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<SEC-DOCUMENT>0001086319-04-000032.txt : 20040326
<SEC-HEADER>0001086319-04-000032.hdr.sgml : 20040326
<ACCEPTANCE-DATETIME>20040326162138
ACCESSION NUMBER: 0001086319-04-000032
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20031231
FILED AS OF DATE: 20040326
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: GASCO ENERGY INC
CENTRAL INDEX KEY: 0001086319
STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311]
IRS NUMBER: 980204105
STATE OF INCORPORATION: NV
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-26321
FILM NUMBER: 04693227
BUSINESS ADDRESS:
STREET 1: 14 INVERNESS DRIVE EAST BLDG H
STREET 2: BLDG H SUITE 236
CITY: ENGLEWOOD
STATE: CO
ZIP: 80112
BUSINESS PHONE: 3037130047
MAIL ADDRESS:
STREET 1: 14 INVERNESS DRIVE EAST BLDG H
STREET 2: BLDG H SUITE 236
CITY: ENGLEWOOD
STATE: CO
ZIP: 80112
FORMER COMPANY:
FORMER CONFORMED NAME: SAN JOAQUIN RESOURCES INC
DATE OF NAME CHANGE: 20000516
FORMER COMPANY:
FORMER CONFORMED NAME: LEK INTERNATIONAL INC
DATE OF NAME CHANGE: 19990511
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10k-2003.txt
<DESCRIPTION>FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003
<TEXT>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal Year Ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-26321
GASCO ENERGY, INC.
(Exact name of registrant as specified in its charter)
NEVADA 98-0204105
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Inverness Drive East, Building H, Suite 236, Englewood, CO 80112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 483-0044
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.0001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes __ No X
As of June 30, 2003, approximately 40,288,800 shares of Common Stock, par value
$0.0001 per share were outstanding, and the aggregate market value of the
outstanding shares of Common Stock of the Company held by non-affiliates was
approximately $18,550,715.
As of March 25, 2004, approximately 64,082,254 shares of Common Stock, par value
$0.0001 per share were outstanding.
Documents incorporated by reference:
Certain information required by Items 10, 11, 12, 13 and 14 of Part III is
incorporated by reference from portions of the registrant's definitive proxy
statement relating to its 2004 annual meeting of stockholders to be filed within
120 days after December 31, 2003.
<PAGE>
Table of Contents
Part I
Item 1. Description of Business...............................................2
Business of Gasco................................................2
History..........................................................3
Acquisition, Exploration and Development Expenses................4
Principal Products or Services and Markets.......................5
Competitive Business Conditions, Competitive Position in the
Industry and Methods of Competition...........................6
Governmental Regulations and Environmental Laws................. 4
Number of Total Employees and Number of Full-Time Employees......5
Risk Factors.....................................................5
Cautionary Statement Regarding Forward-Looking Statements.......13
Item 2. Description of Property..............................................13
Petroleum and Natural Gas Properties............................13
Company Reserve Estimates.......................................16
Volumes, Prices and Operating Expenses..........................17
Development, Exploration and Acquisition Capital Expenditures...18
Productive Gas Wells............................................18
Oil and Gas Acreage.............................................19
Drilling Activity...............................................20
Office Space....................................................21
Item 3. Legal Proceedings....................................................21
Item 4. Submission of Matters to a Vote of Security Holders..................21
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.............22
Equity Compensation Plans.......................................23
Securities Transactions.........................................23
Item 6. Selected Financial Data..............................................25
Item 7. Management's Discussion and Analysis.................................26
Forward Looking Statements......................................26
Overview........................................................26
Liquidity and Capital Resources.................................28
Capital Budget..................................................29
Schedule of Contractual Obligations.............................30
Critical Accounting Policies and Estimates......................30
Results of Operations...........................................32
Recent Accounting Pronouncements................................35
<PAGE>
Table of Contents (continued)
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..........36
Item 8. Financial Statements................................................37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................67
Item 9A. Controls and Procedures.............................................67
Part III
Item 10. Directors and Executive Officers of the Registrant..................67
Item 11. Executive Compensation..............................................67
Item 12. Security Ownership of Certain Beneficial Owners and Management......67
Item 13. Certain Relationships and Related Transactions......................68
Item 14. Principal Accountant Fees and Services..............................68
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....68
<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
Business of Gasco
Gasco Energy, Inc. ("Gasco" or "the Company") is a natural gas and petroleum
exploitation and development company engaged in locating and developing
hydrocarbon prospects, primarily in the Rocky Mountain region. The Company's
mission is to enhance shareholder value by using new technologies to generate
and develop high-potential exploitation prospects in this area. The Company's
principal business is the acquisition of leasehold interests in petroleum and
natural gas rights, either directly or indirectly, and the exploitation and
development of properties subject to these leases.
History
Gasco (formerly known as San Joaquin Resources Inc. ("SJRI")) was incorporated
on April 21, 1997 under the laws of the State of Nevada, as "LEK International,
Inc." The Company operated as a "shell" company until December 31, 1999, when
the Company combined with San Joaquin Oil & Gas Ltd., a Nevada corporation ("Oil
& Gas"). Prior to closing of this transaction, the Company had a total of
3,700,000 shares of common stock issued and outstanding. The Company issued
8,069,000 new shares of common stock in exchange for all of the issued and
outstanding common stock of Oil & Gas. As a result of that transaction, Oil &
Gas became a wholly owned subsidiary of Gasco.
On February 1, 2001, a subsidiary of the Company merged with Pannonian Energy,
Inc. ("Pannonian"), a private corporation incorporated under the laws of the
State of Delaware. In connection with this merger, the Company issued 14,000,000
shares of common stock to the stockholders of Pannonian. Pannonian was an
independent energy company engaged in the exploration, development and
acquisition of crude oil and natural gas reserves in the western United States.
Under the terms of the Pannonian Agreement, Pannonian was required, prior to
closing of the merger on March 30, 2001, to divest itself of all assets not
associated with its "Riverbend" area of interest (the "non-Riverbend assets").
The "spin-offs" were accounted for at the recorded amounts. The net book value
of the non-Riverbend assets in the United States transferred, including cash of
$1,000,000 and liabilities of $555,185, was approximately $1,850,000. The
non-Riverbend assets located outside of the United States were held by Pannonian
International Ltd. ("PIL"), the shares of which were distributed to the
Pannonian stockholders. The net book value of PIL as of the date of distribution
was approximately $174,000.
Certain shareholders of SJRI surrendered for cancellation 2,438,930 common
shares of the Company's capital stock on completion of the transaction
contemplated by the Pannonian Agreement.
2
<PAGE>
Upon completion of the transaction, Pannonian became a wholly owned subsidiary
of the Company. However, since this transaction resulted in the existing
shareholders of Pannonian acquiring control of the Company, for financial
reporting purposes the business combination is accounted for as a reverse
acquisition with Pannonian as the accounting acquirer. All information presented
for periods prior to March 30, 2001 represents the historical information of
Pannonian.
Acquisition, Exploration and Development Expenses
During the year ended December 31, 2003, the Company spent $5,283,426 in
development and exploration activities. During the year ended December 31, 2002,
the Company spent $32,962,855, including the issuance of 9,500,000 shares of
common stock valued at $18,525,000, in the acquisition of additional leases and
in the development and exploitation of the properties subject to these leases.
During the year ended December 31, 2001, the Company spent $7,395,867
identifying and acquiring petroleum and natural gas leases and prospect rights.
As of December 31, 2003, the Company held working interests in 235,709 gross
acres (112,051 net acres) located in Utah, Wyoming and California. As of
December 31, 2003, the Company held an interest in 18 gross (9.5 net) producing
gas wells and 4 gross (4.0 net) shut-in gas wells located on these properties.
As of March 25, 2004 the Company operates 18 wells, of which 13 are currently
producing. See "Item 2 - Description of Properties".
Principal Products or Services and Markets
Gasco focuses its exploitation activities on locating natural gas and crude
petroleum. The principal markets for these commodities are natural gas
transmission pipeline companies, utilities, refining companies and private
industry end-users. Historically, nearly all of the Company's sales have been to
a few customers. However, Gasco is not confined to, nor dependent upon, any one
purchaser or small group of purchasers. Accordingly, the loss of a single
purchaser would not materially affect the Company's business because there are
numerous other purchasers in the areas in which Gasco sells its production. For
the years ended December 31, 2003, 2002 and 2001, purchases by the following
companies exceeded 10% of the total oil and gas revenues of the Company.
For the Year Ended December 31,
------------------------------------------
2003 2002 2001
---- ---- ----
ConocoPhillips Company 93% 98% 60%
Wasatch Energy Corporation - - 37%
Competitive Business Conditions, Competitive Position in the Industry and
Methods of Competition
The Company's natural gas and petroleum exploration activities take place in a
highly competitive and speculative business atmosphere. In seeking suitable
natural gas and petroleum properties for acquisition, Gasco competes with a
number of other companies operating in its areas of interest, including large
oil and gas companies and other independent operators with greater financial
resources. Management does not believe that Gasco's competitive position in the
petroleum and natural gas industry will be significant.
3
<PAGE>
Management anticipates a competitive market for obtaining drilling rigs and
services, and the manpower to run them. The current high level of drilling
activity in Gasco's areas of exploration may have a significant adverse impact
on the timing and profitability of Gasco's operations. In addition, as discussed
under Risk Factors, Gasco will be required to obtain drilling permits for its
wells, and there is no assurance that such permits will be available timely or
at all.
The prices of the Company's products are controlled by domestic and world
markets. However, competition in the petroleum and natural gas exploration
industry also exists in the form of competition to acquire the most promising
acreage blocks and obtaining the most favorable prices for transporting the
product. Gasco, and ventures in which it participates, are relatively small
compared to other petroleum and natural gas exploration companies and may have
difficulty acquiring additional acreage and/or projects, and may have difficulty
arranging for the transportation of product, in the event Gasco, or a venture in
which it participates, is successful in its exploration efforts.
Governmental Regulations and Environmental Laws
Gasco and any venture in which it participates, is required to obtain state
and/or federal and other permits for drilling oil or gas wells.
Exploration and production activities relating to oil and gas leases are subject
to numerous environmental laws, rules and regulations. The Federal Clean Water
Act requires Gasco to construct a fresh water containment barrier between the
surface of each drilling site and the underlying water table.
Various federal, state and local laws and regulations covering the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, may affect the Company's operations and costs through their effect
on oil and gas exploration, development and production operations. Environmental
laws and regulations have changed substantially and rapidly over the last 30
years, and Gasco anticipates that there will be continuing changes. Laws and
regulations protecting the environment have generally become more stringent in
recent years, and may in certain circumstances impose "strict liability,"
rendering a corporation liable for environmental damages without regard to
negligence or fault on the part of such corporation. Such laws and regulations
may expose Gasco to liability for the conduct of operations or conditions caused
by others, or for acts of Gasco that were in compliance with all applicable laws
at the time such acts were performed. Increasingly strict environmental
restrictions and limitations have resulted in increased operating costs for
Gasco and other businesses throughout the United States, and it is possible that
the costs of compliance with environmental laws and regulations will continue to
increase. The modification of existing laws or regulations or the adoption of
new laws or regulations relating to environmental matters could have a material
adverse effect on Gasco's operations. In addition, Gasco's existing and proposed
operations could result in liability for fires, blowouts, oil spills, discharge
of hazardous materials into surface and subsurface aquifers and other
environmental damage, any one of which could result in personal injury, loss of
life, property damage or destruction or suspension of operations.
4
<PAGE>
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, requires payments for cleanup of
certain abandoned waste disposal sites, even though such waste disposal
activities were undertaken in compliance with regulations applicable at the time
of disposal. Under the Superfund law, one party may, under certain
circumstances, be required to bear more than its proportional share of cleanup
costs at a site where it has responsibility pursuant to the legislation, if
payments cannot be obtained from other responsible parties. Other legislation
mandates cleanup of certain wastes at facilities that are currently being
operated. States also have regulatory programs that can mandate waste cleanup.
CERCLA authorizes the Environmental Protection Agency ("EPA") and, in some
cases, third parties to take actions in response to threats to the public health
or the environment and to seek to recover from the responsible classes of
persons the costs they incur. The scope of financial liability under these laws
involves inherent uncertainties.
It is not anticipated that the Company will be required in the near future to
expend material amounts because of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate future cost of compliance. It is anticipated that
before full field development can occur the Company will be required to conduct
Environmental Assessments and/or Environmental Impact Statements which may
result in material delays and/or limitations to developing all or part of the
Company's leasehold. The Company believes it is presently in compliance in all
material respects with all applicable federal, state or local environmental
laws, rules or regulations; however, continued compliance (or failure to comply)
and future legislation may have an adverse impact on the Company's present and
contemplated business operations. No assurance can be given as to what effect
these present and future laws, rules and regulations will have on Gasco's
current and future operations.
Number of Total Employees and Number of Full-Time Employees
As of March 25, 2004, Gasco had eleven full-time employees.
Risk Factors
Due to the nature of the Company's business and the present stage of exploration
on its oil and gas prospects, the following risk factors apply to Gasco's
operations:
Accumulated Losses
To date the Company's operations have not generated sufficient operating cash
flows to provide working capital for the Company's ongoing overhead, the funding
of its lease acquisitions and the exploration and development of these
properties. Without adequate financing, the Company may not be able to
successfully develop any prospects that it acquires or achieve profitability
from its operations in the near future or at all.
During the year ended December 31, 2003, Gasco incurred a net loss of
$2,526,525, and has an accumulated deficit of $25,291,761 since inception.
5
<PAGE>
Uncertainty of Reserve Estimates
Estimating accumulations of gas and oil is complex and is not exact because of
the numerous uncertainties inherent in the process. The process relies on
interpretations of available geological, geophysical, engineering and production
data. The extent, quality and reliability of this technical data can vary. The
process also requires certain economic assumptions, some of which are mandated
by the Securities and Exchange Commission ("SEC"), such as gas and oil prices,
drilling and operating expenses, capital expenditures, taxes and availability of
funds. The accuracy of a reserve estimate is a function of:
- the quality and quantity of available data;
- the interpretation of that data;
- the accuracy of various mandated economic assumptions; and
- the judgment of the persons preparing the estimate.
The proved reserve information included herein is based on estimates prepared by
Netherland, Sewell & Associates, Inc., independent petroleum engineers.
Estimates prepared by others could differ materially from these estimates.
The most accurate method of determining proved reserve estimates is based upon a
decline analysis method, which consists of extrapolating future reservoir
pressure and production from historical pressure decline and production data.
The accuracy of the decline analysis method generally increases with the length
of the production history. Since most of the Company's wells have been producing
less than two years, their production history is relatively short, so other
(generally less accurate) methods such as volumetric analysis and analogy to the
production history of wells of other operators in the same reservoir were used
in conjunction with the decline analysis method to determine the Company's
estimates of proved reserves. As the Company's wells are produced over time and
more data is available, the estimated proved reserves will be redetermined on an
annual basis and may be adjusted based on that data.
Actual future production, gas and oil prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable gas and oil
reserves most likely will vary from the Company's estimates. Any significant
variance could materially affect the quantities and present value of the
Company's reserves. In addition, the Company may adjust estimates of proved
reserves to reflect production history, results of exploration and development
and prevailing gas and oil prices. Natural gas prices historically have been
extremely volatile and lower natural gas prices could result in materially lower
natural gas reserves. The Company's reserves may also be susceptible to drainage
by operators on adjacent properties.
It should not be assumed that the present value of future net cash flows
included herein is the current market value of the Company's estimated proved
gas and oil reserves. In accordance with SEC requirements, the Company generally
6
<PAGE>
bases the estimated discounted future net cash flows from proved reserves on
prices and costs on the date of the estimate. Actual future prices and costs may
be materially higher or lower than the prices and costs as of the date of the
estimate.
Potential Future Impairment
The Company may be required to write down the carrying value of its gas and oil
properties when gas and oil prices are low or if there is substantial downward
adjustments to the estimated proved reserves, increases in the estimates of
development costs or deterioration in the exploration results.
The Company follows the full cost method of accounting, under which, capitalized
gas and oil property costs less accumulated depletion and net of deferred income
taxes may not exceed an amount equal to the present value, discounted at 10%, of
estimated future net revenues from proved gas and oil reserves plus the cost, or
estimated fair value if lower, of unproved properties. Should capitalized costs
exceed this ceiling, an impairment is recognized. The present value of estimated
future net revenues is computed by applying current prices of gas and oil to
estimated future production of proved gas and oil reserves as of period-end,
less estimated future expenditures to be incurred in developing and producing
the proved reserves assuming the continuation of existing economic conditions.
Once an impairment of gas and oil properties is recognized, is not reversible at
a later date even if oil or gas prices increase.
Absence of a Mature Public Market
The Company's common stock is highly speculative and has only been trading in
the public markets since January 2001. The Company's common stock trades on the
over-the-counter market. Holders of Gasco's common stock may not be able to
liquidate their investment in a short time period or at the market prices that
currently exist at the time a holder decides to sell. Because of this limited
liquidity, it is unlikely that Gasco's common stock will be accepted by lenders
as collateral for loans.
Exploration and Production Risks
The business of exploring for and producing oil and gas involves a substantial
risk of investment loss that even a combination of experience, knowledge and
careful evaluation may not be able to overcome. Drilling oil and gas wells
involves the risk that the wells will be unproductive or that, although
productive, the wells do not produce oil and/or gas in economic quantities.
Other hazards, such as unusual or unexpected geological formations, pressures,
fires, blowouts, loss of circulation of drilling fluids or other conditions may
substantially delay or prevent completion of any well. Adverse weather
conditions can also hinder drilling operations.
A productive well may become uneconomic in the event water or other deleterious
substances are encountered, which impair or prevent the production of oil and/or
gas from the well. In addition, production from any well may be unmarketable if
it is impregnated with water or other deleterious substances.
7
<PAGE>
Financing Risks
Gasco has relied in the past primarily on the sale of equity capital and
farm-out and other similar types of transactions to fund working capital and the
acquisition of its prospects and related leases. Failure to generate operating
cash flow or to obtain additional financing for the development of the Company's
properties could result in substantial dilution of Gasco's property interests,
or delay or cause indefinite postponement of further exploration and development
of its prospects with the possible loss of such properties.
It is likely that future projects will require significant new funding. Gasco
has not yet secured specific sources of adequate financing for future projects,
and it may be unable to timely secure financing on terms that are favorable to
the Company or at all. Any future financing through the issuance of Company
common stock will likely result in substantial dilution to Gasco's stockholders.
Strategy Risks
The Company's natural gas and petroleum exploration activities take place in a
highly competitive and speculative business atmosphere. In seeking suitable
natural gas and petroleum properties for acquisition, the Company competes with
a number of other companies operating in our areas of interest, including large
oil and gas companies and other independent operators with greater financial
resources. The Company does not believe that our competitive position in the
petroleum and natural gas industry will be significant.
The Company anticipates a competitive market for obtaining drilling rigs and
services, and the manpower to run them. The current high level of drilling
activity in our areas of exploration may have a significant adverse impact on
the timing and profitability of the Company's operations. In addition, as
discussed below, Gasco will be required to obtain drilling permits for its
wells, and there is no assurance that such permits will be available timely or
at all.
Uninsurable Risks
Although management believes the operator of any properties in which Gasco may
acquire interests will acquire and maintain appropriate insurance coverage in
accordance with standard industry practice, Gasco may suffer losses from
uninsurable hazards or from hazards which the operator or Gasco has chosen not
to insure against because of high premium costs or other reasons. Gasco may
become subject to liability for pollution, fire, explosion, blowouts, cratering
and oil spills against which the Company cannot insure or against which the
Company may elect not to insure. Such events could result in substantial damage
to oil and gas wells, producing facilities and other property and personal
injury. The payment of any such liabilities may have a material adverse effect
on Gasco's financial position.
No Assurance of Titles
If an examination of the title history of property that the Company has
purchased reveals that a petroleum and natural gas lease has been purchased in
error from a person who is not the owner of the mineral interest desired, the
8
<PAGE>
Company's interest would be worthless. In such an instance, the amount paid for
such petroleum and natural gas lease or leases would be lost.
It is Gasco's practice, in acquiring petroleum and natural gas leases, or
undivided interests in petroleum and natural gas leases, not to undergo the
expense of retaining lawyers to examine the title to the mineral interest to be
placed under lease or already placed under lease. Rather, Gasco will rely upon
the judgment of petroleum and natural gas lease brokers or landmen who perform
the fieldwork in examining records in the appropriate governmental office before
attempting to place under lease a specific mineral interest.
Prior to the drilling of a petroleum and natural gas well, however, it is the
normal practice in the petroleum and natural gas industry for the person or
company acting as the operator of the well to obtain a preliminary title review
of the spacing unit within which the proposed well is to be drilled to ensure
there are no obvious deficiencies in title to the well. Frequently, as a result
of such examinations, certain curative work must be done to correct deficiencies
in the marketability of the title, and such curative work entails expense. The
work might include obtaining affidavits of heirship or causing an estate to be
administered.
