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 March 31, 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.
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(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 March 31, 2006
----------------------------- --------------------------------
Common Stock, $.001 par value 4,186,104
TABLE OF CONTENTS
Heading Page
------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................... 1
Consolidated Balance Sheets - March 31, 2006 (Unaudited) and
December 31, 2005................................................................ 2
Consolidated Statements of Operations - three months ended
March 31, 2006 and 2005 (Unaudited)............................................. 4
Consolidated Statements of Stockholders' Equity (Deficit).......................... 5
Consolidated Statements of Cash Flows - three months ended
March 31, 2006 and 2005 (Unaudited)............................................. 6
Notes to Unaudited Condensed Consolidated Financial Statements .................... 8
Item 2. Management's Discussion and Analysis or Plan of Operations.............................. 15
Item 3. Controls and Procedures................................................................. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................. 19
Item 3. Defaults Upon Senior Securities......................................................... 19
Item 4. Submission of Matters to a Vote of Securities Holders................................... 19
Item 5. Other Information....................................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................................ 19
Signatures.............................................................................. 20
PART I
Item 1. Financial Statements
The accompanying consolidated balance sheets of Trans Energy, Inc. at March
31, 2006 (unaudited) and December 31, 2005, related unaudited consolidated
statements of operations, stockholders' equity (deficit) and consolidate
statements of cash flows for the three months ended March 31, 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 quarter ended March 31, 2006, are not necessarily indicative of
the results that can be expected for the fiscal year ending December 31, 2006.
TRANS ENERGY, INC.
AND SUBSIDARIES
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 and December 31, 2005
-1-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
March 31, December 31,
2006 2005
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash $ 444,672 $ 439,258
Accounts receivable, net 1,227,151 1,396,696
Prepaid expenses 11,745 9,617
----------- -----------
Total Current Assets 1,683,568 1,845,571
----------- -----------
PROPERTY AND EQUIPMENT, NET 2,039,211 2,160,256
----------- -----------
OTHER ASSETS
Assets of discontinued operations -- 6,672,688
Deposits 1,223 4,914
Investments 175,000 175,000
Life insurance, cash surrender value 75,995 75,995
----------- -----------
Total Other Assets 252,218 6,928,597
----------- -----------
TOTAL ASSETS $ 3,974,997 $10,934,424
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-2-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, December 31,
2006 2005
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable - trade $ 2,482,964 $ 2,355,429
Related party payables (Note 6) 788,848 855,502
Accrued expenses 879,034 860,368
Judgments payable (Note 3) 77,767 77,767
Debentures payable 50,000 50,000
Notes payable - current portion 659,205 659,205
------------ ------------
Total Current Liabilities 4,937,818 4,858,271
------------ ------------
LONG-TERM LIABILITIES
Notes payable 60,543 6,872
Liabilities of discontinued operations -- 4,772,812
Asset retirement obligation 803,939 799,393
------------ ------------
Total Long-Term Liabilities 864,482 5,579,077
------------ ------------
Total Liabilities 5,802,300 10,437,348
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT) (Note 7)
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; 4,952,148 shares issued
and 4,186,104 and 4,707,515 shares outstanding, respectively 4,952 4,952
Capital in excess of par value 30,856,798 30,856,798
Treasury stock (755,737) (286,467)
Accumulated deficit (31,933,316) (30,078,207)
------------ ------------
Total Stockholders' Equity (Deficit) (1,827,303) 497,076
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 3,974,997 $ 10,934,424
============ ============
-3-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Other Comprehensive Loss
(Unaudited)
For the Three Months Ended
March 31,
2006 2005
----------- -----------
REVENUES $ 1,712,307 $ 752,220
----------- -----------
COSTS AND EXPENSES
Cost of oil and gas 1,520,392 624,248
Salaries and wages 81,658 67,900
Depreciation, depletion, amortization and accretion 139,750 103,856
Selling, general and administrative 111,940 107,279
----------- -----------
Total Costs and Expenses 1,853,740 903,283
----------- -----------
INCOME (LOSS) FROM OPERATIONS (141,433) (151,063)
----------- -----------
OTHER INCOME (EXPENSE)
Gain on disposal of asset -- 2,355
Loss on sale of asset -- (14,894)
Gain on settlement of debt -- 2,306
Interest expense (31,370) (27,175)
