UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 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
Indicate by check mark whether the registrant is a shell company (as
defined in 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 October 31, 2005
----------------------------- ----------------------------------
Common Stock, $.001 par value 4,976,766
TABLE OF CONTENTS
Heading Page
------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................... 3
Item 2. Management's Discussion and Analysis and Results of Operations.......................... 17
Item 3. Controls and Procedures................................................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................. 21
Item 3. Defaults Upon Senior Securities......................................................... 21
Item 4. Submission of Matters to a Vote of Securities Holders................................... 21
Item 5. Other Information....................................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................................ 22
Signatures.............................................................................. 23
-2-
PART I
Item 1. Financial Statements
The accompanying consolidated balance sheet of Trans Energy, Inc. at
September 30, 2005 (unaudited) and December 31, 2004, related unaudited
consolidated statements of operations for the three and nine months ended
September 30, 2005 and 2004, stockholders' equity (deficit) and cash flows for
the nine months ended September 30, 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 September 30, 2005, are not necessarily indicative of the results that can
be expected for the fiscal year ending December 31, 2005.
TRANS ENERGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 and December 31, 2004
-3-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
September 30, December 31,
2005 2004
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash $ 239,010 $ 79,662
Accounts receivable, net 2,349,150 653,917
Other receivables 4,222 8,825
Prepaid expenses 84,799 1,223
----------- -----------
Total Current Assets 2,677,181 743,627
----------- -----------
PROPERTY AND EQUIPMENT, NET 7,099,209 3,372,599
----------- -----------
OTHER ASSETS
Bonds -- 50,159
Deposits 29,574 1,400
Investment in Texas Keystone Wells 175,000 --
Customer lists, net 557,563 --
Life insurance, cash surrender value 67,726 66,326
----------- -----------
Total Other Assets 829,863 117,885
----------- -----------
TOTAL ASSETS $10,606,253 $ 4,234,111
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-4-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, December 31,
2005 2004
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable - trade $ 2,120,291 $ 1,277,375
Related party payables (Note 5) 1,142,012 719,199
Accrued expenses 1,089,764 844,858
Judgments payable (Note 3) 70,379 70,379
Debentures payable 50,000 50,000
Notes payable - current portion 713,004 762,247
------------ ------------
Total Current Liabilities 5,185,450 3,724,058
------------ ------------
LONG-TERM LIABILITIES
Notes payable 4,074,786 108,190
Asset retirement obligation 962,877 1,571,749
------------ ------------
Total Long-Term Liabilities 5,037,663 1,679,939
------------ ------------
Total Liabilities 10,223,113 5,403,997
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT) (Note 7)
Preferred stock; 10,000,000 shares authorized at $0.001 par
value; -0- shares issued and outstanding -- --
Common stock; 500,000,000 shares authorized at $0.001 par
value; 4,956,765 and 3,555,074 shares issued
and outstanding, respectively 4,957 3,555
Treasury stock, 244,633 shares held at cost (286,467) --
Capital in excess of par value 30,795,793 27,854,647
Comprehensive Income (1,808) --
Deferred expenses (74,000) --
Accumulated deficit (30,055,335) (29,028,088)
------------ ------------
Total Stockholders' Equity (Deficit) 383,140 (1,169,886)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 10,606,253 $ 4,234,111
============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-5-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Other Comprehensive Loss
(Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUES $ 3,958,510 $ 325,652 $ 9,847,711 $ 1,460,627
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of oil and gas 3,081,216 319,548 7,416,403 1,387,919
Salaries and wages 45,540 107,230 162,219 287,252
Depreciation, depletion
amortization and accretion 443,529 89,574 1,164,307 230,414
