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, 2005
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 [ ]
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, 2005
------------------------------ --------------------------------
Common Stock, $.001 par value 4,815,098
TABLE OF CONTENTS
Heading Page
------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................... 3
Consolidated Balance Sheets - March 31, 2005 (Unaudited) and
December 31, 2004................................................................ 4
Consolidated Statements of Operations - three months ended
March 31, 2005 and 2004 (Unaudited)............................................. 6
Consolidated Statements of Stockholders' Equity (Deficit).......................... 7
Consolidated Statements of Cash Flows - three months ended
March 31, 2005 and 2004 (Unaudited)............................................. 8
Notes to Unaudited Condensed Consolidated Financial Statements .................... 10
Item 2. Management's Discussion and Analysis and Results of Operations.......................... 18
Item 3. Controls and Procedures................................................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................. 21
Item 3. Defaults Upon Senior Securities......................................................... 21
Item 4. Submission of Matters to a Vote of Securities Holders................................... 21
Item 5. Other Information....................................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................................ 22
Signatures.............................................................................. 23
PART I
Item 1. Financial Statements
The accompanying consolidated balance sheet of Trans Energy, Inc. at March
31, 2005 (unaudited) and December 31, 2004, related unaudited statements of
operations, stockholders' equity (deficit) and cash flows for the consolidated
three months ended March 31, 2005 and 2004, 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,
2005, are not necessarily indicative of the results that can be expected for the
fiscal year ending December 31, 2005.
TRANS ENERGY, INC.
AND SUBSIDARIES
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 and December 31, 2004
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
March 31, December 31,
2005 2004
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash $ 164,204 $ 79,662
Accounts receivable, net 1,811,473 653,917
Other receivables 53,420 8,825
Prepaid expenses 85,131 1,223
----------- -----------
Total Current Assets 2,114,228 743,627
----------- -----------
PROPERTY AND EQUIPMENT, NET 8,665,050 3,372,599
----------- -----------
OTHER ASSETS
Bonds 50,159 50,159
Prepaid loan costs 19,810 --
Deposits 16,268 1,400
Customer lists 766,649 --
Life insurance, cash surrender value 67,726 66,326
----------- -----------
Total Other Assets 920,612 117,885
----------- -----------
TOTAL ASSETS $11,699,890 $ 4,234,111
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-3-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable - trade $ 1,506,521 $ 1,277,375
Related party payables (Note 6) 989,377 719,199
Accrued expenses 986,254 844,858
Judgments payable (Note 3) 70,379 70,379
Debentures payable 50,000 50,000
Notes payable - current portion 611,795 762,247
------------ ------------
Total Current Liabilities 4,214,326 3,724,058
------------ ------------
LONG-TERM LIABILITIES
Notes payable 4,555,876 108,190
Asset retirement obligation 1,749,315 1,571,749
------------ ------------
Total Long-Term Liabilities 6,305,191 1,679,939
------------ ------------
Total Liabilities 10,519,517 5,403,997
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT) (Note 7 and 8)
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; 4,815,098 and 3,555,074 shares issued
and outstanding, respectively 4,815 3,555
Capital in excess of par value 30,365,935 27,854,647
Comprehensive Income (3,301) --
Deferred expenses (92,500) --
Accumulated deficit (29,094,576) (29,028,088)
------------ ------------
Total Stockholders' Equity (Deficit) 1,180,373 (1,169,886)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 11,699,890 $ 4,234,111
============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-4-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Other Comprehensive Loss
(Unaudited)
For the Three Months Ended
March 31,
2005 2004
----------- -----------
REVENUES $ 2,550,540 $ 579,730
----------- -----------
COSTS AND EXPENSES
Cost of sales and oil and gas 1,714,950 619,521
Salaries and wages 67,900 94,915
Depreciation, depletion, amortization and accretion 305,892 341,188
Selling, general and administrative 443,967 35,875
----------- -----------
Total Costs and Expenses 2,532,709 1,091,499
----------- -----------
INCOME (LOSS) FROM OPERATIONS 17,831 (511,769)
----------- -----------
OTHER INCOME (EXPENSE)
Gain on disposal of asset 2,355 175,910
Loss on sale of asset (14,894) --
Gain on settlement of debt 2,306 (246,836)
Interest expense (74,086) (50,218)
----------- -----------
