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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: September 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 November 7, 2003: 45,602,236
1
ITEM I - FINANCIAL INFORMATION
PART 1 - FINANCIAL STATEMENTS
GASCO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2003 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $478,692 $ 2,089,062
Restricted cash 250,000 250,000
Prepaid expenses 194,085 198,491
Accounts receivable 182,903 96,144
------- ---------
Total 1,105,680 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 14,034,155 10,283,488
Unproved mineral interests 14,600,267 13,984,536
Furniture, fixtures and other 166,051 162,787
---------- ----------
Total 28,800,473 25,569,382
---------- ----------
Less accumulated depreciation, depletion,
amortization and property impairment (1,080,038) (697,578)
----------- ----------
Total 27,720,435 24,871,804
---------- ----------
TOTAL ASSETS $ 28,826,115 $ 27,505,501
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,730,248 $ 1,910,974
Accrued expenses 874,043 2,180,262
Note payable - 1,400,000
---------- ---------
Total 3,604,291 5,491,236
---------- ----------
NONCURRENT LIABILITES
Asset retirement obligation 158,990 -
--------- ----------
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;
40,887,500 shares issued and 40,813,800 shares outstanding in
2003; 40,362,500 shares issued and 40,288,800 outstanding in 2002 4,089 4,036
Additional paid in capital 50,051,853 44,958,593
Deferred compensation (207,422) (52,833)
Accumulated deficit (24,655,402) (22,765,236)
Less cost of treasury stock of 73,700 common shares (130,295) (130,295)
----------- ----------
Total 25,062,834 22,014,265
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,826,115 $ 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
September 30,
-------------- ---------------
2003 2002
REVENUES
Gas $ 255,028 $ 43,611
Oil 22,073 -
Interest 3,402 19,198
------- ------
Total 280,503 62,809
------- ------
OPERATING EXPENSES
General and administrative 684,480 1,461,377
Lease operating 104,084 32,742
Depletion, depreciation and amortization 124,948 51,157
Interest 1,200 -
-------- ---------
Total 914,712 1,545,276
-------- ---------
NET LOSS (634,209) (1,482,467)
Preferred stock dividends (88,027) -
-------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (722,236) $ (1,482,467)
=========== =============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.02) $ (0.04)
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 40,388,800 40,502,336
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
3
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
-------------------------------------------
2003 2002
REVENUES
Gas $ 885,866 $ 95,543
Oil 49,612 -
Interest 9,128 62,362
------- -------
Total 944,606 157,905
------- -------
OPERATING EXPENSES
General and administrative 2,120,856 3,936,479
Lease operating 280,968 76,057
Depletion, depreciation and amortization 398,588 195,795
Impairment - 541,125
Interest 24,673 -
--------- ---------
Total 2,825,085 4,749,456
--------- ---------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (1,880,479) (4,591,551)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (9,687) -
----------- ----------
NET LOSS (1,890,166) (4,591,551)
Preferred stock dividends (216,145) -
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,106,311) $ (4,591,551)
============= =============
PER COMMON SHARE DATA - BASIC AND DILUTED:
Loss before cumulative effect of change in accounting principle $ (0.05) $ (0.13)
Cumulative effect of change in accounting principle - -
---------- ---------
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.05) $ (0.13)
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 40,347,042 35,389,349
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
4
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
----------------------------------------
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,890,166) $ (4,591,551)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation, depletion and impairment expense 388,532 736,920
Accretion of asset retirement obligation 10,056 -
Amortization of deferred compensation 66,661 113,563
Cumulative effect of change in accounting principle 9,687 -
Changes in operating assets and liabilities:
Prepaid expenses 4,406 100,743
Accounts receivable (86,759) (19,137)
Accounts payable 819,274 674,785
Accrued expenses (1,229,718) 1,099,974
------------ -----------
Net cash used in operating activities (1,908,027) (1,884,703)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for furniture, fixtures and other (3,264) (84,846)
Cash paid for development and exploration (3,094,652) (10,601,252)
----------- ------------
Net cash used in investing activities (3,097,916) (10,686,098)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash designated as restricted (250,000) (250,000)
Cash undesignated as restricted 250,000 -
Preferred dividends (1,836) -
Proceeds from sale of preferred stock 4,862,840 -
Proceeds from sale of common stock 6,500,000
Cash paid for offering costs (65,431) (526,020)
Repayment of note payable (1,400,000) -
----------- ----------
Net cash provided by financing activities 3,395,573 5,723,980
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,610,370) (6,846,821)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 2,089,062 12,296,585
--------- ----------
END OF PERIOD $ 478,692 $ 5,449,764
========= ===========
The accompanying notes are an integral part of the
consolidated financial statements.
