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EXCEL - IDEA: XBRL DOCUMENT - GATEWAY ENERGY CORP/NEFinancial_Report.xls
EX-32.1 - CERTIFICATION OF CEO PER SECTION 906 - GATEWAY ENERGY CORP/NEexhibit32.htm
EX-31.1 - CERTIFICATION OF CEO PER SECTION 302 - GATEWAY ENERGY CORP/NEexhibit31.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

 

 FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from

 __________to __________

 

                                  Commission File No.     000-06404                                 

 

GATEWAY ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

44-0651207

(State or other jurisdiction of

 incorporation or organization)

 

(I.R.S. Employer Identification

 Number)

 

1415 Louisiana Street, Suite 4100

Houston, TX  77002

(Address of principal executive offices, including zip code)

 

(713) 336-0844

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                 Yes   X                  No ___

  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  X  No ___ 

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer 

Accelerated filer                    

 

Non-accelerated filer    o (Do not check if a smaller reporting company)

 

Smaller reporting company 

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes______ No   X  

 

As of May15, 2013, the registrant had 30,613,637 shares of its common stock outstanding.

 

 

 


 

 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

 

 

Part  I - Financial Information

                                                                                                         

Item 1.  Consolidated Condensed Financial Statements (Unaudited)

   

 

 

Balance Sheets as of March 31, 2013 and December 31, 2012

   3

 

 

 

Statements of Operations for the three month periods ended March 31, 2013 and 2012

4

 

 

 

Statements of Cash Flows for the three month periods ended March 31, 2013 and 2012

5

 

 

 

Notes to Financial Statements

6

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

19

 

Item 4.

 

Controls and Procedures

19

 

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings 

20

 

Item 1A.

 

Risk Factors

20

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds 

20

 

Item 3.

 

Defaults Upon Senior Securities 

20

 

Item 4.

 

Mine Safety Disclosures 

20

 

Item 5.

 

Other Information 

20

 

Item 6.

 

Exhibits 

21

 

 

 

 

 

 

Signatures

 

22

 

 

 

 

 

 

 

 

 

 

                   


 

 

 

 

 

 

 

2

 


 
 

 

                                                                                                     ITEM 1.     FINANCIAL STATEMENTS

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 
   
           

As of

 
           

March 31, 2013

 

December 31, 2012

 
           

(Unaudited)

     

ASSETS

 
                   

Current Assets

             
 

Cash and cash equivalents

$

237,719

$

33,631

 
 

Restricted cash

   

423,166

 

-

 
 

Accounts receivable trade

 

528,242

 

643,524

 
 

Prepaid expenses and other assets

 

104,041

 

137,085

 
 

Current assets of discontinued operations

 

-

 

64,698

 
   

Total current assets

   

1,293,168

 

878,938

 
                   

Property and Equipment, at cost

         
 

Gas distribution, transmission and gathering

 

14,316,836

 

14,066,836

 
 

Office furniture and other equipment

 

174,254

 

174,254

 
           

14,491,090

 

14,241,090

 
 

Less accumulated depreciation and amortization

 

(10,891,325)

 

(10,571,643)

 
           

3,599,765

 

3,669,447

 
                   

Other Assets

             
 

Non-current assets of discontinued operations

 

-

 

1,007,287

 
 

Other

     

36,525

 

28,890

 
           

36,525

 

1,036,177

 
   

Total assets

 

$

4,929,458

$

5,584,562

 
                   

LIABILITIES AND STOCKHOLDERS' EQUITY

 
                   

Current Liabilities

           
 

Accounts payable

 

$

487,923

$

513,703

 
 

Accrued expenses and other liabilities

 

93,897

 

20,344

 
 

Notes payable - insurance

   

15,413

 

60,277

 
 

Asset retirement obligations

 

891,102

 

595,534

 
 

Current maturities of long-term debt

 

1,712,674

 

2,557,674

 
 

Current liabilities of discontinued operations

 

-

 

15,466

 
   

Total current liabilities

   

3,201,009

 

3,762,998

 
                   

Asset retirement obligations

   

735,228

 

807,326

 
   

Total liabilities

   

3,936,237

 

4,570,324

 
                   

Commitments and contingencies

         
                   

Stockholders' Equity

           
 

Preferred stock, $1.00 par value, 10,000 shares authorized, no shares issued and outstanding, respectively

 

-

 

-

 
 

Common stock, $0.01 par value, 150,000,000 shares authorized, 30,332,056 and 24,082,056 shares issued and

outstanding at March 31, 2013 and

 December 31, 2012, respectively

 

303,321

 

240,821

 
 

Additional paid-in capital

   

23,378,055

 

23,174,831

 
 

Accumulated deficit

   

(22,688,155)

 

(22,401,414)

 
   

Total stockholders' equity

 

993,221

 

1,014,238

 
   

Total liabilities and stockholders' equity

$

4,929,458

$

5,584,562

 
                     

 

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

 

3

 


 
 

 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

         

For the Three Months Ended March 31,

         

2013

 

2012

               

Operating revenues

       
 

Sales of natural gas

$

1,020,165

$

962,421

 

Transportation of natural gas and liquids

 

291,938

 

317,770

 

Reimbursables

 

19,500

 

137,131

         

1,331,603

 

1,417,322

               

Operating costs and expenses

       
 

Cost of natural gas purchased

 

896,042

 

786,621

 

Operation and maintenance

 

81,222

 

89,718

 

Reimbursable costs

 

19,500

 

137,131

 

General and administrative

 

349,855

 

388,946

 

Acquisition costs

 

-

 

30,642

 

Asset impairments

 

250,000

 

-

 

Depreciation and amortization

 

69,682

 

112,685

 

Asset retirement obligation accretion

 

28,154

 

25,023

         

1,694,455

 

1,570,766

               

Operating loss

   

(362,852)

 

(153,444)

               

Other expense

         
 

Interest expense, net

 

(35,832)

 

(34,339)

 

Other, net

   

(95)

 

(4,505)

 

Other expense, net

 

(35,927)

 

(38,844)

               

Loss from continuing operations

       
 

before income taxes and discontinued operations

 

(398,779)

 

(192,288)

Income tax expense

 

(14,109)

 

(5,723)

Loss from continuing operations

 

(412,888)

 

(198,011)

               

Income from discontinued operations, net of taxes

 

126,147

 

51,262

         

 

 

 

Net loss

 

$

(286,741)

$

(146,749)

               

Basic and diluted income (loss) per share:

       
 

Continuing operations

$

(0.01)

$

(0.01)

 

Discontinued operations

 

-

 