Total Other Income (Expense) (84,319) (121,144)
----------- -----------
LOSS FROM OPERATIONS BEFORE INCOME TAXES (66,488) (632,913)
INCOME TAXES -- --
----------- -----------
NET LOSS $ (66,488) $ (632,913)
OTHER COMPREHENSIVE LOSS
Changes due to hedging activities (3,301) --
----------- -----------
NET COMPREHENSIVE LOSS $ (69,789) $ (632,913)
=========== ===========
BASIC LOSS PER SHARE $ (0.02) $ (0.33)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,381,090 1,936,944
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-5-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
Preferred Stock Common Stock
-------------------------- ------------------------- Capital In
Comprehensive Accumulated Excess of Comprehensive Accumulated
Shares Amount Shares Amount Par Value Income Deficit
------------ ------------ ------------ ------------ ------------ ------------ -----------
Balance, December 31, 2004
(Restated) -- $ -- 3,555,074 $ 3,555 $ 27,854,647 $ -- $(29,028,088)
Common stock issued for
services to be rendered
(unaudited) -- -- 50,000 50 92,450 -- --
Common stock issued for
the conversion of debt
(unaudited) -- -- 25,000 25 49,975 -- --
Common stock issued for
purchase of Arvilla
(unaudited) -- -- 1,185,024 1,185 2,368,863 -- --
Changes due to hedging activities -- -- -- -- -- (3,301) --
Net loss for the three months ended
March 31, 2005 (unaudited) -- -- -- -- -- -- (66,488)
------------ ------------ ------------ ------------ ------------ ------------ -----------
Balance, March 31, 2005 (unaudited) -- $ -- 4,815,098 $ 4,815 $ 30,365,935 $ (3,301) $(29,094,576)
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-6-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (66,488) $ (632,913)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion, amortization and accretion 305,892 341,188
Net gain from sale of assets (2,355) (175,910)
(Gain) loss on extinguishment of debt (2,306) 246,836
Changes in operating assets and liabilities:
(Increase) in accounts receivable (26,834) (100,599)
(Increase) in prepaids (83,908) --
(Increase) in other current assets (41,365) --
(Decrease) increase in accounts payable and
current liabilities (229,610) 439,407
Decrease in accrued expenses (48,579) --
----------- -----------
Net Cash Provided by Operating Activities (195,553) 118,009
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 1,260 201,000
Cash acquired from subsidiary 408,333 --
Expenditures for property and equipment (198,443) --
----------- -----------
Net Cash Provided by Investing Activities 211,150 201,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank overdraft -- (49,120)
Payments on related party payables (6,640) (88,997)
Proceeds from related party notes 168,328 185,000
Principal payments on notes payable (92,743) (272,036)
----------- -----------
Net Cash Used by Financing Activities 68,945 (225,153)
----------- -----------
NET INCREASE IN CASH 84,542 93,856
CASH, BEGINNING OF PERIOD 79,662 183
----------- -----------
CASH, END OF PERIOD $ 164,204 $ 94,039
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-7-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Three Months Ended
March 31,
2005 2004
---------- ----------
CASH PAID FOR:
Interest $ -- $ 4,918
Income taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES:
Common stock issued for debt relief $ 50,000 $ 47,856
Common stock issued for services to $ 92,500 $ 26,000
be rendered
Common stock issued for the net assets
over liabilities in the purchase
of Arvilla Inc. and subsidiary $2,370,048 $ --
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-8-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2005 and December 31, 2004
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, 2004 Annual Report on Form 10-KSB. Operating
results for the three months ended March 31, 2005 is not necessarily
indicative of the results that may be expected for the year ending December
31, 2005.
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, 2005 of
$ 29,094,576, and has a working capital deficit at March 31, 2005 of
$2,100,098. The potential proceeds from the sale of common stock, other
contemplated debt and equity financing, and increases in operating revenues
from new development 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. If these are not successful,
management is committed to meeting the operational cash flow needs of the
Company.
NOTE 3 - CONTINGENCIES AND COMMITTMENTS
Core Laboratories, Inc.
On July 28, 1999, Core Laboratories, Inc. (Core) obtained a judgment
against the Company 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, 2005 the Company had accrued a balance including
interest of $13,587 which is included in judgments payable. The Company is
currently in default on this judgment.
RR Donnelly
On July 1, 1998, RR Donnelly (RR) obtained a judgment against the Company
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, 2005, the Company has accrued a balance including interest of $56,792
which is included in judgment payable as a current liability. The Company
is currently in default on this judgment.