Natural Gas and Oil Prices
A sharp decline in natural gas and oil prices would result in a commensurate
reduction in Gasco's income for the production of oil and gas. In the event
prices fall substantially, Gasco may not be able to realize a profit from its
production and would continue to operate at a loss. In recent decades, there
have been periods of both worldwide overproduction and underproduction of
hydrocarbons and periods of both increased and relaxed energy conservation
efforts. Such conditions have resulted in periods of excess supply of, and
reduced demand for, crude oil on a worldwide basis and for natural gas on a
domestic basis. These periods have been followed by periods of short supply of,
and increased demand for, crude oil and natural gas. The excess or short supply
of crude oil and natural gas has resulted in dramatic price fluctuations even
during relatively short periods of seasonal market demand. Among the factors
that can cause the price volatility are:
- Worldwide or regional demand for energy, which is affected by economic
conditions;
- The domestic and foreign supply of natural gas and oil;
- Weather conditions;
- Domestic and foreign governmental regulations;
- Political conditions in natural gas or oil producing regions;
- The ability of members of the Organization of Petroleum Exporting
Countries to agree upon and maintain oil prices and production levels;
and
- The price and availability of alternative fuels;
- Acts of war, terrorism or vandalism;
9
<PAGE>
- Market manipulation.
All of Gasco's production is currently located in, and all of Gasco's future
production is anticipated to be located in, the Rocky Mountain Region of the
United States. The gas prices that the Company and other operators in the Rocky
Mountain region have received and are currently receiving are at a steep
discount to gas prices in other parts of the country. Factors that can cause
price volatility for crude oil and natural gas within this region are:
- The availability of gathering systems with sufficient capacity to
handle local production;
- Seasonal fluctuations in local demand for production;
- Local and national gas storage capacity;
- Interstate and intrastate pipeline capacity; and
- The availability and cost of gas transportation facilities from the
Rocky Mountain region.
In addition, because of Gasco's size the Company does not own or lease firm
capacity on any interstate pipelines. As a result, the Company's transportation
costs are particularly subject to short-term fluctuations in the availability of
transportation facilities. The Company's management believes that the steep
discount in the prices it received in the past may have been due to pipeline
constraints out of the region. Recent increases in capacity have lessened the
discount, however, there is no assurance that such pipeline constraints will not
exist in the future. Even if the Company acquires additional pipeline capacity,
conditions may not improve due to other factors listed above.
It is impossible to predict natural gas and oil price movements with certainty.
Lower natural gas and oil prices may not only decrease our revenues on a per
unit basis but also may reduce the amount of natural gas and oil that we can
produce economically. A substantial or extended decline in natural gas and oil
prices may materially and adversely affect Gasco's future business, financial
condition, results of operations, liquidity and ability to finance planned
capital expenditures. Further, oil prices and natural gas prices do not
necessarily move together.
Marketing
Several factors beyond the control of Gasco may adversely affect the Company's
ability to market the oil and gas that it may discover. These factors include
the proximity and capacity of oil and gas pipelines and processing equipment,
market fluctuations of prices, taxes, royalties, land tenure, allowable
production and environmental protection. The extent of these factors cannot be
accurately predicted, but any one or a combination of these factors may result
in Gasco's inability to sell its oil and gas at prices that would result in an
adequate return on the Company's invested capital. For example, the Company
currently sells the gas that it produces into a single pipeline. If this
pipeline were to become unavailable, the Company would incur additional costs to
secure a substitute facility in order to deliver the gas that the Company
produces. Gasco relies upon the services of third party gathering companies to
transport its natural gas to market. A disruption in this service could
materially limit Gasco's ability to move its natural gas to market until
10
<PAGE>
alternative transportation can be arranged which may take an extended period of
time.
Environmental Regulations
The Company's exploration and proposed production activities are subject to
certain federal, state and local laws and regulations relating to environmental
quality and pollution control. These laws and regulations increase the costs of
these activities and may prevent or delay the commencement or continuance of a
given operation. Specifically, Gasco is subject to legislation regarding
emissions into the environment, water discharges, and storage and disposition of
hazardous wastes. In addition, legislation has been enacted which requires well
and facility sites to be abandoned and reclaimed to the satisfaction of state
authorities. However, such laws and regulations have been frequently changed in
the past and Gasco is unable to predict the ultimate cost of compliance as a
result of any future changes. It is anticipated that before full field
development can occur the Company will be required to conduct Environmental
Assessments and/or Environmental Impact Statements which may result in material
delays and/or limitations to developing all or part of the Company's leasehold.
Governmental Regulations
Petroleum and natural gas exploration, development and production are subject to
various types of regulation by local, state and federal agencies. The Company
may be required to make large expenditures to comply with these regulatory
requirements. Legislation affecting the petroleum and natural gas industry is
under constant review for amendment and expansion. Also, numerous departments
and agencies, both federal and state, are authorized by statute to issue and
have issued rules and regulations binding on the petroleum and natural gas
industry and its individual members, some of which carry substantial penalties
for failure to comply. Any increases in the regulatory burden on the petroleum
and natural gas industry created by new legislation would increase Gasco's cost
of doing business and, consequently, adversely affect its profitability. A major
risk inherent in drilling is the need to obtain drilling permits from state and
federal authorities. Delays in obtaining drilling permits, the failure to obtain
a drilling permit for a well, or a permit with unreasonable conditions or costs
could have a materially adverse effect on Gasco's ability to effectively develop
its properties.
Competition
The petroleum and natural gas industry is intensely competitive and Gasco
competes with other companies, which have greater resources. Many of such
companies not only explore for and produce crude petroleum and natural gas but
also carry on refining operations and market petroleum and other products on a
regional, national or worldwide basis. Such companies may be able to pay more
for productive petroleum and natural gas properties and exploratory prospects to
define, evaluate, bid for and purchase a greater number of properties and
prospects than Gasco's financial or human resources permit. In addition, such
companies may have a greater ability to continue exploration activities during
periods of low hydrocarbon market prices. Gasco's ability to acquire additional
properties and to discover reserves in the future will be dependent upon its
11
<PAGE>
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.
Risks Associated with Management of Growth
Because of its small size, Gasco's growth in accordance with its business plans,
if achieved, will place a significant strain on Gasco's financial, technical,
operational and management resources. As Gasco expands its activities and
increases the number of projects it is evaluating or in which it participates,
there will be additional demands on Gasco's financial, technical and management
resources. The failure to continue to upgrade Gasco's technical, administrative,
operating and financial control systems or the occurrence of unexpected
expansion difficulties, including the recruitment and retention of experienced
managers, geoscientists and engineers, could have a material adverse effect on
Gasco's business, financial condition and results of operations and its ability
to timely execute its business plan.
Dependence upon Key Personnel
The success of Gasco's operations and activities is dependent to a significant
extent on the efforts and abilities of its management. The loss of services of
any of its key managers could have a material adverse effect on Gasco. Gasco has
not obtained "key man" insurance for any of its management. Mr. Erickson is the
President and CEO and Mr. Decker is an executive vice president and Chief
Operating Officer of Gasco. The loss of their services may adversely affect the
business and prospects of Gasco.
Conflicts of Interest
Certain of the officers and directors of Gasco will also serve as directors of
other companies or have significant shareholdings in other companies. To the
extent that such other companies participate in ventures in which Gasco may
participate, or compete for prospects or financial resources with Gasco, these
officers and directors of Gasco will have a conflict of interest in negotiating
and concluding terms relating to the extent of such participation. In the event
that such a conflict of interest arises at a meeting of the board of directors,
a director who has such a conflict must disclose the nature and extent of his
interest to the board of directors and abstain from voting for or against the
approval of such participation or such terms.
In accordance with the laws of the State of Nevada, the directors of Gasco are
required to act honestly and in good faith with a view to the best interests of
Gasco. In determining whether or not Gasco will participate in a particular
program and the interest therein to be acquired by it, the directors will
primarily consider the degree of risk to which Gasco may be exposed and its
financial position at that time.
Enforcement of Legal Process
Two of the directors of Gasco reside outside the United States and maintain a
substantial portion of their assets outside the United States. As a result it
may be difficult or impossible to effect service of process within the United
12
<PAGE>
States upon such persons, to bring suit in the United States or to enforce, in
the U.S. courts, any judgment obtained there against such persons predicated
upon any civil liability provisions of the U.S. federal securities laws.
Foreign courts may not entertain original actions against Gasco's directors or
officers predicated solely upon U.S. federal securities laws. Furthermore,
judgments predicated upon any civil liability provisions of the U.S. federal
securities laws may not be directly enforceable in foreign countries.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the shareholders with certain information regarding
the Company's future plans and operations, certain statements set forth in this
Form 10-K relate to management's future plans and objectives. Such statements
are forward-looking statements within the meanings of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than statements of historical
facts included in this report, including, without limitation, statements
regarding the Company's future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "intend," "project," "estimate," "anticipate,"
"believe," or "continue" or the negative thereof or similar terminology.
Although any forward-looking statements contained in this Form 10-K or otherwise
expressed by or on behalf of the Company are, to the knowledge and in the
judgment of the officers and directors of the Company, believed to be
reasonable, there can be no assurances that any of these expectations will prove
correct or that any of the actions that are planned will be taken.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause the Company's actual performance, and financial results in
future periods to differ materially from any projection, estimate or forecasted
result. Important factors that could cause actual results to differ materially
from the Company expectations ("Cautionary Statements") include those discussed
in this report under the caption "Risk Factors", above. All subsequent written
and oral forward-looking statements attributable to the Company, or persons
acting on its behalf, are expressly qualified in their entirety by the
Cautionary Statements. The Company assumes no duty to update or revise its
forward-looking statements based on changes in internal estimates or
expectations or otherwise.
ITEM 2 - DESCRIPTION OF PROPERTY
Petroleum and Natural Gas Properties
Gasco is a natural gas and petroleum exploitation and development company
engaged in locating and developing hydrocarbon prospects primarily in the Rocky
Mountain Region. Gasco's strategy is to enhance stockholder value by using new
technologies to generate high-potential exploitation prospects in this area. The
Company's principal business is the acquisition of leasehold interests in
petroleum and natural gas rights, either directly or indirectly, and the
exploitation and development of properties subject to these leases.
13
<PAGE>
Riverbend Project
The Riverbend Project comprises approximately 119,259 gross acres in the Uinta
Basin of northeastern Utah, of which Gasco hold interests in approximately
46,796 net acres as of December 31, 2003. The Company can also earn interests in
approximately 19,324 gross acres in this area under farm-out and other
agreements. The Company's engineering and geologic focus is concentrated on
three tight-sand formations in the Uinta basin: the Wasatch, Mesaverde and
Blackhawk formations. In January 2002, we entered into an agreement with
Halliburton Energy Services under which Halliburton had the option to earn a
participation interest proportionate to its investment by funding the completion
of wells in the Wasatch and Mesaverde formations. 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, were approximately
$2,340,000. Recompletions for two of these wells took place during November
2003. Gasco's fourth operated well in this area reached total depth during
December 2002 and was completed during November 2003. The drilling and
completion costs for this well, net to Gasco's interest were approximately
$2,700,000. 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, and the well was
completed during November 2003. The total costs for this well, net to Gasco's
interest were approximately $2,200,000.
In addition to the Gasco-operated wells described above, the Company also owns a
14% to 20% working interest in five wells and an overriding royalty interest in
one well that were drilled by ConocoPhillips in this area during late 2001 and
through the fourth quarter of 2002. All of these wells are capable of producing
and selling gas. On March 9, 2004, the Company completed the acquisition of
ConocoPhillips' interests in these producing wells, 13,062 net acres and certain
other assets located in the Uinta Basin in Utah for approximately $3,175,000.
The Company also became the operator of these properties effective January 1,
2004. Pursuant to an existing contract an unrelated third party has the right to
purchase 25% of the acquired properties at the acquisition price within 30 days
following the acquisition date.
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.
During January 2003, Gasco entered into a contract with the system operator to
put a new compressor into place in the Riverbend Project. The installation of
this compressor was completed during February 2003. The additional compression
capacity has allowed the Company to begin producing from wells that were shut-in
14
<PAGE>
or flowing though constricted orifices and should meet the Company's projected
compression needs in this project through the first half of 2004.
On January 16, 2004 the Company entered into agreements with a group of industry
providers (together, the "Service Parties") to accelerate the development of
Gasco's oil and gas properties by drilling up to 50 wells in Gasco's Riverbend
Project in Utah's Uinta Basin. Two of the Company's wells that were completed in
November, as discussed above, were made a part of this agreement. Gasco has
agreed that the Service Parties, which includes Schlumberger Oilfield Services,
will have the exclusive right to provide their services in the development of
the Riverbend acreage during the term of the agreement. The agreement provides
for the group to initially proceed with the first 10-well bundle, which
approximates one year of drilling with a single rig. If the group agrees,
drilling may be accelerated using additional rigs. Gasco's 2004 capital budget
is approximately $13 million for the drilling, completion and pipeline
connection of wells in this area. Gasco may elect to fund up to 20% of the cost
of the wells in the first three bundles and up to 30% in the last two bundles.
Gasco's interest in the production stream from a bundle, net of royalties, taxes
and lease operating expenses is estimated to equal the proportion of the total
well costs that it funds.
To secure its obligations under the agreement, described above, the Company has
pledged its interests in each of the wells in each bundle.
Greater Green River Basin Project
In Wyoming, Gasco established an AMI with Burlington Resources ("Burlington")
covering approximately 330,000 acres in Sublette County, Wyoming within the
Greater Green River Basin. As of December 31, 2003, the Company has a leasehold
interest in approximately 112,582 gross acres and 62,614 net acres in this area.
During 2002, the Company participated in the drilling of a two wells in this
AMI. Gasco has a 31.5% interest in each of these wells.
Three shallow wells were drilled during 2001 in this area for the purpose of
holding acreage and earning expiring leasehold. All of these wells have been
cased and are in various stages of completion, however none of these are
currently producing.
On May 1, 2002, the Company issued 9,500,000 shares of its common stock to the
Shama Zoe Limited Partnership ("Shama Zoe"), a private oil and gas company, for
the acquisition of 53,095 gross (47,786 net) acres plus other assets and
consideration in the Greater Green River Basin in Sublette County Wyoming. The
acquisition was valued at $18,525,000 using a stock price of $1.95 per common
share, which represented the closing price of the Company's common stock on
April 23, 2002; the date the agreement was executed. The original Property
Purchase Agreement governing this transaction prevented the Company from issuing
additional shares of its common stock at prices below $1.80 per share and from
granting registration rights in connection with the issuance of shares of its
common stock. In connection with the August 14, 2002 issuance of 6,500,000
shares of common stock, the original Property Purchase Agreement was amended to
allow for the issuance of those shares at a price of $1.00 per share and Shama
Zoe was granted an option to sell to the Company 1,400,000 shares of the Gasco
common stock that it acquired in the transaction at $1.00 per share at any time
prior to December 31, 2002. On December 31, 2002 Shama Zoe exercised the option
15
<PAGE>
and sold 1,400,000 shares of Gasco common stock back to the Company for $1.00
per share. The Company issued a $1,400,000 promissory note to Shama Zoe for the
purchase of these shares. The promissory note beared interest at 12% and had a
maturity date of March 14, 2003. The Company repaid this note plus accrued
interest in full during February 2003.
During June 2003, the Company announced its plans to dispose of certain of its
Wyoming properties in the Greater Green River Basin covering approximately
62,500 acres, net to its interest. The Company is also currently considering
additional options for this area such as the farm-out of some of our acreage and
other similar type transactions.
During 2003, the Company impaired certain of its unproved acreage in Wyoming by
reclassifying $1,725,000 of costs associated with this acreage into the full
cost pool. The impairment represents the cost of certain of the Company's
acreage that the Company no longer considers prospective. These costs became
subject to amortization during the fourth quarter of 2003.
Southern California Project
The Company has a leasehold interest in approximately 3,868 gross acres (2,641
net acres) in Kern and San Luis Obispo Counties of Southern California. The
Company has no drilling or development plans for this acreage during 2004, but
plans to continue paying leasehold rentals and other minimum geological expenses
to preserve the Company's acreage positions on these prospects. The Company may
consider selling these positions in the future.
Repurchase of Stock for Acreage
On July 16, 2002, Gasco executed and closed a purchase agreement with Brek
Energy Corporation ("Brek"), and certain other Gasco stockholders (the "Other
Stockholders"), pursuant to which Brek and the Other Stockholders purchased from
Gasco an undivided 25% of Gasco's working interests in all undeveloped acreage
owned by Gasco, representing 35,169 net undeveloped acres, in exchange for
6,250,000 shares of Gasco common stock and 500 shares of Gasco preferred stock
held by Brek and the Other Stockholders. The Other Stockholders assigned their
right to receive their share of such working interests to Brek, so that Brek
acquired title to all of the working interests conveyed by Gasco in the
transaction. Brek also had the option to acquire additional undeveloped acreage
that it did not exercise.
The transaction was recorded at $16,709,000 based on the average trading price
of the Company's common stock when the transaction was consummated The
transaction was recorded as a reduction to the Company's unproved properties and
a reduction to the Company's additional paid in capital, preferred and common
stock.
Company Reserve Estimates
The following table summarizes the Company's estimated reserve data as of
December 31, 2003, as estimated by Netherland, Sewell & Associates, Inc.,
independent petroleum engineers. The present value of future net cash flows is
16
<PAGE>
based on prices at December 31, 2003 of $5.89 per Mcf of gas and $29.69 per bbl
of oil. All of the Company's reserves are located within the state of Utah.
<TABLE>
Proved Reserve Quantities Present Value of Future Net Cash Flows
Proved Proved
Mcf of Gas Bbls of Oil Undeveloped Developed Total
<S> <C> <C> <C> <C> <C>
Total 13,601,003 100,987 $ 8,568,500 $ 7,626,600 $16,195,100
=========== ======== ============ ============ ============
</TABLE>
Actual future prices and costs may be materially higher or lower than the prices
and costs as of the date of any estimate. A decrease in price of $0.10 per Mcf
for natural gas and $1.00 per barrel of oil would result in a decrease in the
Company's December 31, 2003 present value of future net cash flows of
approximately $672,600.
On March 9, 2004 the Company completed the acquisition of additional working
interests in six of the Company's producing wells, 13,062 net acres and
gathering system assets located in the Uinta Basin in Utah for approximately
$3,175,000. The acquisition consists of approximately 7,637,000 Mcf and 62,000
Bbls of proved gas and oil reserves with a present value discounted at 10% of
approximately $8,064,000. Pursuant to an existing contract, an unrelated third
party has the right to purchase 25% of the acquired properties at the
acquisition price within 30 days following the date of the acquisition.
No estimates of proved reserves comparable to those included herein have been
included in reports to any federal agency other than the Securities and Exchange
Commission.
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 Years Ended December 31,
------------------------------------------
2003 2002 2001
------------ ----------- --------------
Natural gas production (Mcf) 257,035 66,444 17,545
Average sales price per Mcf $4.69 $ 2.47 $2.10
Oil production (Bbl) 1,988 - -
Average sales price per Bbl $28.52 - -
Expenses per Mcfe:
Lease operating $1.25 $ 1.80 $ 0.72
General and administrative $10.48 $ 76.46 $ 246.57
Depletion and impairment $2.06 $ 9.73 -
17
<PAGE>
Development, Exploration and Acquisition Capital Expenditures
During the year ended December 31, 2003, the Company spent $5,283,426 in
development and exploration activities. During the year ended December 31, 2002,
the Company spent $32,962,855, including the issuance of 9,500,000 shares of
common stock valued at $18,525,000, in the acquisition of additional leases and
in the development and exploitation of the properties subject to these leases.
During the year ended December 31, 2001, the Company spent $7,395,867
identifying and acquiring petroleum and natural gas leases and prospect rights.
As of December 31, 2003, the Company held working interests in 235,709 gross
acres (112,051 net acres) located in Utah, Wyoming and California. As of
December 31, 2003, the Company held an interest in 14 gross (5.5 net) producing
gas wells and 4 gross (4.0 net) shut-in gas wells located on these properties.
During the first quarter of 2004, the Company drilled and cased one additional
successful well and acquired additional working interests in six producing wells
in the Uinta Basin of Utah. Following those events, the Company holds an
interest in 16 gross (6.1 net) producing gas wells and 4 gross (4.0 net) shut-in
gas wells on these properties, and currently operates 18 wells, of which 13 are
producing.
The following table presents information regarding the Company's net costs
incurred in the purchase of proved and unproved properties and in exploration
and development activities:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
------------- ----------- ------------
Property acquisition costs:
<S> <C> <C> <C>
Unproved $ 667,557 $22,324,547 $ 7,161,450
Proved -- -- --
Exploration costs (a) 396,967 3,319,124 --
Development costs 4,218,9022 7,319,1844 --
---------- ------------ ---------
Total excluding asset retirement obligation 5,283,426 32,962,855 7,161,450
========== =========== =========
Total including asset retirement obligation $ 5,398,678 $ 32,962,855 $ 7,161,450
=========== ============ ===========
</TABLE>
(a) Includes seismic data acquisitions of $850,000 during the year ended
December 31, 2002.
Productive Gas Wells
The following summarizes the Company's productive and shut-in gas wells as of
December 31, 2003. Productive wells are producing wells and wells capable of
production. Shut-in wells are wells that are capable of production but are
currently not producing. Gross wells are the total number of wells in which the
Company has an interest. Net wells are the sum of the Company's fractional
interests owned in the gross wells.