----------- -----------
Total Other Income (Expense) (31,370) (37,408)
----------- -----------
LOSS FROM OPERATIONS BEFORE INCOME TAXES (172,803) (188,471)
INCOME TAXES -- --
----------- -----------
NET LOSS BEFORE DISCONTINUED OPERATIONS (172,803) (188,471)
GAIN FROM DISCONTINUED OPERATIONS 183,776 121,983
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (1,866,082) --
----------- -----------
NET LOSS $(1,855,109) $ (66,488)
=========== ===========
BASIC (LOSS) GAIN PER SHARE
Continuing Operations $ (0.04) $ (0.04)
Discontinued Operations (0.40) 0.03
----------- -----------
$ (0.44) $ (0.01)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,707,515 4,381,090
=========== ===========
-4-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
Preferred Stock Common Stock Capital In
-------------------------- -------------------------- Excess of
Treasury Accumulated
Shares Amount Shares Amount Par Value Stock Deficit
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 -- $ -- 4,952,148 $ 4,952 $ 30,856,798 $ (286,467) $(30,078,207)
Shares received for discontinued
operations on March 31, 2006
(unaudited) -- -- -- -- -- (469,270) --
Net loss for the three months
endedMarch 31, 2006
(unaudited) -- -- -- -- -- -- (1,855,109)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2006
(unaudited) -- $ -- 4,952,148 $ 4,952 $ 30,856,798 $ (755,737) $(31,933,316)
============ ============ ============ ============ ============ ============ ============
-5-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,855,109) $ (66,488)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion, amortization and accretion 139,750 305,892
Net gain from sale of assets -- (2,355)
(Gain) loss on extinguishment of debt -- (2,306)
Discontinued operations 1,430,606 --
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable 169,545 (26,834)
(Increase) in prepaid expenses (2,128) (83,908)
(Increase) in other assets 3,691 (41,365)
(Decrease) increase in accounts payable and
current liabilities 127,535 (229,610)
Increase (Decrease) in accrued expenses 23,212 (48,579)
----------- -----------
Net Cash Provided (Used) by Operating Activities 37,102 (195,553)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets -- 1,260
Cash acquired from subsidiary -- 408,333
Expenditures for property and equipment (18,705) (198,443)
----------- -----------
Net Cash Provided (Used) by Investing Activities (18,705) 211,150
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 14,540 --
Payments on related party payables (5,431) (6,640)
Proceeds from related party notes -- 168,328
Principal payments on notes payable (22,092) (92,743)
----------- -----------
Net Cash Provided (Used) by Financing Activities (12,983) 68,945
----------- -----------
NET INCREASE IN CASH 5,414 84,542
CASH, BEGINNING OF PERIOD 439,258 79,662
----------- -----------
CASH, END OF PERIOD $ 444,672 $ 164,204
=========== ===========
-6-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Three Months Ended
March 31,
2006 2005
----------- -----------
CASH PAID FOR:
Interest $ 18,915 $ --
Income taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES:
Common stock issued for debt relief $ -- $ 50,000
Common stock issued for services to $ -- $ 92,500
be rendered
Common stock issued for the net assets
over liabilities in the purchase
of Arvilla Inc. and subsidiary $ -- $ 2,370,048
----------- -----------
-7-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2006 and December 31, 2005
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared by the Company 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 the
Company'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 three months ended March 31,
2006 is not necessarily indicative of the results that may be
expected for the year ending December 31, 2006.
NOTE 2 - GOING CONCERN
The Company'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. The Company has
incurred cumulative operating losses through March 31, 2006 of $
31,933,316, and has a working capital deficit at March 31, 2006 of
$3,254,250. 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 the Company to
continue as a going concern. There can be no assurance that the
Company can or will be able to complete any debt or equity
financing. The Company'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 accounts payable. The judgment
calls for monthly payments of $351 and is bearing interest at
10.00% per annum. At March 31, 2006 we had accrued a balance
including interest of $14,062 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
March 31, 2006, we had accrued a balance including interest of
$63,705 as a current liability. We are currently in default on
this judgment.
-8-
NOTE 3 - CONTINGENCIES AND COMMITMENTS (continued)
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.
NOTE 4 - BUSINESS SEGMENTS
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." Prior period amounts have
been restated to conform to the requirements of this statement.
The Company conducts its operations principally as oil and gas
sales with Trans Energy and Prima Oil and pipeline transmission
with Ritchie County and Tyler Construction.