-9-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2005 and December 31, 2004
NOTE 3 - CONTINGENCIES AND COMMITMENTS (continued)
Arvilla Oilfield Services is required under a certain loan agreement to
maintain specific financial ratios under covenants contained in the loan
agreement. At March 31, 2005 and December 31, 2004 Arvilla was in
compliance with those covenants.
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
--------- ----------- ----------- -----------
Oil and gas revenue 2005 $ 227,621 $ 524,312 $ 1,798,607
2004 55,356 524,374 --
Operating income (loss)
applicable to industry
segment 2005 (216,811) (11,201) 245,843
2004 (514,239) 2,470 --
General corporate expenses
not allocated to industry
segments 2005 -- -- --
2004 -- -- --
Interest expense 2005 (18,867) (8,198) (47,021)
2004 (45,450) (4,768) --
Other income (expenses) 2005 (12,601) (1,120) 3,488
2004 (115,836) 44,910 --
Assets
(net of intercompany accounts) 2005 3,485,768 551,992 7,662,130
2004 541,559 580,992 --
-10-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2005 and December 31, 2004
NOTE 4 - BUSINESS SEGMENTS (continued)
Depreciation and amortization 2005 85,415 18,441 202,036
2004 322,467 18,721 --
Property and equipment
Acquisitions (Deletions) 2005 (14,286) -- 575,936
2004 (67,722) (88,750) --
NOTE 5 - SIGNIFICANT EVENTS
Acquisition - On January 31, 2005, the Company finalized the acquisition of
Arvilla Oilfield Services, LLC., a West Virginia limited liability company,
and have assumed all operations, assets and liabilities of Arvilla. 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. In consideration for Arvilla Oilfield Services,
1,185,024 shares of post split Trans Energy, Inc. stock was issued.
The following represents the condensed financial information for Arvilla
Oilfield Services as of March 31, 2005:
ASSETS
March 31,
2005
(Unaudited)
CURRENT ASSETS
Cash $ 149,033
Accounts receivable, net 1,271,365
Other receivables 27,370
----------
Total Current Assets 1,447,768
----------
PROPERTY AND EQUIPMENT, NET 5,411,635
----------
OTHER ASSETS
Prepaid loan costs 19,810
Deposits 16,268
Customer lists 766,649
----------
Total Other Assets 802,727
----------
TOTAL ASSETS $7,662,130
==========
-11-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2005 and December 31, 2004
NOTE 5 - SIGNIFICANT EVENTS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31,
2005
(Unaudited)
CURRENT LIABILITIES
Accounts payable - trade $ 472,499
Related party payables (3,606)
Accrued expenses 114,114
Notes payable - current portion 608,494
-------------
Total Current Liabilities 1,191,501
-------------
LONG-TERM LIABILITIES
Notes payable 3,733,936
Asset retirement obligation 168,000
-------------
Total Long-Term Liabilities 3,901,936
-------------
Total Liabilities 5,093,437
-------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Capital 25,000
Comprehensive Income (3,301)
Accumulated deficit 2,546,994
-------------
Total Stockholders' Equity (Deficit) 2,568,693
-------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 7,662,130
=============
-12-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2005 and December 31, 2004
NOTE 5 - SIGNIFICANT EVENTS (continued)
For the
Three Months Ended
March 31, 2005
------------------
REVENUES $ 2,459,136
-----------
COSTS AND EXPENSES
Cost of oil and gas 1,740,688
Depreciation, depletion and amortization 202,036
Selling, general and administrative 401,352
-----------
Total Costs and Expenses 2,344,076
-----------
INCOME (LOSS) FROM OPERATIONS 115,060
-----------
OTHER INCOME (EXPENSE)
Gain on allocation of assets 2,612,620
Loss on sale of asset --
Other income (314)
Gain on settlement of debt --
Interest expense (73,361)
-----------
Total Other Income (Expense) 2,538,945
-----------
LOSS FROM OPERATIONS BEFORE INCOME TAXES 2,654,005
INCOME TAXES --
-----------
NET INCOME $ 2,654,005
===========
-13-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2005 and December 31, 2004
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 - OTHER COMPREHENSIVE INCOME
The Company has entered into a loan arrangement containing an interest rate
hedge. The hedge is based on the difference between the lending
institutions floating rate index plus 280 basis points and the existing
LIBOR rate. At March 31, 2005, the difference in rates resulted in
additional interest of $3,101 that was recorded as other comprehensive
income.
NOTE 8 - EQUITY
In January 2005, the Company issued 50,000 shares of common stock for
services to be rendered valued at $100,000.
