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 June 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 June 30, 2006
Common Stock, $.001 par value 5,152,148
TABLE OF CONTENTS
Heading Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................... 1
Consolidated Balance Sheets - June 30, 2006 (Unaudited) and
December 31, 2005................................................................ 2
Consolidated Statements of Operations - three months and six months ended
June 30, 2006 and 2005 (Unaudited).............................................. 4
Consolidated Statements of Stockholders' Equity (Deficit).......................... 5
Consolidated Statements of Cash Flows - six months ended
June 30, 2006 and 2005 (Unaudited).............................................. 6
Notes to Unaudited Condensed Consolidated Financial Statements .................... 8
Item 2. Management's Discussion and Analysis or Plan of Operations.............................. 14
Item 3. Controls and Procedures................................................................. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 19
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....................................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................ 20
Signatures.............................................................................. 20
PART I
Item 1. Financial Statements
The accompanying consolidated balance sheets of Trans Energy, Inc. at June
30, 2006 (unaudited) and December 31, 2005, related unaudited consolidated
statements of operations, stockholders' equity (deficit) and consolidated
statements of cash flows for the six months ended June 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 six months ended June 30, 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
June 30, 2006 and December 31, 2005
-1-
Microsoft Word 11.0.6568;
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
June 30, December 31,
2006 2005
------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT ASSETS
Cash $ 487,515 $ 439,258
Accounts receivable, net 861,209 1,396,696
Receivable from sale of assets 210,000 --
Prepaid expenses 13,461 9,617
----------- -----------
Total Current Assets 1,572,185 1,845,571
----------- -----------
PROPERTY AND EQUIPMENT, NET 2,277,957 2,160,256
----------- -----------
OTHER ASSETS
Assets of discontinued operations -- 6,672,688
Deposits 1,223 4,914
Investments 475,453 175,000
Life insurance, cash surrender value 75,995 75,995
----------- -----------
Total Other Assets 552,671 6,928,597
----------- -----------
TOTAL ASSETS $ 4,402,813 $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)
June 30, December 31,
2006 2005
----------------------------------------------------------------------------------------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable - trade $ 1,458,918 $ 2,355,429
Related party payables (Note 6) 750,153 855,502
Accrued expenses 709,140 860,368
Judgments payable (Note 3) 114,158 77,767
Debentures payable 50,000 50,000
Notes payable - current portion 659,205 659,205
------------ ------------
Total Current Liabilities 3,741,574 4,858,271
------------ ------------
LONG-TERM LIABILITIES
Notes payable 840,085 6,872
Liabilities of discontinued operations -- 4,772,812
Asset retirement obligation 709,218 799,393
------------ ------------
Total Long-Term Liabilities 1,549,303 5,579,077
------------ ------------
Total Liabilities 5,290,877 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; 5,152,148 shares issued and 4,386,104
and 4,707,515 shares outstanding, respectively 5,152 4,952
Capital in excess of par value 30,974,598 30,856,798
Treasury stock (755,737) (286,467)
Accumulated deficit (31,112,077) (30,078,207)
------------ ------------
Total Stockholders' Equity (Deficit) (888,064) 497,076
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 4,402,813 $ 10,934,424
============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-3-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUES $ 812,107 $ 861,468 2,524,414 1,613,688
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of oil and gas 601,619 779,094 2,122,011 1,403,342
Salaries and wages 97,747 48,779 179,405 116,679
Depreciation, depletion and
amortization 54,267 111,830 194,017 215,686
Selling, general and
administrative 298,496 239,886 410,436 347,165
----------- ----------- ----------- -----------
Total Costs and Expenses 1,052,129 1,179,589 2,905,869 2,082,872