-

 

Net loss

 

$

(0.01)

$

(0.01)

               

Weighted average number of basic and

       
 

diluted common shares outstanding

 

27,693,167

 

23,674,602

 

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

 

 

4

 


 
 

 

 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 
             

 

For the Three Months Ended March 31,

 
             

 

2013

 

2012

 
             

 

       

Cash flows from operating activities - continuing operations

 

       

Loss from continuing operations

 

$

(412,888)

$

(198,011)

 

Adjustments to reconcile loss from continuing operations

 

       
 

to net cash provided by operating activities:

 

       
 

Depreciation and amortization

 

 

69,682

 

112,685

 
 

Asset impairment

   

 

250,000

 

-

 
 

Asset retirement obligation accretion

 

 

28,154

 

25,023

 
 

Stock based compensation expense, net of forfeitures

 

15,724

 

17,833

 
 

Amortization of deferred loan costs

 

 

12,802

 

5,629

 
 

Asset retirement obligation expenditures

 

(54,684)

 

-

 
 

Net change in operating assets and liabilities, resulting

 

       
   

from changes in:

   

 

       
   

Accounts receivable trade

 

 

115,282

 

(57,227)

 
   

Prepaid expenses, deposits and other assets

 

35,669

 

57,797

 
   

Accounts payable

   

 

(25,780)

 

77,257

 
   

Accrued expenses and other liabilities

 

73,553

 

(8,728)

 
     

Net cash provided by operating activities

 

107,514

 

32,258

 
             

 

       

Cash flows from investing activities - continuing operations

 

       
 

Capital expenditures

   

 

-

 

(11,036)

 
 

Acquisitions

     

 

-

 

(1,000,000)

 
     

Net cash used in investing activities

 

-

 

(1,011,036)

 
             

 

       

Cash flows from financing activities - continuing operations

 

       
 

Issuance of common stock

   

 

250,000

 

-

 
 

Proceeds from borrowings

   

 

44,785

 

750,000

 
 

Payments on borrowings

   

 

(934,649)

 

(116,928)

 
 

Deferred financing costs

   

 

(23,062)

 

(8,750)

 
 

Change in restricted cash

   

 

(423,166)

 

-

 
     

Net cash provided by (used in) financing activities

 

(1,086,092)

 

624,322

 
             

 

       

Net decrease in cash and cash equivalents from continuing operations

 

(978,578)

 

(354,456)

 
             

 

       

Discontinued operations

   

 

       
 

Net cash provided by discontinued operations operating activity

 

175,379

 

45,616

 
 

Net cash provided by discontinued operations investing activity

 

1,007,287

 

-

 

Net increase in cash and cash equivalents from discontinued operations

 

1,182,666

 

45,616

 
             

 

       

Cash and cash equivalents at beginning of period

 

33,631

 

554,054

 

Cash and cash equivalents at end of period

$

237,719

$

245,214

 
             

 

       

Supplemental disclosures of cash flow information

 

       
 

Cash paid for interest

   

$

13,663

$

28,907

 
 

Cash paid for taxes

   

$

-

$

-

 
             

 

       
                               

The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.

5

 


 
 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

 

  (1)  Business and Organization

 

Gateway Energy Corporation (the “Company” or “Gateway”), a Delaware corporation, was incorporated in 1960 and entered its current business in 1992.  The Company's common stock, par value $0.01 per share, is traded in the over-the-counter market on the bulletin board (“OTCBB”) section under the symbol GNRG.  Gateway is engaged in the midstream natural gas business.  The Company owns and operates natural gas distribution, transmission and gathering systems located onshore in the continental United States and offshore in federal and state waters of the Gulf of Mexico.

 

Gateway conducts all of its business through its wholly owned subsidiary companies, Gateway Pipeline Company, Gateway Offshore Pipeline Company, Gateway Energy Marketing Company, Gateway Processing Company, Gateway Pipeline USA Corporation, Gateway Delmar LLC, Gateway Commerce LLC and CEU TX NPI, L.L.C.  Gateway-Madisonville Pipeline, L.L.C. is 67% owned by Gateway Pipeline Company and 33% owned by Gateway Processing Company. 

 

Access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, our Code of Ethics and current reports on Form 8-K are available at Gateway’s website, www.gatewayenergy.com.

 

The Company had available cash of $237,719 at March 31, 2013.  In addition, as of March 31, 2013, the Company had current debt obligations of $1,712,674 and current asset retirement obligations of $891,102.  Based on the Company’s cash position and its projected cash flows from operations as of March 31, 2013, the Company will not have the ability to repay its existing debt obligations, committed capital expenditures and asset retirement obligations unless it is able to obtain additional financing or raise cash through other means, such as asset sales.  If the Company is unsuccessful in those efforts, the Company may be unable to continue its operations.

 

The Company is actively exploring potential sources of capital to allow it to fund a combination of debt service and asset retirement obligations and to accelerate the implementation of its growth strategy.  Any new capital may take several forms.  There is no guarantee that it will be able to raise outside capital.

 

In this regard, during the fourth quarter of 2012, the Company entered into an asset sales agreement with FMP Holdings, LLC (the “Buyer”), pursuant to which the Company agreed to sell its Tyson Pipeline Systems, which were acquired October 18, 2010, to the Buyer for $1,100,000.  All of the issued and outstanding capital stock of the Buyer is owned by Frederick M. Pevow, the Company’s President, Chief Executive Officer and Director.  Additionally, Mr. Pevow is the acting President of the Buyer.  On February 7, 2013, the Company closed this transaction.

 

Furthermore, on February 7, 2013, the Company entered into a subscription agreement, pursuant to which GreyCap Energy LLC agreed to acquire 6,250,000 shares of its common stock, constituting 20.4% of its issued and outstanding common stock, at a sale price of $0.04 per common share, for an aggregate purchase price of $250,000.  

 

With the net proceeds of these two transactions, the Company reduced its borrowings under its Loan Agreement with Meridian Bank by $825,000 and escrowed $450,000 with Meridian Bank to fund the planned abandonment of certain pipelines located in the Gulf of Mexico during the first and second quarter of 2013.

 

The balance of the net proceeds will be used for general corporate purposes.

 

Glossary

 

                In the following discussion, “Mcf” refers to thousand cubic feet of natural gas; “Bbl” refers to barrel of liquid hydrocarbons of approximately 42 U.S. gallons; “Btu” refers to British thermal unit, a common measure of the energy content of natural gas; “MMBtu” refers to one million British thermal units; “Mcfe” refers to thousand cubic feet equivalent; and liquid hydrocarbons are converted to Mcf equivalents using the ratio of 1.0 barrel of liquid hydrocarbons to 6.0 Mcf of natural gas.