In January 2005, the Company issued 25,000 shares of common stock for debt
relief of $50,000.
In January 2005, the Company issued 1,185,024 shares of common stock for
the acquisition of Arvilla Inc.
Under FASB Statement 123, the Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants,
respectively; dividend yield of zero percent for all years; expected
volatility of 68.72%; risk-free interest rate of 4.08 and expected lives of
10 years for the three months ended March 31, 2005.
Had compensation cost for the Company's stock options granted to directors
and employees been based on the fair value as determined by the
Black-Scholes option pricing model at the grant date under the accounting
provisions of SFAS No. 123, the Company would have recorded an additional
expense of $837,416 for the three months ended March 31, 2005. Also under
these same provisions, the Company's net loss would have been changed by
the pro forma amounts indicated below:
-14-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2005 and December 31, 2004
NOTE 8 - EQUITY (continued)
For the Three Months Ended
March 31,
----------------------------
2005 2004
----------- ------------
Net loss:
As reported $ (66,487 $ (632,913)
Pro forma $ (903,903) $ (632,913)
Basic loss per share:
As reported $ (0.01) $ (0.33)
Pro forma $ (0.22) $ (0.33)
Stock Options - A summary of the status of the warrants granted under
various agreements at March 31, 2005 and 2004, and changes during the years
then ended is presented below:
March 31, 2005 March 31, 2004
----------------------- ---------------------
Weighted Weighted
Average Exercise Average Exercise
Shares Price Shares Price
--------- ---------- --------- ---------
Outstanding at beginning of period -- $ -- -- $ --
Granted 553,324 1.95 -- --
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
--------- ---------- --------- ---------
Outstanding at end of Period 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 $ 1.51 -- $ --
========= ============ ========= =========
-15-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2005 and December 31, 2004
NOTE 8 - EQUITY (continued)
A summary of the status of the warrants granted under the various
agreements at March 31, 2005, 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 9.75 years $ 1.95 553,324 $ 1.95
------------ ------------
553,324 553,324
============ ============
-16-
Item 2. Management's Discussion and Analysis or Plan of Operations
Recent Developments
On November 5, 2004, we acquired Cobham Gas Industries, Inc. and certain
wells, leases, pipelines, gas purchase agreements, oil hauling agreements,
equipment, right of ways and other miscellaneous items related to the leases
located in West Virginia. A total of 229 wells were acquired, of which 98 are
currently producing, located on approximately 15,000 leased acres.
On January 31,2005, we finalized the acquisition of Arvilla, Inc. a Nevada
corporation, and its subsidiary, assuming all its operations, assets and
liabilities. Arvilla 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. Arvilla offers its services in Ohio,
Pennsylvania, New York, Virginia, Kentucky and West Virginia.
On November 29, 2004, our board of directors and stockholders holding a
majority of our outstanding common stock approved a one share for 150 shares
reverse split of our common stock. The reverse split was effected on January 28,
2005.
Results of Operations
The following table sets forth the percentage relationship to total
revenues of principal items contained in the our consolidated statements of
operations for the three month periods ended March 31, 2005 and 2004. It should
be noted that percentages discussed throughout this analysis are stated on an
approximate basis.
Three Months Ended
March 31,
----------------
2005 2004
---- ----
(Unaudited)
Total revenues.......................... 100% 100%
Total costs and expenses................ 100 188
Loss from operations.................... (0) 88
Other income (expense).................. (3) (20)
Other comprehensive loss (hedging)...... (0) --
Net loss................................ (2) (109)
Total revenues for the three months ("first quarter") ended March 31, 2005
increased 340% compared to the first quarter of 2004, primarily due to the
acquisition of Arvilla and inclusion of its revenues for the first quarter.
Increased consolidated revenues also reflect increased oil and gas prices and
volume. Our cost of oil and gas for the first quarter of 2005 increased 176%
from the comparable 2004 period, also due to price and volume increases.
Salaries and wages decreased 28% for the first quarter of 2005 compared to
the 2004 period, due to a reduction in accrued wages, and depreciation,
depletion, amortization and accretion expense decreased 10% in the first quarter
of 2005 due to assets reaching the end of their depreciable lives. The 1137%
increase in selling, general and administrative expenses in the first quarter of
2005, from $35,875 in 2004 to $443,967 in 2005, is also attributed to the
acquisition of Arvilla.
