UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 2006
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
Commission File Number 0-23530
TRANS ENERGY, INC.
(Name of small business issuer 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) (Zip Code)
Issuer's telephone no.: (304) 684-7053
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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[ ]0
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB/A or any amendment to this Form 10-KSB/A. [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the issuer's revenues for its most recent fiscal year. $ 1,420,802
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock as of a specified date within 60 days.
$1,233,094 (Based on price of $1.70 per share on March 29, 2007)
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 29, 2007
----------------------- ----------------------------------
Common Stock, Par Value 9,450,565
$.001 per share
DOCUMENTS INCORPORATED BY REFERENCE
A description of "Documents Incorporated by Reference" is contained in Part
III, Item 13.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
TRANS ENERGY, INC.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Description of Business ................................................. 3
Item 2. Description of Property.................................................. 13
Item 3. Legal Proceedings........................................................ 15
Item 4. Submission of Matter to a Vote of Security Holders....................... 15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters................. 15
Item 6. Management's Discussion and Analysis or Plan of Operation................ 16
Item 7. Financial Statements..................................................... 19
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 19
Item 8A. Controls and Procedures.................................................. 19
Item 8B. Other Information........................................................ 19
PART III
Item 9. Directors, Executive Officers, Promoters and Control persons;
Compliance with Section 16(a) of the Exchange Act........................ 20
Item 10. Executive Compensation................................................... 21
Item 11. Security Ownership of Certain Beneficial Owners and Management........... 22
Item 12. Certain Relationships and Related Transactions........................... 22
Item 13. Exhibits................................................................. 23
Item 14. Principal Accountant Fees and Services................................... 24
Signatures............................................................... 25
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PART I
Item 1. Description of Business
History
Trans Energy, Inc. is engaged in the exploitation, development and
production of natural gas and oil, and, to a lesser extent, the marketing and
transportation of natural gas. We own and operate approximately 245 oil and gas
wells in West Virginia. We also own and operate an aggregate of over 20 miles of
4-inch and 6-inch gas transmission lines located within West Virginia in the
counties of Ritchie and Tyler. We also have approximately 20,000 gross acres
under lease in West Virginia primarily in the counties of Wetzel and Marion.
Our principal executive offices are located at 210 Second Street, P.O. Box
393, St. Marys, West Virginia 26170, and our telephone number is (304) 684-7053.
Recent Events
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. Terms of the sale were satisfied on
March 31, 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 and through
our wholly owned subsidiary, Arvilla, Inc. Trans Energy sold to Clarence E.
Smith and Rebecca L. Smith, both directors of Trans Energy, 100% of the
outstanding membership interests of Arvilla Oilfield Services, LLC, a West
Virginia limited liability company ("AOS").
AOS provides well servicing, workover and related transportation services
to independent oil and natural gas producers in the northeast region of the
United States. It also performs ongoing maintenance and major overhauls
necessary to optimize the level of production from existing oil and natural gas
wells and provides certain ancillary services during the drilling and completion
of new wells. AOS offers its services in Ohio, Pennsylvania, New York, Virginia,
Kentucky and West Virginia and also owns a fleet of well service equipment.
We originally acquired AOS from Clarence and Rebecca Smith on January 31,
2005 through a merger of our subsidiary, Trans Energy Acquisitions, with and
into Arvilla, Inc., with Arvilla being the surviving entity. As consideration,
we issued 1,185,024 shares of our common stock, of which 1,042,821 shares were
issued to the Smiths, both of whom became directors of Trans Energy following
the acquisition. AOS's operations were previously conducted as Arrow Oilfield
Service Company, a division of Belden & Blake Corporation, a privately held
company engaged in the exploration, development and production of oil and
natural gas. In June 2004, the Smiths acquired Arrow Oilfield Service Company
from Belden & Blake and created Arvilla Oilfield Services, LLC as the operating
entity. Subsequently, the Smiths created Arvilla, Inc. that acquired all the
membership interests of Arvilla Oilfield Services in order to facilitate its
acquisition by Trans Energy.