Selling, general and
administrative 702,445 17,986 1,818,062 125,645
------------ ------------ ------------ ------------
Total Costs and Expenses 4,272,730 534,338 10,560,991 2,031,230
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (314,220) (208,686) (713,280) (570,603)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Gain (loss) on extinguishment
of debt (2,306) 288,398 -- 41,562
Net gain (loss)on sale of assets (152,411) -- (160,275) 175,910
Other income 116,064 225 124,357 9,353
Tax assessment -- (18,102) -- (18,102)
Interest expense (82,029) (52,559) (278,049) (161,759)
------------ ------------ ------------ ------------
Total Other Income
(Expense) (120,682) 217,962 (313,967) 46,964
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS
BEFORE INCOME TAXES (434,902) 9,276 (1,027,247) (523,639)
INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (434,902) $ 9,276 $ (1,027,247) $ (523,639)
------------ ------------ ------------ ------------
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-6-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Other Comprehensive Loss (continued)
(Unaudited)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (434,902) $ 9,276 $(1,027,247) $ (523,639)
OTHER COMPRHENSIVE LOSS
Changes due to hedging
activities -- -- (1,808) --
----------- ----------- ----------- -----------
NET COMPREHENSIVE
INCOME (LOSS) $ (434,902) $ 9,276 $(1,029,055) $ (523,639)
=========== =========== =========== ===========
BASIC LOSS PER SHARE $ (0.09) $ 0.00 $ (0.22) $ (0.27)
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 4,876,118 1,957,108 4,692,358 1,950,411
=========== =========== =========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-7-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
(split table)
Preferred Stock Common Stock Treasury Stock
--------------------------- --------------------------- -----------------------
Accumulated
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 -- $ -- 3,555,074 $ 3,555 -- $ --
Common stock issued for
services to be rendered
(unaudited) -- -- 50,000 50 -- --
Common stock issued for
the conversion of debt
(unaudited) -- -- 25,000 25 -- --
Common stock issued for
the conversion of debt
(unaudited) -- -- 141,667 142 -- --
Common stock issued for
purchase of Arvilla
(unaudited) -- -- 1,185,024 1,185 -- --
Changes due to hedging activities -- -- -- -- -- --
(unaudited)
Contributed services (unaudited) -- -- -- -- -- --
Stock exchanged for the sale
of Cobham (unaudited) -- -- -- -- 244,633 (286,467)
Net loss for the nine months ended
September 30, 2005 (unaudited) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2005
(unaudited) -- $ -- 4,956,765 $ 4,957 244,633 $ (286,467)
============ ============ ============ ============ ============ ============
(continued)
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-8A-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
(continued)
Capital In
Excess of Comprehensive
Par Value Income Deficit
------------ ------------ ------------
Balance, December 31, 2004 $ 27,854,647 $ -- $(29,028,088)
Common stock issued for
services to be rendered
(unaudited) 92,450 -- --
Common stock issued for
the conversion of debt
(unaudited) 49,975 -- --
Common stock issued for
the conversion of debt
(unaudited) 254,858 -- --
Common stock issued for
purchase of Arvilla
(unaudited) 2,368,863 -- --
Changes due to hedging activities -- (1,808) --
(unaudited)
Contributed services (unaudited) 175,000 -- --
Stock exchanged for the sale
of Cobham (unaudited) -- -- --
Net loss for the nine months ended
September 30, 2005 (unaudited) -- -- (1,027,247)
------------ ------------ ------------
Balance, September 30, 2005
(unaudited) $ 30,795,793 $ (1,808) $(30,055,335)
============ ============ ============
-8B-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,027,247) $ (523,639)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion, amortization and accretion 1,164,307 230,414
Amortization of deferred expenses 18,500 --
Net loss (gain) from sale of assets 160,275 (175,910)
(Gain) loss on extinguishment of debt -- (41,563)
Contributed services 175,000 --
Changes in operating assets and liabilities:
(Increase) in accounts receivable (564,511) (38,595)
Decrease in prepaids (83,576) --
Decrease in other current assets 7,833 --
Decrease in other assets (1,400) --
Increase in accounts payable and
current liabilities 384,160 670,681
Increase in accrued expenses 53,123 --
----------- -----------