-17-
Our income from operations for the first quarter of 2005 was $17,831
compared to a loss of $511,769 for the first quarter of 2004. The improvement is
related to the acquisition of Arvilla and its increased contribution to revenues
and price and volume increases. We realized total other expenses of $84,319
during the first quarter of 2005 compared to total other expenses of $121,144
for the first quarter of 2004. The first quarter of 2005 results were primarily
due to interest expense of $74,086 and losses from the sale of assets.
As a percentage of total revenues, total costs and expenses decreased from
188% in the first quarter of 2004 to 100% for the first quarter of 2005. This is
also attributed to the acquisition of Arvilla and its additional revenues
reported during the period.
Our net loss for the first quarter of 2005 was $66,488 compared to $632,913
for the first quarter of 2004.
For the remainder of fiscal year 2005, management expects selling, general
and administrative expenses to remain at approximately the same rate as the
first quarter of 2005 and significantly higher that the prior year, reflecting
the Arvilla acquisition. 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 2005.
Liquidity and Capital Resources
Historically, we have satisfied our working capital needs with operating
revenues and from borrowed funds. At March 31, 2005, we had a working capital
deficit of $2,100,098 compared to a deficit of $2,980,431 at December 31, 2004.
This 30% decrease in working capital deficit is primarily attributed to the
acquisition of Arvilla and decreases in current liabilities.
During the first quarter of 2005, operating activities used net cash of
$195,553 compared to net cash provided of $118,099 for the first quarter of
2004. These results are primarily attributed to the reduction in accrued
liabilities and accrued expenses.
Net cash provided by investing activities for the first quarter of 2005 was
$211,150, compared to $201,000 for the first quarter of 2004. This result is
primarily attributed to cash acquired from our Arvilla subsidiary.
During the first quarter of 2005,we realized net cash from financing
activities of $68,945 compared to net cash used of $225,153 in the first quarter
of 2004. These results are attributed to principal payments $272,036 made on
notes payable during the 2004 period, partially offset by $185,000 realized in
proceeds from notes payable. In 2005, principal payments on notes payable were
$92,743 that was exceeded by proceeds from notes of $168,328.
We anticipate meeting our working capital needs during the remainder of the
current fiscal year with revenues our newly acquired subsidiaries and from our
ongoing operations, particularly from our Powder River Basin interests in
Wyoming and New Benson 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, 2005, we had total assets of $11,699,890 and total
stockholders' equity of $1,180,373, compared to total assets of $4,234,111 and
total stockholders' deficit of $1,169,886 at December 31, 2004.
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In 1998, we issued $4,625,400 face value of 8% Secured Convertible
Debentures Due March 31, 1999. A portion of the proceeds were used to acquire
the GCRL properties and interest in Wyoming. During 2000, all but one of the
remaining outstanding debentures were converted into commons stock. At March 31,
2005, we owed $50,000 for a debenture, $24,954 in interest and $2,500 in
penalties.
Because we have incurred significant cumulative operating losses through
March 31, 2005 and have a working capital deficit at March 31, 2005 of
$2,100,098, there exists substantial doubt about our ability to continue as a
going concern. Historically, our revenues have not been sufficient to cover
operating costs, although revenues for the first quarter of 2005 did cover
operating expenses. 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 have included a footnote to our financial statements for the periods
ended March 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. See Note 2 to the consolidated
financial statements.
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:
o the sufficiency of existing capital resources and our ability to raise
additional capital to fund cash requirements for future operations;
o uncertainties involved in the rate of growth of our business and
acceptance of any products or services;
o volatility of the stock market, particularly within the technology
sector; and
o 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.
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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:
o 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.
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
In connection with the closing of the merger agreement on January 31, 2005,
we issued to the holders of Arvilla, Inc. capital stock an aggregate of
1,185,024 shares of Trans Energy common stock. These shares were distributed as
follows: Clarence E. Smith, 531,437 shares; Rebecca L. Smith 531,437 shares and
Howell B. Williams, 122,150 shares.
Each recipient of the Trans Energy shares is a sophisticated and
knowledgeable investor and has full access to all pertinent business and
financial information related to Trans Energy and Arvilla. Accordingly, Trans
Energy has relied upon the exemption from registration under the Securities Act
of 1933 provided by Section 4(2) of the Act that exempts a transaction not
involving a public offering.