As a result of consummating the definitive agreement, Clarence and Rebecca
Smith returned to us 521,411 shares of their Trans Energy common stock. The
Smiths have also conveyed to Trans Energy all of their interest in and to five
oil and gas wells located in Tyler County, West Virginia. Assignments for the
wells originally was to be held in escrow pending satisfaction by Trans Energy
of two promissory notes in the aggregate amount of $763,000 payable to AOS and
to Arvilla Pipeline Construction Co., Inc., a separate entity owned by Clarence
and Rebecca Smith. However, pursuant to the First Amendment to Definitive
Agreement, the parties agreed that the wells would be transferred at the closing
and we agreed to pay AOS $176,239 on or before April 30, 2006, and pay Arvilla
Pipeline $115,000 on or before April 30, 2006. To secure these payments by Trans
Energy, Clarence and Rebecca Smith held a lien on a certain Deed of Trust until
the debt was satisfied.
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 of
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(i) 50,000 shares (adjusted for stock splits or stock dividends; or (ii) one
percent of the total outstanding shares of Trans Energy common stock on the date
of any such sale.
Finally, the closing of the transaction was expressly conditioned on the
receipt of a fairness opinion from a qualified independent party stating that
the transactions contemplated by the definitive agreement were 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 all of our holdings in Wyoming including
certain wells, overriding royalties and undeveloped acreage located in Campbell
County, Wyoming. The assets were sold at public auction through the Oil & Gas
Asset Clearinghouse in Houston, Texas. The gross sales price for the properties
was $1,003,000.
The wells sold by us, all located in Campbell County, Wyoming, included 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 an overriding royalty on two wells (Sagebrush
Federal #1 and Sagebrush Federal #2) and Tract TR4-B, and 2,530 undeveloped
acres, also located in Campbell County, Wyoming.
Purchase of Marion County West Virginia wells and acreage
---------------------------------------------------------
On August 14, 2006, Trans Energy, Inc. entered into an Assignment and Bill
of Sale (the "Agreement ") with George Hillyer, Trustee of Texas Energy Trust
Company, a Delaware Business Trust ("Tetco"), BOK Operating Company, a Delaware
corporation ("BOK"), and Prima Oil Company, Inc., a Delaware corporation
("Prima") that is wholly owned by Trans Energy. TETCO and BOK are collectively
referred to as the "Seller." Under the terms of the Agreement, the Sellers
agreed to sell, assign and convey to Trans Energy all of Sellers' rights, title
and interest in the assets of Cobham Gas Industries, Inc. ("Cobham") including
approximately 120 wells , both producing and non-producing (referred to herein
as the "Wells"), leases, pipelines, equipment and rolling stock (the "Assets").
Also assigned and conveyed to Trans Energy are certain rights-of-way and roads
that may be needed to maintain, produce and abandon the conveyed Wells.
In consideration for the acquisition of assets, Trans Energy paid Mr.
Hillyer and BOK, the sole owner of Cobham, $600,001 and one million shares of
Trans Energy common stock. The shares of common stock are subject to certain
restrictions regarding the future sale of the shares.
Purchase of Dewhurst wells and acreage in Wetzel County, West Virginia
----------------------------------------------------------------------
On September 28, 2006, Trans Energy, Inc. completed the acquisition of the
J.B. Dewhurst oil and gas lease, consisting of a 100% working interest and 87.5%
net revenue interest in seven wells located on 2,200 acres in Grant District,
Wetzel County, West Virginia. The purchase price for the lease was $800,000 that
was paid at the closing.
The lease was acquired from Tom O'Donnell, Bay Oil Company, LLC and Beacon
Lombard Corporation. Conveyance of the lease is by good and sufficient general
warranty assignment, free and clear of all liens and encumbrances and includes
the entire working interest, all wells, personal property, fixtures and
improvements located on the lease.
Sale of Leatherwood Assets
--------------------------
On January 9, 2007 Trans Energy, Inc. completed the assignment for cash to
Leatherwood, Inc., a Pennsylvania corporation, of six oil and/or gas wells
located in Mannington District, Marion County, West Virginia. The assigned wells
are designated as follows: O.N. Koen No. 1, Moffett No. 2, Simon Moore No. 3,
Simon Moore No. 1, Simon Moore No. 2 and W.T. Morris No. 2.
Trans Energy assigned all of its right, title, operating rights and interest
in and to the aforementioned wells, including the absolute right to produce,
operate and maintain the wells. The assignment is by good and sufficient general
warranty assignment, free and clear of all liens and encumbrances and includes
the entire working interest, all wells, equipment, personal property, gathering
and distribution pipelines and other fixtures and improvements located on the
property.
Leatherwood becomes responsible for the plugging and abandoning of the
acquired wells, as necessary, and for any reclamation of the lands after
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plugging and abandoning operations are completed. All plugging and abandoning
operations will be done in accordance with the applicable rules and regulations
of the State of West Virginia or other jurisdictional authorities.