 

 

 

6

 


 
 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

 

(2)  Summary of Significant Accounting Policies and Estimates

               

Basis of Presentation

 

                The Company has prepared the accompanying unaudited consolidated condensed financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) instructions to Form 10-Q and Item 310(b) of Regulation S-K.  These financial statements should be read together with the financial statements and notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on April 8, 2013.  Certain information and footnote disclosures normally included in financial statements prepared in accordance U.S. GAAP have been condensed or omitted.  The accompanying financial statements reflect all adjustments and disclosures, which, in the Company’s opinion, are necessary for fair presentation.  All such adjustments are of a normal recurring nature.  The results of operations for the interim periods are not necessarily indicative of the results of the entire year.  Certain reclassifications have been made to the prior period financial statements to conform to the current period’s presentation.

                 

All of the Company’s operations are onshore in the continental United States and offshore in federal and state waters of the Gulf of Mexico.  Management separately reviews and evaluates the operations of each of its gas distribution, transmission and gathering systems individually, however, these operations are aggregated into one reportable segment due to the fact that all of the Company’s operations are subject to similar economic and regulatory conditions and operate in the same industry group such that they are likely to have similar long-term prospects for financial performance.

 

Principles of Consolidation

 

The Company consolidates the financial statements of its majority-owned and wholly-owned subsidiaries.  All significant intercompany transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.  Management’s significant estimates include depreciation of long-lived assets, estimates and timing of asset retirement obligations, amortization of deferred loan costs, deferred tax valuation allowance, intangible asset lives, impairment and valuation of the fair value of our long-lived assets, purchase price allocations and valuation of stock based transactions.  Actual results could differ from those estimates.

 

Concentrations of Credit Risk

 

                The Company maintains all cash in deposit accounts, which at times may exceed federally insured limits. Additionally, the Company maintains credit on account for customers. The Company has not experienced material losses in such accounts and believes its accounts are fully collectable.  Accordingly, no allowance for doubtful accounts has been provided.

                 

                During the three months ended March 31, 2013, two companies, Hydrocarbon Exchange Corp. and ETC Marketing, Ltd and supplied 52.4% and 47.6%, respectively, of the Company’s total natural gas purchases. 

 

                 

 

7

 


 
 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

 

Due to the nature of the Company’s operations and location of its gas distribution, transmission and gathering systems, the Company is subject to concentration of its sources of revenue from a few significant customers.  Revenues from customers representing 10% or more of total revenue for the three months ended March 31, 2013 and 2012 are as follows:  

 

     

Three Months Ended March 31,

     

2013

 

2012

           

Dart Container Corporation

51.2%

 

41.7%

Owens Corning

 

25.6%

 

27.2%

 

 

The loss of the Company’s contracts with Dart Container Corporation or Owens Corning could have a material adverse effect on its business, results of operations and financial condition.  The Company’s accounts receivable are not collateralized.

 

Property and Equipment

 

Property and equipment is stated at cost, plus capitalized interest costs on major projects during their construction period.  Additions and improvements that add to the productive capacity or extend the useful life of an asset are capitalized.  Expenditures for maintenance and repairs are charged to expense as incurred.  Depreciation and amortization is calculated using the straight-line method over estimated useful lives ranging from 10 to 20 years for its gas distribution, transmission and gathering systems and from two to ten years for office furniture and other equipment.  Upon disposition or retirement of any gas distribution, transmission or gathering system components, any gain or loss is charged or credited to accumulated depreciation.  When entire gas distribution, transmission and gathering systems or other property and equipment are retired or sold, any resulting gain or loss is credited to or charged against operations.

 

Property, plant and equipment and identifiable intangible assets are reviewed for impairment, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, “Property, Plant, and Equipment,” whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets.

 

Asset Retirement Obligations

 

 The Company recognizes asset retirement obligations associated with the retirement of tangible long-lived assets that result from their acquisition, construction, development and operation, when laws or regulations require the Company to pay for their abandonment, in accordance with the ASC Topic 410, “Asset Retirement and Environmental Obligations”.  The Company records the fair value of an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying value of the related long-lived asset.  The obligation is subsequently allocated to expense using a systematic and rational method.  The Company has recorded an asset retirement obligation to reflect its legal obligations related to future abandonment of its pipelines and gas gathering systems, even though the timing and realized allocation of the cost between the Company and its customers may be subject to change. The Company estimates the expected cash flows associated with the legal obligation and discounts the amount using a credit-adjusted, risk-free interest rate.  At least annually, the Company reassesses the obligation to determine whether a change in the estimated obligation is necessary.  The Company also evaluates whether there are indicators that suggest the estimated cash flows underlying the obligation have materially changed.  Should those indicators suggest the estimated obligation may have materially changed on an interim basis (quarterly), the Company will accordingly update its assessment.  

 

 

8

 


 
 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

 

The following table describes changes to the Company’s asset retirement obligation liability during the three months ended March 31, 2013:

 

Asset retirement obligation, beginning of period

$

1,402,860

Revisions in estimated liabilities

   

 

250,000

Asset retirement obligation accretion

 

 

28,154

Liabilities settled

     

 

(54,684)

Asset retirement obligation, end of period

 

 

1,626,330

Less current portion

     

 

(891,102)

Asset retirement obligation, long term

 

$

735,228

 

 

Since June 30, 2012, several of the Company’s offshore and onshore assets have been negatively affected by the loss of future revenues as customers have chosen to delay or abandon natural gas production due to depressed natural gas prices.  Based on those events and then current natural gas market conditions, management performed an impairment review of its capitalized costs on these systems as of September 30, 2012, including their future abandonment costs and associated intangible assets, in accordance with ASC Topic 360 and determined an impairment of those assets was required.  During the three months ended March 31, 2013, the Company determined that a revision in its estimated abandonment obligation was necessary and accrued an additional $250,000.  As a result of the Company’s continued belief in the lack of further recovery from these assets, the accrual necessary to increase the abandonment obligation was reflected as additional asset impairment expense on the Company’s consolidated Statement of Operations for the three months ended March 31, 2013.

 

Income Taxes

           

The Company computes income taxes using the asset and liability method whereby deferred tax assets are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is established against such assets where management is unable to conclude more likely than not that such asset will be realized.

 

The Company recognizes the impact from an uncertain tax position only if that position is more likely than not of being sustained upon examination by the taxing authority based on the technical merits of the position.  Interest and/or penalties related to income tax matters are to be recognized in current income tax expense.  The Company’s tax years from 2002 forward are subject to examination.