Productive Gas Wells
Gross Net
Producing gas wells 14 5.5
Shut-in gas wells 4 4.0
-- ---
18 9.5
== ===
18
<PAGE>
The Company operates seven of the above producing wells and all of the shut-in
wells. Five of the remaining seven producing wells in the above table were
drilled by ConocoPhillips within Gasco's and ConocoPhillip's Area of Mutual
Interest in the Riverbend Project and were operated by ConocoPhillips. Gasco
took over operations of these wells effective January 1, 2004. The two remaining
producing wells are located in Sublette County Wyoming and were drilled and are
operated by Burlington.
On March 9, 2004 the Company completed the acquisition of additional working
interests in six of the Company's producing wells, 13,062 net acres and
gathering system assets located in the Uinta Basin in Utah for approximately
$3,175,000. Pursuant to an existing contract, an unrelated third party has the
right to purchase 25% of the acquired properties at the acquisition price within
30 days following the date of the acquisition. Additionally, during the first
quarter of 2004, the Company drilled and cased a successful well in the Uinta
Basin of Utah.
Oil and Gas Acreage
The following table sets forth the undeveloped and developed leasehold acreage,
by area, held by the Company as of December 31, 2003. Undeveloped acres are
acres on which wells have not been drilled or completed to a point that would
permit the production of commercial quantities of oil and gas, regardless of
whether or not such acreage contains proved reserves. Developed acres are acres,
which are spaced or assignable to productive wells. Gross acres are the total
number of acres in which Gasco has a working interest. Net acres are the sum of
Gasco's fractional interests owned in the gross acres. The table does not
include acreage that the Company has a contractual right to acquire or to earn
through drilling projects, or any other acreage for which the Company has not
yet received leasehold assignments. In certain leases, the Company's ownership
is not the same for all depths; therefore, the net acres in these leases are
calculated using the greatest ownership interest at any depth. Generally this
greater interest represents Gasco's ownership in the primary objective
formation.
Undeveloped Acres Developed Acres
--------------------------- -------------------
Gross Net Gross Net
Utah 118,659 46,618 600 178
Wyoming 112,302 62,546 280 68
California 3,868 2,641 - -
---------- --------- ----- ----
Total acres 234,829 111,805 880 246
========== ========= ==== =====
19
<PAGE>
The following table summarizes the gross and net undeveloped acres by area that
will expire in each of the next three years.
<TABLE>
<CAPTION>
Expiring in 2004 Expiring in 2005 Expiring in 2006
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Utah 2,540 476 7,186 1,543 10,609 2,367
Wyoming 22,643 14,699 24,631 16,420 9,925 5,692
California - 1,073 545 - -
-------- ------ ------ ------ ------- ------
Total 25,183 15,175 32,890 18,508 20,534 8,059
====== ====== ====== ====== ====== =====
</TABLE>
During 2003, the Company impaired certain of its unproved acreage in Wyoming by
reclassifying $1,725,000 of costs associated with this acreage into the full
cost pool. The impairment represents the cost of certain of the Company's
acreage expiring in 2004 that the Company no longer considers prospective. These
costs became subject to amortization during the fourth quarter of 2003. The
impaired acreage (approximately 9,136 net acres) is excluded from the tables
above.
During February 2002, the Company purchased at a BLM sale a 45% interest in
21,614 gross acres (9,726 net acres) for approximately $1,428,000. Effective
July 16, 2002, the Company assigned 25% of this interest to Brek, resulting in
the Company's net acres being reduced from 9,726 acres to 7,295 acres. 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. 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.
As of December 31, 2003, approximately 79% of the acreage that Gasco holds is
located on federal lands and approximately 19% of the acreage is located on
state lands. It has been Gasco's experience that the permitting process related
to the development of acreage on federal lands is more time consuming and
expensive than the permitting process related to acreage on state lands. The
Company has generally been able to obtain state permits within 30 days, while
obtaining federal permits has taken several months or longer. Accordingly, if
the development of the Company's acreage located on federal lands is delayed
significantly by the permitting process, the Company may have to operate at a
loss for an extended period of time.
Drilling Activity
The following table sets forth the Company's drilling activity during the years
ended December 31, 2003, 2002 and 2001. In the table, "gross" refers to the
total wells in which we have a working interest, and "net" refers to gross wells
multiplied by the Company's working interest.
20
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------------
2003 2002 2001
---------------- ------------------------ ----------------------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Exploratory Wells:
<S> <C> <C> <C> <C> <C> <C>
Productive - - 2 0.7 3 3.0
Dry - - 1 1.0 - -
--- --- --- --- --- ---
Total wells - - 3 1.7 3 3.0
=== === === === === ===
Development Wells:
Productive - - 6 3.3 3 0.6
Dry - - - - - -
--- --- --- --- --- ---
Total wells - - 6 3.3 3 0.6
=== === === === === ===
</TABLE>
During the first quarter of 2004, the Company drilled and cased a successful
well and is currently in the process of drilling another well, both of which are
located in the Unita Basin of Utah.
Office Space
The Company leases approximately 3,255 square feet of office space in Englewood,
Colorado for approximately $46,000 per year under two leases, both of which
terminate on August 30, 2004. The Company intends to renew these leases at
current or lower rates when the current leases expire in August 2004.
ITEM 3 - LEGAL PROCEEDINGS
See Note 16 of the accompanying financial statements, which is incorporated by
reference into this Item 3.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
<PAGE>
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company trades under the symbol "GASE", and as of March 25, 2004, the
Company had 111 registered shareholders of its common stock. During the last two
fiscal years, no cash dividends were declared on Gasco's common stock. The
Company's management does not anticipate that dividends will be paid on its
common stock in the near future.
The following table sets forth, for the periods indicated, the high and low
sales prices per share of the Company's common stock as reported on the OTC
bulletin board for the periods indicated.
High Low
2003
First Quarter $0.75 $0.46
Second Quarter 0.90 0.42
Third Quarter 0.90 0.51
Fourth Quarter 1.32 0.54
2002
First Quarter 2.24 1.55
Second Quarter 2.55 1.57
Third Quarter 1.75 0.68
Fourth Quarter 1.15 0.53
22
<PAGE>
Equity Compensation Plans
The table below provides information relating to the Company's equity
compensation plans as of December 31, 2003:
<TABLE>
Number
of securities
remaining available
Number of securities Weighted-average for future issuance
to be issued exercise price of under compensation
upon exercise of outstanding plans (excluding
outstanding options, options, securities reflected
Plan Category warrants and rights warrants and rights in first column)
- ------------- ------------------- ------------------- ----------------
Equity compensation plans
approved by security holders
<S> <C> <C> <C>
Stock option plan 1,799,336 $ 1.09 2,229,544
Restricted stock plan 425,000 N/A (a) -
Equity compensation plans
not approved by security holders 3,817,250 2.18 (b)
--------- ----------
Total 6,041,586 $ 1.83 (c) 2,229,544
========= ==== =========
</TABLE>
(a) The restricted shares vest 20% on the first anniversary, 20% on the second
anniversary and 60% on the third anniversary of the awards, provided the
holder remains employed by the Company.
(b) The equity compensation plan not approved by shareholders is comprised of
individual common stock option agreements issued to directors, consultants
and employees of the Company, as summarized below. The common stock options
vest between zero and two years of the date of issue and expire within ten
years of the vesting date. The exercise prices of these options range from
$1.00 per share to $3.70 per share. Since these options are issued in
individual compensation arrangements, there are no options available under
any plan for future issuance. The material terms of these options are as
follows:
<TABLE>
<CAPTION>
Options Issued to: Number of Options Exercise Price Vesting Dates Expiration Dates
<S> <C> <C> <C> <C> <C> <C> <C>
Employees 3,394,750 $1.00 - $3.15 2001 - 2003 2006 - 2008
Consultants 272,500 $3.00 - $3.70 2001 - 2003 2006 - 2008
Directors 150,000 $3.00 - $3.15 2001 - 2003 2006 - 2008
-------
Total Issued 3,817,250
=========
</TABLE>
(c) Weighted average exercise price of options to purchase a total of 5,616,586
shares of common stock.
Securities Transactions
The Company's securities transactions during the year ended December 31, 2003
that were not registered under the Securities Act of 1933 are described as
follows:
23
<PAGE>
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 were
approximately $15,000.
On October 15, 2003 the Company issued $2,500,000 of 8% Convertible Debentures
("Debentures") in a private placement. 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 2005 and the maturity date of the Debentures is October 15,
2008. Financing fees of $72,500 associated with this transaction were paid to
RENN Capital Group, Inc., and a finder's fee of $37,500 was paid to Bruce
Lazier. 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 $166,667, which will
be amortized over the life of the Debentures. During the year ended December 31,
2003, the Company recorded $6,945 of interest expense representing the
amortization of the beneficial conversion feature.
During February and April 2003, 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 Stock was sold for $440 per share resulting in net proceeds of
approximately $4,797,000. The cost of this offering was $65,431 of which a
$10,000 financial advisory fee was paid to Energy Capital Solutions LLC.
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 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 the year ended December 31, 2003, the Company paid dividends to the
holders of its Preferred Stock consisting of 682 shares of Preferred Stock and
$4,092 in cash.
During the first quarter and fourth quarter of 2003, the Company granted options
to purchase 1,608,000 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
24
<PAGE>
the end of each four-month period after the issuance date. Additionally, the
Company cancelled options to purchase 2,260,000 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.
Unless otherwise noted, each of the above sales of securities by the Company
were exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof, inasmuch as each such sale was conducted as a private
placement to a limited number of sophisticated buyers.
The aggregate net proceeds from the securities offerings during 2003 were
approximately $9,876,000. During February 2003, $1,400,000 of the proceeds were
used to repay all of the Company's outstanding obligations under a short term
promissory note. The remaining proceeds were used for the development and
exploitation of the Company's Riverbend Project and for general corporate
purposes.
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data, derived from the
consolidated financial statements, regarding Gasco's financial position and
results of operations as the dates indicated. All information for periods prior
to March 30, 2001 represents the historical information of Pannonian because
Pannonian was considered the acquiring entity for accounting purposes.
<TABLE>
As of and for the Year Ended December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Summary of Operations
<S> <C> <C> <C> <C> <C>
Oil and gas revenue $1,263,443 $ 164,508 $ 36,850 $ - $ -
General & administrative expense 2,819,675 5,080,287 4,326,065 951,734 738,153
Net loss (2,526,525) (5,649,682) (4,129,459) (843,261) (736,834)
Net loss per share (0.07) (0.16) (0.63) (0.06) (.06)
</TABLE>
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $1,192,249 $ (2,857,539) $11,860,584 $ (420,370) $(65,798)
Cash and cash equivalents 3,081,109 2,089,062 12,296,585 881,041 163,490
Oil and gas properties, net 28,470,917 24,760,149 9,152,740 1,991,290 2,484,919
Total assets 33,059,179 27,505,501 21,658,525 3,007,259 2,688,826
Long-term obligations 2,483,084 - - - -
Stockholders' equity 27,382,083 22,014,265 21,065,425 1,578,905 2,422,166
</TABLE>
25
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward Looking Statements
Please refer to the section entitled "Cautionary Statement Regarding Forward
Looking Statements" under Item 1. For a discussion of factors which could affect
the outcome of forward looking statements used by the Company.
Overview
Gasco is a natural gas and petroleum exploitation and development company
engaged in locating and developing hydrocarbon prospects, primarily in the Rocky
Mountain region. The Company's mission is to enhance shareholder value by using
new technologies to generate and develop high-potential exploitation prospects
in this area. The Company's principal business is the acquisition of leasehold
interests in petroleum and natural gas rights, either directly or indirectly,
and the exploitation and development of properties subject to these leases.
The Company's corporate strategy is to grow through drilling projects. The
Company has been focusing its drilling efforts in the Riverbend Project located
in the Uinta Basin of northeastern Utah. The higher oil and gas prices during
2003 and into early 2004 due to factors such as reduced levels of gas storage,
colder temperatures in the northeastern part of the country and decreased gas
imports from Canada, have increased the profitability of the Company's drilling
projects in this area. The wells in this area tend to have multiple productive
zones of production.
Although the Company did not drill any new wells in this area during 2003, it
completed two wells that were drilled during 2002, performed numerous
recompletions on producing wells and entered into a contract with a system
operator to install a new compressor in the Riverbend Project. The addition of
the compressor created additional compression capacity that allowed the Company
to begin producing from wells that were shut-in or were flowing through
constricted orifices at reduced production rates.
In March 2004, the Company completed the acquisition of additional interests in
six producing wells, 13,062 net acres and certain other assets located in the
Uinta Basin in Utah for approximately $3,175,000.
During 2003, the Company announced its plans to dispose of certain of its
Wyoming properties in the Greater Green River Basin covering approximately
62,500 net acres. 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.
26
<PAGE>
The following table presents the Company's reserve and production information
during the three years ended December 31, 2003. The Mcfe calculations assume a
conversion of 6 Mcfs for each Bbl of oil.
For the Years Ended December 31,
------------------------------------------
2003 2002 2001
--------------- --------------- ----------
Natural gas production (Mcf) 257,035 66,444 17,545
Average sales price per Mcf $4.69 $ 2.47 $2.10
Proved gas reserves (Mcf) 13,601,003 20,622,266 -
Oil production (Bbl) 1,988 - -
Average sales price per Bbl $28.52 - -
Proved oil reserves (Bbl) 100,987 141,652 -
Production (Mcfe) 268,963 66,444 17,545
Proved reserves (Mcfe) 14,206,925 21,472,178 -
During 2003, the Company oil and gas production increased by approximately 300%
primarily due to the completions, recompletions and the compressor installation
discussed above. During 2003, on a combined basis, the oil and gas reserve
quantities have declined by approximately 34% primarily due to normal decline
curves of approximately 30%, property sales of 7%, annual production of 1% and
revisions of previous estimates of 18% partially offset by extensions and
discoveries of 22%.
During 2004 Gasco's 2004 capital budget is approximately $13 million for the
drilling, completion and pipeline connection of wells in the Riverbend Project.
The overall increase in drilling activity has made it more difficult for the
Company to obtain the drilling rigs and will influence the number of wells the
Company is able to drill during 2004. The Company anticipates an overall
increase in its salary expense because it will have to hire three additional
employees to manage the workload associated with its operational plan for 2004.
Management believes it has sufficient capital for its 2004 operational budget,
but will need to raise additional capital for its capital budget in 2005. The
Company will consider several options for raising additional funds such as
entering into a revolving line of credit, 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.
27
<PAGE>
Liquidity and Capital Resources
The following table summarizes the Company's sources and uses of cash for each
of the three years ended December 31, 2003, 2002 and 2001.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Net cash used in operations $ (2,191,914) $ (1,390,306) $ (3,740,654)
Net cash used in investing activities (5,286,690) (14,541,197) (7,180,714)
Net cash provided by financing activities 8,470,651 5,723,980 22,336,912
Net cash flow (deficit) 992,047 (10,207,523) 11,415,544
</TABLE>
Cash used in operations during 2001 was primarily comprised of the Company's
general and administrative expenses partially offset by gas revenue from two
wells, which began producing in late 2001. The decrease in cash used in
operations during 2002 was primarily due to the increase in revenue resulting
from a 278% increase in production due to the Company's drilling activity during
2002, partially offset by higher general and administrative expenses primarily
related to increased employees and consultants needed for the Company's
operational activity. Oil and gas production increased another 300% during 2003
as the Company continued their drilling activity. General and administrative
expenses decreased as well during 2003 due primarily to the Company's cost
cutting measures. See further discussion under Results of Operations.
The Company's investing activities during 2003, 2002, and 2001 related primarily
to the Company's development and exploration activities. The majority of the
Company's property related expenditures during 2001 related to the acquisition
of acreage in Utah and Wyoming. During 2002 the Company acquired acreage for
approximately $22,000,000 in cash and stock and the remaining $11,000,000 was
used to fund the Company's drilling projects. The Company's unproved
acquisitions during 2003 decreased to approximately $700,000 and related
primarily to delay rentals and other leasehold costs. The remaining $ 4,600,000
in property costs was spent on the Company's drilling projects in the Riverbend
Project.
Historically, the Company has relied on the sale of equity capital and farm-outs
and other similar types of transactions to fund working capital, the acquisition
of its prospects and its drilling and development activities. The financing
activities in each of the years presented is comprised of the net proceeds from
the sale of equity in the Company, as further described in Item 8, Notes 6 and 8
of the accompanying financial statements.
In addition to the above equity transactions, On October 15, 2003 the Company
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 2005
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.
28
<PAGE>
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 $166,667, which will
be amortized over the life of the Debentures. During the year ended December 31,
2003, the Company recorded $6,945 of interest expense representing the
amortization of the beneficial conversion feature.
Capital Budget
On January 16, 2004 the Company entered into agreements with a group of industry
providers (together, the "Service Parties") to accelerate the development of
Gasco's oil and gas properties by drilling up to 50 wells in Gasco's Riverbend
Project in Utah's Uinta Basin. Gasco has agreed that the Service Parties will
have the exclusive right to provide their services in the development of the
Riverbend acreage. The agreement provides for the group to initially proceed
with the first 10-well bundle, which approximates one year of drilling with a
single rig. If the group agrees, drilling may be accelerated using additional
rigs. Gasco's 2004 capital budget is approximately $13 million for the drilling,
completion and pipeline connection of wells in this area. Gasco may elect to
fund up to 20% of the cost of the wells in the first three bundles and up to 30%
of the cost in the last two bundles. Gasco's interest in the production stream
from a bundle, net of royalties, taxes and lease operating expenses is estimated
to equal the proportion of the total well costs that it funds.
To secure its obligations under the agreement described above, the Company has
pledged its interests in each of the wells in each bundle.
On February 11, 2004 the Company completed the sale through a private placement
of 14,333,334 shares of its common stock to a group of accredited investors at a
price of $1.50 per share. Proceeds to the Company, net of fees and estimated
expenses were approximately $20,072,000. The proceeds from this sale will be
used for general corporate purposes including the development and exploitation
of Gasco's Riverbend Project in the Uinta Basin in Uintah County, Utah.
The Company intends to use the funds from this transaction and its cash on hand
to fund the following projects:
- On March 9, 2004 the Company completed the acquisition of additional
interests in six producing wells, 13,062 net acres and certain other
assets located in the Uinta Basin in Utah for approximately $3,175,000
(subject to the option of a third party to purchase 25% of such
interests at the acquisition cost within 30 days following the date of
the acquisition).
- The Company plans to spend approximately $12,425,000 for the drilling,
completion and pipeline connection of wells in this area.
- The Company is also considering investing approximately $2,400,000 in
a gathering system within the Riverbend Area.
Management believes it has sufficient capital for its 2004 operational budget,
29
<PAGE>
but will need to raise additional capital for its capital budget in 2005. The
Company will consider several options for raising additional funds such as
entering into a revolving line of credit, 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.
Schedule of Contractual Obligations
The following table summarizes the Company's obligations and commitments to make
future payments under its note payable, operating leases, employment contracts
and consulting agreement for the periods specified as of December 31, 2003.
<TABLE>
<CAPTION>
Payments due by Period
Contractual Obligations Total 1 year 2-3 years 4-5 years After 5 years
- ----------------------- ----- ------ --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Convertible Debentures $2,500,000 $ - $ 525,000 $ 1,975,000 $ -
Operating Lease - office space 32,195 32,195 - - -
Employment Contracts 979,167 470,000 470,000 39,167 -
Consulting Agreement 250,000 120,000 120,000 10,000 -
---------- --------- ---------- ------------ -------
Total Contractual Cash
Obligations $3,761,362 $ 622,195 $1,115,000 $ 2,024,167 $ -
========== ========= ========== =========== ======
</TABLE>
The table above assumes that the Debentures will be outstanding until maturity,
however if they are converted prior to maturity, the future obligations will be
eliminated and the Company's outstanding common stock will increase by 4,166,667
shares.
The Company's office leases expire in August 2004. The Company intends to extend
these leases at current or lower rates. The table above does not include future
obligations that will exist once the Company enters into a new lease.
The Company has also not included asset retirement obligations as discussed in
Note 2 of the accompanying financial statements, as the Company cannot determine
with accuracy the timing of such payments.
Critical Accounting Policies and Estimates
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles in the United States requires
management to make assumptions and estimates that affect the reported amounts of
assets, liabilities, revenues and expenses as well as 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. The
following is a summary of the significant accounting policies and related
estimates that affect the Company's financial disclosures.
Oil and Gas Reserves
Gasco follows the full cost method of accounting whereby all costs related to
the acquisition and development of oil and gas properties are capitalized into a
single cost center referred to as a full cost pool. Depletion of exploration and
development costs and depreciation of production equipment is computed using the
30
<PAGE>
units of production method based upon estimated proved oil and gas reserves.
Under the full cost method of accounting, capitalized oil and gas property costs
less accumulated depletion and net of deferred income taxes may not exceed an
amount equal to the present value, discounted at 10%, of estimated future net
revenues from proved oil and gas reserves plus the cost, or estimated fair value
if lower, of unproved properties. Should capitalized costs exceed this ceiling,
an impairment is recognized.