Upon effectiveness of the assignment of the lease, all production, revenue,
costs, expenses and other liabilities attributable to the assigned wells will
belong to Leatherwood. For a period of one year following the effective date,
Trans Energy will have the right, at its sole cost and expense, to permit and
drill one or more oil and gas wells located on two of the assigned properties.
Purchase of acreage in Kansas
-----------------------------
On January 10, 2007, Trans Energy acquired from National Gulf Production,
Inc. of Giddings, Texas, 75% of National Gulf's rights and interests in and to
certain oil and gas leases covering the oil and gas in and under certain tracts
of land containing approximately 3,120 acres located in Trego County, Kansas.
National Gulf originally acquired the leases pursuant to a farmout agreement
with Wevco Production, Inc. In connection with the agreement, Trans Energy and
National Gulf will acquire certain 3-D seismic data on the subject leases.
In consideration for the leases Trans Energy will pay its proportionate 75%
of the farmout fee, or approximately $146,250, plus its proportionate 75% of the
seismic acquisition, processing and interpretation cost, a total of
approximately $285,000. The final seismic cost will be adjusted when completed.
The lease has a reservation by Wevco of an overriding royalty interest of
3.5% and the right, but not the obligation, to participate up to 25% at cost, in
the wells drilled by National Gulf and Trans Energy. There will also be an
overriding royalty interest of 1% to the Project Geophysicist and National Gulf
will retain an overriding royalty interest of 2%, resulting in an 81% working
interest. National Gulf will also earn a 6.15% carried working interest.
Upon completion of each well capable of commercial production, Trans Energy
will be entitled to receive an assignment of its proportionate share of the 20
acre producing unit, or other unit size as may be directed or allowed by the
State. This assignment will be made without warranty of title, express or
implied.
From the date of the agreement Trans Energy and National Gulf will have one
year to drill the first well and will also have an option for six months after
completion of any well to drill another well, until all drillable 20 acre units
in the leases are drilled. In the event Trans Energy and National Gulf do not
drill the first well within one year, or do not drill subsequent wells within
the prescribed six month periods, then this agreement terminates with respect to
all undrilled areas, unless such failure to perform is due to an act of God,
labor disputes, riots, or any other cause beyond the control of the parties. In
such an event, the required time to perform would be extended for the period of
the interruption.
Trans Energy and National Gulf will enter into a mutually acceptable
participation and operating agreement, whereby National Gulf will be the
Operator and will drill and operate the wells that are drilled on the leases.
Business History
Our business strategy is to economically increase reserves, production and
the sale of natural gas and oil from existing and acquired properties in the
Appalachian Basin and elsewhere, in order to maximize shareholders' return over
the long term. Our strategic location in West Virginia enables us to actively
pursue the acquisition and development of producing properties in that area that
will enhance our revenue base without proportional increases in overhead costs.
We operate oil and natural gas properties and transport and market natural
gas through our transmission systems in West Virginia. Although management
desires to acquire additional oil and natural gas properties and to become more
involved in exploration and development, this can only be accomplished if we can
secure future funding. Management intends to continue to develop and increase
the production from oil and natural gas properties that we currently own. We
will continue to transport and market natural gas through our pipelines. During
2004 we sold approximately 7.6 miles of our 6-inch pipeline and approximately 10
miles of our 4-inch pipeline for cash and other consideration. In 2004, we sold
approximately 3 miles of 6-inch pipeline and approximately 5.7 miles of 4-inch
pipeline.
-5-
Cobham Gas Industries, Inc.
---------------------------
On November 5, 2004, we finalized an agreement with Texas Energy Trust
Company, a Delaware Business Trust with offices in Irving, Texas, whereby we
acquired certain oil and gas leases and leasehold interests located in Wetzel
and Marion Counties, West Virginia, and other assets. Our acquisition of Cobham
includes its two subsidiaries, Penine Resources, Inc. and Belmont Energy, Inc.
The acquisition was accomplished by our wholly owned subsidiary, Prima Oil
Company, Inc., acquiring from Texas Energy Trust 100% of the issued and
outstanding shares (2,100 shares) of Cobham Gas Industries, Inc., a Delaware
corporation. Under the terms of the agreement, we acquired 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 producing,
located on approximately 15,000 leased acres. Among the assets acquired are
certain vehicles and heavy equipment and various other drilling equipment.