Net Cash Provided by Operating Activities 286,464 121,388
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for other assets (236,791) --
Proceeds from sale of assets 76,575 201,000
Borrowings from life insurance policy -- 1,708
Cash acquired from subsidiary 408,333 --
Expenditures for property and equipment (556,155) (440)
----------- -----------
Net Cash Provided (Used) by Investing Activities (308,038) 202,268
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank overdraft -- (49,120)
Payments on related party payables (67,765) (141,757)
Proceeds from related party notes 637,088 --
Principal payments on notes payable (378,401) (119,993)
----------- -----------
Net Cash Provided (Used) by Financing Activities 190,922 (310,870)
----------- -----------
NET INCREASE IN CASH 159,348 12,786
CASH, BEGINNING OF PERIOD 79,662 183
----------- -----------
CASH, END OF PERIOD $ 239,010 $ 12,969
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-9-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Nine Months Ended
September 30,
2005 2004
----------- -----------
CASH PAID FOR:
Interest $ -- $ 44,057
Income taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES:
Common stock issued for debt relief $ 305,000 $ 47,856
Common stock issued for services to
be rendered $ 92,500 $ 26,000
Common stock issued for the net assets
over liabilities in the purchase
of Arvilla Inc. and subsidiary $ 2,370,048 $ --
Contributed services $ 175,000 $ --
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-10-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 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 and nine months ended
September 30, 2005 are 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 September 30, 2005 of
$30,055,335 and has a working capital deficit at September 30,
2005 of $2,526,769. Revenues have not been sufficient to cover its
operating costs and to allow it to continue as a going concern. he
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 September 30, 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.
-11-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2005 and December 31, 2004
NOTE 3 - CONTINGENCIES AND COMMITMENTS (continued)
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 September 30, 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.
Tioga Lumber Company
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.
Arvilla Oilfield Services is required under a certain loan
agreement to maintain specific financial ratios under covenants
contained in the loan agreement. At September 30, 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
Nine Months
Ended Oil and Gas Pipeline Well
September 30 Sales Transmission Servicing
------------ ------------ ----------- ---------------
Oil and gas revenue 2005 $ 833,933 $ 1,880,110 $ 7,133,668
2004 295,963 1,164,664 --
Operating loss
applicable to industry
segment 2005 (518,151) (37,305) (157,824)
2004 (473,915) (96,688) --
General corporate expenses
not allocated to industry
segments 2005 -- -- --
2004 -- -- --
-12-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2005 and December 31, 2004
NOTE 4 - BUSINESS SEGMENTS (Continued)
For the
Nine Months
Ended Oil and Gas Pipeline Well
September 30 Sales Transmission Servicing
------------ ------------ ----------- ---------------
Interest expense 2005 (59,090) (25,345) (193,614)
2004 (140,275) (21,484) --
Other income (expenses) 2005 (157,760) 3,609 118,233
2004 163,812 44,911 --
Assets
(net of intercompany accounts) 2005 2,317,856 813,396 7,475,001
2004 756,602 335,380 --
Depreciation, depletion,
Amortization and accretion 2005 260,205 55,321 848,781
2004 169,341 61,073 --
Property and equipment
Acquisitions (Deletions) 2005 187,875 36,881 254,824
2004 440 -- --
NOTE 5 - 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.
-13-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2005 and December 31, 2004
NOTE 6 - 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 September 30, 2005, the difference
in rates resulted in additional interest of $1,808 that was
recorded as other comprehensive income.
NOTE 7 - EQUITY
In January 2005, the Company issued 50,000 shares of common stock
for services to be rendered valued at $92,500.
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.
In July 2005, the Company issued 141,667 shares of common stock
for debt relief of $255,000.
Through September 30, 2005, certain officers and directors have
contributed services valued at $175,000.
