UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended September 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-23530
TRANS ENERGY, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 93-0997412
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
210 Second Street, P.O. Box 393, St. Marys, West Virginia 26170
(Address of principal executive offices)
Registrant's telephone no., including area code: (304) 684-7053
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined by Rule 12b-2) of the Exchange Act. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding as of September 30, 2006
----------------------------- ------------------------------------
Common Stock, $.001 par value 9,433,565
TABLE OF CONTENTS
Heading Page
------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................... 3
Consolidated Balance Sheets - September 30, 2006 (Unaudited) and
December 31, 2005..................................................................... 4
Consolidated Statements of Operations - three months and nine months ended
September 30, 2006 and 2005 (Unaudited).............................................. 6
Consolidated Statements of Stockholders' Equity (Deficit)............................... 7
Consolidated Statements of Cash Flows - nine months ended
September 30, 2006 and 2005 (Unaudited).............................................. 9
Notes to Unaudited Condensed Consolidated Financial Statements ......................... 11
Item 2. Management's Discussion and Analysis or Plan of Operations.............................. 16
Item 3. Controls and Procedures................................................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................. 21
Item 3. Defaults Upon Senior Securities......................................................... 21
Item 4. Submission of Matters to a Vote of Securities Holders................................... 21
Item 5. Other Information....................................................................... 21
Item 6. Exhibits and Reports on Form 8-K........................................................ 21
Signatures.............................................................................. 22
-2-
PART I
Item 1. Financial Statements
The accompanying consolidated balance sheets of Trans Energy, Inc. at
September 30, 2006 (unaudited) and December 31, 2005, related unaudited
consolidated statements of operations, stockholders' equity (deficit) and
consolidated statements of cash flows for the nine months ended September 30,
2006 and 2005, have been prepared by our management in conformity with
accounting principles generally accepted in the United States of America. In the
opinion of management, all adjustments considered necessary for a fair
presentation of the consolidated results of operations and consolidated
financial position have been included and all such adjustments are of a normal
recurring nature. Operating results for the nine months ended September 30,
2006, are not necessarily indicative of the results that can be expected for the
fiscal year ending December 31, 2006.
-3-
TRANS ENERGY, INC.
Consolidated Balance Sheets
ASSETS
September 30, December 31,
2006 2005
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash $ 386,346 $ 439,258
Accounts receivable, net of allowance for doubtful accounts
of $15,621 377,264 396,696
Accounts receivable - related parties 418,000 1,000,000
Prepaid expenses 6,794 9,617
----------- -----------
Total Current Assets 1,188,404 1,845,571
----------- -----------
Oil and gas properties, using successful efforts accounting
and property and equipment, net of accumulated depletion
and depreciation of $1,576,765 and $ 4,101,429 5,636,913 2,160,256
----------- -----------
OTHER ASSETS
Assets of discontinued operations -- 6,672,688
Loan fees, net of accumulated amortization of $106, 7,433 --
Deposits 2,873 4,914
Investments 627,628 175,000
Life insurance, cash surrender value 75,995 75,995
----------- -----------
Total Other Assets 713,929 6,928,597
----------- -----------
TOTAL ASSETS $ 7,539,246 $10,934,424
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-4-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2006 2005
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable - trade $ 1,132,030 $ 2,355,429
Accounts payable - related parties 211,404 --
Accrued expenses 546,758 860,368
Judgments payable 116,102 77,767
Debentures payable 50,000 50,000
Short term debt - related parties 552,431 855,502
Notes payable - current portion 712,377 659,205
------------ ------------
Total Current Liabilities 3,321,101 4,858,271
------------ ------------
LONG-TERM LIABILITIES
Notes payable 1,835,616 6,872
Liabilities of discontinued operations -- 4,772,812
Asset retirement obligation 1,677,888 799,393
------------ ------------
Total Long-Term Liabilities 3,513,504 5,579,077
------------ ------------
Total Liabilities 6,834,606 10,437,348
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock; 10,000,000 shares authorized at $0.001 par
value; -0- shares issued and outstanding -- --
Common stock; 500,000,000 shares authorized at $0.001 par
value; 9,433,565 and 4,952,148 shares issued and