In consideration for the acquired property, we paid a purchase price of
$892,344, of which approximately $489,000 is payable in cash and the balance in
244,633 shares of restricted Trans Energy common stock, post-split, to be issued
following the effectiveness of our one share for 150 shares reverse stock split
in January 2005. An initial payment of $250,000 was paid at the closing with the
remaining balance to be paid quarterly in equal installments beginning January
1, 2005, with the final payment due October 1, 2005.
The wells are situated in well defined fields producing from the shallow
Devonian formation. Big Injun, Gordon and Thirty Foot are sands in the Devonian
foundation that have produced substantial natural gas in West Virginia. The
field/acreage positions consist of three specific areas; Mannington,
Smithfield/Wallace and Dents Run. The Mannington field consists of 107 wells
encompassing 4,573 acres. These wells are Big Injun wells, at approximately
2,900 - 3,000 feet in depth, dependent on elevation. The Smithfield/Wallace
field consists of 92 wells encompassing 9,223 acres. The majority of these wells
are Big Injun wells, although there are several Gordon wells in the field.
Management believes that future development can expand the Gordon and Bayard
play. The Dents Run field consists of 30 wells encompassing 1,097 acres. These
wells are completed through the Thirty Foot sand.
On September 1, 2005, together with our wholly owned subsidiary Prima Oil
Company, Inc., we finalized the sale of certain assets to Texas Energy Trust
Company and its trustee, George Hillyer ("Buyer"). These assets include the
following:
* Certain leases for the production of oil and natural gas located in
Marion County, West Virginia (the "Marion County Leases");
* Certain oil or natural gas wells located on the Marion County Leases
(the "Marion County Wells"), together with all of the equipment and
other tangible personal property physically attached to any of the
wells, including all pipelines, rights of way, easements, well head
equipment and leasehold estates;
* 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 the outstanding capital common stock of Cobham Gas Industries held
by Trans Energy, Inc. or any of our affiliates.
-6-
In consideration for the above referenced assets, the Buyer provided the
following to us:
* The return to us of 244,633 shares of Trans Energy, Inc. common stock
initially issued to Buyer in January 2005 and which shares are 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;
* We retain the right to use through December 31, 2005 the $50,000
reclamation bond in order to comply with certain West Virginia bonding
requirements; and
* Buyer will assume responsibility for the payment of certain loans in
the amount of $96,839, the 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 Buyer under that certain agreement dated November 5, 2004, and we
will retain responsibility for the payment of certain debts related to Cobham
Gas Industries.
Powder River Basin Wyoming
--------------------------
On March 6, 1998, we entered into an agreement to purchase from GCRL
Energy, Ltd. all of its interest in the Powder River Basin in Campbell and Crook
Counties, Wyoming, consisting of interests in five (5) wells, four (4) of which
are producing, interests in 30,000 leasehold acres, and interests in
approximately seventy-three miles of 3-D seismic data. The properties include
three producing fields from Minnelusa Sandstone and were discovered on 3-D
seismic. We made an initial payment for the properties of $50,000 and the
balance of $2,987,962 was paid for with proceeds from the sale of debentures.
The following table sets forth information concerning the existing oil
production per day of the producing wells located on the GCRL property.
Gross Bbls. Net % Net Bbls.
Name of Well Oil Per Day to TENG to TENG
------------ ----------- ------- -------
Sagebrush Flat (one unit) 61 42.15% 26
Pinon Fee #1 19 51.2% 9
Swartz Draw 27 27.7% 7
------ ----
Total 107 42
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 were 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.
Current Business Activities
We operate our oil and natural gas properties and transport and market
natural gas through our transmission systems in West Virginia. Although
management desires to acquire additional oil and natural gas properties and to
become more involved in exploration and development, this can only be
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accomplished if we can secure future funding. Management intends to continue to
develop and increase the production from the oil and natural gas properties that
it currently owns.
We will continue to transport and market natural gas through our various
pipelines in 2007.
During 2006, we drilled 4 new wells in Doddridge County, West Virginia to the
Gordon formation. The four new wells were the Lyon #2, Lyon #3, Lyon #4 and Lyon
#6 of which we own a 100% working interest in each well.
Research and Development
We have not allocated funds for conducting research and development
activities. We do not anticipate allocating funds for research and development
in the immediate future.
Marketing
We operate exclusively in the oil and gas industry. Natural gas production
from wells owned by us is generally sold to various intrastate and interstate
pipeline companies and natural gas marketing companies. Sales are generally made
on the spot market or under short-term contracts (one year or less) providing
for variable or market sensitive prices. These prices often are tied to natural
gas futures contracts as posted in national publications.