5
GASCO ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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 applicable to interim financial statements and
reflect all adjustments which are, in the opinion of management, necessary to
provide a fair statement of the results of operations and financial position for
the interim periods. Such financial statements generally conform to the
presentation reflected in the Company's Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 2002. The current interim
period reported herein should be read in conjunction with the Company's Form
10-K for the year ended December 31, 2002.
The results of operations for the three and nine months ended September 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.
During the nine months ended September 30, 2003 the Company incurred operating
losses of $1,890,166 and used cash in operating activities of $1,908,027. As of
September 30, 2003 the Company had a working capital deficit of $2,498,611 and
its cash balance decreased to $478,692 from the December 31, 2002 balance of
$2,089,062. Also, as discussed in Note 10, during the nine months ended
September 30, 2003 a trade creditor filed suit against the Company for the
collection of $1,007,894 in trade payables. Subsequent to September 30, 2003 the
Company issued $2,500,000 in 8% Convertible Debentures, sold 4,788,436 shares of
common stock through a private placement for approximately $2,780,000 and
settled approximately $1,600,000 of its accounts payable to an oilservice
provider by making a cash payment of $400,000 to the provider and conveying to
the provider a portion of the interests in two of its wells, as further
described in Note 11. Management believes that the completion of these
transactions will provide the Company with adequate resources to meet its
obligations during the next year, however, management's drilling plans for the
coming year will require capital in excess of that currently available and will
require that Company to raise additional funds by selling securities, selling
assets or farm-outs or similar type arrangements. 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
Restricted Cash
The restricted cash balance at December 31, 2002 collateralized a letter of
credit that the Company established in connection with its drilling projects.
The letter of credit was terminated during August 2003. During September 2003,
the Company entered into a $250,000 escrow agreement in connection with one of
its drilling projects. The funds held in escrow will be released on April 1,
2004 pending the completion of certain drilling obligations, and are 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.
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 lower of cost, or estimated
fair value 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.
7
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
change in accounting principle on prior years of $9,687. For the nine months
ended September 30, 2003, the Company recognized accretion expense of $10,056
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 10,056
---------
Balance 9/30/03 $ 158,990
=========
Computation of Net Loss Per Share
Basic net loss per share is computed by dividing net loss attributable to the
common stockholders by the weighted average number of common shares outstanding
during the reporting period. The shares of restricted common stock granted to
certain officers and directors are included in the computation only after the
shares become fully vested. 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, the options described in Note 7,
and the restricted stock described in Note 8 have not been included in the
computation of diluted net 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
8
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 nine months ended September 30, 2003 and 2002 would have been
increased to the pro forma amounts indicated below:
For the Quarters Ended For the Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss attributable
to common
shareholders:
As reported $(722,236) $ (1,482,467) $ (2,106,311) $ (4,591,551)
Pro forma (765,235) (1,909,804) (2,377,866) (5,873,471)
Net loss per share:
As reported $ (0.02) $ (0.04) $ (0.05) $ (0.13)
Pro forma (0.02) (0.05) $ (0.06) (0.17)
The fair value of the common stock options granted during 2003 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,
2003 2002
---- ----
Expected dividend yield -- --
Expected price volatility 82% 90%
Risk-free interest rate 2.9% 3.5% - 4.1%
Expected life of options 5 years 5 years
Use of Estimates
The preparation of the financial statements for the Company in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
9
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 September 30, 2003, the Company
had undeveloped leaseholds of approximately $13,984,536 and $14,600,267,
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 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company's adoption of
FIN 45 on January 1, 2003 did not affect 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
10
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 ending after December 15,
2003, for variable interest entities created before February 1, 2003. The
Company's prospective application of the provisions of FIN 46 that were
effective January 31, 2003, did not effect its financial position or results of
operations.