9,433,565 and 4,707,515 shares outstanding, respectively 9,433 4,952
Capital in excess of par value 33,365,976 30,856,798
Treasury stock -- (286,467)
Accumulated deficit (32,670,769) (30,078,207)
------------ ------------
Total Stockholders' Equity 704,640 497,076
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,539,246 $ 10,934,424
============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-5-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUES $ 921,062 $ 1,100,355 $ 3,445,587 $ 2,714,043
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of oil and gas 660,170 918,826 2,780,681 2,322,168
Depreciation, depletion and
amortization 50,426 99,839 244,444 315,525
Selling, general and
administrative 1,885,604 276,952 2,476,947 740,796
----------- ----------- ----------- -----------
Total Costs and Expenses 2,596,200 1,295,617 5,502,072 3,378,489
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,675,138) (195,262) (2,056,485) (664,446)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on extinguishment
of debt 11,864 5,000 17,072 7,306
Net gain (loss) on sale of assets 14,900 (38,725) 719,016 (46,590)
Other income (expense) (21,027) 1,264 63,949 6,845
Interest expense (73,409) (31,884) (145,599) (85,156)
----------- ----------- ----------- -----------
Total Other Income
(Expense) (67,672) (64,345) 654,438 (117,595)
----------- ----------- ----------- -----------
NET LOSS BEFORE
DISCONTINUED OPERATIONS (1,742,810) (259,607) (1,402,047) (782,041)
GAIN (LOSS) FROM DISCONTINUED
OPERATIONS -- (175,295) 183,775 (245,206)
GAIN (LOSS) ON DISPOSAL OF
DISCONTINUED OPERATIONS -- -- (1,374,290) --
----------- ----------- ----------- -----------
NET LOSS $(1,742,810) $ (434,902) $(2,592,562) $(1,027,247)
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS
PER SHARE
Continuing Operations (0.25) (0.07) (0.26) (0.17)
Discontinued Operations 0.00 (0.04) (0.22) (0.05)
----------- ----------- ----------- -----------
$ (0.25) $ (0.11) $ (0.48) $ (0.22)
=========== =========== =========== ===========
BASIC AND DILUTED WEIGHTED
AVERAGE SHARES
OUTSTANDING 6,938,208 4,815,098 5,405,293 4,692,358
=========== =========== =========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-6-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
Nine months ended September 30, 2006
(unaudited)
Preferred Stock Common Stock
------------------------------------------------------------ -------------------------
Treasury
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance, December 31, 2005 -- $ -- 4,952,148 $ 4,952
Shares received for discontinued
operations on March 31, 2006
(unaudited) -- -- -- --
hares issued for services
(unaudited) -- -- 2,790,000 2,790
Shares issued for debt -- -- 1,119,961 1,120
Shares issued for cash -- -- 337,500 337
Shares issued for properties -- -- 1,000,000 1,000
Value of options granted -- -- -- --
Treasury stock cancelled -- -- (766,044) (766)
Net loss for the nine months ended
September 30, 2006 (unaudited) -- -- -- --
------------ ------------ ------------ ------------
Balance, June 30, 2006 (unaudited) -- $ -- 9,433,565 $ 9,433
============ ============ ============ ============
(continued)
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-7-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
Nine months ended September 30, 2006
(unaudited)
Capital In
Excess of
Accumulated Treasury Accumulated Total
Par Value Stock Deficit
------------ ------------ ------------ ------------
Balance, December 31, 2005 $ 30,856,798 $ (286,467) $(30,078,207) $ 497,076
Shares received for discontinued
operations on March 31, 2006
(unaudited) -- (469,270) -- (469,270)
Shares issued for services
(unaudited) 1,669,210 -- -- 1,672,000
Shares issued for debt 608,015 -- -- 609,135
Shares issued for cash 269,663 -- -- 270,000
Shares issued for properties 679,000 -- -- 680,000
Value of options granted 38,261 -- -- 38,261
Treasury stock cancelled (754,971) 756,737 -- --
Net loss for the nine months ended
September 30, 2006 (unaudited) -- -- (2,592,562) (2,592,562)
------------ ------------ ------------ ------------
Balance, June 30, 2006 (unaudited) $ 33,365,976 $ -- $(32,670,769) $ 704,640
============ ============ ============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-8-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,592,562) $(1,027,247)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion, amortization and accretion 244,444 1,164,307
Net (gain) loss from sale of assets (719,016) 160,275
(Gain) loss on extinguishment of debt -- --
Discontinued operations 1,374,290 --
Contributed services -- 175,000
Gain on settlement of debt (17,072) --
Shares issued for services 1,672,000 --
Value of options and beneficial conversion feature 38,261 --
Changes in operating assets and liabilities:
Accounts receivable 601,432 (564,511)
Prepaid expenses 2,823 (57,243)
Other assets (5,392) (1,400)
Accounts payable (1,188,835) 384,160
Accrued expenses (149,987) 53,123
----------- -----------
Net cash provided by (used in) operating activities (739,614) 286,464
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in joint venture (245,019) (236,791)
Proceeds from sale of assets 1,003,000 76,575
Cash acquired from subsidiary -- 408,333