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (240,022) (318,121) (381,455) (469,184)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on extinguishment
of debt 5,208 -- 5,208 2,306
Net gain (loss) on sale of assets 704,116 4,674 704,116 (7,865)
Other income 85,087 5,581 85,087 5,581
Interest expense (40,429) (26,097) (71,799) (53,272)
----------- ----------- ----------- -----------
Total Other Income
(Expense) 753,982 (15,842) 722,612 (53,250)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS
BEFORE INCOME TAXES 13,960 (333,963) 341,157 (522,434)
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE
DISCONTINUED OPERATIONS 513,960 (333,963) 341,157 (522,434)
GAIN (LOSS) FROM DISCONTINUED
OPERATIONS -- (191,894) 183,775 (69,911)
GAIN (LOSS) ON DISPOSAL OF
DISCONTINUED OPERATIONS 307,279 -- (1,558,802) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 821,239 $ (525,857) $(1,033,870) $ (592,345)
=========== =========== =========== ===========
BASIC INCOME (LOSS) PER SHARE
Continuing Operations $ 0.12 $ (0.07) $ 0.07 $ (0.11)
Discontinued Operations 0.07 (0.04) (0.30) (0.02)
----------- ----------- ----------- -----------
$ 0.19 $ (0.11) $ (0.23) $ (0.13)
=========== =========== =========== ===========
DILUTED INCOME PER SHARE
Continuing Operations $ 0.11 $ 0.07
Discontinued Operations 0.06 (0.27)
----------- -----------
$ 0.17 N/A $ (0.20) N/A
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 4,328,961 4,815,098 4,514,311 4,599,293
=========== =========== =========== ===========
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 4,882,285 N/A 5,067,635 N/A
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-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) --
Shares issued for services (unaudited) -- -- 200,000 200 117,800 -- --
Net loss for the six months ended
June 30, 2006 (unaudited) -- -- -- -- -- -- (1,033,870)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2006 (unaudited) -- $ -- 5,152,148 $ 5,152 $ 30,974,598 $ (755,737) $(31,112,077)
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-5-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,033,870) $ (592,345)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion, amortization and accretion 244,539 720,778
Net gain from sale of assets (704,116) (3,254)
(Gain) loss on extinguishment of debt -- (2,306)
Discontinued operations 1,638,214 --
Contributed services -- 75,000
Shares issued for services 118,000 --
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable 535,487 (170,461)
(Increase) in prepaid expenses (3,844) (74,326)
(Increase) in other assets (296,762) (87,182)
(Decrease) increase in accounts payable and
current liabilities (896,511) (58,018)
Increase (Decrease) in accrued expenses (114,837) 126,449
----------- -----------
Net Cash Provided (Used) by Operating Activities (513,700) (65,665)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 726,824 15,260
Cash acquired from subsidiary -- 408,333
Expenditures for property and equipment (685,123) (477,545)
----------- -----------
Net Cash Provided (Used) by Investing Activities 41,701 (53,952)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 683,866 --
Payments on related party payables (105,349) (6,640)
Proceeds from related party notes -- 637,088
Principal payments on notes payable (58,261) (255,864)
----------- -----------
Net Cash Provided (Used) by Financing Activities 520,256 374,584
----------- -----------
NET INCREASE IN CASH 48,257 254,967
CASH, BEGINNING OF PERIOD 439,258 79,662
----------- -----------
CASH, END OF PERIOD $ 487,515 $ 334,629
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-6-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Six Months Ended
June 30,
2006 2005
--------------------------------------------------------------------------- -----------
CASH PAID FOR:
Interest $ 44,886 $ --
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
Contributed services $ -- $ 75,000
Investments purchased by the assumption of debt $ 207,608 $ --
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-7-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 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 six months ended June
30, 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 June 30, 2006 of $ 31,112,077, and has a working
capital deficit at June 30, 2006 of $2,169,389. 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 June 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 10.00% per annum. At
June 30, 2006, we had accrued a balance including interest of $93,471
as a current liability. We are currently in default on this judgment.