In December 2002, the FASB approved Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an amendment of FASB Statement No. 123" (SFAS No. 148). SFAS No. 148 amends
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for financial statements for fiscal years ending after
December 15, 2002. The Company will continue to account for stock based
compensation using the methods detailed in the stock-based compensation
accounting policy.
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's adoption of this Statement did not 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's adoption of
this Statement did not 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.
11
NOTE 3 - STOCK OFFERING
During February and April 2003, 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 Preferred Stock was sold for $440 per share
resulting in net proceeds of approximately $4,797,000. 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 $1,836. 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 was 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
12
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. 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. The Company was notified in July
2003 that all of the protested leases were released from suspense. The value of
these leases is recorded as unproved mineral interests in the accompanying
financial statements.
NOTE 6 - PROPERTY IMPAIRMENT
During the nine months ended September 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 nine 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 - COMMON STOCK ISSUANCE
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 ("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.
The compensation expense related to the restricted stock was measured on
September 18, 2003, the date the Restricted Stock Plan was approved by the
Company's stockholders and is amortized over the three year vesting period. The
shares of restricted stock are considered issued and outstanding at the date of
grant and are included in shares outstanding for the purposes of computing
diluted earnings per share. The Company had 425,000 unvested shares of
restricted stock outstanding as of September 30, 2003 and the compensation
expense related to these shares during the nine months ended September 30, 2003
was $13,828. There were no outstanding shares of restricted stock during 2002.
13
NOTE 9 - STATEMENT OF CASH FLOWS
During the nine months ended September 30, 2003, the Company's non-cash
investing and financing activities consisted of the following transactions:
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.
Issuance of 425,000 shares of restricted common stock to certain of the
Company's officers and directors and the issuance of 100,000 shares of
common stock as compensation to a former employee.
During the nine months ended September 30, 2002, the Company's non-cash
investing and financing activities 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.
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.
Reclassification of $1,400,000 from additional paid in capital to
redeemable common stock to reflect the option described in Note 4.
Noncash stock offering costs of $250,000 incurred in connection with
redeemable common stock as described in Note 4.
Cash paid for interest during the nine months ended September 30, 2003 was
$23,473. There was no cash paid for interest during the nine months ended
September 30, 2002.
NOTE 10 - 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. On July 15, 2003, Gasco
was also named as defendant in the same lawsuit. The plaintiffs, Burlington
Resources Oil & Gas Company LP by BROG GP Inc. its sole General Partner
("Burlington Resources") claim that Pannonian and Gasco owe 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
NOTE 11 - SUBSEQUENT EVENTS
On October 15, 2003 Gasco closed the sale of $2,500,000 of 8% Convertible
Debentures ("Debentures") in a private placement offering. The Debentures bear
interest at 8% per annum, which is payable monthly, and are convertible into
14
4,166,667 shares of the Company's common stock, at the holder's option, at a
conversion price of $0.60 per common share. Monthly principal payments of
$37,500 begin in the fourth quarter of 2006 and the maturity date of the
Debentures is October 15, 2008. The Debentures are secured by the producing
wellbores that Gasco develops using this financing. Additionally, the Debenture
holders exercised their right to designate a single nominee to the Company's
Board of Directors during October 2003.