 

Earnings per Share

 

Basic earnings per share is computed by dividing net earnings or net loss by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed by dividing net earnings or net loss by the weighted average number of shares outstanding, after giving effect to potentially dilutive common share equivalents outstanding during the period.  Potentially dilutive common share equivalents are not included in the computation of diluted earnings per share if they are anti-dilutive.  During the three months ended March 31, 2013 and 2012, all potentially dilutive common shares arising from outstanding stock options and restricted stock have been excluded from diluted earnings per share as their effects were anti-dilutive.

 

(3)  

Business Combinations

 

                Acquisition of Commerce Pipeline

 

On February 29, 2012, Gateway Commerce LLC, a wholly owned subsidiary of the Company, purchased a natural gas pipeline from Commerce Pipeline, L.P. (“Commerce”).  The acquisition was made as part of the Company’s strategy to expand its unregulated natural gas distribution activities.  The pipeline is located in Commerce, Texas and delivers natural gas into an aluminum smelting plant owned by Hydro Aluminum Metal Products North America.  The pipeline and related assets were acquired pursuant to an Asset Sales Agreement (the “Agreement”), dated February 29, 2012, between Gateway Commerce LLC and Commerce.  Pursuant to the Agreement and subject to the terms contained therein, Gateway Commerce LLC agreed to acquire from Commerce the pipeline and related assets for $1,000,000 in cash.  The Agreement contained representations, warranties and indemnities that are customary for transactions of this type.  The Company financed the $1,000,000 purchase price through a combination of cash-on-hand and borrowings under its credit facility.  The transaction was accounted for in accordance with ASC Topic 805 “Business Combinations” and recorded to its gas distribution, transmission and gathering property and equipment account.  During the three months ended March 31, 2012, the Company incurred $30,642 in acquisition costs related to legal fees and due diligence expenses associated with this transaction.  During the three months ended March 31, 2013 and 2012, the Company realized revenue of $46,184 and $15,284, respectively, and operating income of $42,983 and $14,566, respectively, from the activity associated with its Commerce pipeline.

9

 


 
 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

 

 

 (4)

Discontinued Operations

 

On July 31, 2012, the Company sold its Bolivar pipeline to Duma Energy Corporation (“Duma”), the operator of the field in which the Bolivar pipeline is located.  In connection with the sale, the Company received $1.00 and Duma assumed certain post-closing liabilities, including the future abandonment obligation of the pipeline.  As of June 30, 2012, the Company carried an asset retirement obligation of $49,310 on its balance sheet with respect to the Bolivar pipeline.  The Company realized an operating loss of $4,956 during the three months ended March 31, 2012, with respect to the Bolivar pipeline.

 

On October 11, 2012, the board of directors of the Company formed a special committee, consisting solely of independent directors, to consider a proposal from the Company’s President, Chief Executive Officer and Director, Frederick M. Pevow, Jr., for a sale of certain of the Company’s assets to Mr. Pevow (the “Asset Sale”).

 

On December 12, 2012, Gateway Pipeline USA Corporation (“Gateway Pipeline USA”), a wholly owned subsidiary of the Company, entered into an asset sales agreement (the “ASA”) with FMP Holdings, LLC (the “Buyer”), pursuant to which Gateway Pipeline USA would sell certain assets, including certain pipelines and pipeline facilities located in Guadalupe and Shelby Counties, Texas, Miller County, Arkansas and Pettis County, Missouri, as well as certain surface contracts, commercial contracts and records related to the operation of the facilities (the “Sold Assets”), to the Buyer for $1,100,000.  All of the issued and outstanding capital stock of the Buyer is owned by Frederick M. Pevow, the President, Chief Executive Officer and Director of the Company.  Additionally, Mr. Pevow is the acting President of the Buyer.  On February 7, 2013, the Company closed this transaction. 

   

The Company has determined that, given the consummation of the sale transaction, it has met the guidance set forth in both ASC Topic 205, “Presentation of Financial Statements” and ASC Topic 360, “Property, Plant and Equipment” to reflect the assets, liabilities and results of operations of the Sold Assets as a component of Discontinued Operations for all periods presented herein.

 

The Company’s results of operations from discontinued operations are as follows:

 

     

 

 

 

   
     

 

For the Three Months Ended

March 31,

     

 

     

 

2013

 

 

2012

     

 

 

 

   

Transportation of natural gas and liquids

$

38,447

 

$

80,456

Operation and maintenance

 

(5,289) 

 

 

(11,366)

Depreciation

 

 

(5,292)

 

 

(12,701)

Other income (expense)

 

807

 

 

(5,127)

Gain on sale of assets

 

 

97,474

 

 

-

Income from discontinued operations, net of taxes

$

126,147

 

$

51,262

     

 

 

 

   

10

 


 
 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

 

 

(5)  

Debt

 

Insurance Notes Payable

 

During 2012, the Company executed premium finance agreements for its insurance premiums.  The total original principal amount of the notes issued in connection with these agreements was $148,674 with an interest rate of 3.99%.  The notes require monthly principal and interest payments.  The amount of the monthly payment varies depending on any changes in coverage and policy renewal periods. 

 

Long Term Debt

 

In connection with the sale of the Sold Assets and the closing of the ASA, and effective as of January 30, 2013, the Company, Gateway Pipeline Company (“GPC”), Gateway Offshore Pipeline Company (“GOPC”), Gateway Processing Company (“Gateway Processing”), Gateway Energy Marketing Company (“GEMC”), Gateway Pipeline USA, Gateway Commerce LLC (“GCLLC”) and Gateway Delmar LLC (together with GPC, GOPC, Gateway Processing, GEMC, Gateway Pipeline USA and GCLLC, the “Guarantors”), entered into a fifth amendment to the Loan Agreement (the “Fifth Amendment”) with Meridian Bank.

 

Pursuant to the Fifth Amendment, the following amendments were made to the Loan Agreement:

 

·         In addition to certain existing collateral securing obligations under the note, the Company assigned a deposit account in the amount of $450,000 to Meridian Bank pursuant to an Assignment of Deposit Account dated as of January 30, 2013.  The purpose of the deposit account is to fund the planned abandonment of certain pipelines located in the Gulf of Mexico during the first and second quarter of 2013.

 

·         Gateway Delmar LLC was required to execute and deliver an unlimited guaranty in favor of Meridian Bank and became one of the “Guarantors” under the Loan Agreement.