Certain financial information concerning the Company's operations
in different industries is as follows:
For the
Three Months
Ended Oil and Gas Pipeline Well
March 31, Sales Transmission Servicing
------------ ---------- ------------- ------------
(Discontinued)
Oil and gas revenue 2006 $ 324,075 $ 1,388,232 $ --
2005 227,621 524,312 1,798,607
Operating income (loss)
applicable to industry
segment 2006 (117,160) (24,273) --
2005 (216,811) (11,201) 183,755
General corporate expenses
not allocated to industry
segments 2006 -- -- --
2005 -- -- --
Interest expense 2006 (31,003) (367) --
2005 (18,867) (8,198) (47,021)
Other income (expenses) 2006 -- -- --
2005 (12,601) (1,120) 3,488
Assets
(net of intercompany accounts) 2006 2,516,498 1,458,499 --
2005 3,485,768 551,992 7,662,130
-9-
NOTE 4 - BUSINESS SEGMENTS (continued)
Depreciation and amortization 2006 136,490 3,260 --
2005 85,415 18,441 202,036
Property and equipment
Acquisitions (Deletions) 2006 18,705 -- --
2005 (14,286) -- 575,936
NOTE 5 - SIGNIFICANT EVENTS
Sale of Arvilla
Effective March 31, 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. sold to Clarence E. Smith and Rebecca L. Smith, both
directors of Trans Energy, 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 June 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.
-10-
NOTE 5 - SIGNIFICANT EVENTS (Continued)
Sale of Arvilla (Continued)
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 will hold a
lien on a certain Lyon Leasehold Deed of Trust until the debt is
satisfied.
An additional term of the definitive agreement provided that
each of Clarence and Rebecca Smith received bonuses equal to
approximately $85,000. 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.
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, which is
expected to be paid to us when the sales close on or about May 12,
2006.
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,
Sagebrush Federal #2) and Tract TR4-B, and 2,530 undeveloped
acres, also located in Campbell County.
-11-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2006 and December 31, 2005
NOTE 6 - RELATED PARTIES
Marketing Agreement - Sancho
Natural gas delivered through the Company's pipeline network is
sold either to Sancho Oil and Gas Corporation ("Sancho"); a
company controlled by the Vice President of the Company, to
Dominion Gas, a local utility, on an on-going basis at a variable
price per month per Mcf.
Under its contract with Sancho, the Company 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 the Company 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 the Company have personally
guaranteed specific notes payable.
NOTE 7 - EQUITY
The Company has adopted the disclosure-only provisions of
Statement of Financial Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation cost has
been recognized in the financial statements for employees, except
when the exercise price is below the market price of the stock on
the date of grant. 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 Three Months Ended
March 31,
------------------------------
2006 2005
------------- -------------
Net loss:
As reported $ (1,855,109) $ (66,488)
Addback:
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 $ (1,855,109) $ (903,904)
============= =============
Basic loss per share:
As reported $ (0.44) $ (0.01)
Pro forma $ (0.44) $ (0.19)
-12-
NOTE 7 - EQUITY (continued)
Stock Warrants - A summary of the status of the warrants granted
under various agreements at March 31, 2006 and 2005, and changes
during the years then ended is presented below:
March 31, 2006 March 31, 2005
----------------------------- ---------------------------
Weighted Weighted
Average Exercise Average Exercise
Shares Price Shares Price
----------- --------------- ----------- -------------
Outstanding at beginning of period 553,324 $ 1.95 -- --
Granted -- -- 553,324 $ 1.95
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
----------- --------------- ----------- -------------
Outstanding at end of Period 553,324 $ 1.95 553,324 $ 1.95
=========== =============== =========== =============
Weighted average fair value of options
granted during the year -- $ -- 553,324 $ 1.95
=========== =============== =========== =============
Weighted average fair value of options
granted during the year -- $ -- 553,324 $ 1.95
=========== =============== =========== =============
Options Outstanding Options Exercisable
------------------------------------- -------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- ---------------- ---------------- -----------
$1.95 553,324 8.75 years $ 1.95 553,324 $1.95
------------ ----------------
553,324 553,324
============ ================
-13-
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 June 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 will hold a lien on a certain Lyon Leasehold
Deed of Trust until the debt is satisfied. These notes have been paid and the
lien released.
An additional term of the definitive agreement provided that each of
Clarence and Rebecca Smith received bonuses equal to approximately $85,000. 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.
-14-
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.
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 three month periods ended March 31, 2006 and 2005. It should
be noted that percentages discussed throughout this analysis are stated on an
approximate basis.