Estimated reserve quantities and future net cash flows have the most significant
impact on the Company because these reserve estimates are used in providing a
measure of the Company's overall value. These estimates are also used in the
quarterly calculations of depletion, depreciation and impairment of the
Company's proved properties.
Estimating accumulations of gas and oil is complex and is not exact because of
the numerous uncertainties inherent in the process. The process relies on
interpretations of available geological, geophysical, engineering and production
data. The extent, quality and reliability of this technical data can vary. The
process also requires certain economic assumptions, some of which are mandated
by the Securities and Exchange Commission ("SEC"), such as gas and oil prices,
drilling and operating expenses, capital expenditures, taxes and availability of
funds. The accuracy of a reserve estimate is a function of the quality and
quantity of available data; the interpretation of that data; the accuracy of
various mandated economic assumptions; and the judgment of the persons preparing
the estimate.
The most accurate method of determining proved reserve estimates is based upon a
decline analysis method, which consists of extrapolating future reservoir
pressure and production from historical pressure decline and production data.
The accuracy of the decline analysis method generally increases with the length
of the production history. Since most of the Company's wells have been producing
less than two years, their production history is relatively short, so other
(generally less accurate) methods such as volumetric analysis and analogy to the
production history of wells of other operators in the same reservoir were used
in conjunction with the decline analysis method to determine the Company's
estimates of proved reserves. As the Company's wells are produced over time and
more data is available, the estimated proved reserves will be redetermined on an
annual basis and may be adjusted based on that data.
Actual future production, gas and oil prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable gas and oil
reserves most likely will vary from the Company's estimates. Any significant
variance could materially affect the quantities and present value of the
Company's reserves. In addition, the Company may adjust estimates of proved
reserves to reflect production history, results of exploration and development
and prevailing gas and oil prices. The Company's reserves may also be
susceptible to drainage by operators on adjacent properties.
31
<PAGE>
Impairment of Long-lived Assets
The cost of the Company's unproved properties is withheld from the depletion
base as described above, until such a time as the properties are either
developed or abandoned. These properties are reviewed periodically for possible
impairment. The Company's management reviewed the unproved property located
within the state of Wyoming and determined that it would not be developing some
of the acres that were not considered to be prospective. As a result, the
Company estimated the value of these acres for the purpose of recording the
related impairment. The impairment was estimated by calculating a per acre value
from the total unproved costs incurred for the Wyoming acreage divided by the
total net acres owned by the Company. This per acre estimate was applied to the
acres that the Company does not plan to develop to calculate the impairment. A
change in the estimated value of the acreage could have a material impact on the
total of the impairment recorded by the Company.
Revenue Recognition
The Company's revenue is derived from the sale of oil and gas production from
its producing wells. This revenue is recognized as income when the production is
produced and sold. The Company typically receives its payment for production
sold one to three months subsequent to the month the production is sold. For
this reason, the Company must estimate the revenue that has been earned but not
yet received by the Company as of the reporting date. The Company uses actual
production reports to estimate the quantities sold and the Questar Rocky
Mountain spot price less marketing and transportation adjustments to estimate
the price of the production. Variances between our estimates and the actual
amounts received are recorded in the month the payment is received.
Stock Based Compensation
The Company accounts for its stock-based compensation using the intrinsic value
recognition and measurement principles detailed in Accounting Principles Board's
Opinion No. 25 ("APB No. 25"). No stock-based compensation expense has been
reflected in the Company's financial statements for the options granted to its
employees as these options had exercise prices equal to or higher than the
market value of the underlying common stock on the date of grant. The Company
uses the Black-Scholes option valuation model to calculate the required
disclosures under SFAS 123. This model requires the Company to estimate a risk
free interest rate and the volatility of the Company's common stock price. The
use of a difference estimate for any one of these components could have a
material impact on the amount of calculated compensation expense.
Results of Operations
All information for periods prior to March 30, 2001 represents the historical
information of Pannonian because Pannonian was considered the acquiring entity
for accounting purposes.
32
<PAGE>
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 Year Ended December 31,
-----------------------------------------
2003 2002 2001
---- ---- ----
Natural gas production (Mcf) 257,035 66,444 17,545
Average sales price per Mcf $ 4.69 $2.47 $2.10
Oil production (Bbl) 1,988 - -
Average sales price per Bbl $28.52 - -
2003 Compared to 2002
Oil and gas revenue increased $1,098,935 during 2003 compared with 2002 due to
an increase in gas production from 66,444 Mcf during 2002 to 257,035 Mcf during
2003 combined with an increase in the average gas price from $2.47 during 2002
to $4.69 per Mcf during 2003. During 2003, the Company also produced 1,988 bbls
of oil at an average price of $28.52 per bbl. The increase in production is
primarily due to the Company's completion and recompletion activity during 2003
as well as the compressor installation discussed above which occurred during
February 2003.
Interest income decreased by 84% from 2002 to 2003 primarily due to lower
average cash and cash equivalent balances during 2003.
General and administrative expense decreased from $5,080,287 to $2,819,675
during 2003 as compared with 2002, primarily due to the Company's efforts to
decrease its overhead expenses. The $2,260,612 decrease in these expenses is
comprised of approximately $775,000 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 $300,000 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 $565,000 reduction in legal fees and $246,000 in
accounting fees as a result of fewer transaction related fees during 2003 and a
$400,000 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 increased $217,469 during 2003 as compared with the
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 expense during 2003 is comprised of
$480,000 of depletion expense related to the Company's proved oil and gas
properties, $54,128 of depreciation expense related to the Company's furniture,
fixtures and other assets and $11,795 of accretion expense related the Company's
asset retirement obligation. The corresponding expense during 2002 consists of
33
<PAGE>
$105,321 of depletion expense and $43,788 of depreciation expense. The increase
in depletion expense during 2003 as compared with 2002 is due primarily to the
increase in production discussed above.
Impairment expense during 2003 represents the value of the acreage and related
unproved costs that the Company does not plan to develop prior to its expiration
during 2004. Impairment expense during 2002 represents costs associated with a
well drilled in the Southwest Jonah field located in the Greater Green River
Basin in Sublette County, Wyoming. The well was plugged and abandoned during
March of 2002. The Company recognized impairment expense of $541,125 associated
with this well during 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 during 2003 represents the interest expense related to the
Company's outstanding Debentures.
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 SFAS 143 on January 1, 2003.
2002 Compared to 2001
During the year ended December 31, 2002, the Company owned interests in thirteen
producing wells, two of which began producing in late October of 2001 and the
remainder of which began producing during 2002. The oil and gas revenue and
lease operating expense during 2002 relate to these wells and is comprised of
66,444 Mcf of gas at an average price of $2.47 per Mcf, compared to 17,545 Mcf
of gas at an average price of $2.10 per Mcf during the year ended December 31,
2001. Lease operating expense increased from $12,679 during 2001 to $119,809
during 2002 due to the increase in the number of producing wells during 2002.
Interest income during 2002 and 2001 represents the interest earned on the
Company's combined cash and cash equivalents and restricted cash balances.
Interest income decreased from $193,352 during 2001 to $76,410 during 2002. The
decrease is primarily the result of a higher average cash balance during the
2001 primarily due to the sale of preferred and common stock during the second
half of 2001.
General and administrative expense increased by $754,222 from $4,326,065 during
2001 to $5,080,287 during 2002. The increase during 2002 is primarily comprised
of a $550,000 increase in compensation expense due to an increase in full-time
staff and consultants associated with the increase in the Company's operational
activity, a one-time expense of $110,266 in consulting fees paid on behalf of a
company of which two of Gasco's directors have a combined 66.67% ownership, and
numerous other miscellaneous fluctuations, none of which was individually
significant.
Depletion, depreciation and amortization expense during 2002 is comprised of
$105,321 of depletion expense related to the Company's proved oil and gas
34
<PAGE>
properties and $43,788 of depreciation related to the Company's furniture,
fixtures and other assets, respectively. The corresponding expense during 2001
consists of the depreciation expense related to the Company's furniture,
fixtures and other assets.
The impairment expense during the year ended December 31, 2002 represents the
costs associated with a well drilled in the Southwest Jonah field located in the
Greater Green River Basin in Sublette County, Wyoming during the first quarter
of 2002. The natural gas encountered in this well was not of sufficient
quantities to be deemed economic; therefore, the costs associated with this well
were charged to impairment expense during the year ended December 31, 2002
because the Company believed that the total costs for this well exceeded the
present value, discounted at 10%, of the future net revenues from its proved oil
and gas reserves.
The interest expense during the year ended December 31, 2001 represents the
interest incurred on the Company's outstanding notes payable, which were repaid
during 2001.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS 141) and Statement of Financial Accounting Standards No. 142, "Goodwill
and Intangible Assets" (SFAS 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
SFAS 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" (SFAS 69). Additional disclosures required by SFAS 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 SFAS 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 SFAS 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 SFAS
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, 2003 and 2002, the Company had
undeveloped leaseholds of approximately $13,212,039 and $13,984,536,
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 SFAS 142 related to these interests. The Company's
current disclosures are those required by SFAS 69.
35
<PAGE>
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 May 2003 FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that such financial instruments be classified as a liability (or as an
asset in certain circumstances). SFAS No. 150 is effective for all freestanding
instruments entered into or modified after May 31, 2003. Otherwise, it became
effective for Gasco as of July 1, 2003. The Company has no financial instruments
that fall within the scope of this statement.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk relates to changes in the pricing applicable
to the sales of gas production in the Uinta Basin of northeastern Utah and the
Greater Green River Basin of west central Wyoming. This risk will become more
significant to the Company as more wells are drilled and begin producing in
these areas. Although the Company is not using derivatives at this time to
mitigate the risk of adverse changes in commodity prices, it may consider using
them in the future.
36
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report 38
Consolidated Balance Sheets at December 31, 2003 and 2002 39
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001 40
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2003, 2002 and 2001 41
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 42
Notes to Consolidated Financial Statements 43-66
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Gasco Energy, Inc.:
We have audited the consolidated balance sheets of Gasco Energy, Inc. (the
"Company") and its subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2003
and 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, in 2003 the
Company adopted Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations."
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
March 25, 2004
38
<PAGE>
<TABLE>
<CAPTION>
GASCO ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------
2003 2002
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $3,081,109 $2,089,062
Restricted cash 250,000 250,000
Prepaid expenses and other assets 555,786 198,491
Accounts receivable 499,363 96,144
--------- ---------
Total 4,386,258 2,633,697
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Proved mineral interests 16,386,252 10,283,488
Well in progress - 1,138,571
Unproved mineral interests 13,212,039 13,984,536
Furniture, fixtures and other 166,051 162,787
---------- ----------
Total 29,764,342 25,569,382
Less accumulated depreciation, depletion, amortization and property impairment (1,232,634) (697,578)
----------- ----------
Total 28,531,708 24,871,804
----------- ----------
OTHER ASSET
Deferred financing costs 141,213 -
----------- ----------
TOTAL ASSETS $ 33,059,179 $ 27,505,501
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,260,492 $ 1,910,974
Accrued expenses 933,520 2,180,262
Note payable - 1,400,000
--------- ---------
Total 3,194,012 5,491,236
--------- ---------
NONCURRENT LIABILITIES
8% Convertible Debentures, net of unamortized discount $159,722 2,340,278 -
Asset retirement obligation 142,806 -
--------- --------
Total 2,483,084 -
--------- --------
STOCKHOLDERS' EQUITY
Series B Convertible Preferred stock - $.001 par value; 20,000 shares authorized;
11,734 shares issued and outstanding in 2003, liquidation preference of $5,162,960 12 -
Common stock - $.0001 par value; 100,000,000 shares authorized;
45,675,936 shares issued and 45,602,236 shares outstanding in 2003; and
40,362,500 shares issued and 40,288,800 shares outstanding in 2002 4,568 4,036
Additional paid in capital 52,979,325 44,958,593
Deferred compensation (179,766) (52,833)
Accumulated deficit (25,291,761) (22,765,236)
Less cost of treasury stock of 73,700 common shares (130,295) (130,295)
----------- ----------
Total 27,382,083 22,014,265
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,059,179 $ 27,505,501
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
39
<PAGE>
<TABLE>
<CAPTION>
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
--------------------------------------------------
2003 2002 2001
REVENUES
<S> <C> <C> <C>
Gas $ 1,206,741 $ 164,508 $ 36,850
Oil 56,702 - -
Interest income 11,987 76,140 193,352
--------- ------- -------
Total 1,275,430 240,648 230,202
--------- ------- -------
OPERATING EXPENSES
General and administrative 2,819,675 5,080,287 4,326,065
Lease operating 337,278 119,809 12,679
Depletion, depreciation, amortization and asset retirement
liability accretion 552,923 149,109 5,760
Impairment 541,125
Interest expense 82,392 67,363
--------- ----------- ---------
Total 3,792,268 5,890,330 4,411,867
--------- ---------- ---------
OTHER INCOME - - 52,206
---------- ----------- ---------
LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (2,516,838) (5,649,682) (4,129,459)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (9,687) - -
-------- ----------- -----------
NET LOSS (2,526,525) (5,649,682) (4,129,459)
Preferred stock dividends (304,172) - -
Preferred stock deemed distribution - - 11,400,000
------------- ------------ ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,830,697) $(5,649,682) $ (15,529,459)
============= ============= ==============
PER COMMON SHARE DATA - BASIC AND DILUTED:
Loss before cumulative effect of change in accounting principle $ (0.07) $ (0.16) $ (0.63)
Cumulative effect of change in accounting principle - - -
-------- ----- ------
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.07) $ (0.16) $ (0.63)
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 41,262,778 36,439,074 24,835,144
========== ========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Preferred Stock Common Stock Paid in Deferred Accumulated Treasury
Shares Value Shares Value Capital Compensation Deficit Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2001 - - 13,800,595 1,380 3,163,620 - (1,586,095) - 1,578,905
Distribution of assets (2,023,568) (2,023,568)
Issuance of common shares in
connection with reverse acquisition
of San Joaquin Resources, Inc. 9,549,405 955 571,389 572,344
Issuance of preferred stock 1,000 $ 1 17,430,366 17,430,367
Issuance of common shares 3,902,500 390 7,343,147 7,343,537
Options issued for services 684,969 (684,969)
Amortization of deferred compensation
expense 423,594 423,594
Deemed distribution 11,400,000 (11,400,000)
Repurchase of common stock (130,295) (130,295)
Net loss - - - - - - (4,129,459) (4,129,459)
---- ---- --------- ------- ---------- ------- ------------ --------- -------------
Balance, December 31, 2001 1,000 1 27,252,500 2,725 38,569,923 (261,375) (17,115,554) (130,295) 21,065,425
Conversion of preferred shares to common
shares 4,760,000 476 (476) -
Issuance of common shares for acreage 9,500,000 950 18,524,050 18,525,000
Amortization of deferred compensation
expense 208,542 208,542
Redemption of preferred and common
stock (1,000) (1) (6,250,000) (625) (16,708,374) (16,709,000)
Issuance of common stock 6,500,000 650 5,973,330 5,973,980
Repurchase of common stock (1,400,000) (140) (1,399,860) (1,400,000)
Net loss - - - - - - (5,649,682) - (5,649,682)
-------- ---- ---------- ------ ----------- ------ ------------ --------- ------------
Balance, December 31, 2002 - - 40,362,500 4,036 44,958,593 (52,833) (22,765,236) (130,295) 22,014,265
Issuance of preferred stock 11,052 11 4,797,398 4,797,409
Issuance of common stock 4,888,436 490 2,808,719 2,809,209
Issuance of restricted stock 425,000 42 250,708 (221,250) 29,500
Amortization of deferred compensation 94,317 94,317
Beneficial conversion feature 166,667 166,667
Dividends paid 682 1 (4,092) (4,091)
Net loss (2,526,525) (2,526,525)
Other - - - 1,332 - - - 1,332
------ ---- ---------- ----- --------- --------- ----------- -------- -----------
Balance December 31, 2003 11,734 $ 12 45,675,936 $4,568 $52,979,325 $(179,766)$(25,291,761) $(130,295) $ 27,382,083
====== ==== ========== ====== ========== ========== =========== ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
41
<PAGE>
<TABLE>
<CAPTION>
GASCO ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------------------------
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,526,525) $(5,649,682) $ (4,129,459)
Adjustment to reconcile net loss to net cash used
in operating activities
<S> <C> <C> <C>
Depreciation, depletion and impairment expense 541,128 690,234 5,760
Accretion of asset retirement obligation 11,795 - -
Amortization of deferred compensation 94,317 208,542 423,594
Amortization of beneficial conversion feature 6,945
Amortization of offering costs 7,758
Cumulative effect of change in accounting principle 9,687 - -
Changes in operating assets and liabilities:
Prepaid expenses (320,059) (74,139) (121,171)
Accounts receivable (403,219) (63,397) 132,494
Accounts payable 349,518 1,362,121 (51,872)
Accrued expenses 36,741 2,136,015 -
---------- ------------ ----------
Net cash used in operating activities (2,191,914) (1,390,306) (3,740,654)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for furniture, fixtures and other (3,264) (103,342) (49,876)
Cash paid for development and exploration (5,283,426) (14,437,855) (7,395,867)
Cash received upon recapitalization and merger 265,029
---------- ------------ -----------
Net cash used in investing activities (5,286,690) (14,541,197) (7,180,714)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash designated as restricted (250,000) (250,000) -
Cash undesignated as restricted 250,000 - -
Preferred dividends (4,092) - -
Proceeds from sale of preferred stock 4,862,840 - 19,000,000
Proceeds from sale of common stock 2,777,292 6,500,000 6,826,218
Proceeds from sale of convertible debentures 2,500,000 - -
Cash paid for offering costs (266,721) (526,020) (2,144,468)
Proceeds from short-term borrowings - - 500,000
Repayment of short-term borrowings - - (714,543)
Repayment of note payable (1,400,000) - -
Repurchase of common stock - - (130,295)
Distribution to Rubicon Oil and Gas, Inc. (1,000,000)
Other 1,332 - -
----------- ------------ -----------
Net cash provided by financing activities 8,470,651 5,723,980 22,336,912
----------- ------------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 992,047 (10,207,523) 11,415,544
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 2,089,062 12,296,585 881,041
--------- ---------- -----------
END OF PERIOD $ 3,081,109 $ 2,089,062 $ 12,296,585
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE>
GASCO ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
NOTE 1 - ORGANIZATION
Gasco Energy, Inc. ("Gasco" or the "Company") is an independent energy company
engaged in the exploration, development, and acquisition and production of crude
oil and natural gas in the western United States.
On February 1, 2001, San Joaquin Resources, Inc. ("SJRI"), a Nevada corporation,
and Pannonian Energy, Inc. ("Pannonian"), a Delaware corporation, entered into
an Agreement and Plan of Reorganization (the "Pannonian Agreement") whereby a
subsidiary of SJRI merged into Pannonian and SJRI issued 14,000,000 shares of
its common stock to the former shareholders of Pannonian in exchange for all of
the outstanding shares and warrants of Pannonian. Certain shareholders of SJRI
surrendered for cancellation 2,438,930 common shares of the Company's capital in
connection with the transaction, and as a result the existing shareholders of
Pannonian acquired control of the combined company. For financial reporting
purposes this business combination is accounted for as a reverse acquisition
with Pannonian as the accounting acquirer.
The reverse acquisition was valued at $572,344 and was allocated as follows:
Oil and gas properties $ 265,836
Receivables, prepaid and other, net 41,479
Cash 265,029
-----------
Net assets acquired $ 572,344
===========
Under the terms of the Pannonian Agreement, Pannonian was required, prior to
closing of the merger on March 30, 2001, to divest itself of all assets not
associated with its "Riverbend" area of interest (the non-Riverbend assets). The
"spin-offs" were accounted for at the recorded amounts. The net book value of
the non-Riverbend assets in the United States transferred, including cash of
$1,000,000 and liabilities of $555,185, was approximately $1,850,000. The
non-Riverbend assets located outside the United States were held by Pannonian
International Ltd. ("PIL"), the shares of which were distributed to the
Pannonian stockholders. The book value of PIL as of the date of distribution was
approximately $174,000.
43
<PAGE>
The following unaudited pro forma information presents the financial information
of the Company as if the consolidation of Gasco and Pannonian had taken place on
January 1, 2001.
For the Year Ended December 31,2001
------------------------------------
As Reported Pro Forma
Revenue $ 36,850 $ 36,850
Net loss (15,529,459) (15,572,061)
Net loss per share attributable to common
shareholders basic and diluted $ (0.63) $ (0.63)
========= =========
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include Gasco and its wholly owned
subsidiaries, Pannonian and San Joaquin Oil and Gas, Ltd. All significant
intercompany transactions have been eliminated.
During 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 5. Subsequent to December 31, 2003, the Company sold
an additional 14,333,334 shares of common stock through a private placement for
net proceeds of approximately $20,072,000. Management believes that these
transactions provide the Company with adequate resources to meet its obligations
and operational goals through mid 2005. After this time the Company may be
required 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.
Cash and Cash Equivalents
All highly liquid investments purchased with an initial maturity of three months
or less are considered to be cash equivalents.