Natural gas delivered through our pipeline network is sold through a
contract with Sancho Oil and Gas Corporation to Dominion Hope Gas, a local
utility. Some of the gas is sold at a fixed price on a year long basis and some
at a variable price per month per Mcf. Under our contract with Sancho, we have
the right to sell natural gas subject to the terms and conditions of a 20-year
contract, as amended, that Sancho entered into with Hope Gas in 1988. This
agreement is a flexible volume supply agreement whereby we receive the full
price which Sancho charges the end user less a $.05 per Mcf marketing fee paid
to Sancho. In addition to the natural gas produced by our wells, we also
purchased approximately 876 Mcf of natural gas per day in 2005.
The natural gas from our Wetzel County wells is sold to East Resources or
Equitable Gas. The gas from our Doddridge County wells is sold to Dominion Hope
through a Trans Energy, Inc. contract.
We sell our oil production to third party purchasers under agreements at
posted field prices. These third parties purchase the oil at the various
locations where the oil is produced.
Although management believes that we are not dependent upon any one
customer, our marketing arrangement with Sancho accounted for approximately 77%
of our revenue for the year ended December 31, 2006, and approximately 77% for
2005. This marketing agreement is in effect until September 1, 2008.
Competition
We are in direct competition with numerous oil and natural gas companies,
drilling and income programs and partnerships exploring various areas of the
Appalachian Basin and elsewhere competing for customers. Many competitors are
large, well-known oil and gas and/or energy companies, although no single entity
dominates the industry. Many of our competitors possess greater financial and
personnel resources enabling them to identify and acquire more economically
desirable energy producing properties and drilling prospects than us.
Additionally, there is competition from other fuel choices to supply the energy
needs of consumers and industry. Management believes that there exists a viable
market place for smaller producers of natural gas and oil and for operators of
smaller natural gas transmission systems.
Government Regulation
The oil and gas industry is extensively regulated by federal, state and
local authorities. The scope and applicability of legislation is constantly
monitored for change and expansion. Numerous agencies, both federal and state,
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have issued rules and regulations binding on the oil and gas industry and its
individual members, some of which carry substantial penalties for noncompliance.
To date, these mandates have had no material effect on our capital expenditures,
earnings or competitive position.
Legislation and implementing regulations adopted or proposed to be adopted
by the Environmental Protection Agency and by comparable state agencies,
directly and indirectly, affect our operations. We are required to operate in
compliance with certain air quality standards, water pollution limitations,
solid waste regulations and other controls related to the discharging of
materials into, and otherwise protecting the environment. These regulations also
relate to the rights of adjoining property owners and to the drilling and
production operations and activities in connection with the storage and
transportation of natural gas and oil.
We may be required to prepare and present to federal, state or local
authorities data pertaining to the effect or impact that any proposed operations
may have upon the environment. Requirements imposed by such authorities could be
costly, time-consuming and could delay continuation of production or exploration
activities. Further, the cooperation of other persons or entities may be
required for us to comply with all environmental regulations. It is conceivable
that future legislation or regulations may significantly increase environmental
protection requirements and, as a consequence, our activities may be more
closely regulated which could significantly increase operating costs. However,
management is unable to predict the cost of future compliance with environmental
legislation. As of the date hereof, management believes that we are in
compliance with all present environmental regulations. Further, we believe that
our oil and gas explorations do not pose a threat of introducing hazardous
substances into the environment. If such event should occur, we could be liable
under certain environmental protection statutes and laws. We presently carry
insurance for environmental liability.
Our exploration and development operations are subject to various types of
regulation at the federal, state and local levels. Such regulation includes the
requirement of permits for the drilling of wells, the regulation of the location
and density of wells, limitations on the methods of casing wells, requirements
for surface use and restoration of properties upon which wells are drilled, and
governing the abandonment and plugging of wells. Exploration and production are
also subject to property rights and other laws governing the correlative rights
of surface and subsurface owners.
We are subject to the requirements of the Occupational Safety and Health
Act, as well as other state and local labor laws, rules and regulations. The
cost of compliance with the health and safety requirements is not expected to
have a material impact on our aggregate production expenses. Nevertheless, we
are unable to predict the ultimate cost of compliance.
Although past sales of natural gas and oil were subject to maximum price
controls, such controls are no longer in effect. Other federal, state and local
legislation, while not directly applicable to us, may have an indirect effect on
the cost of, or the demand for, natural gas and oil.