On February 28, 2005, our board of directors authorized the issuance of
50,000 shares of authorized, but previously unissued shares of common stock to
Liberty Consulting International, Inc. The shares are in consideration for
services pursuant to a Consulting Services Agreement between the company and
Liberty Consulting International. The shares have been issued and constitute
less than 5% of the total outstanding shares of Trans Energy common stock. The
issuance of shares is being made in a private transaction to a person with
knowledge of the company's business in reliance upon an exemption from
registration under the Securities Act of 1933, pursuant to Section 4(2) of that
Act.
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Our board also authorized the issuance of 25,000 shares of our common stock
in exchange for professional services rendered and valued at $50,000. The shares
are to be issued pursuant to a registration statement, although that has not
been finalized and the shares have not been certificated.
Item 3. Defaults Upon Senior Securities
In 1998, we issued $4,625,400 face value of 8% secured convertible
debentures due September 30, 1999. Interest on the debentures accrued upon the
date of issuance until payment in full of the principal sum was been made or
duly provided for. Holders of the debentures have the option, at any time, until
maturity, to convert the principal amount of their debenture, or any portion of
the principal amount which is at least $10,000 into shares of the our common
stock at a conversion price for each share equal to the lower of (a) seventy
percent (70%) of the market price of the our stock averaged over the five
trading days prior to the date of conversion, or (b) the market price on the
issuance date of the debentures. Any accrued and unpaid interest shall be
payable, at our option, in cash or in shares of our common stock valued at the
then effective conversion price. During 2000, all but one of the remaining
outstanding debentures were converted into commons stock. At March 31, 2005, we
owed $50,000 to one debenture holder, $24,954 in interest and $2,500 in
penalties.
Item 4. Submission of Matters to a Vote of Security Holders
In connection with the reverse stock split effected January 28, 2005, we
filed with the State of Nevada on the same date an amendment to our articles of
incorporation to reflect the reverse split. The amendment reported the reverse
stock split and stated that our current authorized capitalization will remain
unchanged at 500 million shares of common stock with a par value of $0.001. The
reverse stock split and amendment were approved by the written consent of
shareholders holding a majority of our common stock by a vote of 256,287,738
pre-split shares (51.6%) voting for, and zero shares voting against.
Item 5. Other Information
The following reports were filed with the SEC on Form 8-K during the three
month period ended March 31, 2005.
February 2, 2005 - reporting under Item 1.01, the entering of a merger
agreement and plan of reorganization dated December 3, 2004 to acquire
Arvilla Oilfield Services with our wholly owned subsidiary Trans Energy
Acquisitions, Inc., Arvilla, Inc., and the controlling stockholders of
Arvilla, Inc. Also reported (i) under Item 2.01that the merger agreement
was finalized and closed on January 31, 2005; (ii) under Item 3.02 that in
connection with the closing of the merger agreement we issued to the
current holders of Arvilla, Inc. capital stock an aggregate of 1,185,024
shares of Trans Energy common stock; (iii) under Item 5.02 that in
connection with the acquisition of Arvilla, Inc., immediately prior to the
effective time of the merger transaction our board of directors unanimously
appointed two new directors, Clarence E. Smith and Rebecca L. Smith,
effective upon the closing of the transaction on January 31, 2005; and (iv)
under Item 5.03 that in connection with the reverse stock split effected
January 28, 2005, we filed with the State of Nevada on the same date an
amendment to our articles of incorporation to reflect the reverse split.
March 9, 2005 - reporting under Item 3.02, the unregistered sales of equity
securities relating to the issuance of 50,000 shares of common stock in
consideration for services pursuant to a consulting services agreement, and
which shares have now been issued. Also reporting under Item 5.02 the
appointment of new executive directors and a new director.
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June 9, 2005 - amendment to our Form 8-K filed November 11, 2004, reporting
under Item 2.01 that in connection with the completion of the acquisition
of Cobham Gas Industries, Inc. we are filing under Item 9.01 the applicable
financial statements related to Cobham.
Item 6. Exhibits
Exhibit 31.1 Certification of C.E.O. Pursuant to Section 302 of the
Sarbanses-Oxley Act of 2002.
Exhibit 31.2 Certification of Principal Accounting Officer Pursuant to
Section 302 of the Sarbanses-Oxley Act of 2002.
Exhibit 32.1Certification 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 20, 2005 By /S/ CLARENCE E. SMITH
----------------------------------------
Clarence E. Smith
Chief Executive Officer and Director
Date: June 20, 2005 By /S/ WILLIAM F. WOODBURN
----------------------------------------
WILLIAM F. WOODBURN
Secretary / Treasurer
(Principal Accounting Officer)
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