The Debenture conversion price of $0.60 per common share was lower than the
trading value of the Company's common stock on the date the Debentures were
issued. This resulted in a beneficial conversion feature of approximately
$167,000, which will be amortized over the life of the Debentures.
On October 23, 2003 the Company completed the sale through a private placement
of 4,788,436 shares of its common stock to a group of accredited previous
investors. The selling price of $0.58 per common share was determined by taking
97 percent of the 20-day average closing price of the Company's common stock for
the period ending October 17, 2003, and resulted in total proceeds of
approximately $2,780,000. The expenses associated with this transaction are
expected to be approximately $15,000.
The Company plans to use the proceeds from these transactions to develop and
exploit its core-area Riverbend Project in the Uinta Basin in Utah and for its
ongoing operations.
During October 2003, the Company completed a transaction whereby it settled an
outstanding amount owed of $1,606,982 to an oilservice provider arising from
drilling and completion expenditures on five Gasco-operated wells, by paying the
provider $400,000 in cash and conveying to the provider a portion of its
interests in two Riverbend wells. Subsequent to the transaction, the Company
retained a 30% working interest in the two subject wells and ownership in the
remaining three wells is unchanged.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the results of operations of Gasco for the periods
ended September 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.
15
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 lower of cost, or estimated
fair value 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 September 30, 2003, the Company
had undeveloped leaseholds of approximately $13,984,536 and $14,600,267,
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.
16
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 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company's adoption of
FIN 45 on January 1, 2003 did not affect 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 ending after December 15,
2003, for variable interest entities created before February 1, 2003. The
Company's prospective application of the provisions of FIN 46 that were
effective January 31, 2003, did not effect its financial position or results of
operations.
In December 2002, the FASB approved Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an amendment of FASB Statement No. 123" (SFAS No. 148). SFAS No. 148 amends
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for financial statements for fiscal years ending after
December 15, 2002. The Company will continue to account for stock based
compensation using the methods detailed in the stock-based compensation
accounting policy.
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's adoption of this Statement did not have a
material impact on the financial statements.
17
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's adoption of
this Statement did not have a material impact on the financial statements.
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 119,419 gross acres in the
Uinta Basin of northeastern Utah, of which the Company holds an interest in
approximately 46,771 net acres as of September 30, 2003. Additionally, Gasco has
an opportunity to earn or acquire an interest in approximately 19,324 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 had 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 shared technical information through the formation
of a joint technical team. Halliburton elected to participate in two of the
wells and declined to participate in the remaining three wells in this area. The
agreement was terminated during October 2003.
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 30% working interest, were approximately $2,340,000. The Company has
scheduled recompletions for two of these wells during November 2003. Gasco's
fourth operated well in this area reached total depth during December 2002 and
is currently scheduled for completion during November 2003. The drilling and
completion costs for this well, net to Gasco's interest are expected to be
approximately $1,600,000. Gasco's fifth operated well in this area was spudded
in October 2002 with a small rig that was moved off the drill site. A larger rig
was moved onto the site in March 2003 to complete the drilling of this well. The
Company plans to complete this well during November 2003. The total costs for
this well, net to Gasco's interest are estimated at approximately $1,600,000.
During October 2003, the Company completed a transaction whereby it settled an
outstanding amount owed of $1,606,982 to an oilservice provider arising from
drilling and completion expenditures on five Gasco-operated wells, by paying the
provider $400,000 in cash and conveying to the provider a portion of its
interests in two Riverbend wells. Subsequent to the transaction, the Company
retained a 30% working interest in the two subject wells and the ownership in
remaining three wells is unchanged.
18
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 producing and 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 September 30, 2003, the Company has a leasehold
interest in approximately 110,797 gross acres and 71,274 net acres in this area.
During 2002, the Company participated in the drilling of two wells in this AMI.
Gasco has a 31.5% interest in each of these wells, which are currently producing
and are operated by Burlington.