-8-
E>
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2006 and December 31, 2005
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
Six Months
Ended Oil and Gas Pipeline Well
June 30, Sales Transmission Servicing
-------------------------------------------------------------- ---------------- ------------ ------------------
(Discontinued)
Oil and gas revenue 2006 $ 522,507 $ 2,001,907 $ --
2005 509,770 1,103,917 4,275,514
Operating income (loss)
applicable to industry
segment 2006 (265,371) (116,084) --
2005 (404,307) (64,875) 70,122
General corporate expenses
not allocated to industry
segments 2006 -- -- --
2005 -- -- --
Interest expense 2006 (57,779) (14,020) --
2005 (35,283) (17,990) (142,747)
Other income (expenses) 2006 788,585 5,826 --
2005 (3,288) 3,309 2,714
Assets
(net of intercompany accounts) 2006 3,411,953 990,860 --
2005 3,613,560 588,788 7,708,573
-9-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2006 and December 31, 2005
NOTE 4 - BUSINESS SEGMENTS (continued)
Depreciation and amortization 2006 157,313 36,704 --
2005 178,805 36,881 505,092
Property and equipment
Acquisitions (Deletions) 2006 (2,457,388) -- --
2005 (17,651) -- 477,545
NOTE 5 - SIGNIFICANT EVENTS
Sale of Arvilla
---------------
Effective March 31, 2006, the Company 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. Part of the reason for the sale was the inability of the
Company's board of directors to agree on the direction of the Company
with Arvilla, Inc. ("Arvilla') as a significant subsidiary. Arvilla
holds all of the outstanding membership interests of Arvilla Oilfield
Services, LLC, a West Virginia limited liability company ("AOS').
Under the terms of the definitive agreement, Arvilla was sold to
Clarence E. Smith and Rebecca L. Smith, both former directors of the
Company.
Arvilla provides well servicing, work over 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.
The Company 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, the Company 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 the Company.
-10-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2006 and December 31, 2005
NOTE 5 - SIGNIFICANT EVENTS (Continued)
Sale of Arvilla (Continued)
---------------------------
As a result of consummating the definitive agreement, Clarence and
Rebecca Smith returned to the Company 521,411 shares of their Trans
Energy common stock. The Smiths have also conveyed to the Company all
of their interest in and to five oil and gas wells located in Tyler
County, West Virginia subject to loan of $207,608, assumed by the
Company. Assignments for the wells originally was to be held in escrow
pending satisfaction by the Company 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 the Company 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.
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 the Company and Arvilla, Inc. Clarence and
Rebecca Smith have also agreed not to sell an amount of their
remaining Company 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 the Company's 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 the Company 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, of which $210,000 remains unpaid as of June
30, 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
June 30, 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 Six Months Ended
June 30,
------------------------------
2006 2005
-------------- -------------
Net loss:
As reported $ (1,033,870) $ (592,345)
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 $ (1,033,870) $ (1,429,761)
============== =============
Basic loss per share:
As reported $ (0.23) $ (0.13)
Pro forma $ (0.23) $ (0.31)
-12-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2006 and December 31, 2005
NOTE 7 - EQUITY (continued)
Stock Warrants - A summary of the status of the warrants granted
under various agreements at June 30, 2006 and 2005, and changes
during the years then ended is presented below:
June 30, 2006 June 30, 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 -- $ -- 53,324 $ 1.95
============ ============ =========== ============
Weighted average fair value of options
granted during the year -- $ -- 553,324 $ 1.95
A summary of the status of the warrants granted under the various
agreements at June 30, 2006, are presented in the table below:
Warrants Outstanding Warrants 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 8.50 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. 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.
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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 six and three month periods ended June 30, 2006 and 2005. It
should be noted that percentages discussed throughout this analysis are stated
on an approximate basis.
Six Months Ended
June 30,
--------------------
2006 2005
---- ----
(Unaudited)
Total revenues.................................. 100 % 100 %
Total costs and expenses........................ 115 129
Loss from operations............................ (15) (29)
Other income (expense).......................... 28 (3)
Discontinued operations......................... (54) (4)
Net loss........................................ (41) (36)
Three Months Ended
June 30,
--------------------
2006 2005
---- ----
(Unaudited)
Total revenues.................................. 100 % 100 %
Total costs and expenses........................ 130 137
Loss from operations............................ (30) (37)
Other income (expense).......................... 93 (2)
Discontinued operations......................... 38 (22)
Net loss........................................ 101 (61)
----------------------
Total revenues from continuing operations for the three months ("second
quarter") ended June 30, 2006 decreased 6% compared to the second 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 second quarter of 2006 also
decreased by $177,475 or 23% from the comparable 2005 period, because more of
the gas used to fulfill our distribution contracts came from our own wells.
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Salaries and wages increased 100% for the second quarter of 2006 compared
to the 2005 period, due to the hiring of the Company's CEO and raises given to
the other members of management. Depreciation, depletion and amortization and
accretion expense decreased 51% due to the sale of the Cobham and Wyoming
mineral properties. Selling, general and administrative expenses increased
$58,610 or 24% in the second quarter of 2006 from the same quarter of 2005 due
to a signing bonus given to the Company's new president and CEO in shares of the
Company's common stock valued at $118,000.