Restricted Cash
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 are expected to be released
44
<PAGE>
during the first part of May 2004 pending the completion of certain drilling
obligations.
Property, Plant and Equipment
The Company follows the full cost method of accounting whereby all costs related
to the acquisition and development of oil and gas properties are capitalized
into a single cost center ("full cost pool"). Such costs include lease
acquisition costs, geological and geophysical expenses, overhead directly
related to exploration and development activities and costs of drilling both
productive and non-productive wells. Proceeds from property sales are generally
credited to the full cost pool without gain or loss recognition unless such a
sale would significantly alter the relationship between capitalized costs and
the proved reserves attributable to these costs. A significant alteration would
typically involve a sale of 25% or more of the proved reserves related to a
single full cost pool.
Depletion of exploration and development costs and depreciation of production
equipment is computed using the units of production method based upon estimated
proved oil and gas reserves. The costs of unproved properties are withheld from
the depletion base until such time as they are either developed or abandoned.
The properties are reviewed periodically for impairment. Total well costs are
transferred to the depletable pool even when multiple targeted zones have not
been fully evaluated. For depletion and depreciation purposes, relative volumes
of oil and gas production and reserves are converted at the energy equivalent
rate of six thousand cubic feet of natural gas to one barrel of crude oil.
Gasco's wells began producing in late October of 2001; therefore, the Company
did not have sufficient production information by which reserves could have be
estimated as of December 31, 2001. Because of this, and because the costs
associated with the Company's oil and gas properties related to projects which
have not yet been associated with proved reserves, the Company did not record
depletion expense during the year ended December 31, 2001.
Under the full cost method of accounting, capitalized oil and gas property costs
less accumulated depletion and net of deferred income taxes may not exceed an
amount equal to the present value, discounted at 10%, of estimated future net
revenues from proved oil and gas reserves plus the cost, or estimated fair
value, if lower of unproved properties. Should capitalized costs exceed this
ceiling, an impairment is recognized. The present value of estimated future net
revenues is computed by applying current prices of oil and gas to estimated
future production of proved oil and gas reserves as of period-end, less
estimated future expenditures to be incurred in developing and producing the
proved reserves assuming the continuation of existing economic conditions.
Well in Progress
Well in progress at December 31, 2002 represents the costs associated with the
drilling of a well in the Riverbend area of Utah. Since the well 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.
45
<PAGE>
Impairment of Long-lived Assets
The Company's unproved properties are evaluated periodically for the possibility
of potential impairment. During 2003, the Company recorded an impairment of its
Wyoming acreage of $1,725,000. The impairment represents the cost of certain of
the Company's acreage expiring in 2004 that it does not consider to be
prospective. Other than oil and gas properties, the Company has no other
long-lived assets and to date has not recognized any impairment losses.
Deferred Financing Costs
Deferred financing costs at December 31, 2003 represents the offering costs
associated with the Company's issuance of $2,500,000 in 8% Convertible
Debentures ("Debentures"), further described in Note 6. These costs are being
amortized over the five-year life of the Debentures. The Company recorded
amortization expense of $7,758 related to these costs during the year ended
December 31, 2003.
Asset Retirement Obligation
In June 2001 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 year ended December 31, 2003, the Company recognized accretion expense
of $11,795 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 (17,923)
Revisions in estimated cash flows -
Accretion expense 11,795
---------
Balance 12/31/03 $ 142,806
=========
46
<PAGE>
The following schedules present, on a pro forma basis, the asset retirement
obligation, the net loss, net loss per share amounts as if the provisions of
SFAS No. 143 had been applied during all the periods presented.
As of December 31,
-----------------------------------------------
2002 2001
---- ----
Asset Retirement Obligation $ 148,934 $ 70,401
For the Year Ended December 31,
-------------------------------------------------
2003 2002 2001
---- ---- ----
Net Loss
As reported $ (2,526,525) $ (5,649,682) $ (4,129,459)
Pro forma (2,516,838) (5,652,438) (4,136,390)
Net Loss per Common Share
As reported $(0.07) $(0.16) $(0.63)
Pro forma (0.07) (0.16) (0.63)
Revenue Recognition
Oil and gas revenue is recognized as income when the oil or gas is produced and
sold.
Computation of Net Loss Per Share
Basic net loss per share is computed by dividing net loss attributable to the
common shareholders by the weighted average number of common shares outstanding
during the reporting period. Diluted net income per common share includes the
potential dilution that could occur upon exercise of the options to acquire
common stock computed using the treasury stock method which assumes that the
increase in the number of shares is reduced by the number of shares which could
have been repurchased by the Company with the proceeds from the exercise of the
options (which were assumed to have been made at the average market price of the
common shares during the reporting period). The Series B Convertible Preferred
Stock ("Preferred Stock") described in Note 8, the options described in Note 9,
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.
Significant Customers
Although the Company sells the majority of its production to a few purchasers,
there are numerous other purchasers in the areas in which Gasco sells it
production; therefore, the loss of its significant customers would not adversely
affect the Company's operations. For the years ended December 31, 2003, 2002 and
2001, purchases by the following companies exceeded 10% of the total oil and gas
revenues of the Company.
47
<PAGE>
For the Year Ended December 31,
-----------------------------------------
2003 2002 2001
---- ---- ----
ConocoPhillips Company 93% 98% 60%
Wasatch Energy Corporation -- -- 37%
Use of Estimates
The preparation of the financial statements for the Company in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Other Comprehensive Income
The Company does not have any items of other comprehensive income for the years
ended December 31, 2003, 2002 and 2001. Therefore, total comprehensive income
(loss) is the same as net income (loss) for these periods.
Income Taxes
The Company uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the accounting bases and the tax
bases of the Company's assets and liabilities. The deferred tax assets and
liabilities are computed using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.
Stock Based Compensation
The Company accounts for its stock-based compensation using Accounting
Principles Board's Opinion No. 25 ("APB No. 25") and related interpretations.
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. 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 pro forma net loss and net loss per share
for the years ended December 31, 2003, 2002 and 2001 would have been increased
to the pro forma amounts indicated below:
48
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
2003 2002 2001
---- ---- ----
Net loss attributable to common shareholders:
<S> <C> <C> <C>
As reported $ (2,830,697) $ (5,649,682) $(15,529,459)
Add: Stock-base employee compensation
included in net loss (a) 41,484 - -
Less: Stock based employee compensation
determined under the fair value based
method 742,211 1,709,226 5,682,268
---------- ----------- ------------
Pro forma $(3,531424) $(7,358,908) $(21,211,727)
=========== ============ =============
Net loss per common share:
As reported $ (0.07) $ (0.16) $(0.63)
======== ======== =======
Pro forma $ (0.09) $ (0.20) $ (0.85)
======== ======== ========
</TABLE>
(a) Represents the compensation expense associated with the Company's
restricted stock awards, further described in Note 8.
The fair value of the common stock options granted during 2003, 2002 and 2001,
for disclosure purposes was estimated on the grant dates using the Black Scholes
Pricing Model and the following assumptions.
For the Year Ended December 31,
---------------------------------------------
2003 2002 2001
---- ---- ----
Expected dividend yield -- -- --
Expected price volatility 82% 90% 89%
Risk-free interest rate 2.9% 3.5% - 4.1% 3.8% - 4.9%
Expected life of options 5 years 5 years 5 years
Concentration of Credit Risk
The Company's cash equivalents are exposed to concentrations of credit risk. The
Company manages and controls this risk by investing these funds with major
financial institutions.
The Company's receivables are comprised of oil and gas revenue receivables and
joint interest billings receivable. The amounts are due from a limited number of
entities. Therefore, the collectability is dependent upon the general economic
conditions of the few purchasers and joint interest owners. The receivables are
not collateralized. However, to date the Company has had minimal bad debts.
49
<PAGE>
Fair Value
The Company's financial instruments including cash and cash equivalents,
restricted cash, accounts receivable and accounts payable are carried at cost,
which approximates fair value due to the short-term maturity of these
instruments. The Company's 8% Convertible Debentures are recorded at cost, and
the fair value is disclosed in Note 6. Since considerable judgment is required
to develop estimates of fair value, the estimates provided are not necessarily
indicative of the amounts the Company could realize upon the purchase or
refinancing of such instruments.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS 141) and Statement of Financial Accounting Standards No. 142, "Goodwill
and Intangible Assets" (SFAS 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
SFAS 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" (SFAS 69). Additional disclosures required by SFAS 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 SFAS 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 SFAS 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 SFAS
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, 2003 and 2002, the Company had
undeveloped leaseholds of approximately $13,212,039 and $13,984,536,
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 SFAS 142 related to these interests. The Company's
current disclosures are those required by SFAS 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
50
<PAGE>
is not expected that this interpretation, if adopted, would have a material
impact on the Company's financial condition or results of operations.
In May 2003 FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that such financial instruments be classified as a liability (or as an
asset in certain circumstances). SFAS No. 150 is effective for all freestanding
instruments entered into or modified after May 31, 2003. Otherwise, it became
effective for Gasco as of July 1, 2003. The Company has no financial instruments
that fall within the scope of this statement.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to
the classifications used in the current year.
NOTE 3 - OIL AND GAS PROPERTY
The following table presents information regarding the Company's net costs
incurred in the purchase of proved and unproved properties and in exploration
and development activities:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
2003 2002 2001
---------------------------------- -------------------
Property acquisition costs:
<S> <C> <C> <C>
Unproved $667,557 $22,324,547 $ 7,161,450
Proved - - -
Exploration costs (a) 396,967 3,319,124 -
Development costs 4,218,902 7,319,184 -
----------- ---------- ---------
Total excluding asset retirement obligation 5,283,426 32,962,855 7,161,450
========== =========== ==========
Total including asset retirement obligation $ 5,398,678 $ 32,962,855 $ 7,161,450
=========== ============ ===========
</TABLE>
(a) Includes seismic data acquisitions of $850,000 during twelve months ended
December 31, 2002.
Depletion and impairment expense related to proved properties per equivalent Mcf
of production for the years ended December 31, 2003 and 2002 was $2.06 and
$9.73, respectively. There was no depletion or impairment expense during the
year ended December 31, 2001.
During the first quarter of 2002, the Company drilled a well in the Southwest
Jonah field located in the Greater Green River Basin in Sublette County,
Wyoming. The well was drilled to a total depth of 11,000 feet. The well
encountered natural gas, however not of sufficient quantities to be deemed
economic. The well was plugged and abandoned during March of 2002. The costs
associated with this well of $541,125, were charged to impairment expense during
the year ended December 31, 2002 because the Company believed that the total
costs for this well exceeded the present value, discounted at 10%, of the future
net revenues from its proved oil and gas reserves at the time the well was
plugged and abandoned.
51
<PAGE>
At December 31, the Company's unproved properties consist of leasehold costs in
the following areas:
2003 2002
---- ----
Utah $ 963,530 $ 297,371
Wyoming 12,089,104 13,536,872
California 159,405 150,293
---------- ----------
$13,212,039 $13,984,536
=========== ===========
During 2003, the Company impaired certain of its unproved acreage in Wyoming by
reclassifying $1,725,000 of costs associated with this acreage into the full
cost pool. The impairment represents the cost of certain of the Company's
acreage that the Company no longer considers prospective. These costs became
subject to amortization during the fourth quarter of 2003.
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. Effective July 16, 2002, the Compay assigned 25%
of this interest to Brek, resulting in the Company's net acres being reduced
from 9,726 acres to 7,295 acres. After the sale, the Company was notified by the
BLM in Wyoming that several environmental agencies filed a protest against the
BLM offering numerous parcels of land for oil and gas leasing. All of the
parcels (leases) purchased by the Company were placed in suspense pending the
resolution of this protest. 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 4 - PROPERTY ACQUISITION
On May 1, 2002, the Company issued 9,500,000 shares of its common stock to the
Shama Zoe Limited Partnership ("Shama Zoe"), a private oil and gas company, for
the acquisition of 53,095 gross (47,786 net) acres plus other assets and
consideration in the Greater Green River Basin in Sublette County Wyoming. The
acquisition was valued at $18,525,000 using a stock price of $1.95 per common
share, which represented the closing price of the Company's common stock on
April 23, 2002; the date the agreement was executed. The original Property
Purchase Agreement governing this transaction prevented the Company from issuing
additional shares of its common stock at prices below $1.80 per share and from
granting registration rights in connection with the issuance of shares of its
common stock. In connection with the August 14, 2002 issuance of 6,500,000
shares of common stock, as described in Note 4, the original Property Purchase
Agreement was amended to allow for the issuance of these shares at a price of
$1.00 per share and Shama Zoe was granted an option to sell to the Company
1,400,000 shares of the Gasco common stock that it acquired in the transaction
at $1.00 per share at any time prior to December 31, 2002. On December 31, 2002
Shama Zoe sold 1,400,000 shares of Gasco common stock back to the Company for
$1.00 per share. The Company issued a $1,400,000 promissory note to Shama Zoe
for the purchase of these shares. The promissory note is further described in
Note 7.
52
<PAGE>
In connection with this transaction, the Board of Directors of the Company
authorized the payment to an employee of the Company, who was instrumental in
securing the Company's agreement with Shama Zoe, of $300,000 in cash and the
issuance of options to purchase 250,000 shares of Gasco common stock at an
exercise price of $1.95 per share, which is equal to the fair market of the
common stock on April 23, 2002. Prior to the end of 2002 the Company had paid
$150,000 of the total cash bonus to the employee, therefore, the remaining cash
payment of $150,000 was included in accrued expenses in the accompanying
financial statements as of December 31, 2002 and was paid during 2003.
NOTE 5 - PROPERTY DIVESTITURES
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.
On July 16, 2002, Gasco executed and closed a purchase agreement with Brek
Energy Corporation ("Brek"), and certain other Gasco stockholders (the "Other
Stockholders"), pursuant to which Brek and the Other Stockholders purchased from
Gasco an undivided 25% of Gasco's working interests in all undeveloped acreage
owned by Gasco in exchange for 6,250,000 shares of Gasco common stock and 500
shares of Gasco Series A Preferred stock held by Brek and the Other
Stockholders. The Other Stockholders assigned their right to receive their share
of such working interests to Brek, so that Brek acquired title to all of the
working interests conveyed by Gasco in the transaction. Brek also had an option
to acquire additional acreage that it did not exercise.
The transaction was recorded at $16,709,000 based on the average trading price
of the Company's common stock when the transaction was consummated. In
accordance with Securities and Exchange Commission Regulation S-X Rule 4.10, the
transaction was recorded as a reduction to the Company's unproved properties and
a reduction to the Company's additional paid in capital, preferred stock and
common stock.
NOTE 6 - CONVERTIBLE DEBENTURES
On October 15, 2003 Gasco issued $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 2005 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.
53
<PAGE>
The Company has the option to redeem the Debentures at 101% of the principal
amount plus accrued and unpaid interest, on any interest payment date, after
notice to the holders, if all of the following conditions are satisfied: (i) the
average closing bid price of the Company's common stock exceeds $2.00 per share
for the twenty consecutive trading days prior to the notice date, (ii) the
average trading volume for the same twenty consecutive trading days is greater
than 100,000 shares, (iii) the market price of the Company's common stock
reflects a price-to-book value ratio of no greater than three based upon the
Company's most recent quarterly financial statements that have been filed with
the SEC, and (iv) the shares of common stock issuable upon conversion of the
Debentures have been fully registered under the applicable securities laws.
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 $166,667, which will
be amortized over the life of the Debentures. During the year ended December 31,
2003, the Company recorded $6,945 of interest expense representing the
amortization of the beneficial conversion feature.
Based on the market price of the Company's common stock as of December 31, 2003,
the fair value of the Debentures is $5,333,334.
The Debenture balance as of December 31, 2003 consists of the following:
8% Convertible Debentures $ 2,500,000
Unamortized beneficial conversion feature (159,722)
---------
Balance, December 31, 2003 $ 2,340,278
===========
As of December 31, 2003, the Company's debt maturity schedule is as follows:
Year Ended December 31, Maturity
----------------------- --------
2004 --
2005 $ 75,000
2006 450,000
2007 450,000
2008 1,525,000
---------
Total $ 2,500,000
===========
NOTE 7 - NOTE PAYABLE
The original Property Purchase Agreement governing the Shama Zoe transaction
described in Note 4 prevented the Company from issuing additional shares of its
common stock at prices below $1.80 per share and from granting registration
rights in connection with the issuance of shares of its common stock. In
connection with the August 14, 2002 issuance of 6,500,000 shares of common
stock, as described in Note 8, 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
54
<PAGE>
Scholes model, of $250,000 has been recorded as additional noncash offering
costs associated with the Company's sale of common stock as described in Note 8.
On December 31, 2002 the Company repurchased and cancelled 1,400,000 shares of
Gasco common stock from Shama Zoe for $1.00 per share. The Company issued a
$1,400,000 promissory note to Shama Zoe for the purchase of these shares. The
promissory note beared interest at 12%, had a maturity date of March 14, 2003
and was recorded as a short-term note payable in the accompanying financial
statements as of December 31, 2002. On February 20, 2003, the Company repaid
this note plus accrued interest in full.
NOTE 8 - STOCKHOLDERS' EQUITY
The Company's capital stock as of December 31, 2003 and 2002 consists of
100,000,000 authorized shares of common stock, par value $0.0001 per share, and
20,000 authorized shares of Series B Convertible Preferred stock, par value
$0.001 per share.
Series B Convertible Preferred Stock - As of December 31, 2003, Gasco had 11,734
shares of Series B Preferred Stock ("Preferred Stock") issued and outstanding.
The Preferred Stock is entitled to receive dividends 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 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 the year ended December 31, 2003, the Company paid dividends to the
holders of its Preferred Stock consisting of 682 shares of Preferred Stock and
$4,092 in cash.
Common Stock - Gasco has 46,675,936 shares of Common Stock issued and 45,602,236
shares outstanding as of December 31, 2003. The common shareholders are entitled
to one vote per share on all matters to be voted on by the shareholders;
however, there are no cumulative voting rights. Additionally, the holders of the
Preferred Stock are entitled to vote with shares of common stock on an
as-converted basis. The common shareholders are entitled to dividends and other
distributions as may be declared by the board of directors. Upon liquidation or
dissolution, the common shareholders will be entitled to share ratably in the
distribution of all assets remaining available for distribution after
satisfaction of all liabilities and payment of the liquidation preference of any
outstanding preferred stock.
The Company's common stock equity transactions during 2003 and 2002 are
described as follows:
55
<PAGE>
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 were
approximately $15,000. The Company plans to use the proceeds from this
transaction to develop and exploit its core-area Riverbend Project in the Uinta
Basin in Utah and for its ongoing operations.
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 December 31, 2003 and the compensation
expense related to these shares during the year ended December 31, 2003 was
$41,484. There were no outstanding shares of restricted stock during 2002 or
2001.
On August 14, 2002, the Company issued 6,500,000 shares of common stock for net
proceeds of approximately $6,000,000 in a private placement.
On July 16, 2002, as further described in Note 5, Gasco executed and closed a
purchase agreement with certain of its stockholders, pursuant to which the
stockholders purchased from Gasco an undivided 25% of Gasco's working interests
in all undeveloped acreage owned by Gasco, representing 35,169 net undeveloped
acres, in exchange for 6,250,000 shares of Gasco common stock and 500 shares of
Gasco's previously outstanding Series A Preferred stock held by the
Stockholders.
The transaction was recorded at $16,709,000 based on the average trading price
of the Company's common stock when the transaction was executed.
On May 1, 2002, as further described in Note 4, the Company issued 9,500,000
shares of its common stock to Shama Zoe, a private oil and gas company, for the
acquisition of 53,095 gross (47,786 net) acres plus other assets and
consideration in the Greater Green River Basin in Sublette County Wyoming. The
acquisition was valued at $18,525,000 using a stock price of $1.95 per common
share, which represented the closing price of the Company's common stock on
April 23, 2002; the date the agreement was executed.
56
<PAGE>
NOTE 9 - STOCK OPTIONS
During 2003, the Company granted an additional 1,608,000 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 1,608,000 options granted during 2003 were issued to the individuals
whose options were cancelled.
As of December 31, 2003 options to purchase an aggregate 5,616,586 shares of the
Company's common stock were outstanding. These options were granted during 2003,
2002 and 2001 to the Company's employees, directors and consultants at exercise
prices ranging from $1.00 to $3.70 per share. The options vest at varying
schedules within two years of their grant date and expire within ten years from
the grant date. The aggregate fair market value of options, determined using the
Black Scholes Pricing Model, granted to consultants and an officer of Pannonian,
of $52,833, $208,542 and $423,594 was charged to operations during the years
ended December 31, 2003, 2002 and 2001, respectively.
A summary of the options granted to purchase common stock and the changes
therein during the years ended December 31, 2003, 2002 and 2001 is presented
below.