Expenditures for property and equipment (2,446,590) (556,155)
----------- -----------
Net cash used in investing activities (1,688,609) (308,038)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 270,000 --
Proceeds from notes payable 1,929,671 --
Payments on related party payables (18,997) (67,765)
Proceeds from related party notes 450,000 637,088
Principal payments on notes payable (255,362) (388,401)
----------- -----------
Net cash provided by financing activities 2,375,312 180,922
----------- -----------
NET CHANGE IN CASH (52,911) 159,348
CASH, BEGINNING OF PERIOD 439,258 79,662
----------- -----------
CASH, END OF PERIOD $ 386,346 $ 239,010
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-9-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Nine Months Ended
September 30,
2006 2005
----------- -----------
CASH PAID FOR:
Interest $ 102,224 $ --
Income taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES:
Common stock issued for debt relief $ 609,135 $ 305,000
Common stock issued for the net assets
over liabilities in the purchase
of Arvilla Inc. and subsidiary $ -- $2,370,048
Contributed services $ -- $ 175,000
Investments purchased by the assumption of debt $ 207,608 $ --
Property acquired for common stock $ 680,000 $ --
Treasury stock cancelled $ 755,737 $ --
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-10-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2006 and December 31, 2005
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Trans Energy, Inc. pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted in accordance with such
rules and regulations. The information furnished in the interim condensed
consolidated financial statements includes normal recurring adjustments and
reflects all adjustments, which, in the opinion of management, are
necessary for a fair presentation of such financial statements. Although
management believes the disclosures and information presented are adequate
to make the information not misleading, it is suggested that these interim
condensed consolidated financial statements be read in conjunction with
Trans Energy's most recent audited financial statements and notes thereto
included in its December 31, 2005 Annual Report on Form 10-KSB. Operating
results for the nine months ended September 30, 2006 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2006.
NOTE 2 - GOING CONCERN
Trans Energy's condensed consolidated financial statements are prepared
using accounting principles generally accepted in the United States of
America applicable to a going concern which contemplates the realization of
assets and liquidation of liabilities in the normal course of business.
Trans Energy has incurred cumulative operating losses through September 30,
2006 of $32,670,769, and has a working capital deficit at September 30,
2006 of $2,132,697. Revenues have not been sufficient to cover its
operating costs and to allow it to continue as a going concern. The
potential proceeds from the sale of common stock, sale of drilling
programs, and other contemplated debt and equity financing, and increases
in operating revenues from new development and business acquisitions would
enable Trans Energy to continue as a going concern. There can be no
assurance that Trans Energy can or will be able to complete any debt or
equity financing. Trans Energy's consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
NOTE 3 - CONTINGENCIES AND COMMITTMENTS
On July 28, 1999 Core Laboratories, Inc. obtained a judgment against us for
non-payment of an account payable. The judgment calls for monthly payments
of $351 and is bearing interest at 10.00% per annum. At September 30, 2006
we had accrued a balance including interest of $21,204 as a current
liability. We are currently in default on this judgment.
On July 1, 1998, RR Donnelly obtained a judgment against us for non-payment
of accounts payable. The judgment calls for monthly payments of $3,244 and
is bearing interest at 10.00% per annum. At September 30, 2006, we had
accrued a balance including interest of $94,898 as a current liability. We
are currently in default on this judgment.
We may be engaged in various other lawsuits and claims, either as plaintiff
or defendant, in the normal course of business. In the opinion of
management, based upon advice of counsel, the ultimate outcome of these
lawsuits will not have a material impact on our financial position or
results of operations.
-11-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2006 and December 31, 2005
NOTE 4 - SIGNIFICANT EVENTS
Sale of Arvilla
Effective March 31, 2006, Trans Energy finalized the agreement to sell its
well servicing and maintenance business in exchange for shares of Trans
Energy common stock, certain natural gas properties and other
considerations, which agreement was initially entered into on January 3,
2006. Under the terms of the definitive agreement, 100% of Trans Energy's
wholly owned subsidiary, Arvilla, Inc. was sold to several of its
directors.
Trans Energy originally acquired Arvilla, Inc. from those directors on
January 31, 2005 through a merger of our subsidiary, As consideration,
Trans Energy issued 1,185,024 shares of its common stock.