On August 31, 2005, the Company sold its wholly owned subsidiary,
Cobham Oil & Gas Industries, Inc. along with certain assets and
liabilities of that entity to its previous owner in exchange for
the return of 244,633 shares of the Company's common stock. These
shares remain outstanding and are being held by the Company as
Treasury Stock and have been valued at $286,467 representing the
fair value of the stock on the date of the Cobham transaction.(See
Note 8)
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 nine
months ended September 30, 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 nine months
ended September 30, 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
September 30, 2005 and December 31, 2004
NOTE 7 - EQUITY (continued)
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -------------------------------------
2005 2004 2005 2004
------------------- ---------------- ------------------ -----------------
Net loss:
As reported $ (434,902) $ 9,276 $ (1,027,247) $ (523,639)
Pro forma $ (434,902) $ 9,276 $ (1,864,663) $ (523,639)
Basic loss per share:
As reported $ (0.09) $ 0.00 $ (0.22) $ (0.27)
Pro forma $ (0.09) $ 0.00 $ (0.40) $ (0.27)
Stock Options - A summary of the status of the warrants granted
under various agreements at September 30, 2005 and 2004, and
changes during the periods then ended is presented below:
September 30, 2005 September 30, 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 $ -- $ --
========= ============= =========== ==========
A summary of the status of the warrants granted under the various
agreements at September 30, 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 9.25 years $ 1.95 553,324 $ 1.95
------------ ------------
553,324 553,324
============ ============
-15-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2005 and December 31, 2004
NOTE 8 - SIGNIFICANT EVENTS
On November 5, 2004, the Company 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. On September 1, 2005, the Company sold a portion of
these acquired assets to the previous owner. These assets include
the following:
- Certain leases for the production of oil and natural gas
located in Marion County, West Virginia;
- Certain oil or natural gas wells located on the Marion
County Leases, together with all equipment and other
tangible personal property attached to the wells;
- Certain vehicles and other equipment, parts, inventories
and hand tools;
- Miscellaneous well logs, maps, production data, sales
records and histories, royalty payment records and other
information concerning the Marion County Leases and Marion
County Wells;
- A $50,000 reclamation bond pursuant to which all of the
Marion County Wells, and others, are permitted;
- Certain cash and trade accounts receivable generated by
the operations and results of operations of the Marion
County Leases and Marion County Wells, realized on or
after August 1, 2005; and
- All outstanding capital common stock of Cobham Gas
Industries held by Trans Energy, Inc. or any affiliate.
In consideration for the above referenced assets, the buyer will
provide to us:
- The return to us of 244,633 shares of Trans Energy, Inc.
common stock initially issued to acquire Cobham, to be
valued at the closing price per share of our common stock
on the closing date;
- The return to us of all of buyer's options, warrants and
future rights to acquire any securities of Trans Energy or
any of our affiliates;
- The Company retain the right to use through December 31,
2005 the $50,000 reclamation bond in order to comply with
certain West Virginia boding requirements; and
- Buyer will assume responsibility for the payment of
certain loans in the amount of $96,839, liabilities
related to the plugging of certain of the Marion County
Wells, all expenses related to operation, maintenance and
ownership of the Marion County Leases and the Marion
County Wells incurred on or after August 1, 2005.
In addition to the above, we have agreed to fulfill the remaining
payment obligations to the buyer under that certain agreement
dated November 5, 2004, and we will retain responsibility for the
payment of certain debts related to Cobham.
-16-
Item 2. Management's Discussion and Analysis or Plan of Operations
Recent Developments
Arvilla, Inc.
On January 31,2005, we acquired Arvilla, Inc., a provider of well
servicing, workover and related transportation services to independent oil and
natural gas producers in northeast 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.
Cobham Gas Industries, Inc.
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. On September 1, 2005, we sold a portion of these
acquired assets to Texas Energy Trust Company and its trustee, George Hillyer.