During June 2003, the Company announced its plans to dispose of certain of its
Wyoming properties in the Greater Green River Basin covering approximately
72,000 acres net to Gasco's interest. The Company is also considering additional
options for this area such as the farm-out of some of its acreage and other
similar type transactions.
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. Effective July 16, 2002, the Company assigned 25% of this
suspended interest resulting in the Company's net acres being reduced from 9,726
to 7,295 net acres. The Company was notified in July 2003 that all of the
protested leases were released from suspense.
Southern California Project
The Company has a leasehold interest in approximately 3,868 gross acres (2,727
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
During February and April, 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 Preferred
19
Stock was sold for $440 per share resulting in net proceeds of $4,797,409 during
the first nine 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 on June 15, 2003 and was paid by the issuance of 287
shares of Preferred Stock and a cash payment of $1,836. 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. Holders of the
Preferred Stock vote as a class on issues that affect the Preferred
Stockholders' interests and vote with holders 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.
Subsequent Events
On October 15, 2003 Gasco closed the sale of $2,500,000 of 8% Convertible
Debentures ("Debentures") in a private placement offering. The Debentures bear
interest at 8% per annum, which is payable monthly, and are convertible into
4,166,667 shares of the Company's common stock, at the holder's option, at a
conversion price of $0.60 per common share. Monthly principal payments of
$37,500 begin in the fourth quarter of 2006 and the maturity date of the
Debentures is October 15, 2008. The Debentures are secured by the producing
wellbores that Gasco develops using this financing. Additionally, the Debenture
holders exercised their right to designate a single nominee to the Company's
Board of Directors during October 2003.
The Debenture conversion price of $0.60 per common share was lower than the
trading value of the Company's common stock on the date the Debentures were
issued. This resulted in a beneficial conversion feature of approximately
$167,000, which will be amortized over the life of the Debentures.
On October 23, 2003 the Company completed the sale through a private placement
of approximately 4,788,436 shares of its common stock to a group of accredited
previous investors. The selling price of $0.58 per common share was determined
by taking 97 percent of the 20-day average closing price of the Company's common
stock for the period ending October 17, 2003, and resulted in total proceeds of
approximately $2,780,000. The selling price of $0.58 per common share was lower
than the trading price of the Company's common stock, which resulted in a
beneficial conversion feature of approximately $334,000. The expenses associated
with this transaction are expected to be approximately $15,000.
The Company plans to use the proceeds from these transactions to develop and
exploit its core-area Riverbend Project in the Uinta Basin in Utah and for its
ongoing operations.
20
During October 2003, the Company completed a transaction whereby it settled an
outstanding amount owed of $1,606,982 to an oilservice provider arising from
drilling and completion expenditures on five Gasco-operated wells, by paying the
provider $400,000 in cash and conveying to the provider a portion of its
interests in two Riverbend wells. Subsequent to the transaction, the Company
retained a 30% working interest in the two subject wells and the ownership in
the remaining three wells is unchanged.
Results of Operations
Volumes, Prices and Operating Expenses
The following table presents information regarding the production volumes,
average sales prices received and average production costs associated with the
Company's sales of natural gas for the periods indicated.
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
2003 2002 2003 2002
Natural gas production (Mcf) 59,028 27,965 199,645 46,465
Average sales price per Mcf $ 4.30 $1.56 $4.44 $2.05
Oil production (Bbl) 802 - 1,750 -
Average sales price per Bbl 27.52 - 28.35 -
Expenses per Mcfe:
Lease operating 1.63 1.17 1.34 1.64
Depletion and impairment 1.96 1.83 1.90 15.86
The Third Quarter of 2003 Compared to the Third Quarter of 2002
Gas Revenue
Gas revenue increased from $43,611 during the third quarter of 2002 to $255,028
during the third quarter of 2003. The revenue increase is comprised of an
increase in the average gas price from $1.56 per Mcf during 2002 to $4.30 per
Mcf during 2003 combined with increased production of 59,028 Mcf during 2003
versus 27,965 Mcf during 2002, primarily due to the Company's drilling activity
during 2002 and 2003.