 

·         The Fifth Amendment requires that the Company maintain a debt to tangible net worth ratio less than or equal to 3.5 to 1.0 as of the end of the each fiscal quarter, a debt service coverage ratio greater than 1.5 to 1.0 and a current ratio of 1.25 to 1.0.

 

In connection with entering the Fifth Amendment, the Company and Meridian also entered into an Amendment to Term Promissory Note effective as of January 30, 2013 (the “Amended Term Note”).  The outstanding balance of the Amended Term Note, as of January 30, 2013, after the partial payoff contemplated by the Paydown Letter was $1,732,674, and has a maturity date of June 30, 2013.  Principal on the Amended Term Note is due and payable in equal monthly installments of $10,000, plus all accrued interest, with a maturity date of June 30, 2013.

 

As of March 31, 2013, there was a $1,712,674 outstanding balance on the facility.  At March 31, 2013, the Company was not in compliance with the financial covenants of the Loan Agreement.  The Company has not received a waiver of the non-compliance.   

 

 (6)

Equity

 

                Issuance of Common Stock

 

On February 7, 2013, the Company entered into a subscription agreement (the “Subscription Agreement”), pursuant to which GreyCap Energy LLC (“GreyCap”) agreed to acquire 6,250,000 shares of the Company’s common stock, constituting 20.4% of the Company’s issued and outstanding common stock, at an aggregate purchase price of $250,000.

 

The closing of the transactions contemplated by the Subscription Agreement occurred immediately following the closing of the (i) transactions contemplated by the ASA and (ii) the Fifth Amendment.  The shares purchased by GreyCap were issued pursuant to an exemption under Section 4(2) of the Securities Act of 1933.

11

 


 
 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

 

 

Pursuant to the terms of the Subscription Agreement, if the Company proposes to sell any equity securities, with certain exceptions, before February 7, 2015, GreyCap shall have the opportunity to purchase, on the same terms, at the same price and for the same consideration to be paid by the proposed buyer(s) of the additional equity securities in an amount up to the product obtained by multiplying (i) the number of equity securities being offered to the proposed buyer(s) by (ii) the lesser of (x) 20.4% or (y) a fraction, the numerator of which is the number of shares of common stock owned by GreyCap at the time and the denominator of which is the total number of issued and outstanding shares of common stock at such time.

 

Stock Compensation

 

Gateway’s 2007 Plan provides for stock-based compensation for officers, employees and non-employee directors.  The 2007 Plan was approved by the shareholders during May 2007 and provided for 2,000,000 shares to be made available under the plan.  In December 2012, the Company’s 2007 Plan was frozen. As a result, no further grants or awards will be made under the 2007 Plan.

 

The Company made no stock-based compensation awards during the three months ended March 31, 2013.  As of March 31, 2013, 622,249 shares of the Company’s common stock were issuable under outstanding stock option grants under the 2007 Plan (which is in addition to 20,000 shares issuable under outstanding stock option grants under the Company’s former 1998 Stock Option Plans).  The Company also has 281,581 shares of unvested restricted stock outstanding under the 2007 Plan. 

 

Compensation expense related to non-qualified stock options and restricted stock was $15,724 for the three months ended March 31, 2013, as compared to compensation expense of $17,833 for the three months ended March 31, 2012.  We view all awards of stock-based compensation as a single award with an expected life equal to the average expected life of component awards and amortize the fair value of the award over the requisite service period.

 

Compensation expense related solely to stock options was $4,915 and $5,015 for the three months ended March 31, 2013 and 2012, respectively.  The Company had no forfeitures in the first three months of 2013 or 2012.  At March 31, 2013, there was $13,478 of total unrecognized compensation expense related to unvested stock option awards which is expected to be recognized over a remaining weighted-average period of approximately one year. 

 

                The following table represents stock option activity for the three months ended March 31, 2013:

 

       

Weighted

 

Weighted

   
       

Average

 

Average

 

Intrinsic Value

       

Exercise

 

Contractual

 

of Options as of

   

Shares

 

Price

 

Terms

 

March 31, 2013

           

(Years)

   
                 

Options outstanding, beginning of period

 

642,249

$

0.28

 

3.01

   

Options granted

 

-

$

-

 

-

   

Options cancelled

 

-

$

-

 

-

   

Options exercised

 

-

$

-

 

-

   

Options outstanding, end of period

 

642,249

$

0.28

 

2.77

$

-

Options exercisable, end of period

 

326,657

$

0.31

 

2.52

$

-

                 

 

The market value of the Company’s common stock, as quoted on the OTCBB, on March 29, 2013, the last trading day of the Company’s first quarter, was $0.03 per share.

 

12

 


 
 

GATEWAY ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2013

(Unaudited)

 

Compensation expense for restricted stock is recognized on a straight-line basis over the vesting period.  We recognized $10,809 and $12,818 in compensation expense related to restricted stock grants during the three months ended March 31, 2013 and 2012, respectively.  Compensation expense related to restricted stock grants is based upon the market value of the shares on the date of the grant.  As of March 31, 2013, unrecognized compensation cost related to restricted stock awards was $32,176, which is expected to be recognized over the remaining weighted average period of approximately one year.

 

                The following table represents restricted stock activity for the three months ended March 31, 2013:

 

         

Weighted Average

         

Grant Date

     

Shares

 

Fair Value

           

Non-vested, beginning of period

 

281,581

$

0.23

 

Granted

 

-

$

-

 

Vested

 

-

$

-

 

Forfeited

 

-

$

-

Non-vested, end of period

 

281,581

$

0.23

           

 

 

 

13

 


 
 

 

 

Item  2.   Management's Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 that relate to, among others, possible future events, our future performance, and our future operations.  Forward-looking statements can be identified by words such as “may,” “will,” “should,” “anticipates,” “believes,” “expects,” “plans,” “future,” “intends,” “could,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other similar references to future periods. These statements are only our predictions.  Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made.  Our actual results could and likely will differ materially from these forward-looking statements for many reasons, including the risks described in our Annual Report on Form 10-K for the year ended December 31, 2012.  We cannot guarantee future results, levels of activities, performance, or achievements. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time, whether as a result of new information, future developments or otherwise.

 

Examples of forward-looking statements include, among others, statements we make concerning:

 

·      Expectations regarding our operating margins from our distribution systems;

 

·      Expectations regarding our transportation revenues from our gathering systems;

 

·      Expectations regarding our operating margins from our gathering systems;

 

·      Expectations regarding our general and administrative expenses in 2013;

 

·      Expectations regarding our ability to finance the construction of new facilities;

 

·      Expectations regarding our ability to find new sources of capital to fund debt service and asset retirement obligations; and

 

·      Expectations regarding future activities planned by our customers.