<TABLE>
<CAPTION>
2003 2002 2001
---- ----- ----
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 6,355,250 $ 2.17 6,392,750 $ 2.23 - $ -
Granted 1,608,000 1.00 500,000 1.80 6,519,000 2.25
Cancelled (2,346,664) 2.18 (537,500) 2.56 (126,250) 3.03
----------- ------ --------- ------ --------- ----
Outstanding at end of year 5,616,586 $ 1.83 6,355,250 $ 2.17 6,392,750 $ 2.23
=========== ====== ========= ====== ========= ======
Exercisable at December 31, 4,476,586 $ 2.07 6,027,085 $ 2.06 5,137,250 $ 2.01
========== ====== ========= ======= ========= ======
Weighted average fair value of options granted $ 0.45 $ 1.28 $ 1.37
====== ====== ======
</TABLE>
Weighted average remaining contractual life of options
outstanding as of December 31, 2003 7.4 years
=========
57
<PAGE>
The following table presents additional information related to the options
outstanding as of December 31, 2003.
Exercise Number of Weighted Average
Price per Number of Shares Shares Remaining Contractual
Share Outstanding Exercisable Life (years)
----- ----------- ------- -----------------
$1.00 2,541,336 1,401,336 9.1
1.58 150,000 150,000 4.3
1.73 100,000 100,000 4.2
1.80 50,000 50,000 7.7
2.00 1,301,000 1,301,000 8.0
2.20 8,000 8,000 3.9
3.00 650,000 650,000 6.0
3.15 613,750 613,750 2.6
3.70 202,500 202,500 3.1
--------- ---------
Total 5,616,586 4,476,586 7.4
========= ========= ===
NOTE 10 - STATEMENT OF CASH FLOWS
The following transactions represent the non-cash investing and financing
activities of the Company during the year ended December 31, 2003.
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 682 shares of Preferred Stock in payment of the June 30, and
December 31, 2003 Preferred Stock dividends.
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.
Assignment of property interests in two wells in settlement of $1,206,982
in accounts payable and $17,923 in the asset retirement obligation.
During the year ended December 31, 2002, the Company's non-cash investing and
financing activities consisted of the following transactions:
Conversion of 500 shares of Series A 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.
58
<PAGE>
Repurchase of 500 shares of Series A Preferred stock and 6,250,000 shares
of common stock in exchange for an undivided 25% working interest in the
Company's undeveloped acreage valued at $16,709,000.
Repurchase of 1,400,000 shares of common stock in exchange for a promissory
note as described in Note 7.
Noncash stock offering costs of $250,000 incurred in connection with
redeemable common stock as described in Note 7.
The following transactions represent the non-cash investing and financing
activities of the Company during the years ended December 31, 2001.
The Company issued 375,000 shares of common stock for oil and gas
properties, valued at $1,093,500 ($2.82 to $3.30 per share).
The Company issued 1,025,000 shares of common stock in conjunction with the
sale of preferred stock, valued at $3,280,000 ($3.20 per share).
Cash paid for interest was $82,392, and $67,363 for the years ended December 31,
2003 and 2001, respectively. There was no cash paid for interest during the year
ended December 31, 2002.
NOTE 11 - INCOME TAXES
A provision (benefit) for income taxes for the years ended December 31, 2003,
2002 and 2001 consists of the following:
2003 2002 2001
---- ---- ----
Current taxes:
Federal $ - $ - $ -
State - - -
Deferred taxes:
Federal (2,556,837) (74,128) (1,333,826)
State (285,004) (68,422) (191,435)
Less: valuation allowance 2,841,841 142,550 1,525,261
--------- ------- ---------
Net income tax provision (benefit) $ - $ - $ -
======== ======= =======
59
<PAGE>
A reconciliation of the provision (benefit) for income taxes computed at the
statutory rate to the provision for income taxes as shown in the financial
statements of operations for the years ended December 31, 2003 and 2002 is
summarized below:
<TABLE>
<CAPTION>
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Tax provision (benefit) at federal statutory rate $ (859,019) $ (1,920,892) $ (1,404,016)
State taxes, net of federal tax effects (188,102) (45,159) (126,347)
Valuation adjustment on assets distributed in
stock redemption - 1,798,941 -
Prior year tax return permanent true-up (1,798,941) - -
Other Permanent items 4,221 24,560 5,102
Valuation allowance 2,841,841 142,550 1,525,261
--------- ------- -- ---------
Net income tax provision (benefit) $ - $ - $ -
========= =========== ===========
</TABLE>
The components of the deferred tax assets and liabilities as of December 31,
2003 and 2002 are as follows:
2003 2002
---- ----
Deferred tax assets:
Federal and state net operating loss carryovers $4,576,075 $ 1,529,644
Oil and gas property 1,272,043 869,272
Deferred compensation 284,805 335,534
----------- ----------
Total deferred tax assets 6,132,923 2,734,450
Less: valuation allowance (5,406,804) (2,564,963)
----------- -----------
726,119 169,487
Deferred tax liabilities:
Other property, plant & equipment 318,777 97,169
Other 407,342 72,318
------- ------------
Total deferred tax liabilities 726,119 169,487
------- -----------
Net deferred tax asset $ - $ -
======= ===========
The Company has a $12,138,173 net operating loss carryover for federal income
tax purposes and a $9,416,094 net operating loss carryover for state income tax
purposes as of December 31, 2003. The net operating losses may offset against
taxable income through the year ended December 31, 2023. A portion of the net
operating loss carryovers begins expiring in 2019. The Company provided a
valuation allowance against its deferred tax asset of $5,406,804 and $2,564,963
as of December 31, 2003 and 2002, respectively, since it believes that it is
more likely than not that it may not be able to fully utilize it on its future
tax returns.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2003 a clerical error was made in the payroll
process, which caused the president and chief executive officer of the Company,
Mark Erickson, to be overpaid by $55,000 during 2003, and $9,196 during the
first quarter of 2004. The error was discovered during February 2004, and Mr.
Erickson made restitution as soon as possible thereafter. Since the repayment
was made as soon as possible, no interest was charged and Mr. Erickson owes no
60
<PAGE>
further amounts to the Company. The overpayment of $55,000 is included in the
accounts receivable balance of the accompanying financial statements.
During the year ended December 31, 2003 and during both of the years ended
December 31, 2002 and 2001, the Company paid $120,000 and $240,000, respectively
in consulting fees to a company owned by a director of Gasco. The Company is
committed to pay $120,000 per year in consulting fees to this company through
January 31, 2006. Another director of the Company earned consulting fees of
$16,000 and $52,000 from the Company during the years ended December 31, 2002
and 2001, respectively.
During the year ended December 31, 2002, the Company paid $110,266 in consulting
fees to an unrelated third party. The obligation to pay these fees was a joint
and several liability of Gasco and a Company of which two of Gasco's directors
have a combined 66.67% ownership.
During 2001, an officer of the Company earned a $28,000 fee and 12,500 shares of
Gasco's common stock for consulting services provided in connection with a
property acquisition. This same officer was paid $22,879 in consulting fees
prior to his appointment.
An officer of the Company, who retired effectively December 31, 2002, was an
employee of and owned a less than 1% interest in an entity from which Gasco
purchased acreage in Utah and Wyoming during 2001 and 2002. Additionally, the
Company recorded a payable to this officer of $213,000 as of December 31, 2002
representing a bonus of $150,000 and severance payments of $63,000. These
amounts were paid to this officer in full during the year ended December 31,
2003.
Certain of the Company's directors and officers have working and/or overriding
royalty interests in oil and gas properties in which the Company has an
interest. It is expected that the directors and officers may participate with
the Company in future projects. All participation by directors and officers will
continue to be approved by the disinterested members of the Company's Board of
Directors.
NOTE 13 - COMMITMENTS
The Company leases office facilities in Englewood, Colorado for approximately
$46,000 per year under two leases that expire on August 30, 2004. The Company
intends to renew these leases at current or lower rates when the current leases
expire in August 2004. Remaining commitments under these leases mature as
follows:
Year Ending December 31, Annual Rentals
2004 $32,195
=======
Rent expense for the years ending December 31, 2003, 2002 and 2002 was $56,970,
$42,055 and $46,476, respectively.
61
<PAGE>
As is customary in the oil and gas industry, the Company may at times have
commitments in place to reserve or earn certain acreage positions or wells. If
the Company does not pay such commitments, the acreage positions or wells may be
lost.
The Company has entered into employment agreements with three key officers
through January 31, 2006. These agreements were revised during the first quarter
of 2003 to reduce the total compensation for the officers covered by the
employment agreements from $560,000 per annum to $470,000 per annum. The
agreements contain clauses regarding termination and demotion of the officer
that would require payment of an amount ranging from one times annual
compensation to up to approximately five times annual compensation plus a cash
payment from $250,000 to $500,000. Included in the employment agreements is a
bonus calculation for each of the covered officers totaling 2.125% of a defined
cash flow figure based on net after tax earnings adjusted for certain expenses.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Company adopted a 401(k) profit sharing plan (the "Plan") in October 2001,
available to employees who meet the Plan's eligibility requirements. The Plan is
a defined contribution plan. The Company may make discretionary contributions to
the Plan and is required to contribute 3% of the participating employee's
compensation to the Plan. The contributions made by the Company totaled $32,708,
$41,726 and $6,270 during the years ended December 31, 2003, 2002 and 2001,
respectively.
NOTE 15 - SELECTED QUARTERLY INFORMATION (Unaudited)
The following represents selected quarterly financial information for the years
ended December 31, 2003 and 2002.
<TABLE>
<CAPTION>
2003 For the Quarter Ended
---------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C>
Gross revenue $158,850 $499,527 $ 277,101 $327,965
Net revenue from oil
and gas operations 92,402 389,091 173,017 271,655
Net loss (747,465) (508,492) (634,209) (636,359)
Net loss per share
basic and diluted (0.02) (0.02) (0.02) (0.01)
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
2002 For the Quarter Ended
---------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C>
Gross revenue $28,506 $23,426 $ 43,611 $68,965
Net revenue from oil and
gas operations 3,440 5,177 10,869 25,213
Net income (loss) (1,639,009) (1,477,075) (1,482,467) (1,051,131) a
Net loss per share
basic and diluted (0.06) (0.04) (0.04) (0.02)
</TABLE>
a - During the fourth quarter, depletion expense was calculated for the entire
year using the December 31, 2002 reserve report.
NOTE 16 - 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 17 - SUBSEQUENT EVENTS
On January 20, 2004 the Company entered into agreements with a group of industry
providers (together, the "Service Parties") to accelerate the development of
Gasco's oil and gas properties by drilling up to 50 wells in Gasco's Riverbend
Project in Utah's Uinta Basin.
Gasco has agreed that the Service Parties, which includes Schlumberger Oilfield
Services , will have the exclusive right to provide their services in the
development of the Riverbend acreage. The agreement provides for the group to
initially proceed with the first 10-well bundle, which approximates one year of
drilling with a single rig. If the group agrees, drilling may be accelerated
using additional rigs. Gasco's 2004 capital budget is approximately $13 million
for the drilling, completion and pipeline connection of wells in this area.
General Terms of the Agreement:
- Contract Area consists of Gasco Energy's leasehold position in
portions of Carbon, Duschesne and Uintah Counties, Utah.
- Gasco can continue to independently develop its acreage subject to
certain limitations and provisions of this agreement.
- Decisions will be made by a committee chaired by a Gasco
representative.
- Schlumberger will coordinate certain activities under Gasco's
direction as operator of record. o Gasco will elect to fund up to 20%
of each of the first three bundles and up to 30% of the last two
bundles. Gasco's interest in the production stream from a bundle, net
of royalties, taxes and lease operating expenses, is estimated to
equal the proportion of the total well costs that it funds.
63
<PAGE>
- The Service Parties include certain investors that have undertaken to
provide, on a best efforts basis, up to 35% of the costs of each
project bundle.
To secure its obligations under the agreement, described above, the Company has
pledged its interests in each of the wells in each bundle.
On February 11, 2004 the Company completed the sale through a private placement
of 14,333,334 shares of its common stock to a group of accredited investors at a
price of $1.50 per share. Proceeds to the company, net of fees and estimated
expenses were approximately $20,072,000. The proceeds from this sale will be
used for general corporate purposes including the development and exploitation
of Gasco's Riverbend Project in the Uinta Basin in Uintah County, Utah.
On March 9, 2004 the Company completed the acquisition of additional working
interests in six producing wells, 13,062 net acres and gathering system assets
located in the Uinta Basin in Utah for approximately $3,175,000. Pursuant to an
existing contract, an unrelated third party has the right to purchase 25% of the
acquired properties at the acquisition price within 30 days following the
acquisition date.
NOTE 18 - SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (Unaudited)
The following reserve quantity and future net cash flow information for the
Company represents proved reserves located in the United States. The reserves as
of December 31, 2003 have been estimated by Netherland, Sewell and Associates,
Inc., independent petroleum engineers. The reserves as of December 31, 2002 were
estimated by James R. Stell, independent petroleum engineer. The determination
of oil and gas reserves is based on estimates, which are highly complex and
interpretive. The estimates are subject to continuing change as additional
information becomes available.
The standardized measure of discounted future net cash flows is prepared under
the guidelines set forth by the Securities and Exchange Commission (SEC) that
require the calculation to be performed using year-end oil and gas prices. The
oil and gas prices used as of December 31, 2003 and 2002 were $29.69 per bbl of
oil and $5.89 per Mcf of gas and $29.60 per bbl of oil and $3.39 per Mcf of gas,
respectively. Future production costs are based on year-end costs and include
severance taxes. Each property that is operated by the Company is also charged
with field-level overhead in the reserve calculation. The present value of
future cash inflows is based on a 10% discount rate.
On March 9, 2004 the Company completed the acquisition of additional working
interests in six of the Company's producing wells, 13,062 net acres and
gathering system assets located in the Uinta Basin in Utah for approximately
$3,175,000. The acquisition consists of approximately 7,637,000 Mcf and 62,000
Bbls of proved gas and oil reserves with a present value discounted at 10% of
64
<PAGE>
approximately $8,064,000. Pursuant to an existing contract, an unrelated third
party has the right to purchase 25% of the acquired properties at the
acquisition price within 30 days following the date of the acquisition.
Reserve Quantities
Gas Oil
Mcf Bbls
Proved Reserves:
Balance, December 31, 2002 20,622,266 141,652
Extensions and discoveries 4,446,547 36,288
Revisions of previous estimates (a) (9,752,505) (66,455)
Sales of reserves in place (1,458,270) (8,500)
Purchases of reserves in place -- --
Production (257,035) (1,998)
----------- -----------
Balance, December 31, 2003 13,601,003 100,987
========== =========
Proved Developed Reserves
Balance, December 31, 2003 2,937,388 24,818
=========== ==========
Balance, December 31, 2002 5,889,981 34,493
=========== ==========
(a) The revisions of previous estimates are due primarily to a failed
re-completion on one of the Company's wells, which resulted in a reduction in
the reserves associated with the producing wellbore location and the loss of the
surrounding proved undeveloped offset locations.
Standardized Measure of Discounted Future Net Cash Flows
December 31,
------------------------------------
2003 2002
---- ----
Future cash flows $ 83,099,200 $ 73,763,406
Future production and development costs (32,804,600) (38,958,416)
------------- --------------
Future net cash flows before discount 50,294,600 34,804,990
------------- -------------
10% discount to present value (34,099,500) (22,492,988)
------------- --------------
Standardized measure of discounted future
net cash flows $ 16,195,100 $ 12,312,002
============= ==============
65
<PAGE>
<TABLE>
<CAPTION>
Changes in the Standardized Measure of Discounted Future Net Cash Flows
For the Years Ended December 31,
----------------------------------------
2003 2002
---- ----
Standardized measure of discounted future net cash
<S> <C> <C>
flows at the beginning of year $ 12,312,002 $ -
Sales of oil and gas produced, net of production costs (926,165) (44,699)
Net changes in prices and production costs 13,209,650 -
Extensions and discoveries, net of future
production and development costs 7,250,499 21,007,459
Development costs incurred 4,218,902 7,319,184
Changes in estimated future development costs 1,890,021 (31,717,307)
Revisions of previous quantity estimates (2,629,973) -
Purchases of reserves in place - -
Sales of reserves in place (391,020) -
Accretion of discount 1,231,200 -
Changes in production rates and other (19,970,015) 15,747,365
------------- ----------------
Standardized measure of discounted future net
cash flows at the end of year $ 16,195,100 $ 12,312,002
============= =================
</TABLE>
66
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A - CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
December 31, 2003 pursuant to Rule 13a-15 under the Exchange Act. Based upon
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective. Disclosure controls and procedures are controls and procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There have been no changes in the Company's internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) 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.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included in the definitive proxy
statement of Gasco relating to the Company's 2004 Annual Meeting of Shareholders
to be filed with the SEC pursuant to Regulation 14A, which information is
incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item will be included in the definitive proxy
statement of Gasco relating to the Company's 2004 Annual Meeting of Shareholders
to be filed with the SEC pursuant to Regulation 14A, which information is
incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item will be included in the definitive proxy
statement of Gasco relating to the Company's 2004 Annual Meeting of Shareholders
to be filed with the SEC pursuant to Regulation 14A, which information is
incorporated herein by reference.
67
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the definitive proxy
statement of Gasco relating to the Company's 2004 Annual Meeting of Shareholders
to be filed with the SEC pursuant to Regulation 14A, which information is
incorporated herein by reference.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be included in the definitive proxy
statement of Gasco relating to the Company's 2004 Annual Meeting of Shareholders
to be filed with the SEC pursuant to Regulation 14A, which information is
incorporated herein by reference.
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. See "Index to Financial Statements" under Item 8 on page 37. 2.
Financial Statement Schedules - none. 3. Exhibits
INDEX TO EXHIBITS
2.1 Agreement and Plan of Reorganization dated January 31, 2001 among San
Joaquin Resources Inc., Nampa Oil & Gas, Ltd., and Pannonian Energy, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated
January 31, 2001, filed on February 2, 2001).
2.2 Agreement and Plan of Reorganization dated December 15, 1999 by and between
LEK International, Inc. and San Joaquin Oil & Gas Ltd. (incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K dated December 31, 1999,
filed on January 21, 2000).
2.3 Property Purchase Agreement dated as of April 23, 2002, between the Company
and Shama Zoe Limited Partnership (incorporated by reference to Exhibit 2.1
to the Company's Form 8-K dated May 1, 2002, filed on May 9, 2002).
2.4 Purchase Agreement dated as of July 16, 2002, among Gasco, Pannonian Energy
Inc., San Joaquin Oil & Gas Ltd., Brek, Brek Petroleum Inc., Brek Petroleum
(California), Inc. and certain stockholders of Gasco. (incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K dated July 16, 2002,
filed on July 31, 2002).
2.5 Purchase and Sale Agreement between ConocoPhillips and the Company relating
to the Riverbend Field, Uintah and Duchesne Counties, Utah, Effective
January 1, 2004 (incorporated by reference to Exhibit 2.1 to the Company's
Form 8-K dated March 9, 2004, filed on March 15, 2004).
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).
68
<PAGE>
3.5 Certificate of Designation for Series B Convertible Preferred Stock
(incorporated by reference to Exhibit 3.5 to the Company's Form S-1
Registration Statement, File No. 333-104592).
4.1 Form of Subscription and Registration Rights Agreement, dated as of August
14, 2002 between the Company and certain investors Purchasing Common Stock
in August, 2002. (Filed as Exhibit 10.21 to the Company's Form S-1
Registration Statement dated November 15, 2002, filed on November 15,
2002).
4.2 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 (incorporated by reference to Exhibit 4.6 to the Company's Form
10-Q for the quarter ended September 30, 2003, filed on November 10, 2003).
4.3 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
(incorporated by reference to Exhibit 4.7 to the Company's Form 10-Q for
the quarter ended September 30, 2003, filed on November 10, 2003).
4.4 Subsidiary Guaranty Agreement, dated October 15, 2003 between Pannonian and
Renn Capital Group, Inc (incorporated by reference to Exhibit 4.8 to the
Company's Form 10-Q for the quarter ended September 30, 2003, filed on
November 10, 2003).
4.5 Subsidiary Guaranty Agreement, dated October 15, 2003 between San Joaquin
Oil and Gas, Ltd. And Renn Capital Group, Inc (incorporated by reference to
Exhibit 4.9 to the Company's Form 10-Q for the quarter ended September 30,
2003, filed on November 10, 2003).
4.6 Form of Subscription and Registration Rights Agreement between the Company
and investors purchasing Common Stock in October 2003 (incorporated by
reference to Exhibit 4.10 to the Company's Form 10-Q for the quarter ended
September 30, 2003, filed on November 10, 2003).
*4.7 Form of Subscription and Registration Rights Agreement between the Company
and investors purchasing Common Stock in February, 2004.
#10.11999 Stock Option Plan (incorporated by reference to Exhibit 4.1 to the
Company's Form 10-KSB for the fiscal year ended December 31, 1999, filed on
April 14, 2000).
#10.2Form of Stock Option Agreement under the 1999 Stock Option Plan
(incorporated by reference to Exhibit 10.8 to the Company's Form 10-K for
the fiscal year ended December 31, 2001, filed on March 29, 2002).
#10.3Stock Option Agreement dated January 2, 2001 between Gasco and Mark A.
Erickson (Filed as Exhibit 10.9 to the Company's Form 10-K for the fiscal
year ended December 31, 2001, filed on March 29, 2002).