Oil Revenue
Oil revenue during the third quarter of 2003 is comprised of 802 bbl of oil at
an average price of $27.52 per bbl. The increase in production from the same
period during 2002 is due to the increased drilling activity discussed above.
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 $15,796 during the third quarter of 2003 as
compared with the third quarter of 2002 primarily due to a decrease in the
average cash balance.
21
General and Administrative Expense
General and administrative expense decreased from $1,461,377 to $684,480 during
the quarter ended September 30, 2003 as compared with the same period during
2002, primarily due to the Company's efforts to decrease its overhead expenses.
The $776,897 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 $270,000 reduction in compensation expense due to the one time
payment of a bonus to an employee of the Company who was instrumental in
securing the Company's agreement with Shama Zoe, as described above, a $150,000
reduction in legal fees and a $200,000 decrease in consulting fees that were
incurred in connection with the 2002 property transactions discussed above. The
remaining decrease in general and administrative expenses is due to the
fluctuation in numerous other expenses, none of which are individually
significant.
Lease Operating Expense
Lease operating expense increased $71,342 during the third quarter of 2003 as
compared with the third quarter of 2002. The increase is due a greater number of
producing wells during 2003 resulting from the Company's drilling activity
during 2002 and 2003.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization expense during third quarter of 2003 is
comprised of $108,000 of depletion expense related to the Company's proved oil
and gas properties, $13,596 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
third quarter of 2002 consists of $39,325 of depletion expense and $11,832 of
depreciation expense. The increase in depletion expense during the third quarter
of 2003 as compared with the third quarter of 2002 is due primarily to the
increase in production discussed above. The increase in depreciation expense
during 2003 is the result of the additional equipment purchased during 2002 and
2003.
The Nine Months Ended September 30, 2003 Compared to the Nine Months Ended
September 30, 2002
The comparisons for the nine months ended September 30, 2003 and the nine months
ended September 30, 2002 are consistent with those discussed in the third
quarter of 2003 compared to the third quarter of 2002 except as discussed below.
Gas Revenue
Gas revenue increased from $95,543 during the first nine months of 2002 to
$885,866 during the first nine months of 2003. The revenue increase is comprised
of an increase in the average gas price from $2.05 per Mcf during 2002 to $4.44
per Mcf during 2003 combined with increased production of 199,645 Mcf during
2003 versus 46,465 Mcf during 2002, due primarily to the Company's drilling
activity during 2002 and 2003.
22
Oil Revenue
Oil revenue during the first nine months of 2003 is comprised of 1,750 bbl of
oil at an average price of $28.35 per bbl. The increase in production from the
same period during 2002 is due to the increased drilling activity discussed
above.
Impairment Expense
The impairment expense during the first nine months of 2002 represents costs
associated with a well drilled in the Southwest Jonah field located in the
Greater Green River Basin in Sublette County, Wyoming during the first quarter
of 2002. The 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 nine 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.
Interest Expense
The interest expense during the nine months ended September 30, 2003 primarily
represents the interest incurred on the Company's outstanding note payable,
which was repaid during February 2003.
Cumulative Effect of Change in Accounting Principle
The cumulative effect of change in accounting principle during 2003 represents
the Company's recognition of an asset retirement obligation in connection with
the adoption of FAS 143 on January 1, 2003.
Liquidity and Capital Resources
The Company's principal capital requirements are to fund operations and to
acquire, explore and develop petroleum and natural gas properties. 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.
At September 30, 2003, the Company had cash and cash equivalents of $478,692
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 $3,094,652 and the cash used in operations of $1,908,027 partially
offset by the net proceeds from the Preferred Stock offering of $4,797,409.
23
The Company's working capital deficit decreased from $2,857,539 at December 31,
2002 to $2,498,611 as of September 30, 2003 due primarily to the Preferred Stock
offering proceeds, the repayment of the note payable and the development and
exploration activities discussed above.
