem shares of the
Preferred Stock at a price of 105% of the purchase price at any time after
February 10, 2006. The Preferred Stock votes as a class on issues that affect
18
the Preferred Stockholder's interests and votes with shares of common stock on
all other issues on an as-converted basis. Additionally, the holders of the
Preferred Stock exercised their right to elect one member to Gasco's board of
directors during March 2003.
During February 2003, $1,400,000 of the proceeds from this sale were used to
repay the note that was issued to Shama Zoe in connection with the Company's
repurchase of 1,400,000 shares of common stock at $1.00 per share. The remaining
proceeds from this sale will be used for the development and exploitation of the
Company's Riverbend Project in the Uinta Basin in Utah and to fund the general
corporate purposes of the Company.
Results of Operations
Volumes, Prices and Operating Expenses
The following table presents information regarding the production volumes,
average sales prices received and average production costs associated with the
Company's sales of natural gas for the periods indicated.
For the Six
For the Three Months Months Ended
Ended June 30, June 30,
2003 2002 2003 2002
Natural gas production (Mcf) 102,121 8,712 140,343 18,500
Average sales price per Mcf $ 4.62 $2.69 $4.49 $2.81
Oil production (Bbl) 948 - 948 -
Average sales price per Bbl 29.05 - 29.05 -
Expenses per Mcfe:
Lease operating 1.02 2.09 1.21 2.34
Depletion and impairment 1.93 11.33 1.87 37.07
The Second Quarter of 2003 Compared to the Second Quarter of 2002
Gas Revenue
Gas revenue increased from $23,426 during the second quarter of 2002 to $471,988
during the second quarter of 2003. The revenue increase is comprised of an
increase in the average gas price from $2.69 per Mcf during 2002 to $4.62 per
Mcf during 2003 combined with increased production of 102,121 Mcf during 2003
versus 8,712 Mcf during 2002, primarily due to the Company's drilling activity
during 2002 and 2003.
Oil Revenue
Oil revenue during the second quarter of 2003 is comprised of 948 bbl of oil at
an average price of $29.05 per bbl. The increase in production from the same
period during 2002 is due to the increased drilling activity discussed above.
19
Interest Income
Interest income during 2003 and 2002 represents the interest earned on the
Company's combined cash and cash equivalents and restricted cash balances.
Interest income decreased by $3,987 during the second quarter of 2003 as
compared with the second quarter of 2002 primarily due to a decrease in the
average cash balance.
General and Administrative Expense
General and administrative expense decreased from $1,390,079 to $703,205 during
the quarter ended June 30, 2003 as compared with the same period during 2002,
primarily due to the Company's efforts to decrease its overhead expenses. The
$686,874 decrease in these expenses is comprised of approximately $100,000 in
salary reductions due to the implementation, during January 2003, of a 36%
annual reduction in the cash component of the Company's senior management
compensation, a $380,000 reduction in legal fees and a $90,000 decrease in
consulting fees that were incurred in connection with the 2002 property
transactions discussed above and a $71,000 reduction in travel expenses due to
management's cost cutting efforts. The remaining decrease in general and
administrative expenses is due to the fluctuation in numerous other expenses,
none of which are individually significant.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expense during second quarter of 2003
is comprised of $180,000 of depletion expense related to the Company's proved
oil and gas properties, $13,540 of depreciation expense related to the Company's
furniture, fixtures and other assets and $3,352 of accretion expense related the
Company's asset retirement obligation. The corresponding expense during the
second quarter of 2002 consists of $17,931 of depletion expense and $11,618 of
depreciation expense. The increase in depletion expense during the second
quarter of 2003 as compared with the second quarter of 2002 is primarily due to
the increase in production discussed above. The increase in depreciation expense
during 2003 is the result of the additional equipment purchased during 2002.