As a result of consummating the definitive agreement, the directors
returned to Trans Energy 521,411 shares of Trans Energy's common stock and
all of their interest in and to five oil and gas wells located in Tyler
County, West Virginia.
Sale of Wyoming Wells and Properties
In April 2006, Trans Energy finalized a definitive Agreement for Sale of
Oil and Gas Properties related to the sale of certain wells, overriding
royalties and undeveloped acreage located in Campbell County, Wyoming. The
gross sales price for the properties is $1,003,000.
Purchase of West Virginia Wells
In August 2006, Trans Energy purchased various oil and gas wells and
interests in West Virginia for 1,000,000 shares of its common stock and
cash of $600,000.
Employee Stock Bonuses
In April and August 2006, Trans Energy issued 2,790,000 shares of its
common stock to its officers and directors as bonuses for entering into
employment agreements.
Debt Settled for Common Stock
In August 2006, Trans Energy issued 1,052,693 shares of its common stock as
settlement for debts owed to its officers, directors and attorney.
-12-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2006 and December 31, 2005
NOTE 5 -RELATED PARTIES
Marketing Agreement - Sancho
Natural gas delivered through Trans Energy's pipeline network is sold
either to Sancho Oil and Gas Corporation ("Sancho"); a company controlled
by the Vice President of Trans Energy, to Dominion Gas, a local utility, on
an on-going basis at a variable price per month per Mcf.
Under its contract with Sancho, Trans Energy has the right to sell natural
gas subject to the terms and conditions of a 20-year contract, as amended,
that Sancho entered into with Dominion Gas in 1988. This agreement is a
flexible volume supply agreement whereby Trans Energy receives the full
price which Sancho charges the end user less a $0.05 per Mcf marketing fee
paid to Sancho.
Certain officers and directors of Trans Energy have personally guaranteed
specific notes payable.
NOTE 6 - EQUITY
On January 1, 2006, Trans Energy adopted SFAS No. 123(R), "Share-Based
Payment" ("SFAS 123(R)"). This replaced SFAS No. 123 and supersedes APB
Opinion No. 25. SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The pro forma disclosures
previously permitted under SFAS 123 are no longer an alternative to
financial statement recognition. Trans Energy adopted SFAS 123(R) using the
modified prospective method which requires the application of the
accounting standard as of January 1, 2006. The consolidated financial
statements as of and for the quarter ended September 30, 2006 reflect the
impact of adopting SFAS 123(R). In accordance with the modified prospective
method, the consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of SFAS 123(R).
-13-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2006 and December 31, 2005
Prior to 2006, compensation was recorded for stock-based compensation
grants based on the excess of the estimated fair value of the common
stock on the measurement date over the exercise price. Had
compensation cost for our stock option plans been determined based on
the fair value at the grant date for awards in fiscal year 2006 and
2005 consistent with the provisions of SFAS No. 123, our approximate
net loss and loss per share would have been the pro forma amounts
indicated below:
For the Nine Months Ended
September 30,
2006 2005
------------- -----------
Net loss:
As reported $ (2,592,563) $(1,027,247)
Add back:
Stock-based employee compensation
expense determined under intrinsic value
based method for all awards, net of
related tax effects -- --
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related
tax effects -- (837,416)
------------- -----------
Pro forma $ (2,592,563) $(1,864,663)
============= ===========
Basic loss per share:
As reported $ (0.48)$ (0.22)
Pro forma $ (0.48)$ (0.40)
Stock Warrants - A summary of the status of the options and warrants
granted under various agreements at September 30, 2006 and 2005, and
changes during the years then ended is presented below:
September 30, 2006 September 30, 2005
----------------------- -----------------------
Weighted Weighted
Average Exercise Average Exercise
Shares Price Shares Price
--------- ----------- --------- -----------
Outstanding at beginning of period 553,324 $ 1.95 -- $ --
Granted 950,000 0.65 553,324 1.95
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
--------- ----------- --------- -----------
Outstanding at end of Period 1,503,324 $ 1.13 553,324 $ 1.95
========= =========== ========= ===========
Weighted average fair value of options
and warrants granted during the year 950,000 $ 0.65 553,324 $ 1.95
========= =========== ========= ===========
-14-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2006 and December 31, 2005
A summary of the status of the options and warrants granted under the
various agreements at September 30, 2006, are presented in the table
below:
Options and Warrants Outstanding Options and Warrants Exercisable
-------------------------------------------------------- ---------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ------------ ----------------- ---------------- ------------ ----------------
$0.65 950,000 3.00 years $ 0.65 300,000 $ 0.65
$1.95 553,324 8.25 years $ 1.95 553,324 $ 1.95
--------- ------------
1,503,324 853,324
========= ============
-15-
Item 2. Management's Discussion and Analysis or Plan of Operations
Recent Developments
Sale of Arvilla
On April 7, 2006, we finalized the agreement to sell our well servicing and
maintenance business in exchange for shares of Trans Energy common stock,
certain natural gas properties and other considerations, which agreement was
initially entered into on January 3, 2006. Part of the reason for the sale was
the inability of our board of directors to agree on the direction of Trans
Energy with Arvilla as a significant subsidiary. Under the terms of the
definitive agreement, our wholly owned subsidiary, Arvilla, Inc. was sold to
Clarence E. Smith and Rebecca L. Smith, both directors of Trans Energy,
including 100% of the outstanding membership interests of Arvilla Oilfield
Services, LLC, a West Virginia limited liability company ("AOS").