Three Months Ended
March 31,
--------------------
2006 2005
---- ----
(Unaudited)
Total revenues........................ 100 % 100 %
Total costs and expenses.............. 108 120
Loss from operations.................. (8) (20)
Other income (expense)................ (2) (5)
Discontinued operations............... (98) 16
Net loss.............................. (108) (9)
Total revenues from continuing operations for the three months ("first
quarter") ended March 31, 2006 increased 128% compared to the first quarter of
2005, primarily due to the 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 first quarter of 2006 also increased by $896,144 or 144% from the
comparable 2005 period, because of the gas purchased to fulfill our distribution
contracts.
Salaries and wages increased 20% for the first quarter of 2006 compared to
the 2005 period, due to raises given to our management employees. Depreciation,
depletion and amortization and accretion expense increased 35% due to an
impairment of mineral properties recorded in the first quarter of 2006 of
$40,697. Selling, general and administrative expenses increased $4,661 or 4% in
the first quarter of 2006 from the first quarter of 2005 due to raises given to
management.
Our loss from operations for the first quarter of 2006 was $141,433
compared to a loss of $151,063 for the first quarter of 2005. The improvement is
related to the increase in oil and gas prices. We realized total other expenses
of $31,370 during the first quarter of 2006 compared to total other expenses of
$37,408 for the first quarter of 2005. The first quarter of 2006 results were
due to interest expense of $31,370.
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We recorded a loss of $1,682,306 on the disposition of Arvilla in the first
quarter of 2006. Our statement of operations for the first quarter of 2005 was
restated to reflect the operations of Arvilla as discontinued.
Our net loss for the first quarter of 2006 was $1,855,109 compared to
$66,488 for the first 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.
Liquidity and Capital Resources
Historically, we have satisfied our working capital needs with operating
revenues and from borrowed funds. At March 31, 2006, we had a working capital
deficit of $3,254,250 compared to a deficit of $3,012,700 at December 31, 2005.
This 8% increase in working capital deficit is primarily attributed to the net
loss in the first quarter of 2006.
During the first quarter of 2006, operating activities provided net cash of
$37,102 compared to net cash used of $195,553 for the first quarter of 2005.
These results are primarily attributed to the reduction in accounts receivable
and an increase in current liabilities.
Net cash used by investing activities for the first quarter of 2006 was
$18,705 for the purchase of well equipment, compared to $211,150 provided
primarily from the acquisition of a subsidiary during the first quarter of 2005.
During the first quarter of 2006, we used net cash in financing activities
of $12,983 in the repayment of notes payable compared to net cash provided by
notes payable of $68,945 in the first quarter 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 March 31, 2006, we had total assets of $3,974,997 and total
stockholders' deficit of $1,827,303, 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.
Because we have incurred significant cumulative operating losses through
March 31, 2006 and have a working capital deficit at March 31, 2006 of
$3,254,250, 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.
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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
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 Securities
Exchange Act of 1934. Based upon that evaluation, our chief executive officer
and principal financial officer concluded that our disclosure controls and
procedures are effective to cause the material information required to be
disclosed by us in the reports that we file or submit under the Exchange Act to
be recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. There have been no significant changes
in our internal controls or in other factors which could significantly affect
internal controls subsequent to the date we carried out our evaluation.
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
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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 March 31, 2006 we had accrued
a balance including interest of $20,330 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 March 31, 2006, we had accrued a balance
including interest of $91,857 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
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our securities holders during the
first quarter ended March 31, 2006.
Item 5. Other Information
The following reports were filed with the SEC on Form 8-K during the three
month period ended March 31, 2006.
January 9, 2006 - reporting under Item 101 that Trans Energy has entered
into an agreement to sell certain assets, including Arvilla Oilfield
Services, LLC held by Arvilla, Inc., our wholly owned subsidiary, and
reporting under Item 502 the resignation of our Chief Executive Officer,
Clarence E. Smith, and the appointment of James K. Abcouwer as our new
President and Chief Executive Officer
April 13, 2006 - reporting under Item 2.01 the completion of the sale of
Arvilla, Inc. and reporting under Item 502 the resignations of two
directors, Clarence E. Smith and Rebecca L. Smith.
April 27, 2006 - reporting under Item 1.01 the sale of certain wells and
properties located in Campbell County Wyoming.
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.
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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: June 21, 2006 By /S/ JAMES K. ABCOUWER
-----------------------------------------------
JAMES K. ABCOUWER
Chief Executive Officer and Director
Date: June 21, 2006 By /S/ WILLIAM F. WOODBURN
---------------------------------------------
WILLIAM F. WOODBURN
Chief Operating Officer,
Secretary / Treasurer and Director
(Principal Accounting Officer)
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