#10.4Form of Stock Option Agreement dated February 8, 2001 between Gasco and
each of Mark A. Erickson, Marc Bruner, J. Timothy Bowes, Carl Stadelhofer
and Howard O. Sharpe (Filed as Exhibit 10.10 to the Company's Form 10-K for
the fiscal year ended December 31, 2001, filed on March 29, 2002).
#10.5W. King Grant Amended and Restated Employment Contract dated February 14,
2003 (Filed as Exhibit 10.10 to the Company's Form 10-K for the fiscal year
ended December 31, 2002, filed on March 29, 2003).
#10.6Michael Decker Amended and Restated Employment Contract dated February 14,
2003 (Filed as Exhibit 10.11 to the Company's Form 10-K for the fiscal year
ended December 31, 2002, filed on March 29, 2003).
69
<PAGE>
#10.7Mark A. Erickson Amended and Restated Employment Contract dated February
14, 2003 (Filed as Exhibit 10.12 to the Company's Form 10-K for the fiscal
year ended December 31, 2002, filed on March 29, 2003).
#10.8Amended and Restated Consulting Agreement dated February 14, 2003, between
Gasco and Marc Bruner (Filed as Exhibit 10.13 to the Company's Form 10-K
for the fiscal year ended December 31, 2002, filed on March 29, 2003).
#10.92003 Restricted Stock Plan (Filed as Appendix B to the Company's Proxy
Statement dated August 25, 2003 for its 2003 Annual Meeting of
Stockholders, filed on August 25, 2003).
10.10Muddy Creek Exploration Agreement dated August 15, 2001, between Gasco,
Shama Zoe Limited Partnership and Burlington Oil and Gas Company (Filed as
Exhibit 10.15 to the Company's Form 10-K for the fiscal year ended December
31, 2001, filed on March 29, 2002).
10.11CD Exploration Agreement dated August 15, 2001, between Gasco, Shama Zoe
Limited Partnership and Burlington Oil and Gas Company (Filed as Exhibit
10.16 to the Company's Form 10-K for the fiscal year ended December 31,
2001, filed on March 29, 2002).
10.12Gamma Ray Exploration Agreement dated August 15, 2001, between Gasco,
Shama Zoe Limited Partnership and Burlington Oil and Gas Company (Filed as
Exhibit 10.17 to the Company's Form 10-K for the fiscal year ended December
31, 2001, filed on March 29, 2002).
10.13Sublette County, WY AMI Agreement dated August 22, 2001 between Gasco,
Alpine Gas Company and Burlington Oil and Gas Company (Filed as Exhibit
10.18 to the Company's Form 10-K for the fiscal year ended December 31,
2001, filed on March 29, 2002).
10.14Lead Contractor Agreement dated January 24, 2002, between Gasco and
Halliburton Energy Services, Inc. (Filed as Exhibit 10.19 to the Company's
Form 10-K for the fiscal year ended December 31, 2001, filed on March 29,
2002).
10.15Property Purchase Agreement, dated as of April 23, 2002, between the
Company and Shama Zoe Limited Partnership (Filed as Exhibit 2.1 to the
Company's Form 8-K dated May 1, 2002, filed on May 9, 2002).
10.16Purchase Agreement, dated as of July 16, 2002, among the Company,
Pannonian Energy Inc., San Joaquin Oil & Gas Ltd., Brek Energy Corporation,
Brek Petroleum Inc., Brek Petroleum (California), Inc. and certain
stockholders (Filed as Exhibit 2.1 to the Company's Form 8-K dated July 16,
2002, filed on July 31, 2002).
10.17Amendment No. 1 to Property Purchase Agreement dated as of August 9, 2002
between the Company and Shama Zoe Limited Partnership. (Filed as Exhibit
10.21 to the Company's Form S-1 dated November 15, 2002, filed on November
15, 2002).
10.18Financial Advisory Services Agreement dated August 22, 2002, between the
Company and Energy Capital Solutions LLC. (Filed as Exhibit 10.21 to the
Company's Form S-1 Registration Statement, filed on November 15, 2002).
*21 List of Subsidiaries
*23.1 Consent of Deloitte & Touche, LLP
*23.2 Consent of Netherland, Sewell & Associates, Inc.
*31 Rule 13a-14(a)/15d-14(a) Certifications.
*32 Section 1350 Certifications
* Filed herewith.
# Identifies management contracts and compensatory plans or arrangements.
70
<PAGE>
(b) Reports on Form 8-K: The following reports on Form 8-K were filed
during the last quarter during the period covered by this report.
Form 8-K dated October 15, 2003, filed October 15, 2003
Item 9, Item 7(c) - Press Release
Form 8-K dated October 15, 2003, filed October 16, 2003
Item 9, Item 7(c) - Press Release
Form 8-K dated October 23, 2003, filed October 24, 2003
Item 9, Item 7(c) - Press Release
Form 8-K dated November 6, 2003, filed November 6, 2003
Item 9, Item 7(c) - Press Release
Form 8-K dated December 2, 2003, filed December 2, 2003
Item 9, Item 7(c) - Press Release
Form 8-K dated December 23, 2003, filed December 23, 2003
Item 9, Item 7(c) - Press Release
71
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GASCO ENERGY, INC. Dated: March 25, 2004
By: /s/ Mark A. Erickson
------------------------------------
Mark A. Erickson, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Mark A. Erickson Director and President and Chief Executive Officer March 25, 2004
- --------------------
Mark A. Erickson
/s/ Marc A. Bruner Director March 25, 2004
- ------------------
Marc A. Bruner
/s/ Carl Stadelhofer Director March 25, 2004
- --------------------
Carl Stadelhofer
/s/ W. King Grant Executive Vice President and Chief Financial Officer March 25, 2004
- -----------------
W. King Grant (Principal Financial Officer and Principal Accounting
Officer)
/s/ Carmen Lotito Director March 25, 2004
- -----------------
Carmen ("Tony") Lotito
/s/ Charles B. Crowell Director March 25, 2004
- ----------------------
Charles B. Crowell
/s/ Richard S. Langdon Director March 25, 2004
- ----------------------
Richard S. Langdon
/s/ R. J. Burgess Director March 25, 2004
- ---------------------
R.J. Burgess
/s/ John A. Schmit Director March 25, 2004
- ----------------------
John A. Schmit
</TABLE>
72
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.7
<SEQUENCE>3
<FILENAME>subagrmnt204.txt
<DESCRIPTION>FORM OF SUBSCRIPTION & REG RIGHTS AGRMNT 2/04
<TEXT>
EXHIBIT 4.7
GASCO ENERGY, INC.
SUBSCRIPTION AND REGISTRATION RIGHTS AGREEMENT
This Subscription and Registration Rights Agreement (this "Agreement"),
dated as of _______, 2004, by and between Gasco Energy, Inc. (the "Company") and
______________ (the "Subscriber"), is intended to set forth certain
representations, covenants and agreements between the Company and the
Subscriber, with respect to the offering (the "Offering") for sale by the
Company of share of Common Stock, par value $.0001 per share (the "Common
Stock").
1. Subscription. Subject to the terms and conditions hereof, the
Subscriber hereby irrevocably subscribes for and agrees to purchase
from the Company ___________ shares of Common Stock (the "Shares") at
a purchase price of $1.50 per share (the "Offering Price"), and the
Company agrees to sell such Shares to the Subscriber at the Offering
Price.
2. Delivery of Subscription Amount; Acceptance of Subscription; Delivery
of Shares. Subscriber understands and agrees that this subscription is
made subject to the following terms and conditions:
(a) Contemporaneously with the execution and delivery of this
Agreement, Subscriber shall execute and deliver the Certificate
of Accredited Investor Status, and shall wire to the Company to
hold in a separate, non-interest bearing account, immediately
available funds in the amount equal to the Offering Price
multiplied by the number of Shares for which the Subscriber has
subscribed (the "Subscription Amount") in accordance with the
instructions set forth on Exhibit A hereto.
(b) The subscription for Shares shall be deemed to be accepted only
when this Agreement has been signed by an authorized officer of
the Company, and the deposit of the Subscription Amount for
clearance will not be deemed an acceptance of this Agreement;
(c) Certificates representing the Shares purchased will be issued in
the name of each Subscriber within 5 days of the consummation of
the Offering as set forth under Section 3 hereof; and
(d) The representations and warranties of the Company and Subscriber
set forth herein shall be true and correct as of the date that
the Company accepts this subscription.
3. Terms of Subscription.
(a) The consummation of the Offering (the "Closing") will occur on
___________, 2004, or such later date as the parties hereto shall
mutually agree (the "Closing Date").
(b) If the Subscriber is not a United States person, the Subscriber
hereby represents that it has satisfied itself as to the full
observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Shares or any use of this
Agreement, including (i) the legal requirements within its
jurisdiction for the purchase of the Shares, (ii) any foreign
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exchange restrictions applicable to such purchase, (iii) any
governmental or other consents that may need to be obtained, and
(iv) the income tax and other tax consequences, if any, that may
be relevant to the purchase, holding, redemption, sale or
transfer of the Shares. The Subscriber's subscription and payment
for, and his or her continued beneficial ownership of the Shares,
will not violate any applicable securities or other laws of the
Subscriber's jurisdiction.
4. Registration Rights.
(a) Subscriber acknowledges that it is acquiring the Shares for its
own account and for the purpose of investment and not with a view
to any distribution or resale thereof within the meaning of the
Securities Act of 1933, as amended, (the "Securities Act"). The
Subscriber further agrees that it will not sell, assign or
transfer the Shares at any time in violation of the Securities
Act and acknowledges that, in taking unregistered securities, it
must continue to bear the economic risk of its investment for an
indefinite period of time because of the fact that the Shares
have not been registered under the Securities Act, and further
realizes that the Shares can not be sold unless subsequently
registered under the Securities Act or an exemption from such
registration is available. The Subscriber further recognizes that
the Company is not assuming any obligation to register the Shares
except as expressly set forth herein. The Subscriber also
acknowledges that appropriate legends reflecting the status of
the Shares under the Securities Act may be placed on the face of
the certificates for such shares at the time of their transfer
and delivery to the holder thereof.
(b) The Shares may not be transferred except in a transaction which
is in compliance with the Securities Act. Except as provided
hereafter with respect to registration of the Shares, it shall be
a condition to any such transfer that the Company shall be
furnished with an opinion of counsel to the holder of such
shares, reasonably satisfactory to the Company, to the effect
that the proposed transfer would be in compliance with the
Securities Act.
(c) On or prior to April 19, 2004 (the "Filing Date"), the Company
shall use its commercially reasonable efforts to prepare and file
with the Securities and Exchange Commission (the "SEC"), a
registration statement and such other documents as may be
necessary in the opinion of counsel for the Company, and use its
commercially reasonable efforts to have such registration
statement declared effective within 65 days after the Filing Date
in order to comply with the provisions of the Securities Act so
as to permit the registered resale of the Shares for a period of
two (2) years following the Closing Date by Subscriber. The
Shares that are registered for resale under such registration
statement are referred to herein as the "Offering Shares," and
the Subscriber, together with its affiliates, are hereafter
referred to as "Offering Holders." The Company will include in
such registration statement (i) the information required under
the Securities Act to be so included concerning the Offering
Holders, as provided by the Offering Holders on the signature
page hereto, including any changes in such information that may
be provided by the Offering Holders in writing to the Company
from time to time, and (ii) a section entitled "Plan of
Distribution," substantially in the form of Exhibit C hereto,
that describes the various procedures that may be used by the
Offering Holders in the sale of Shares. Notwithstanding anything
to the contrary in this Section 4, the Company may, at its
option, terminate such registration statement at any time after a
period of one year following the Closing Date, if at such time no
Offering Holder beneficially owns more than 1,000,000 of the
Shares that such Offering Holder purchased in the Offering.
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<PAGE>
(d) If the registration statement referred to in Section 4(c) above
has not been declared effective by the SEC within 65 days after
the Filing Date and the cause of the delay is not related to
circumstances beyond the Company's control (such as failure of
the SEC to review and act on the registration statement or
amendments to the registration statement in a timely manner), the
Company shall pay liquidated damages of 1% of the Offering Price
per share for every Share for each 30 day period of delay
following such initial 65 day period ("Liquidated Damages"). For
any period of delay that is less than 30 days, the Company shall
pay liquidated damages equal to the product of 1% of the Offering
Price multiplied by the quotient of such number of days of delay
divided by 30, and such amount shall be included in the total of
Liquidated Damages. The foregoing payment shall constitute the
sole monetary remedy available to the Subscriber in the event
that the Company does not comply with the deadlines set forth in
Section 4(c) with respect to the filing and effectiveness of the
registration statement referred to therein.
(e) Notwithstanding the foregoing provisions of this Section 4, the
Company may voluntarily suspend the effectiveness of any such
registration statement for a limited time, which in no event
shall be longer than 60 days in any three-month period and no
longer than 120 days in any twelve month period, if the Company
has been advised in writing by counsel or underwriters to the
Company that the offering of any Offering Shares pursuant to the
registration statement would materially adversely affect, or
would be improper in view of (or improper without disclosure in a
prospectus), a proposed financing, a reorganization,
recapitalization, merger, consolidation, or similar transaction
involving the Company. If any event occurs that would cause any
such registration statement to contain a material misstatement or
omission or not to be effective and usable during the period that
such registration statement is required to be effective and
usable, the Company shall promptly file an amendment to the
registration statement and use its commercially reasonable
efforts to cause such amendment to be declared effective as soon
as practicable thereafter. Notwithstanding any provision
contained herein to the contrary, the Company's obligation to
include, or continue to include, Offering Shares in any such
registration statement under this Section 4 shall terminate to
the extent such shares are eligible for resale under Rule 144(k)
promulgated under the Securities Act.
(f) If and whenever the Company is required by the provisions of this
Agreement to use its commercially reasonable efforts to effect
the registration of the Offering Shares under the Securities Act
for the account of an Offering Holder, the Company will, as
promptly as possible:
(i) prepare and file with the SEC a registration statement with
respect to such securities and use its commercially
reasonable efforts to cause such registration statement to
become and remain effective;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the
prospectus used in connection therewith as may be necessary
to keep such registration statement effective and to comply
with the requirements of the Securities Act and the rules
and regulations promulgated by the SEC thereunder relating
to the sale or other disposition of the securities covered
by such registration statement; and
(iii)furnish to each Offering Holder such numbers of copies of a
prospectus, including a preliminary prospectus, complying
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with the requirements of the Securities Act, and such other
documents as such Offering Holder may reasonably request in
order to facilitate the public sale or other disposition of
the Offering Shares owned by such Offering Holder, but such
Offering Holder shall not be entitled to use any selling
materials other than a prospectus and such other materials
as may be approved by the Company, which approval will not
be unreasonably withheld.
(g) Except as provided below in this Section 4, the expenses incurred
by the Company in connection with action taken by the Company to
comply with this Section 4, including, without limitation, all
registration and filing fees, printing and delivery expenses,
accounting fees, fees and disbursements of counsel to the
Company, consultant and expert fees, premiums for liability
insurance, if the Company chooses to obtain such insurance,
obtained in connection with a registration statement filed to
effect such compliance and all expenses, including counsel fees,
of complying with any state securities laws ("State Acts"), shall
be paid by the Company. All fees and disbursements of any
counsel, experts, or consultants employed by any Offering Holder
shall be borne by such Offering Holder. The Company shall not be
obligated in any way in connection with any registration pursuant
to this Section 4 for any selling commissions or discounts
payable by any Offering Holder to any underwriter or broker of
securities to be sold by such Offering Holder. Subscriber agrees
to pay all expenses required to be borne by such Offering Holder.
(h) In the event of any registration of Shares pursuant to this
Section 4, the Company will indemnify and hold harmless each
Offering Holder, its officers, directors, investment advisors and
each underwriter of such securities, and any person who controls
such Offering Holder or underwriter within the meaning of Section
15 of the Securities Act, against all claims, actions, losses,
damages, liabilities and expenses, joint or several, to which any
of such persons may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages, liabilities
or actions arise out of or are based upon any untrue statement of
any material fact contained in any registration statement under
which such securities were registered under the Securities Act,
any preliminary prospectus or final prospectus contained therein,
or any amendment or supplement thereof, or arise out of or are
based upon the omission to state therein a material fact required
to be stated therein or necessary to make the statements therein
not misleading, and will reimburse such Offering Holder, its
officers, directors and each underwriter of such securities, and
each such controlling person or entity for any legal and any
other expenses reasonably incurred by such Offering Holder, such
underwriter, or such controlling person or entity in connection
with investigating or defending any such loss, action, claim,
damage, liability, or action; provided, however, that the Company
will not be liable in any such case to the extent that any such
loss, claim, damage, liability or action arises directly out of
or is based primarily upon an untrue statement or omission made
in said registration statement, said preliminary prospectus or
said prospectus, or said amendment or supplement in reliance upon
and in conformity with written information furnished to the
Company by such Offering Holder or such underwriter specifically
for use in the preparation thereof, and provided further however,
that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability or action
arises directly out of or is based primarily upon an untrue
statement or omission made in any preliminary prospectus or final
prospectus if (i) such Offering Holder failed to send or deliver
a copy of the final prospectus or prospectus supplement with or
prior to the delivery of written confirmation of the sale of the
Offering Shares, and (ii) the final prospectus or prospectus
supplement would have corrected such untrue statement or
omission.
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(i) At any time when a prospectus relating to the Offering is
required to be delivered under the Securities Act, the Company
will notify the Offering Holder of the happening of any event,
upon the notification or awareness of such event by an executive
officer of the Company, as a result of which the prospectus
included in such registration statement, as then in effect,
includes an untrue statement of material fact or omits to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the
circumstances then existing.
(j) In the event of any registration of any Shares under the
Securities Act pursuant to this Section 4, Subscriber agrees to
indemnify and hold harmless the Company, its officers, directors
and any person who controls the Company within the meaning of
Section 15 of the Securities Act, against any losses, claims,
damages, liabilities, or actions, joint or several, to which the
Company, its officers, directors, or such controlling person or
entity may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages, liabilities, or actions
arise out of or are based upon any untrue statement of any
material fact contained in any registration statement under which
such Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereto, or arise out of or are based
upon the omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, in each case to the extent and only to the extent
that any such loss, claim, damage, liability, or action arises
out of or is based upon an untrue statement or omission made in
said registration statement, said preliminary prospectus or said
prospectus or said amendment or supplement in reliance upon and
in conformity with written information furnished to the Company
by Subscriber or any affiliate (as defined in the Securities Act)
of Subscriber specifically for use in the preparation thereof.
(k) Any party entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification and (ii) unless in such
indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with
respect to such claim, permit such indemnifying party to assume
the defense of such claim with counsel reasonably satisfactory to
the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any
settlement made by the indemnified party without its consent
(which consent may not be unreasonably withheld). An indemnifying
party who is not entitled to, or elects not to, assume the
defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by
such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other
of such indemnified parties with respect to such claim.
(l) With a view to making available to the Offering Holder the
benefits of Rule 144 promulgated under the Securities Act, the
Company agrees that it will use its commercially reasonable
efforts to maintain registration of its Common Stock under
Section 12 or 15 of the Securities and Exchange Act of 1934, as
amended, (the "Exchange Act") and to file with the SEC in a
timely manner all reports and other documents required to be
filed by an issuer of securities registered under the Exchange
Act so as to maintain the availability of Rule 144. Upon the
request of any record owner, the Company will deliver to such
owner a written statement as to whether it has complied with the
reporting requirements of Rule 144.
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<PAGE>
5. Representations and Warranties of the Subscriber. Subscriber hereby
represents and warrants to the Company as follows:
(a) Subscriber is acquiring the Shares for its own account, for
investment and not with a view to, or for resale in connection
with, any distribution or public offering thereof within the
meaning of the Securities Act, and applicable state securities
laws.
(b) The Subscriber understands that (A) the Shares (1) have not been
registered under the Securities Act or any state securities laws,
(2) will be issued in reliance upon an exemption from the
registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) and/or Regulation D
thereof and (3) will be issued in reliance upon exemptions from
the registration and prospectus delivery requirements of state
securities laws which relate to private offerings, and (B) the
Subscriber must therefore bear the economic risk of such
investment indefinitely unless a subsequent disposition thereof
is registered under the Securities Act and applicable state
securities laws or is exempt therefrom. Subscriber further
understands that such exemptions depend upon, among other things,
the bona fide nature of the investment intent of the Subscriber
expressed herein. Pursuant to the foregoing, the Subscriber
acknowledges that the certificates representing the Shares shall
bear a restrictive legend substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND STATE SECURITIES LAWS, AND MAY NOT BE
OFFERED FOR SALE, SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR
OTHERWISE DISPOSED OF UNLESS (I) REGISTERED UNDER THE
APPLICABLE SECURITIES LAWS OR (II) AN OPINION OF COUNSEL,
WHICH OPINION AND COUNSEL ARE BOTH REASONABLY SATISFACTORY
TO THE COMPANY, HAS BEEN DELIVERED TO THE COMPANY AND SUCH
OPINION STATES THAT THE SHARES MAY BE TRANSFERRED WITHOUT
SUCH REGISTRATION."