These assets include the following:
o Certain leases for the production of oil and natural gas located in
Marion County, West Virginia;
o Certain oil or natural gas wells located on the Marion County Leases,
together with all equipment and other tangible personal property
attached to the wells;
o Certain vehicles and other equipment, parts, inventories and hand
tools;
o Miscellaneous well logs, maps, production data, sales records and
histories, royalty payment records and other information concerning the
Marion County Leases and Marion County Wells;
o A $50,000 reclamation bond pursuant to which all of the Marion County
Wells, and others, are permitted;
o Certain cash and trade accounts receivable generated by the operations
and results of operations of the Marion County Leases and Marion County
Wells, realized on or after August 1, 2005; and
o All outstanding capital common stock of Cobham Gas Industries held by
Trans Energy, Inc. or any affiliate.
In consideration for the above referenced assets, the buyer will provide to
us:
o The return to us of 244,633 shares of Trans Energy, Inc. common stock
initially issued to acquire Cobham, to be valued at the closing price
per share of our common stock on the closing date;
o The return to us of all of buyer's options, warrants and future rights
to acquire any securities of Trans Energy or any of our affiliates;
o We retain the right to use through December 31, 2005 the $50,000
reclamation bond in order to comply with certain West Virginia boding
requirements; and
o Buyer will assume responsibility for the payment of certain loans in
the amount of $96,839, liabilities related to the plugging of certain
of the Marion County Wells, all expenses related to operation,
maintenance and ownership of the Marion County Leases and the Marion
County Wells incurred on or after August 1, 2005.
-17-
In addition to the above, we have agreed to fulfill the remaining payment
obligations to the buyer under that certain agreement dated November 5, 2004,
and we will retain responsibility for the payment of certain debts related to
Cobham.
Stock Split
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. All references to per share data and common stock have been restated to
reflect the effect of this reverse split.
Results of Operations
The following table sets forth the percentage relationship to total
revenues of principal items contained in the our unaudited consolidated
statements of operations for the three and nine month periods ended September
30, 2005 and 2004. It should be noted that percentages discussed throughout this
analysis are stated on an approximate basis.
Three Months Ended Nine months Ended
September 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Total Revenues..................... 100% 100% 100% 100%
Total costs and expenses........... 108 164 107 139
Loss from operations.............. (8) (64) (7) (39)
Other income (expense)............. (3) 67 (3) 3
Net income (loss).................. (11) 3 (10) (36)
Revenues for the three months ("third quarter") and nine months ("first
nine months") ended September 30, 2005 increased 1116% and 574%, respectively,
compared to the 2004 periods, primarily due to the acquisition of Arvilla and
inclusion of its revenues for the 2005 periods. Increased consolidated revenues
also reflect increased oil and gas prices and volume. Our cost of oil and gas
for the third quarter and first nine months of 2005 increased 864% and 434%,
respectively, compared to the 2004 periods, also due to price and volume
increases.
Selling, general and administrative expenses increased from $17,986 in the
third quarter of 2004 to $702,445 for the third quarter of 2005, and from
$125,645 for the first nine months of 2004 to $1,818,062 for the first nine
months of 2005. These increases are attributed to the acquisition of Arvilla and
the associated expenses of our expanded operations. Salaries and wages decreased
58% and 44% for the third quarter and first nine months of 2005, respectively,
when compared to the 2004 periods primarily due to a reduction in accrued wages.
Depreciation, depletion, amortization and accretion expense increased 395% and
405% for the third quarter and first nine months of 2005, respectively, due to
the addition of Arvilla Assets.
Loss from operations for the third quarter and first nine months of 2005
was $314,220 and $713,280, respectively, compared to a loss of $208,686 and
%$570,603 for the like periods of 2004. The improvement for the first nine
-18-
months of 2005 is related to the acquisition of Arvilla and its increased
contribution to revenues, price and volume increases, although the loss for the
third quarter increased from the 2004 period due to a decrease in April revenues
in Arvilla related to poor weather conditions. We realized total other expenses
of $120,682 and $313,967 during the third quarter and first nine months of 2005,
respectively, compared to total other income of $217,962 and $46,964 for the
2004 periods. The 2005 results were primarily attributed to the net loss on the
sale of assets and increase in interest expense in 2005, and was partially
offset the increase in other income in 2005.