Employees
As of the end of our fiscal year on December 31, 2006, we employed fifteen
full-time employees, consisting of four executives, four marketing and clerical
persons, and seven production employees.
None of our employees are members of any union, nor have they entered into
any collective bargaining agreements. We believe that our relationship with our
employees is good. With the successful implementation of our business plan, we
may seek additional employees in the next year to handle anticipated potential
growth.
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Facilities
We currently occupy approximately 4,000 square feet of office space in St.
Marys, West Virginia, which we share with our subsidiaries, Tyler Construction
Company and Ritchie County Gathering Systems. We lease an aggregate of
approximately 4,000 square feet from an unaffiliated third party under a verbal
arrangement for $1,400 per month, inclusive of utilities.
In addition, we acquired a new lease of approximately 2,000 square feet of
office space in Parkersburg, West Virginia, which we share with our
subsidiaries, Tyler Construction Company and Ritchie County Gathering Systems.
This office is dedicated to our financial operations. We lease an aggregate of
approximately 2,000 square feet from an unaffiliated third party under a written
lease agreement for $1,450 per month, inclusive of utilities.
Industry Segments
We are presently engaged in two industry segments. The first is the
transportation and marketing of natural gas and oil; the second is the
exploratijn, development, and production of natural gas and oil. Reference is
made to Note 15, contained in the financial statements included herewith for the
disclosure of our segmented revenues, expenses, and operating loss for the past
two fiscal years.
Risk Factors
You should carefully consider the risks and uncertainties described below
and other information in this report. If any of the following risks or
uncertainties actually occur, our business, financial condition and operating
results, would likely suffer. Additional risks and uncertainties, including
those that are not yet identified or that we currently believe are immaterial,
may also adversely affect our business, financial condition or operating
results.
We have a history of losses and may realize future losses.
---------------------------------------------------------------------------
As a result of our revenue decreasing approximately 7% during the fiscal
year ended December 31, 2006, we may not achieve, or subsequently maintain
profitability if anticipated revenues do not increase in the future. We have
experienced operating losses, negative cash flow from operations and net losses
in each quarterly and annual period for the past several years. As of December
31, 2006, our net operating loss carryforward was approximately $25 million and
our accumulated deficit was approximately $33 million. We expect to continue to
incur significant expenses in connection with
* exploration and development of new and existing properties;
* costs of sales and marketing efforts;
* construction of gathering system infrastructure;
* additional personnel; and
* increased general and administrative expenses.
Accordingly, we will need to generate significant revenues to achieve and
attain, and eventually sustain profitability. If revenues do not increase, we
may be unable to attain or sustain profitability on a quarterly or annual basis.
Any of these factors could cause the price of our stock to decline.
We have a significant working capital deficit that makes it more
difficult to obtain capital necessary for our operations and which may
have an adverse effect on our future business.
----------------------------------------------------------------------
-10-
As of December 31, 2006, we had a working capital deficit of $2,318,875. If
our business does not produce positive working capital in the future, our
business and financial condition would most likely be materially and negatively
impacted.
It may be necessary for us to seek additional funding, which may not be
available on terms favorable to us, or at all.
---------------------------------------------------------------------------
Management believes that we may need to seek additional funding in the
future to provide sufficient working capital and funds for capital expenditures.
If we cannot meet future capital requirements through realized revenues from our
ongoing business, we may have to raise additional capital by borrowing or by
selling equity or equity-linked securities, which would dilute the ownership
percentage of our existing stockholders. Also, these securities could also have
rights, preferences or privileges senior to those of our common stock.
Similarly, if we raise additional capital by issuing debt securities, those
securities may contain covenants that restrict us in terms of how we operate our
business, which could also affect the value of our common stock. If we borrow
more money, we will have to pay interest and may also have to agree to
restrictions that limit operating flexibility. We may not be able to obtain
funds needed to finance operations at all, or may be able to obtain funds only
on very unattractive terms. Management may also explore other alternatives such
as a joint venture with other oil and gas companies. There can be no assurances,
however, that we will conclude any such transaction.
There are many competitors in the oil and gas industry.
---------------------------------------------------------------------------
We encounter many competitors in the oil and gas industry including in the
exploration and development of properties and the sale of oil and gas.
Management expects competition to continue to intensify in the future. Many
existing and potential competitors have greater financial resources, larger
market share and more customers than us, which may enable them to establish a
stronger competitive position than we have. If we fail to address competitive
developments quickly and effectively, we will not be able to grow and our
business will be adversely affected.