AOS provides well servicing, workover and related transportation services
to independent oil and natural gas producers in the northeast region of the
United States. It also performs ongoing maintenance and major overhauls
necessary to optimize the level of production from existing oil and natural gas
wells and provides certain ancillary services during the drilling and completion
of new wells. AOS offers its services in Ohio, Pennsylvania, New York, Virginia,
Kentucky and West Virginia and also owns a fleet of well service equipment.
We originally acquired AOS from Clarence and Rebecca Smith on January 31,
2005 through a merger of our subsidiary, Trans Energy Acquisitions, with and
into Arvilla, Inc., with Arvilla being the surviving entity. As consideration,
we issued 1,185,024 shares of our common stock, of which 1,042,821 shares were
issued to the Smiths, both of whom became directors of Trans Energy following
the acquisition. AOS's operations were previously conducted as Arrow Oilfield
Service Company, a division of Belden & Blake Corporation, a privately held
company engaged in the exploration, development and production of oil and
natural gas. In September 2004, the Smiths acquired Arrow Oilfield Services from
Belden & Blake and created Arvilla Oilfield Services, LLC as the operating
entity. Subsequently, the Smiths created Arvilla, Inc. that acquired all the
membership interests of Arvilla Oilfield Services in order to facilitate its
acquisition by Trans Energy.
As a result of consummating the definitive agreement, Clarence and Rebecca
Smith returned to us 521,411 shares of their Trans Energy common stock. The
Smiths have also conveyed to Trans Energy all of their interest in and to five
oil and gas wells located in Tyler County, West Virginia. Assignments for the
wells originally was to be held in escrow pending satisfaction by Trans Energy
of two promissory notes in the aggregate amount of $763,000 payable to AOS and
to Arvilla Pipeline Construction Co., Inc., a separate entity owned by Clarence
and Rebecca Smith. However, pursuant to the First Amendment to Definitive
Agreement, the parties agreed that the wells would be transferred at the closing
and we agreed to pay AOS $176,239 on or before April 30, 2006, and pay Arvilla
Pipeline $115,000 on or before April 30, 2006. To secure these payments by Trans
Energy, Clarence and Rebecca Smith held a lien on a certain Lyon Leasehold Deed
of Trust until the debt is satisfied. These notes have been paid and the lien
released. A further condition of the closing included the written consent for
the sale of AOS from certain banks and lenders having the right to call a loan
on the ownership transfer of AOS.
Upon execution of the definitive agreement, Clarence Smith resigned as our
Chief Executive Officer, but remained on our board of directors until the
closing. At the closing, both Clarence and Rebecca Smith resigned as directors
of Trans Energy and Arvilla, Inc. Clarence and Rebecca Smith have also agreed
not to sell an amount of their remaining Trans Energy common stock during each
calendar quarter on or after March 22, 2006, in an aggregate amount greater that
(i) 50,000 shares (adjusted for stock splits or stock dividends; or (ii) one
percent of the total outstanding shares of Trans Energy common stock on the date
of any such sale.
-16-
Finally, the closing of the transaction was expressly conditioned on the
receipt of a fairness opinion from a qualified independent party stating that
the transactions contemplated by the definitive agreement are fair to Trans
Energy and our stockholders. That opinion was issued and delivered to Trans
Energy on March 31, 2006.
Sale of Wyoming Wells and Properties
In April 2006, we finalized a definitive Agreement for Sale of Oil and Gas
Properties related to the sale of certain wells, overriding royalties and
undeveloped acreage located in Campbell County, Wyoming. The assets have been
sold at public auction through the Oil & Gas Asset Clearinghouse in Houston,
Texas. The gross sales price for the properties is $1,003,000.