Our loss from operations for the second quarter of 2006 was $240,022
compared to a loss of $318,121 for the second quarter of 2005. The improvement
is related to the decrease in the cost of oil and gas sold. We realized total
other income of $753,982 during the second quarter of 2006 compared to total
other expenses of $15,842 for the same quarter of 2005. The second quarter of
2006 results were due to a gain on the sale of the Wyoming properties of
$704,116 offset by interest expense of $40,429 compared to interest expense of
$26,097 in 2005.
We recorded a gain of $307,279 on the disposition of Arvilla in the second
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 income for the second quarter of 2006 was $821,239 compared to a
loss of $525,857 for the second 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 six months ("first half")
ended June 30, 2006 increased 56% compared to the first half 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 quarter of 2006 also increased by
$718,669 or 51% from the comparable 2005 period, because more of the gas used to
fulfill our distribution contracts came from our own wells.
Salaries and wages increased 54% for the first half of 2006 compared to the
2005 period, , due to the hiring of the Company's CEO and raises given to the
other members of management. Depreciation, depletion and amortization and
accretion expense decreased 10% due to the sale of the Cobham and Wyoming
mineral properties. Selling, general and administrative expenses increased
$63,271 or 18% in the first half of 2006 from the same period of 2005 due to a
signing bonus given to the Company's new president and CEO in shares of the
Company's common stock valued at $118,000.
Our loss from operations for the first half of 2006 was $381,455 compared
to a loss of $469,184 for the first half of 2005. The improvement is related to
the decrease in the cost of oil and gas sold as a percentage of sales. We
realized total other income of $722,612 during the first half of 2006 compared
to total other expenses of $53,250 for the same period of 2005. The first half
of 2006 results were due to a gain on the sale of the Wyoming properties of
$704,116 offset by interest expense of $71,799 compared to interest expense of
$53,272 in 2005.
We recorded a loss of $1,558,802 on the disposition of Arvilla in the first
half 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 half of 2006 was $1,033,870 compared to a loss
of $592,345 for the first half of 2005.
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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 June 30, 2006, we had a working capital
deficit of $2,169,389 compared to a deficit of $3,012,700 at December 31, 2005.
This 28% decrease in working capital deficit is primarily attributed to the sale
of the Wyoming properties in the first half of 2006.
During the first half of 2006, operating activities used net cash of
$513,700 compared to net cash used of $65,665 for the first half of 2005. These
results are primarily attributed to the reduction in accounts receivable offset
by a decrease in current liabilities.
Net cash provided by investing activities for the first half of 2006 was
$41,701. $685,123 of cash was used for the purchase of well equipment and the
drilling of wells and cash of $726,824 was received from the sale of wells,
compared to net cash used of $53,952 primarily from the acquisition of a
subsidiary during the first half of 2005 offset by $477,545 used in the purchase
of well equipment and the drilling of wells.
During the first half of 2006, we were provided net cash in financing
activities of $520,256 from the borrowings of notes payable compared to net cash
provided by related party notes payable of $637,088 in the first half 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 June 30, 2006, we had total assets of $4,402,813 and total
stockholders' deficit of $888,064, 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
June 30, 2006 and have a working capital deficit at June 30, 2006 of $2,169,389,
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.
Inflation
In the opinion of our management, inflation has not had a material effect
on our operations.
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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.
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,
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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 June 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 June 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
The 200,000 shares of common stock issued for services were valued at
$118,000, or $0.59 per share. 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our securities holders during the
second quarter ended June 30, 2006.
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Item 5. Other Information
The following reports were filed with the SEC on Form 8-K during the three
month period ended June 30, 2006.
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.
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: August 14, 2006 By /S/ JAMES K. ABCOUWER
---------------------------------------------
JAMES K. ABCOUWER
Chief Executive Officer and Director
Date: August 14, 2006 By /S/ WILLIAM F. WOODBURN
-------------------------------------------
WILLIAM F. WOODBURN
Chief Operating Officer,
Secretary / Treasurer and Director
(Principal Accounting Officer)
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