 

 

                Critical Accounting Policies

 

The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reporting of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities.  Note 2 to our audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012, provides a summary of our significant accounting policies, which are all in accordance with U.S. GAAP.  Certain of our accounting policies are critical to understanding our Consolidated Financial Statements because their application requires management to make assumptions about future results and depends to a large extent on management’s judgment, because past results have fluctuated and are expected to continue to do so in the future. 

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.  Management’s significant estimates include depreciation of long-lived assets, estimates and timing of asset retirement obligations, amortization of deferred loan costs, deferred tax valuation allowance, intangible asset lives, impairment and valuation of the fair value of our long-lived assets, purchase price allocations and valuation of stock based transactions.  Actual results could differ from those estimates.

 

Results of Operations

 

                General

 

                All of our operations are onshore in the continental United States and offshore in federal and state waters of the Gulf of Mexico.  We separately review and evaluate the operations of each of our gas distribution, transmission and gathering systems; however, these operations are aggregated into one reportable segment due to the fact that all of our operations are subject to similar economic and regulatory conditions and operate in the same industry group such that they are likely to have similar long-term prospects for financial performance.

 

 

14

 


 
 

 

The Henry Hub monthly, INSIDE FERC price for natural gas (as quoted in the Platts Gas Daily Price Guide) during the three months ended March 31, 2013, averaged $3.34 per MMBtu, as compared to $2.72 per MMBtu for the three months ended March 31, 2012.

 

         

For the Three Months Ended March 31,

         

2013

 

2012

               

Operating revenues

       
 

Sales of natural gas

$

1,020,165

$

962,421

 

Transportation of natural gas and liquids

 

291,938

 

317,770

 

Reimbursables

 

19,500

 

137,131

         

1,331,603

 

1,417,322

               

Operating costs and expenses

       
 

Cost of natural gas purchased

 

896,042

 

786,621

 

Operation and maintenance

 

81,222

 

89,718

 

Reimbursable costs

 

19,500

 

137,131

 

General and administrative

 

349,855

 

388,946

 

Acquisition costs

 

-

 

30,642

 

Asset impairments

 

250,000

 

-

 

Depreciation and amortization

 

69,682

 

112,685

 

Asset retirement obligation accretion

 

28,154

 

25,023

         

1,694,455

 

1,570,766

               

Operating loss

   

(362,852)

 

(153,444)

               

Other expense

         
 

Interest expense, net

 

(35,832)

 

(34,339)

 

Other, net

   

(95)

 

(4,505)

 

Other expense, net

 

(35,927)

 

(38,844)

               

Loss from continuing operations

       
 

before income taxes and discontinued operations

 

(398,779)

 

(192,288)

Income tax expense

 

(14,109)

 

(5,723)

Loss from continuing operations

 

(412,888)

 

(198,011)

               

Income from discontinued operations, net of taxes

 

126,147

 

51,262

         

 

 

 

Net loss

 

$

(286,741)

$

(146,749)

               

 

                Revenues 

 

Our total revenues declined $85,719, or 6.0%, during the three months ended March 31, 2013, as compared to the three months ended March 31, 2012. 

 

Revenues from sales of gas on our Waxahachie distribution system increased $57,744 for the three months ended March 31, 2013, as compared to the three months ended March 31, 2012, predominantly attributable to significantly higher gas prices.  The Company realized an average price of $3.96 per MMBtu for the first quarter of 2013, as compared to $3.38 per MMBtu for the first quarter of 2012.  The benefit of this increase, however, was partially offset by a decline in our average sales volume between the two periods.  During the first quarter of 2013, our sales volumes totaled 257,478 MMBtu, or an average of 2,861 MMBtu per day, as compared to 284,352 MMBtu, or an average of 3,125 MMBtu per day, for the first quarter of 2012.  The increase in revenues due to higher gas prices from our Waxahachie system was more than offset by increases in the cost of purchased gas.  Although our volumes are bought and sold pursuant to “back-to-back” contracts based on monthly price indices, our contractual mark-up on the index pricing was lowered as a result of contract renegotiations in the first quarter of 2013.

15

 


 
 

 

Our transportation revenues decreased by $25,832 for the three months ended March 31, 2013, as compared to the same period in 2012.  This decrease was primarily attributable to decreases of $56,732 in transportation revenues attributable to lower production on, and abandonment of, natural gas wells connected to our gathering systems.  However, partially offsetting these declines were $30,900 of higher revenue contribution from our Commerce pipeline acquired on February 29, 2012.

 

Revenues from reimbursable costs decreased by $117,631 during the three months ended March 31, 2013, as compared to same period in 2012.  This decrease is attributable to decreased operating costs which, pursuant to particular contractual arrangements, are reimbursed by our customers.  These revenues will fluctuate as the related expenses increase or decrease.

 

We believe that transportation revenues from our gathering systems will continue to decrease through the first half of 2013 but may stabilize or even increase beginning in late 2013 due to drilling and workover activities planned by our customers, in particular those connected to our Hickory Creek pipeline system.  There are no assurances that such planned drilling and workover activities will ever contribute to revenues, as they are dependent on oil and gas prices, drilling rig availability and dry hole risk, among other factors.

                 

Operating Margin

 

We define operating margin as fee revenues from the transportation of natural gas, plus revenues from the reimbursement of reimbursable costs, plus revenues from the sale of natural gas, net of the cost of purchased gas, less operating and maintenance expenses and reimbursable costs generated by our pipeline systems.  Operating margin was $334,839 for the three months ended March 31, 2013, which was a decline from the $403,852 we recognized during the same period in 2012. 

 

Unregulated Distribution Systems

 

Operating margin contribution from our distribution systems was $183,258 during the three months ended March 31, 2013, a $15,150 decrease compared to the $198,408 contribution during the same period in 2012.  Our Commerce pipeline system, acquired on February 29, 2012, contributed $42,983 of operating margin during the three months ended March 31, 2013, as compared to $14,566 during the three months ended March 31, 2012, or an increase of $28,417.  We also realized a slight increase in operating margin contribution of $7,083 from our Delmar pipeline system.  These increases, however, were more than offset by a decrease of $50,650 in operating margin contribution from our Waxahachie distribution system.  During the first quarter of 2013, our Waxahachie distribution system contributed $104,538 of operating margin, as compared to a contribution of $155,188 in 2012.  As noted above, our contractual mark-up on the index pricing was lowered in our most recent contract renegotiation with our customer who purchases the off-take from this system.