Impairment Expense
The impairment expense during the second quarter of 2002 represents costs
associated with a well drilled in the Southwest Jonah field located in the
Greater Green River Basin in Sublette County, Wyoming during the first quarter
of 2002. The well was drilled to a total depth of 11,000 feet. The well
encountered natural gas, however not of sufficient quantities to be deemed
economic. The well was plugged and abandoned during March of 2002. The Company
recognized impairment expense of $472,000 associated with this well during the
first quarter of 2002 and $69,125 during the second quarter of 2002 because the
Company believed that the costs incurred for this well exceeded the present
value, discounted at 10%, of the future net revenues from its proved oil and gas
reserves.
Cumulative Effect of Change in Accounting Principle
The cumulative effect of change in accounting principle represents the Company's
recognition of an asset retirement obligation in connection with the adoption of
FAS 143 on January 1, 2003.
20
The Six Months Ended June 30, 2003 Compared to the Six Months Ended June 30,
2002
The comparisons for the six months ended June 30, 2003 and the six months ended
June 30, 2002 are consistent with those discussed in the second quarter of 2003
compared to the second quarter of 2002 except as discussed below.
Gas Revenue
Gas revenue increased from $51,932 during the first six months of 2002 to
$630,838 during the first six months of 2003. The revenue increase is comprised
of an increase in the average gas price from $2.81 per Mcf during 2002 to $4.49
per Mcf during 2003 combined with increased production of 140,343 Mcf during
2003 versus 18,500 Mcf during 2002, primarily due to the Company's drilling
activity during 2002 and 2003.
Interest Expense
The interest expense during the six months ended June 30, 2003 represents the
interest incurred on the Company's outstanding note payable, which was repaid
during February 2003.
Liquidity and Capital Resources
At June 30, 2003, the Company had cash and cash equivalents of $1,442,252
compared to cash and cash equivalents of $2,089,062 at December 31, 2002. The
decrease in cash and cash equivalents is primarily attributable to the repayment
of the $1,400,000 note payable, the cash paid for development and exploration
activities of $2,311,883 and the cash used in operations of $1,729,744 partially
offset by the net proceeds from the Preferred Stock offering of $4,797,409.
The Company's working capital deficit decreased from $2,857,539 at December 31,
2002 to $1,294,402 as of June 30, 2003 primarily due to the Preferred Stock
offering proceeds, the repayment of the note payable and the development and
exploration activities discussed above.
In management's view, given the nature of the Company's operations, which
consist of the acquisition, exploration and evaluation of petroleum and natural
gas properties and participation in drilling activities on these properties, the
most meaningful information relates to current liquidity and solvency. The
Company's financial success will be dependent upon the extent to which Gasco can
discover sufficient economic reserves and successfully develop and produce from
the properties containing those reserves. Such development may take years to
complete and the amount of resulting income, if any, is difficult to determine
with any certainty. The sales value of any petroleum or natural gas that is
discovered is largely dependent upon other factors beyond the Company's control.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. For the six months ended June 30,
2003 the Company incurred operating losses of $1,246,270 and used cash in
operating activities of $1,729,744. During the six months ended June 30, 2003
our working capital deficit decreased to $1,294,402 from $2,857,539 while our
cash balance decreased to $1,442,252 from the December 31, 2002 balance of
$2,089,062. Also, as discussed in Note 9 of the accompanying financial
21
statements, in the quarter ended June 30, 2003 a trade creditor has filed suit
against the Company for the collection of $1,007,894 in trade payables. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
To date, the Company's capital needs have been met primarily through equity
financings. In order to earn interests in additional acreage and depths in
Riverbend, the Company will need to expend significant additional capital to
drill and complete wells. The Company continues to use approximately $3,400,000
of the proceeds from its February 2003 Preferred Stock offering to fund a
portion of its 2003 capital budget, however, it will be necessary for Gasco to
acquire additional financing in order to complete its operational plan for 2003
and to continue operations past November 30, 2003. The Company is considering
several options for raising additional capital to fund its 2003 operational
budget such as equity offerings, asset sales (including the Wyoming properties
referred to above under "Petroleum and Natural Gas Properties - Greater Green
River Basin Project"), 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 or that any asset sale
transaction will close. Any financing obtained through the sale of Gasco equity
will likely result in substantial dilution to the Company's stockholders. If the
Company is forced to sell an asset to meet its current liquidity needs, it may
not realize the full market value of the asset and the sales price could be less
than the Company's carrying value of the asset.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the stockholders with certain information regarding
the Company's future plans and operations, certain statements set forth in this
Form 10-Q relate to management's future plans and objectives. Such statements
are forward-looking statements within the meanings of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical
facts included in this report, including, without limitation, statements
regarding the Company's future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "intend," "project," "estimate," "anticipate,"
"believe," or "continue" or the negative thereof or similar terminology.