The wells sold by us, all located in Campbell County, Wyoming, include the
Pinion Fee #1, Sagebrush Federal #1, Sagebrush Federal #2, Sagebrush Federal #3
(injector), Boley #31-36 Sandbar, State #1-36 Sandbar and State #2-36 Sandbar.
Also included in the sales were overriding royalties on two wells (Sagebrush
Federal #1 and Sagebrush Federal #2) and Tract TR4-B, and 2,530 undeveloped
acres, also located in Campbell County.
Purchase of West Virginia Wells
On August 14, 2006, we finalized an acquisition of certain assets of Cobham
Gas Industries, Inc. These assets included certain interest in 120 oil and gas
wells, both producing and non-producing, located in Marion County, West
Virginia, together with all of the equipment and other tangible personal
property physically attached to the wells, including all pipelines, rights of
way, easements, well head equipment, and approximately 2,500 acres of leasehold
estates; certain vehicles and other equipment; and a $50,000 reclamation bond
pursuant to which all of the Marion County wells are permitted.
Results of Operations
The following table sets forth the percentage relationship to total
revenues of principal items contained in our consolidated statements of
operations for the nine and three month periods ended September 30, 2006 and
2005. It should be noted that percentages discussed throughout this analysis are
stated on an approximate basis.
Nine Months Ended
September 30,
2006 2005
(Unaudited)
Total revenues ........................................... 100% 100%
Total costs and expenses ................................. 160 124
Loss from operations ..................................... (60) (24)
Other income (expense) ................................... 19 (4)
Discontinued operations .................................. (35) (10)
Net loss ................................................. (75) (38)
Three Months Ended
September 30,
2006 2005
(Unaudited)
Total revenues ........................................... 100% 100%
Total costs and expenses ................................. 282 118
Loss from operations ..................................... (182) (18)
Other income (expense) ................................... (7) (6)
Discontinued operations .................................. -- (16)
Net loss ................................................. (189) (40)
-17-
Total revenues from continuing operations for the three months ("third
quarter") ended September 30, 2006 decreased 19% compared to the third quarter
of 2005, primarily due to the sale of the Cobham properties in the fall of 2005
and the sale of the Wyoming properties in the spring of 2006 offset by an
increase in energy prices and the gas distribution contracts the Company entered
into in the summer of 2005. Our cost of oil and gas for the third quarter of
2006 also decreased by $260,256 or 28% from the comparable 2005 period, because
more of the gas used to fulfill our distribution contracts came from our own
wells.
Depreciation, depletion and amortization and accretion expense increased
136% due to the increased production from the Company's own wells. Selling,
general and administrative expenses increased $1,608,652 in the third quarter of
2006 from the same quarter of 2005 due to a signing bonus given to the Company's
officers and directors in shares of the Company's common stock valued at
$1,554,000.
Our loss from operations for the third quarter of 2006 was $1,675,138
compared to a loss of $195,262 for the third quarter of 2005. The increase is
related to the value of the shares issued as signing bonuses to its officers and
directors. We realized total other expenses of $67,672 during the third quarter
of 2006 compared to total other expenses of $64,345 for the same quarter of
2005. The third quarter of 2006 interest expense was $73,409 compared to
interest expense of $31,884 in 2005. The increase was the result of the
operating funds borrowed by the Company in 2006.
We recorded the disposition of Arvilla in the second quarter of 2006. Our
statement of operations for the third quarter of 2005 was restated to reflect
the operations of Arvilla as discontinued.
Our net loss for the third quarter of 2006 was $1,742,810 compared to a
loss of $434,902 for the third quarter of 2005.
For the remainder of fiscal year 2006, management expects selling, general
and administrative expenses to remain at approximately the same rate as the
first quarter of 2006. The cost of oil and gas produced is expected to fluctuate
with the amount produced and with prices of oil and gas, and management
anticipates that revenues are likely to increase during the remainder of 2006.
We do not expect to recognize a gain from the sale of properties during the
remainder of 2006.
Total revenues from continuing operations for the nine months ended
September 30, 2006 increased 27% compared to the first nine months of 2005,
primarily due to the gas distribution contracts the Company entered into in the
summer of 2005. Our cost of oil and gas for the first nine months of 2006 also
increased by $458,513 or 20% from the comparable 2005 period, because more of
the gas used to fulfill our distribution contracts came from our own wells.