 

We expect our full year 2013 operating margin from our distribution systems to be lower by at least 25% in 2013, as compared to 2012, as a result of contract renewals at reduced volumes and lower prices than what we realized in 2012.

 

Gathering Systems

 

Operating margin contribution from our gathering systems was $151,580 during the three months ended March 31, 2013, a $53,863, or 26.2%, decrease compared to the $205,443 contribution during 2012. 

 

Our Gulf of Mexico gathering systems contributed $65,385 to operating margin during the three months ended March 31, 2013, a $19,265 decrease compared to the $84,650 realized during 2012.  Our Hickory Creek gathering system continued to decline in performance in 2013, generating $86,195 in operating margin during the first quarter of 2013, as compared to $120,793 in 2012, or a decline of $34,598.

 

Our 2013 expected operating margin contribution from our gathering systems is uncertain relative to the 2012 operating margin contribution from such systems. In order to maintain or increase operating margin contribution from our gathering systems, natural declines in volumes from existing wells connected to our systems will need to be offset by new volumes from drilling new wells or workovers of existing wells by our customers.  This activity is dependent on natural gas prices, among other factors. 

  

                General and Administrative Costs

 

General and administrative expenses were $349,855 for the three months ended March 31, 2013, which represented a decrease of $39,091, from the $388,946 in such expenses we recognized during the same period of 2012.  This decrease was primarily attributable to lower employee compensation costs and lower professional fees.

16

 


 
 

 

 

We expect general and administrative expenses during 2013 to continue to be comparable to those realized in 2012, as we continue to manage our overall level of fixed costs.

 

                Acquisition Costs

 

We incurred acquisition related costs of $30,642 during the three months ended March 31, 2012, related to the acquisition of our Commerce pipeline completed on February 29, 2012.

 

Asset Impairments

 

Since June 30, 2012, several of our offshore and onshore assets have been negatively affected by the loss of future revenues as customers have chosen to delay or abandon natural gas production due to depressed natural gas prices.  Based on those events and then current natural gas market conditions, we performed an impairment review of our capitalized costs on these systems as of September 30, 2012, including their future abandonment costs and associated intangible assets, in accordance with ASC Topic 360 and determined an impairment of those assets was required.  During the three months ended March 31, 2013, we determined that a revision in our estimated abandonment obligation was necessary and accrued an additional $250,000.  As a result of our continued belief in the lack of further recovery from these assets, the accrual necessary to increase the abandonment obligation was reflected as additional asset impairment expense.

 

Depreciation and Amortization

 

As a result of the asset impairment charges recognized during 2012, our depreciation expense for the period ended March 31, 2013, decreased $43,003, to $69,682, as compared to the $112,685 recognized during the three months ended March 31, 2012.

 

Asset Retirement Obligation Accretion

 

We have established an estimated asset retirement obligation with a current value of $1,476,330, on a discounted basis, with respect to our offshore Gulf of Mexico gathering systems.  This liability is being accreted to our total undiscounted estimated liability over future periods until the date of such abandonment.  During the three months ended March 31, 2013 and 2012, we recognized $28,154 and $25,023 of such accretion expense, respectively.

 

Interest Expense, net

 

Our interest expense, net, was comparable between the three months ended March 31, 2013 and 2012, as we had similar average borrowings outstanding during the periods.

 

Income Tax Expense

 

Our income tax expense for both periods presented consists solely of accrued Texas franchise taxes payable based on our Texas activity.

 

Income from Discontinued Operations, net of taxes

 

On December 12, 2012, we entered into an asset sales agreement pursuant to which we agreed to sell our Tyson Pipeline Systems, which were acquired October 18, 2010.  The sale transaction closed on February 7, 2013.  As a result, we don’t expect material contributions from, or expenditures on, these assets during 2013.

 

During the three months ended March 31, 2013, these assets generated revenue of $38,447 and incurred operation and maintenance expenses of $5,289, depreciation of $5,292 and other income of $807.  We also realized a gain on the sale of these assets of $97,474, resulting in net income from discontinued operations of $126,147.

 

During the three months ended March 31, 2012, these assets generated revenue of $80,456 and incurred operation and maintenance expenses of $11,366, depreciation of $12,701 and other expense of $5,127, resulting in net income from discontinued operations of $51,262.

 

 

17

 


 
 

 

Liquidity and Capital Resources

 

Net cash provided by continuing operations operating activities totaled $107,514 during the three months ended March 31, 2013, as compared to $32,258 for the three months ended March 31, 2012.  This increase was attributable to changes in working capital between the two periods.

 

We did not use any cash in continuing operations investing activities during the three months ended March 31, 2013.  We did use $1,011,036 of cash in continuing operations investing activities during the three months ended March 31, 2012, primarily attributable to our acquisition of the Commerce pipeline.

 

We used $1,086,092 of cash in continuing operations financing activities for the three months ended March 31, 2013, primarily on the partial repayment of outstanding bank borrowings upon the closing of the sale of our Tyson Pipeline Systems.  In addition, as a condition of the fifth amendment to our loan agreement, discussed below, we were required to escrow $450,000 of our sale proceeds to use in meeting part of our asset retirement obligations.  During 2013, we also issued 6,250,000 shares of our common stock for an aggregate purchase price of $250,000.

 

We were provided $624,322 of net cash from continuing operations financing activities during the three months ended March 31, 2012, primarily attributable to borrowings on our credit facility to acquire the Commerce pipeline, partially offset by required repayments of indebtedness. 

 

During the three months ended March 31, 2013, we were provided $1,182,666 of cash from discontinued operations, primarily attributable to the $1,100,000 of gross sales proceeds received upon consummation of our asset sale.

 

We had available cash of $237,719 at March 31, 2013, in addition to $423,166 of restricted cash to be used in meeting our asset retirement obligations.  As of March 31, 2013, we had current debt obligations of $1,712,674 and current asset retirement obligations of $891,102.  .  On May 2, 2013, the Bureau of Safety and Environmental Enforcement (“BSEE”) approved our request to reestablish partial right-of-way on one of our pipelines located in the Gulf of Mexico, subject to the decommissioning of a section of the pipeline within 180 days of issuance of approval. The estimated asset abandonment obligation associated with the subject pipelines was approximately $300,000 as of March 31, 2013.

 

Based on our cash position and our projected cash flows from operations as of March 31, 2013, we will not have the ability to repay our existing debt obligations, committed capital expenditures and asset retirement obligations unless we are able to obtain additional financing or raise cash through other means, such as asset sales.  If we are unsuccessful in those efforts, the Company may be unable to continue its operations beyond October 2013, even if we successfully extend the maturity of Amended Term Note, which currently matures on June 30, 2013.