Our operating results are likely to fluctuate significantly and cause our
stock price to be volatile which could cause the value of your investment
in our shares to decline.
---------------------------------------------------------------------------
Quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. If operating results do not meet the expectations of
securities analysts and investors, the trading price of our common stock could
significantly decline which may cause the value of your investment to decline.
Some of the factors that could affect quarterly or annual operating results or
impact the market price of our common stock include:
* our ability to develop properties and to market our oil and gas;
* the timing and amount of, or cancellation or rescheduling of, orders
for our oil and gas;
* our ability to retain key management, sales and marketing and
engineering personnel;
* a decrease in the prices of oil and gas; and
* changes in costs of exploration or marketing oil and gas.
Due to these and other factors, quarterly and annual revenues, expenses and
results of operations could vary significantly in the future, and
period-to-period comparisons should not be relied upon as indications of future
performance.
Our business could be adversely affected by any adverse economic
developments in the oil and gas industry and/or the economy in general.
---------------------------------------------------------------------------
The oil and gas industry is susceptible to significant change that may
influence our business development due to a variety of factors, many of which
are outside our control. Some of these factors include:
* varying demand for oil and gas;
* fluctuations in price;
* competitive factors that affect pricing;
* attempts to expand into new markets;
* the timing and magnitude of capital expenditures, including costs
relating to the expansion of operations;
* hiring and retention of key personnel;
* changes in generally accepted accounting policies, especially those
related to the oil and gas industry; and
* new government legislation or regulation.
-11-
Any of the above factors or a significant downturn in the oil and gas industry
or with economic conditions generally, could have a negative effect on our
business and on the price of our common stock.
Our future success depends on retaining existing key employees and hiring
and assimilating new key employees. The loss of key employees or the
inability to attract new key employees could limit our ability to execute
our growth strategy, resulting in lost profitability and a slower rate of
growth.
---------------------------------------------------------------------------
Our future success depends, in part, on the ability to retain our key
employees including executive officers. Also, we do not carry, nor do we
anticipate obtaining, "key man" insurance on our executives. It would be
difficult for us to replace any one of these individuals. In addition, as we
grow we may need to hire additional key personnel. We may not be able to
identify and attract high quality employees or successfully assimilate new
employees into our existing management structure.
If we are unable to manage our growth effectively, our operations and
financial performance could be adversely affected.
---------------------------------------------------------------------------
The ability to manage and operate our business as we execute our
anticipated growth will require effective planning. Significant future growth
could strain our internal resources, leading to a lower quality of service and
other problems that could adversely affect our financial performance. Our
ability to manage future growth effectively will also require us to successfully
attract, train, motivate, retain and manage new employees and continue to update
and improve our operational, financial and management controls and procedures.
If we do not manage our growth effectively, our operations could be adversely
affected, resulting in slower growth and a failure to achieve or sustain
profitability.
Going concern issue.
---------------------------------------------------------------------------
Our ability to continue as a going concern is dependant upon our ability to
achieve a profitable level of operations. We may need, among other things,
additional capital resources which we will seek through loans from banks or
other forms of financing.
Risks relating to ownership of our common stock
The price of our common stock is extremely volatile and investors may not
be able to sell their shares at or above their purchase price, or at all.
---------------------------------------------------------------------------
Our common stock is presently traded on the OTC Bulletin Board, although
there is no assurance that a viable market will continue. The price of our
shares in the public market is highly volatile and may fluctuate substantially
because of:
* actual or anticipated fluctuations in our operating results;
* changes in or failure to meet market expectations;
* conditions and trends in the oil and gas industry; and
* fluctuations in stock market price and volume, which are particularly
common among securities of small capitalization companies.
Future sales or the potential for sale of a substantial number of shares of
our common stock could cause the market value to decline and could impair our
ability to raise capital through subsequent equity offerings.
If we do not generate necessary cash from our operations to finance future
business, we may need to raise additional funds through public or private
financing opportunities. The issuance of a substantial number of our common
shares to individuals or in the public markets, or the perception that these
sales may occur, could cause the market price of our common stock to decline and
could materially impair our ability to raise capital through the sale of
additional equity securities. Any such issuances would dilute the equity
interests of existing stockholders.
We do not intend to pay dividends.