As a percentage of total revenues, total costs and expenses decreased from
164% in the third quarter of 2004 to 108% for the third quarter of 2005, and
also decreased from 139% for the first nine months of 2004 to 107% for the first
nine months of 2005. This improvement is also attributed to the acquisition of
Arvilla and cost reductions in servicing of the Cobham wells.
Our net loss for the third quarter and first nine months of 2005 was
$434,902 and $1,029,055 (after a $1,808 adjustment due to hedging activities),
respectively, compared to a net income of $9,276 for the third quarter of 2004
and a net loss of $523,639 for the first nine months 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 nine months of 2005 and significantly higher than 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 September 30, 2005, we had a working
capital deficit of $2,508,269 compared to a deficit of $2,980,431 at December
31, 2004. This 16% decrease in working capital deficit is primarily attributed
to the acquisition of Arvilla and the reduction of current liabilities and debt.
During the first nine months of 2005, operating activities provided net
cash of $286,464 compared to net cash provided of $121,388 for the first nine
months of 2004. These results are primarily attributed to increases in
depreciation and accounts payable. Also during the first nine months of 2005,
net cash used by investing activities was $308,038, compared to net cash
provided of $202,268 for the first nine months of 2004. This result is primarily
attributed to payment for other assets and expenditures for property and
equipment.
During the first nine months of 2005, we realized net cash from financing
activities of $190,922 compared to $310,870 in the first nine months of 2004.
These results are attributed to the increase in proceeds from related party
notes.
We anticipate meeting our working capital needs during the remainder of the
current fiscal year with revenues from 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 September 30, 2005, we had total assets of $10,606,253 and total
stockholders' equity of $383,140, compared to total assets of $4,234,111 and
total stockholders' deficit of $1,169,886 at December 31, 2004.
-19-
In 1998, we issued $4,625,400 face value of 8% Secured Convertible
Debentures Due June 30, 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 September
30, 2005, we owed $50,000 for a debenture plus approximately $25,000 in
interest.
Because we have incurred significant cumulative operating losses through
September 30, 2005 and have a working capital deficit at September 30, 2005 of
$2,526,769, there exists substantial doubt about our ability to continue as a
going concern. Historically, our revenues have not been sufficient to cover
operating costs and 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 September 30, 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.
-20-
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.
o On July 1, 1998, RR Donnelly (RR) obtained a judgment against us for
non-payment of accounts payable. The judgment calls for monthly payments of
$3,244 and is bearing interest at 10.00% per annum. At September 30, 2005, we
had accrued a balance including interest of $56,792 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
On July 1, 2005, we issued 141,668 shares to our Chief Executive Officer,
Clarence Smith, in exchange for his forgiving a debt of $255,000. On October 19,
2005, we issued 20,000 shares to John Corp as a signing bonus for becoming a
director and officer of Trans Energy. The issuances were made in isolated,
private transactions to affiliates and executive officers and were, therefore,
exempt from the registration requirements of the Securities Act of 1933 pursuant
to Section 4(2) of that Act.
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
-21-
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 September 30, 2005,
we owed $50,000 to one debenture holder plus approximately $25,000 in interest.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
The following reports were filed with the SEC on Form 8-K during the three
month period ended September 30, 2005.
September 16, 2005 - reporting under Item 2.01 the sale of certain assets
previously acquired upon the acquisition of Cobham Gas Industries, Inc.
The September 16, 2005 report also reported under Item 5.01 the resignation
John G. Corp as a director and Vice President. However, the report
inadvertently stated that Mr. Corp resigned as a director, although his
resignation was only as an officer and he remains as a director.
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 32.1 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.
-22-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TRANS ENERGY, INC.
Date: November 25, 2005 By /S/ Clarence E. Smith
----------------------------------------
Clarence E. Smith
Chief Executive Officer and Director
Date: November 25, 2005 By /S/ William F. Woodburn
-----------------------------------------
WILLIAM F. WOODBURN
Secretary / Treasurer
(Principal Accounting Officer)
-23-