Depreciation, depletion and amortization and accretion expense increased
36% due to increased production from Company owned wells. Selling, general and
administrative expenses increased $1,736,151 in the first nine months of 2006
from the same period of 2005 due to signing bonus given to the Company's
officers and directors in shares of the Company's common stock valued at
$1,672,000.
Our loss from operations for the first nine months of 2006 was $2,056,485
compared to a loss of $664,446 for the first nine months of 2005. The increase
is the result of the shares issued as signing bonuses. We realized total other
income of $654,438 during the first nine months of 2006 compared to total other
expenses of $117,595 for the same period of 2005. The first nine months of 2006
results were due to a gain on the sale of the Wyoming properties of $719,016
offset by interest expense of $145,599 compared to interest expense of $85,156
in 2005. The increase in interest expense is due to the additional debt incurred
in 2006.
We recorded a loss of $1,374,290 on the disposition of Arvilla in the first
nine months of 2006. Our statement of operations for the first nine months of
2005 was restated to reflect the operations of Arvilla as discontinued.
-18-
Our net loss for the first nine months of 2006 was $2,592,562 compared to a
loss of $1,027,247 for the same period of 2005.
For the remainder of fiscal year 2006, management expects selling, general
and administrative expenses to remain at approximately the same rate as the
first quarter of 2006. The cost of oil and gas produced is expected to fluctuate
with the amount produced and with prices of oil and gas, and management
anticipates that revenues are likely to increase during the remainder of 2006.
We do not expect to recognize a gain from the sale of properties during the
remainder of 2006.
Liquidity and Capital Resources
Historically, we have satisfied our working capital needs with operating
revenues and from borrowed funds. At September 30, 2006, we had a working
capital deficit of $2,132,697 compared to a deficit of $3,012,700 at December
31, 2005. This 29% decrease in working capital deficit is primarily attributed
to the sale of the Wyoming properties and the conversion of $609,135 of debt to
equity in 2006.
During the first nine months of 2006, operating activities used net cash of
$739,614 compared to net cash provided of $286,464 for the same period of 2005.
These results are primarily attributed to the reduction in accounts receivable
offset by a decrease in current liabilities.
Net cash used by investing activities for the first nine months of 2006 was
$1,688,609. $2,446,590 of cash was used for the purchase of well equipment and
the drilling of wells and cash of $1,003,000 was received from the sale of
wells, compared to net cash used of $308,038 in 2005. In 2005 cash of $556,155
was used in the purchase of well equipment and the drilling of wells and cash of
$408,333 was received from the acquisition of a subsidiary.
During the first nine months of 2006, we were provided net cash in
financing activities of $2,379,671 from the borrowings of notes payable compared
to net cash provided by related party notes payable of $637,088 in the same
period of 2005. Our cash was used to repay related and unrelated notes payable.
We anticipate meeting our working capital needs during the remainder of the
current fiscal year with revenues from our ongoing operations, particularly from
our wells in Wetzel County, West Virginia and new third party natural gas wells
drilled in West Virginia, which gas goes into our 6-inch pipeline. In the event
revenues are not sufficient to meet our working capital needs, we will explore
the possibility of additional funding from either the sale of debt or equity
securities. There can be no assurance such funding will be available to us or,
if available, it will be on acceptable or favorable terms.
As of September 30, 2006, we had total assets of $7,539,246 and total
stockholders' equity of $704,640, compared to total assets of $10,934,424 and
total stockholders' equity of $497,076 at December 31, 2005. The decrease was
due to the disposition of Arvilla and the Wyoming properties.
Because we have incurred significant cumulative operating losses through
September 30, 2006 and have a working capital deficit at September 30, 2006 of
$2,132,697, there exists substantial doubt about our ability to continue as a
going concern. Historically, our revenues have not been sufficient to cover
operating costs. However, we may potentially need to rely on proceeds from sale
of common stock, debt or equity financing, and increased operating revenues from
new developments to allow us to continue as a going concern. There can be no
assurance that we can or will be able to complete any debt or equity financing.
We included a footnote to our financial statements for the period ended
December 31, 2005 stating that because of our continued losses, working capital
deficit, and need for additional funding, there is substantial doubt as to
whether we can continue as a going concern.
-19-
Inflation
In the opinion of our management, inflation has not had a material effect
on our operations.