(c) The Subscriber has knowledge, skill and experience in financial,
business and investment matters relating to an investment of this
type and is capable of evaluating the merits and risks of such
investment and protecting the Subscriber's interest in connection
with the acquisition of the Shares. The Subscriber understands
that the acquisition of the Shares is a speculative investment
and involves substantial risks and that the Subscriber could lose
the Subscriber's entire investment in the Shares. To the extent
deemed necessary by the Subscriber, the Subscriber has retained,
at its own expense, and relied upon, appropriate professional
advice regarding the investment, tax and legal merits and
consequences of purchasing and owning the Shares. The Subscriber
has the ability to bear the economic risks of the Subscriber's
investment in the Company, including a complete loss of the
investment, and the Subscriber has no need for liquidity in such
investment.
(d) The Subscriber has been furnished by the Company all information
(or provided access to all information) regarding the business
and financial condition of the Company, its expected plans for
future business activities, the attributes of the Shares and the
merits and risks of an investment in the Shares which the
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<PAGE>
Subscriber has requested or otherwise need to evaluate the
investment in the Company.
(e) Subscriber is in receipt of and has carefully read and
understands the following items:
(i) Annual Report on Form 10-K for the period ending December
31, 2002, filed by the Company with the Securities and
Exchange Commission on March 31, 2003;
(ii) Quarterly Reports on Form 10-Q for each of the periods
ending March 31, 2003, June 30, 2003 and September 30, 2003
filed by the Company with the Securities and Exchange
Commission on May 15, 2003, August 13, 2003 and November 10,
2003, respectively;
(iii)Definitive Proxy Statement on Form 14A, filed by the
Company with the Securities and Exchange Commission on
August 25, 2003; and,
(iv) Current Reports on Form 8-K filed by the Company with the
Securities and Exchange Commission on April 9, 2003, June 6,
2003, October 15, 2003, October 16, 2003, October 24, 2003,
November 6, 2003, December 2, 2003, December 23, 2003 and
January 21, 2004; (together with the exhibits thereto,
collectively, items (i) through (iv), the "Disclosure
Documents").
(f) In making the proposed investment decision, the Subscriber is
relying solely on investigations made by the Subscriber and the
Subscriber's representatives. The Subscriber acknowledges that
documents listed in Section 5(e) are the only information
provided to the Subscriber by the Company and that the Subscriber
is not relying on any other information in making the proposed
investment decision. The offer to sell the Shares was
communicated to the Subscriber in such a manner that the
Subscriber was able to ask questions of and receive answers from
the management of the Company concerning the terms and conditions
of the proposed transaction and that at no time was the
Subscriber presented with or solicited by or through any leaflet,
public promotional meeting, television advertisement or any other
form of general or public advertising or solicitation.
(g) The Subscriber acknowledges that the Subscriber has been advised
that:
(i) The Shares offered hereby have not been approved or
disapproved by the SEC or any state securities commission
nor has the SEC or any state securities commission passed
upon the accuracy or adequacy of any representations by the
Company. Any representation to the contrary is a criminal
offense.
(ii) In making an investment decision, the Subscriber must rely
on its own examination of the Company and the terms of the
Offering, including the merits and risks involved. The
Shares have not been recommended by any federal or state
securities commission or regulatory authority. Furthermore,
the foregoing authorities have not confirmed the accuracy or
determined the adequacy of any representation. Any
representation to the contrary is a criminal offense.
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<PAGE>
(iii)The Shares are "Restricted Securities" within the meaning of
Rule 144 under the Securities Act, are subject to
restrictions on transferability and resale and may not be
transferred or resold except as permitted under the
Securities Act and applicable state securities laws,
pursuant to registration or exemption therefrom. The
Subscriber is aware that the Subscriber may be required to
bear the financial risks of this investment for an
indefinite period of time.
(h) The Subscriber acknowledges and is aware that there has never
been any representation, guarantee or warranty made by the
Company or any officer, director, employee or agent or
representative of the Company, expressly or by implication, as to
(i) the approximate or exact length of time that the Subscriber
will be required to remain an owner of the Shares (ii) the
percentage of profit and/or amount of or type of consideration,
profit or loss to be realized, if any, as a result of this
investment; or (iii) that the limited past performance or
experience on the part of the Company, or any future expectations
will in any way indicate the predictable results of the ownership
of the Shares or of the overall financial performance of the
Company.
(i) The Subscriber agrees to furnish the Company such other
information as the Company may reasonably request in order to
verify the accuracy of the information contained herein and
agrees to notify the Company immediately of any material change
in the information provided herein that occurs prior to the
Company's acceptance of this Agreement.
(j) The Subscriber further represents and warrants that the
Subscriber is an "accredited investor" within the meaning of Rule
501 of Regulation D under the Securities Act, and Subscriber has
executed the Certificate of Accredited Investor Status, attached
hereto as Exhibit B.
(k) As of the date of this Agreement the Subscriber and its
affiliates do not have, and during the 30 day period prior to the
date of this Agreement the Subscriber and its affiliates have not
entered into, any "put equivalent position" as such term is
defined in Rule 16a-1 of under the Exchange Act or short sale
positions with respect to the Common Stock of the Company.
The foregoing representations and warranties and undertakings are made by
the Subscriber with the intent that they be relied upon in determining its
suitability as an investor and the Subscriber hereby agrees that such
representations and warranties shall survive its purchase of the Shares.
6. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Subscriber as follows:
(a) The Company is duly incorporated, validly existing and in good
standing under the laws of its state of incorporation, and is
duly qualified to do business as a foreign corporation in all
jurisdictions in which the failure to be so qualified would
materially and adversely affect the business or financial
condition, properties or operations of the Company. The Company
has all requisite corporate power and authority (i) to own and
lease the properties and assets it currently owns and leases (if
any) and it contemplates owning and leasing and (ii) to conduct
its activities as such activities (if any) are currently
conducted and as currently contemplated to be conducted.
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(b) The authorized capital of the Company immediately prior to the
Closing will consist of: (i) 5,000,000 shares of Preferred Stock,
of which 1,000 shares are designated as Series A Preferred Stock,
none of which are issued and outstanding, and of which 20,000
shares are designated as Series B Preferred Stock, 11,734 of
which are issued and outstanding, and (ii) 100,000,000 shares of
Common Stock, 45,602,236 of which were issued and outstanding as
of December 31, 2003.
(c) The Company has duly authorized the issuance and sale of the
Shares in accordance with the terms of this Agreement (as
described herein) by all requisite corporate action, including
the authorization of the Company's Board of Directors of the
issuance and sale of the Shares in accordance herewith and the
execution, delivery and performance of any other agreements and
instruments executed in connection herewith. This Agreement
constitutes a valid and legally binding obligation of the
Company, enforceable in accordance with its terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization,
moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by
laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, and (iii) to the
extent the indemnification provisions contained herein may be
limited by applicable federal or state securities laws.
(d) The Shares, when issued and paid for in accordance with this
Agreement, will represent validly authorized, duly issued and
fully paid and nonassessable shares of Common Stock of the
Company, and the issuance thereof will not conflict with the
certificate of incorporation or bylaws of the Company and will be
in full compliance with all federal and state securities laws
applicable to such issuance and sale.
(e) The execution and delivery of this Agreement, the fulfillment of
the terms set forth herein and the consummation of the
transactions contemplated hereby will not conflict with, or
constitute a breach of or default under, any agreement, indenture
or instrument by which the Company is bound or any law,
administrative rule, regulation or decree of any court or any
governmental body or administrative agency applicable to the
Company.
(f) As of the date of this Agreement, the Disclosure Documents do not
contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(g) The Disclosure Documents that have been filed with the SEC, at
the time they were filed with the SEC, complied in all material
respects with the requirements of the Exchange Act, and, when
read together and with the other information in the Disclosure
Documents, do not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(h) Subsequent to the dates as of which information is given in the
Disclosure Documents, except as described therein, there has not
been any material adverse change with regard to the assets or
properties, results of operations or financial condition of the
Company.
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7. Survival; Indemnification. All representations, warranties and
covenants contained in this Agreement and the indemnification
contained in this Section 7 shall survive (i) the acceptance of this
Agreement by the Company, (ii) changes in the transactions, documents
and instruments described herein which are not material or which are
to the benefit of Subscriber, and (iii) the death or disability of
Subscriber. Subscriber acknowledges the meaning and legal consequences
of the representations, warranties and covenants in Section 5 hereof
and that the Company has relied upon such representations, warranties
and covenants in determining Subscriber's qualification and
suitability to purchase the Shares. Subscriber hereby agrees to
indemnify, defend and hold harmless the Company, its officers,
directors, employees, agents and controlling persons, from and against
any and all losses, claims, damages, liabilities, expenses (including
attorneys' fees and disbursements), judgments or amounts paid in
settlement of actions arising out of or resulting from the untruth of
any representation of Subscriber herein or the breach of any warranty
or covenant herein by Subscriber. Notwithstanding the foregoing,
however, no representation, warranty, covenant or acknowledgment made
herein by Subscriber shall in any manner be deemed to constitute a
waiver of any rights granted to it under the Securities Act or state
securities laws.
8. Notices. All notices and other communications provided for herein
shall be in writing and shall be deemed to have been duly given if
delivered personally or sent by registered or certified mail, return
receipt requested, postage prepaid:
(a) if to the Company, to the following address:
Gasco Energy, Inc.
14 Inverness Drive East
Building H, Suite 236
Englewood, CO 80112
Attn: Peggy Herald
Telephone: (303) 483-0044
(b) if to Subscriber, to the address set forth on the signature page
hereto.
(c) or at such other address as any party shall have specified by
notice in writing to the others.
9. Notification of Changes. Subscriber agrees and covenants to notify the
Company immediately upon the occurrence of any event prior to the
consummation of this Offering that would cause any representation,
warranty, covenant or other statement contained in this Agreement to
be false or incorrect or of any change in any statement made herein
occurring prior to the consummation of this Offering.
10. Assignability. This Agreement is not assignable by the Subscriber, and
may not be modified, waived or terminated except by an instrument in
writing signed by the party against whom enforcement of such
modification, waiver or termination is sought.
11. Binding Effect. Except as otherwise provided herein, this Agreement
shall be binding upon and inure to the benefit of the parties and
their heirs, executors, administrators, successors, legal
representatives and assigns, and the agreements, representations,
warranties and acknowledgments contained herein shall be deemed to be
made by and be binding upon such heirs, executors, administrators,
successors, legal representatives and assigns.
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12. Obligations Irrevocable. The obligations of the Subscriber shall be
irrevocable, except with the consent of the Company, until the
consummation or termination of the Offering.
13. Entire Agreement. This Agreement constitutes the entire agreement of
the Subscriber and the Company relating to the matters contained
herein, superseding all prior contracts or agreements, whether oral or
written.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado, without regard to
the principles of conflicts of law thereof that would require the
application of the laws of any jurisdiction other than Colorado.
15. Severability. If any provision of this Agreement or the application
thereof to Subscriber or any circumstance shall be held invalid or
unenforceable to any extent, the remainder of this Agreement and the
application of such provision to other subscriptions or circumstances
shall not be affected thereby and shall be enforced to the greatest
extent permitted by law.
16. Headings. The headings in this Agreement are inserted for convenience
and identification only and are not intended to describe, interpret,
define, or limit the scope, extent or intent of this Agreement or any
provision hereof.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which together shall be deemed to
be one and the same agreement.
18. Counsel. Subscriber hereby acknowledges that the Company and its
counsel, Vinson & Elkins L.L.P., represent the interests of the
Company and not those of the Subscriber in any agreement (including
this Agreement) to which the Company is a party.
[Signature Page to follow]
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<PAGE>
IN WITNESS WHEREOF, Subscriber has executed this Subscription and
Registration Rights Agreement as of ___________________, 2004.
SUBSCRIBER
Number of Shares: ____________________
Offering Price per Share: $1.50
Subscription Amount: $_______________________
By: _________________________________________
Name:_________________________________________
Title:________________________________________
Address: ____________________________________
The Company hereby accepts the foregoing subscription subject to the terms
and conditions hereof as of ______________, 2004.
Gasco Energy, Inc.
a Nevada corporation
By:____________________________________________
Mark A. Erickson, President and
Chief Executive Officer
12
<PAGE>
Exhibit A
HOW TO SUBSCRIBE
(1) If you are subscribing for the purchase of Shares, please date and
sign the signature page to this Subscription and Registration Rights Agreement
in the applicable spaces. Please signify the amount of Shares you are purchasing
by inserting such amount in the space provided for on the signature page to the
Agreement.
(2) Complete and sign the accompanying Accredited Investor Certificate.
(3) Send all completed documents to:
Gasco Energy, Inc.
14 Inverness Drive East
Building H, Suite 236
Englewood, CO 80112
Attn: Peggy Herald
Telephone: (303) 483-0044
(4) Transmit funds in an amount equal to the number of Shares you are
purchasing multiplied by the Offering Price via wire to the following account:
Domestic
Usbank
601 2nd Ave. South
Minneapolis, MN 55402-7020
ABA 091-000-022
Piper Jaffray Inc.
Acct # 1731-0311-4547
For Further Credit To: Gasco Energy Offering Proceeds
3595-9612 EH08
Foreign
Us Bank MNPLS
Swift USBKUS441MT
Acct # 1731-0311-4547 Piper Jaffray
For Further Credit To: ___Gasco Energy Offering Proceeds
_________ 3595-9612 EH08
ATTENTION SUBSCRIBERS: NO SUBSCRIPTION WILL BE ACCEPTED UNLESS ALL DOCUMENTATION
PRESCRIBED HEREIN IS FULLY COMPLETED AND EXECUTED. ANY MATERIALS RECEIVED THAT
ARE INCOMPLETE IN ANY RESPECT WILL BE RETURNED BY THE COMPANY.
13
<PAGE>
Exhibit B
CERTIFICATE OF ACCREDITED INVESTOR STATUS
Except as may be indicated by the undersigned below, the undersigned is
an individual "accredited investor," as that term is defined in Regulation D
under the Securities Act of 1933, as amended (the "Securities Act"). The
undersigned has checked the box below indicating the basis on which he is
representing his status as an "accredited investor":
__ a bank as defined in Section 3(a)(2) of the Securities Act, or any savings
and loan association or other institution as defined in Section 3(a)(5)(A)
of the Securities Act whether acting in its individual or fiduciary
capacity; a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934, as amended (the "Securities Exchange
Act"); an insurance company as defined in Section 2(13) of the Securities
Act; an investment company registered under the Investment Company Act of
1940 or a business development company as defined in Section 2(a)(48) of
that Act; a small business investment company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958; a plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, and such plan has
total assets in excess of $5,000,000; an employee benefit plan within the
meaning of the Employee Retirement Income Security Act of 1974, if the
investment decision is made by a plan fiduciary, as defined in Section
3(21) of such Act, which is either a bank, savings and loan association,
insurance company, or registered investment adviser, or if the employee
benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons that
are "accredited investors";
__ a private business development company as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940;
__ an organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or partnership,
not formed for the specific purpose of acquiring the securities offered,
with total assets in excess of $5,000,000;
__ a natural person whose individual net worth, or joint net worth with the
undersigned's spouse, at the time of this purchase exceeds $1,000,000;
__ a natural person who had an individual income in excess of $200,000 in each
of the two most recent years or joint income with the undersigned's spouse
in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
__ a trust with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is
14
<PAGE>
directed by a person who has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of
the prospective investment; or
__ an entity in which all of the equity holders are "accredited investors" by
virtue of their meeting one or more of the above standards.
__ an individual who is a director or executive officer of Gasco Energy, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Accredited Investor Status effective as of __________________, 2004.
____________________________________
Name of Subscriber
By: ________________________
Name: ______________________
Title: _______________________
15
<PAGE>
Exhibit C
PLAN OF DISTRIBUTION
As of the date of this prospectus, we have not been advised by the selling
stockholders as to any plan of distribution. Distributions of the shares by the
selling stockholders, or by their partners, pledgees, donees (including
charitable organizations), transferees or other successors in interest, may from
time to time be offered for sale either directly by such individual, or through
underwriters, dealers or agents or on any exchange on which the shares may from
time to time be traded, in the over-the-counter market, or in independently
negotiated transactions or otherwise. The methods by which the shares may be
sold include:
o a block trade (which may involve crosses) in which the broker or
dealer so engaged will attempt to sell the securities as agent but may
position and resell a portion of the block as principal to facilitate
the transaction;
o purchases by a broker or dealer as principal and resale by such broker
or dealer for its own account pursuant to this prospectus;
o exchange distributions and/or secondary distributions;
o sales in the over-the-counter market;
o underwritten transactions;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o privately negotiated transactions.
Such transactions may be effected by the selling stockholders at market
prices prevailing at the time of sale or at negotiated prices. The selling
stockholders may effect such transactions by selling the Common Stock to
underwriters or to or through broker-dealers, and such underwriters or
broker-dealers may receive compensations in the form of discounts or commissions
from the selling stockholders and may receive commissions from the purchasers of
the Common Stock for whom they may act as agent. The selling stockholders may
agree to indemnify any underwriter, broker-dealer or agent that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act. We have agreed to
register the shares for sale under the Securities Act and to indemnify the
selling stockholders and each person who participates as an underwriter in the
offering of the shares against certain civil liabilities, including certain
liabilities under the Securities Act.
In connection with sales of the Common Stock under this prospectus, the
selling stockholders may enter into hedging transactions with broker-dealers,
who may in turn engage in short sales of the Common Stock in the course of
hedging the positions they assume. The selling stockholders also may sell shares
of Common Stock short and deliver them to close our the short positions, or loan
or pledge the shares of Common Stock to broker-dealers that in turn may sell
them.
The selling stockholders and any underwriters, dealers or agents that
participate in distribution of the shares may be deemed to be underwriters, and
any profit on sale of the shares by them and any discounts, commissions or
concessions received by any underwriter, dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Act.
There can be no assurances that the selling stockholders will sell any or
all of the shares offered under this prospectus.
16
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>sublist.txt
<DESCRIPTION>LIST OF SUBSIDIARIES
<TEXT>
EXHIBIT 21
List of Subsidiaries
Gasco Production Company (formerly Pannonian Energy Inc.), a Delaware
Corporation
San Joaquin Oil & Gas, Ltd., a Nevada Corporation
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>dtcons2003.txt
<DESCRIPTION>CONSENT OF DELOITTE & TOUCHE, LLP
<TEXT>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-105974 on Form S-8 of Gasco Energy, Inc. of our report dated March 25, 2004,
(which report expresses and unqualified opinion and includes an explanatory
paragraph for the adoption of Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations") appearing in this Annual
Report on Form 10-K of Gasco Energy, Inc. for the year ended December 31, 2003.
/s/Deloitte & Touche LLP
Denver, Colorado
March 25, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>6
<FILENAME>nsaicons2003.txt
<DESCRIPTION>CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC.
<TEXT>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to (i) the reference in
this Annual Report on Form 10-K of Gasco Energy, Inc. (the "Company") for the
year ended December 31, 2003, as well as in the Notes to the Consolidated
Financial Statements included in such Annual Report, to Netherland, Sewell &
Associates, Inc., independent petroleum engineers, and the report prepared by
such independent petroleum engineers appearing in this Annual Report, and (ii)
the incorporation by reference in Registration Statement No. 333-105974 on Form
S-8 of the Company of all references to Netherland, Sewell & Associates, Inc.,
independent petroleum engineers, and the reports prepared by such independent
petroleum engineers appearing in this Annual Report.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D. Sewell
---------------------------------
Frederic D. Sewell
Chairman and Chief Executive Officer
Dallas, Texas
March 24, 2004
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>7
<FILENAME>rule13cert03.txt
<DESCRIPTION>RULE 13 CERTIFICATIONS
<TEXT>
EXHIBIT 31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Mark A. Erickson, Chief Executive Officer of Gasco Energy, Inc., certify
that:
1. I have reviewed this annual report on Form 10-K of Gasco Energy,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonable likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 25, 2004 /s/ Mark A. Erickson
Mark A. Erickson, President and
Chief Executive Officer
1
<PAGE>
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, W. King Grant, Chief Financial Officer of Gasco Energy, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Gasco Energy,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonable likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(c) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 25, 2004 /s/ W. King Grant
W. King Grant, ExecutiveVice President and
Chief Financial Officer
2
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>8
<FILENAME>sec1350cert2003.txt
<DESCRIPTION>SECTION 1350 CERTIFICATIONS
<TEXT>
EXHIBIT 32
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
OF GASCO ENERGY, INC.
PURSUANT TO 18 U.S.C. ss. 1350
In connection with the accompanying Annual Report of Gasco Energy, Inc.
(the "Company") on Form 10-K for the period ended December 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Mark A. Erickson, Chief Executive Officer of the Company, hereby certify, to
my knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Mark A. Erickson
Name: Mark A. Erickson
Date: March 25, 2004
1
<PAGE>
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF GASCO ENERGY, INC.
PURSUANT TO 18 U.S.C. ss. 1350
In connection with the accompanying Annual Report of Gasco Energy, Inc.
(the "Company") on Form 10-K for the period ended December 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, W. King Grant, Chief Financial Officer of the Company, hereby certify, to my
knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ W. King Grant
Name: W. King Grant
Date: March 25, 2004
2
<PAGE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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