Although any forward-looking statements contained in this Form 10-Q or otherwise
expressed by or on behalf of the Company are, to the knowledge and in the
judgment of the officers and directors of the Company, believed to be
reasonable, there can be no assurances that any of these expectations will prove
correct or that any of the actions that are planned will be taken.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual performance and financial results in future
periods to differ materially from any projection, estimate or forecasted result.
Important factors that could cause actual results to differ materially from the
Company expectations ("Cautionary Statements") include those discussed under the
caption "Risk Factors", in the Company's Form 10-K for the year ended December
31, 2002. All subsequent written and oral forward-looking statements
attributable to the Company, or persons acting on its behalf, are expressly
qualified in their entirety by the Cautionary Statements. The Company assumes no
duty to update or revise its forward-looking statements based on changes in
internal estimates or expectations or otherwise.
22
ITEM 3A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk relates to changes in the pricing applicable
to the sales of gas production in the Uinta Basin of northeastern Utah and the
Greater Green River Basin of west central Wyoming. This risk will become more
significant to the Company as more wells are drilled and begin producing in
these areas. Although the Company is not using derivatives at this time to
mitigate the risk of adverse changes in commodity prices, it may consider using
them in the future.
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company has evaluated,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as defined in Exchange Act Rule 13a-15(e). 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 has been no change in the Company's internal control over financial
reporting identified in the above evaluation that occurred during the Company's
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
23
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
See Note 9 to the accompanying financial statements.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Exhibit
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Form 8-K dated December
31, 1999, filed on January 21, 2000).
3.2 Certificate of Amendment to Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's Form
8-K/A dated January 31, 2001, filed on February 16, 2001).
3.3 Certificate of Designation for Series A Preferred Stock
(incorporated by reference to Exhibit 3.5 to the Company's Form
10-Q for the quarter ended September 30, 2001, filed on November
14, 2001).
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).
24
3.5 Certificate of Designation for Series B Preferred Stock
(incorporated by reference to Exhibit 3.5 to the Company's Form
S-1 Registration Statement, File No. 333-104592).
4.1 Stock Purchase Agreement dated July 5, 2001 between Gasco Energy,
Inc. and First Ecom.com, Inc. (incorporated by reference to
Exhibit 10.7 to the Company's Form 10-QSB for the quarter ended
September 30,2001, filed on November 14,2001).
4.2 1999 Stock Option Plan (incorporated by reference to Exhibit 4.1
to the Company's Form 10-KSB for the fiscal year ended December
31, 1999, filed on April 14, 2000).
4.3 Form of Subscription and Registration Rights Agreement between
the Company and investors purchasing Series B Preferred Stock in
February 2003 (incorporated by reference to Exhibit 4.3 to the
Company's Form S-1 Registration Statement, File No. 333-104592).
4.4 Gasco Energy Inc. 2003 Restricted Stock Plan (incorporated by
reference to Exhibit 4.1 to the Company's Form S-8 Registration
Statement, File No. 333-105974).
*31 Rule 13a-14(a)/15d-14(a) Certifications.
*32 Section 1350 Certifications
* Filed herewith.
(b) Reports on Form 8-K: The following reports on Form 8-K were
filed during the period covered by this report:
Form 8-K dated April 9, 2003, Item 9,Item 7(c) - Press
filed April 9, 2003 Release
Form 8-K dated June 6, 2003, Item 9, Item 7(c) - Press
filed June 6, 2003 Release
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GASCO ENERGY, INC.
Date: August 13, 2003 By: /s/ W. King Grant
W. King Grant, Executive Vice President
Principal Financial and Accounting Officer
26