 

We are actively exploring sources of capital to allow us to fund a combination of debt service and asset retirement obligations and to accelerate the implementation of our growth strategy.  Any new capital may take several forms.  There is no guarantee that we will be able to raise outside capital.  

 

In this regard, during the fourth quarter of 2012, we entered into an asset sales agreement with FMP Holdings, LLC (the “Buyer”), pursuant to which we agreed to sell our Tyson Pipeline Systems, which were acquired October 18, 2010, to the Buyer for $1,100,000.  All of the issued and outstanding capital stock of the Buyer is owned by Frederick M. Pevow, our President, Chief Executive Officer and Director.  Additionally, Mr. Pevow is the acting President of the Buyer.  On February 7, 2013, we closed this transaction.

 

Furthermore, on February 7, 2013, we entered into a subscription agreement, pursuant to which GreyCap Energy LLC agreed to acquire 6,250,000 shares of our common stock, constituting 20.4% of our issued and outstanding common stock, at a sale price of $0.04 per common share, for an aggregate purchase price of $250,000. 

 

With the net proceeds of these two transactions, we reduced our borrowings under our Loan Agreement with Meridian Bank by $825,000 and escrowed $450,000 with Meridian Bank to fund the planned abandonment of certain pipelines located in the Gulf of Mexico during the first and second quarter of 2013.

 

The balance of the net proceeds will be used for general corporate purposes.

 

In connection with the sale of our Tyson Pipeline Systems, we entered into a fifth amendment to the Loan Agreement (the “Fifth Amendment”) with Meridian Bank.

 

Pursuant to the Fifth Amendment, the following amendments were made to the Loan Agreement:

 

Collateral.  In addition to certain existing collateral securing obligations under the note, we assigned a deposit account in the amount of $450,000 to Meridian Bank pursuant to an Assignment of Deposit Account dated as of January 30, 2013.  The purpose of the deposit account is to fund the planned abandonment of certain pipelines located in the Gulf of Mexico during the first and second quarter of 2013.

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Guarantors.  Gateway Delmar LLC was required to execute and deliver an unlimited guaranty in favor of Meridian Bank and became one of the “Guarantors” under the Loan Agreement.

 

Financial Covenant.  The Fifth Amendment requires that we maintain a debt to tangible net worth ratio less than or equal to 3.5 to 1.0 as of the end of the each fiscal quarter, a debt service coverage ratio greater than 1.5 to 1.0 and a current ratio of 1.25 to 1.0.

 

Fees.  In connection with the Fifth Amendment, we paid Meridian Bank an amendment fee of $3,750.

 

In connection with entering the Fifth Amendment, we also entered into an Amendment to Term Promissory Note effective as of January 30, 2013 (the “Amended Term Note”).  The outstanding balance of the Amended Term Note was $1,732,674, and has a maturity date of June 30, 2013.  Principal on the Amended Term Note is due and payable in equal monthly installments of $10,000, plus all accrued interest, with a maturity date of June 30, 2013.

 

                Off-Balance Sheet Arrangements

 

The Company had no off-balance sheet arrangements at March 31, 2013.

 

Non-GAAP Financial Measure

 

We evaluate our operations using operating margin, which we define as revenues less cost of purchased gas, operating and maintenance expenses and reimbursable costs.  Such amounts are before asset impairments, general and administrative expense, depreciation and amortization expense, interest income or expense or income taxes.  Operating margin is not a GAAP measure but the components of operating margin are computed by using amounts that are determined in accordance with GAAP. A reconciliation of operating margin to net loss, which is its nearest comparable GAAP financial measure, is included in the table below.

 

         

For the Three Months Ended March 31,

         

2013

 

2012

               

Operating Margin

$

334,839

$

403,852

Less:

         
 

General and administrative expenses

 

349,855

 

388,946

 

Acquisition costs

 

-

 

30,642

 

Asset impairments

 

250,000

 

-

 

Depreciation and amortization

 

69,682

 

112,685

 

Asset retirement obligation accretion

 

28,154

 

25,023

 

Interest expense, net

 

35,832

 

34,339

 

Income tax expense

 

14,109

 

5,723

 

Other expense, net

 

95

 

4,505

Plus:

         
 

Income from discontinued operations, net of taxes

 

126,147

 

51,262

Net loss

 

$

(286,741)

$

(146,749)

               

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk  

 

                Not applicable.  

 

Item 4.  Controls and Procedures

                 

Management’s Report on Disclosure Controls and Procedures

 

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                We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer (our Principal Executive Officer  and Principal Financial Officer) to allow for timely decisions regarding required disclosure.

 

                As of March 31, 2013, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer (our Principal Executive Officer and Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our President and Chief Executive Officer (our Principal Executive Officer and Principal Financial Officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control over Financial Reporting

 

                There have been no changes in our internal controls over financial reporting that occurred during our quarter ended March 31, 2013, that have materially affected or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Part II – OTHER INFORMATION

 

Item 1.   Legal Proceedings

                                  

                None

 

Item 1A.  Risk Factors

                                  

                There are no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

On February 7, 2013, the Company entered into a subscription agreement (the “Subscription Agreement”), pursuant to which GreyCap Energy LLC (“GreyCap”) agreed to acquire 6,250,000 shares of the Company’s common stock, constituting 20.4% of the Company’s issued and outstanding common stock, at an aggregate purchase price of $250,000.  The shares purchased by GreyCap were issued pursuant to an exemption under Section 4(2) of the Securities Act of 1933.

 

Item 3.

Defaults Upon Senior Securities

 

 

At March 31, 2013, the Company was not in compliance with the financial covenants of the Loan Agreement.  The Company has not received a waiver of this non-compliance.  However, the Company is in active discussions with Meridian to amend its covenants and principal amortization requirements, but there are no assurances that such amendments will be obtained.

 

Item 4.   Mine Safety Disclosures

 

                Not applicable

 

Item 5.   Other Information

               

None

 

 

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Item 6.   Exhibits 

Exhibit         Description of Document         

31.1*

Certification pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer and Principal Financial Officer

 

32.1*

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer and Principal Financial Officer

101**

Interactive Data Files pursuant to Rule 405 of Regulation S-T

101.INS

101.SCH

101.CAL

101.DEF

101.LAB

101.PRE

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

** Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 


                                                                          GATEWAY ENERGY CORPORATION

 

 

 

May 15, 2013

 

/s/ Frederick M. Pevow

(Date)

 

President and Chief Executive Officer

 

 

(Principal Executive Officer and Principal Financial Officer)

 

 

 

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