Forward-looking and Cautionary Statements
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements may relate to such
matters as anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services, anticipated
market performance and similar matters. When used in this report, the words
"may," "will," "expect," "anticipate," "continue," "estimate," "project,"
"intend," and similar expressions are intended to identify forward-looking
statements regarding events, conditions, and financial trends that may affect
our future plans of operations, business strategy, operating results, and
financial position. We caution readers that a variety of factors could cause our
actual results to differ materially from the anticipated results or other
matters expressed in forward-looking statements. These risks and uncertainties,
many of which are beyond our control, include:
* the sufficiency of existing capital resources and our ability to
raise additional capital to fund cash requirements for future
operations;
* uncertainties involved in the rate of growth of our business and
acceptance of any products or services;
* volatility of the stock market, particularly within the energy
sector; and
* general economic conditions.
Although we believe the expectations reflected in these forward-looking
statements are reasonable, such expectations cannot guarantee future results,
levels of activity, performance or achievements.
Item 3. Controls and Procedures
We maintain disclosure controls and procedures that are designed to be
effective in providing reasonable assurance that information required to be
disclosed in our reports under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC, and that such information is accumulated and
communicated to our management to allow timely decisions regarding required
disclosure.
In designing and evaluating disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute assurance of achieving the
desired objectives. Also, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake. The
design of any system of controls is based, in part, upon certain assumptions
about the likelihood of future events and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our chief executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
-20-
Based upon that evaluation, management concluded that our disclosure controls
and procedures are effective to cause the information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods prescribed by SEC,
and that such information is accumulated and communicated to management,
including our chief executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
There was no change in our internal controls over financial reporting
identified in connection with the requisite evaluation that occurred during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
Information concerning certain material pending legal proceedings to which
we are a party, or to which any of our property is subject, is set forth below:
On September 22, 2000, Tioga Lumber Company obtained a judgment of $43,300
plus interest in the Circuit Court of Pleasants County, West Virginia, against
Tyler Construction Company for breach of contract. On February 28, 2002, we
reached a negotiated payment schedule with Tioga and made the initial payment.
We believe that we have satisfied the balance owed to Tioga of $26,233.58,
although the judgment has not yet been released. We are proceeding to secure the
release of the judgment.
On July 28, 1999 Core Laboratories, Inc. obtained a judgment against us for
non-payment of an accounts payable. The judgment calls for monthly payments of
$351 and is bearing interest at 10% per annum. At September 30, 2006 we had
accrued a balance including interest of $20,687 as a current liability. We are
currently in default on this judgment.
On July 1, 1998, RR Donnelly obtained a judgment against us for non-payment
of accounts payable. The judgment calls for monthly payments of $3,244 and is
bearing interest at 10% per annum. At September 30, 2006, we had accrued a
balance including interest of $93,471 as a current liability. We are currently
in default on this judgment.
We may be engaged in various other lawsuits and claims, either as plaintiff
or defendant, in the normal course of business. In the opinion of management,
based upon advice of counsel, the ultimate outcome of these lawsuits will not
have a material impact on our financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Date No. of Shares Title At Reason
---- ------------- ----- -- ------
April 27, 2006 200,000 Common $ 0.59 Services
August 14, 2006 1,000,000 Common $ 0.68 Oil and Gas
Properties
August 15, 2006 2,590,000 Common $ 0.60 Services
August 15, 2006 1,052,693 Common $ 0.53 Debt
August 15, 2006 337,500 Common $ 0.80 Cash
August 29, 2006 67,268 Common $ 0.80 Services
The shares were issued in a private, non public isolated transaction pursuant
to exemption from registration provided by Section 4(2) of the Securities Act of
1933.
Item 3. Defaults Upon Senior Securities
None.
-21-
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our securities holders during the
third quarter ended September 30, 2006.
Item 5. Other Information
The following reports were filed with the SEC on Form 8-K during the three
month period ended September 30, 2006.
August 17, 2006 - reporting under Item 1.01 the acquisition of certain
wells, properties and equipment in Marion County, West Virginia.
September 13, 2006 - reporting under Item 4.01 the change in certifying
accountant from HJ & Associates, LLC to Malone & Bailey, PC.
Item 6. Exhibits
Exhibit 31.1 Certification of C.E.O. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Principal Accounting Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of C.E.O. Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Exhibit 32.2 Certification of Principal Accounting Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TRANS ENERGY, INC.
Date: November 20, 2006 By /S/ JAMES K. ABCOUWER
-----------------------------------------
JAMES K. ABCOUWER
Chief Executive Officer and Director
Date: November 20, 2006 By /S/ LISA A. CORBITT
-----------------------------------------
LISA A. CORBITT
Controller, Principal Financial Officer
(Principal Accounting Officer)
-22-