Subsequent to September 30, 2003 the Company issued $2,500,000 in 8% Convertible
Debentures, sold 4,788,436 shares of common stock through a private placement
for approximately $2,780,000 and settled approximately $1,600,000 of its
accounts payable to an oilservice provider by making a cash payment of $400,000
to the provider and conveying to the provider a portion of the interests in two
of its wells, as further described above. Management believes that the
completion of these transactions will provide the Company with adequate
resources to meet its obligations during the next year, however, management's
drilling plans for the coming year will require capital in excess of that
currently available and will require the Company to raise additional funds by
selling securities, selling assets or farmouts or similar type arrangements. 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.
24
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.
25
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
See Note 10 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
The Company held its Annual Meeting ("Annual Meeting") of Stockholders on
September 18, 2003. The meeting was held to elect seven directors to serve until
the 2004 Annual Meeting of Stockholders, to approve the Gasco Energy, Inc. 2003
Restricted Stock Plan and to ratify the selection of Deloitte & Touche LLP as
independent auditors of the Company for the year ending December 31, 2003.
The "For" column represents the number of affirmative votes, and the "withheld"
column represents the number of abstentions and broker non-votes, by holders of
common and preferred stock represented by either proxy or at the Annual Meeting.
Only holders of preferred stock were permitted to vote for the Preferred Stock
Director, Richard Langdon. The results of the voting related to the elections of
the nominees for director were as follows:
Name For Withheld
Marc A. Bruner 37,628,368 6,049,931
Charles B. Crowell 43,195,909 482,390
Mark A. Erickson 36,454,849 7,223,450
Richard J. Burgess 43,485,649 192,650
Carmen J. (Tony) Lotito 31,753,725 11,924,574
Carl Stadelhofer 43,162,509 515,790
Preferred Stock Director
Richard S. Langdon 11,339 --
Stockholders voted 37,900,536 shares "for" and 319,201 shares "against" the
proposal to approve the Gasco Energy, Inc. 2003 Restricted Stock Plan, with
5,458,562 votes abstaining.
Stockholders voted 25,793,354 shares "for" and 103,000 shares "against" the
proposal to ratify the selection of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending December 31, 2003, with
5,431,842 votes abstaining and 12,350,103 shares not voted.
26
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).
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).
27
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).
*4.5 Convertible Loan Agreement, dated October 15, 2003 between the Company
and Renaissance Capital Growth & Income Fund III, Inc., Renaissance US
Growth & Investment Trust PLC, BFSUS Special Opportunities Trust PLC
and Renn Capital Group, Inc.
*4.6 Form of Gasco Energy, Inc. 8.00% Convertible Debenture, dated October
15, 2003 between each of The Frost National Bank, Custodian FBO
Renaissance US Growth & Investment Trust PLC Trust No. W00740100, HSBC
Global Custody Nominee (U.K.) Limited Designation No. 896414 and The
Frost National Bank, Custodian FBO Renaissance Capital Growth & Income
Fund III, Inc. Trust No. W00740000.
*4.7 Deed of Trust and Security Agreement, dated October 15, 2003 between
Pannonian and BFSUS Special Opportunities Trust PLC, Renaissance
Capital Growth & Income Fund III, Inc. and Renaissance US Growth &
Income Trust PLC.
*4.8 Subsidiary Guaranty Agreement, dated October 15, 2003 between
Pannonian and Renn Capital Group, Inc.
*4.9 Subsidiary Guaranty Agreement, dated October 15, 2003 between San
Joaquin Oil and Gas, Ltd. And Renn Capital Group, Inc.
*4.10Form of Subscription and Registration Rights Agreement between the
Company and investors purchasing Common Stock in October 2003.
*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:
None.
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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: November 7, 2003 By: /s/ W. King Grant
--------------------------------
W. King Grant, Executive Vice President
Principal Financial and Accounting Officer
29