---------------------------------------------------------------------------
To date, we have never declared or paid a cash dividend on shares of our
common stock. We currently intend to retain any future earnings for growth and
development of business and, therefore, do not anticipate paying any dividends
in the foreseeable future.
-12-
Possible "Penny Stock" Regulation.
---------------------------------------------------------------------------
Trading of our common stock on the OTC Bulletin Board may be subject to
certain provisions of the Securities Exchange Act of 1934, commonly referred to
as the "penny stock" rule. A penny stock is generally defined to be any equity
security that has a market price less than $5.00 per share, subject to certain
exceptions. If our stock is deemed to be a penny stock, trading in our stock
will be subject to additional sales practice requirements on broker-dealers.
These may require a broker dealer to:
* make a special suitability determination for purchasers of penny
stocks;
* receive the purchaser's written consent to the transaction prior to the
purchase; and
* deliver to a prospective purchaser of a penny stock, prior to the first
transaction, a risk disclosure document relating to the penny stock
market.
Consequently, penny stock rules may restrict the ability of broker-dealers
to trade and/or maintain a market in our common stock. Also, many prospective
investors may not want to get involved with the additional administrative
requirements, which may have a material adverse effect on the trading of our
shares.
Item 2. Description of Property
Our properties consist essentially of working and royalty interests owned
by us in various oil and gas wells and leases located in West Virginia. Our
proved reserves for the years ended December 31, 2006, 2005 and 2004 are set
forth below:
December 31,
--------------------------------------------
2006 2005 2004
----------- ----------- -----------
Natural Gas (mmcf)
Developed 13,161,354 4,263 542,955
Undeveloped -- -- --
----------- ----------- -----------
Total Proved 13,161,354 4,263 542,955
=========== =========== ===========
Crude Oil (Bbl)
Developed 1,340,964 215,844 106,649
Undeveloped -- -- --
----------- ----------- -----------
Total Proved 1,340,964 215,844 106,649
=========== =========== ===========
Productive Gas Wells
The following summarizes the Company's productive oil and gas wells as of
December 31, 2006. Productive wells are producing wells and wells capable of
production. Gross wells are the total number of wells in which the Company has
an interest. Net wells are the sum of the Company's fractional interests owned
in the gross wells.
Gross Net
------------- ------------
Oil and gas wells, West Virginia 245 245
------------- ------------
245 245
============= ============
Oil and Gas Acreage
The following table sets forth the undeveloped leasehold acreage, by area,
held by the Company as of December 31, 2006. Undeveloped acres are acres on
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves. Gross acres are the total number of acres
in which the Company has a working interest. Net acres are the sum of the
Company's fractional interests owned in the gross acres. In certain leases, the
Company's ownership varies at different depths; therefore, the net acres in
these leases are calculated using the lowest ownership interest at any depth.
Gross Net
------------- ------------
West Virginia, approximately 20,000 20,000
------------- ------------
20,000 20,000
============= ============
The estimates for 2005 and 2004 are based primarily on the reports of
Robert L. Richards (Wyoming), Geologist and presently an officer and director of
Trans Energy, and Mark V. Schumacher, PE (West Virginia). The estimates for 2006
are based upon the report of Schlumberger Technology Corporation, independent
petroleum consultants, dated February 27, 2007.
-13-
Such reports are, by their very nature, inexact and subject to changes and
revisions. Proved developed reserves are reserves expected to be recovered from
existing wells with existing equipment and operating methods. Proved undeveloped
reserves are expected to be recovered from new wells drilled to known reservoirs
on undrilled acreage for which existence and recoverability of such reserves can
be estimated with reasonable certainty, or from existing wells where a
relatively major expenditure is required to establish production. No estimates
of reserves have been included in any reports to any federal agency other than
the SEC. See SFAS 69 Supplemental Disclosures included as part of our
consolidated financial statements.
Set forth in the following schedule is the average sales price per unit of
oil, expressed in barrels ("bbl"), and of natural gas, expressed in thousand
cubic feet ("mcf"), produced by us for the past three fiscal years. The increase
in the cost of oil production in 2006 is attributed to expenses incurred putting
water flood into operation.
Years ended December 31,
--------------------------------------------
Average sales price:
2006 2005 2004
----------- ----------- -----------
Gas (per mcf) $ 6.78 $ 10.28 $ 7.40
Oil (per bbl) 47.26 56.20 30.24
Average cost of production:
Gas (per mcf) -- -- --
Oil (per bbl) $ 16.28 $ 16.19 14.19
We have not filed any estimates of total, proved net oil and gas reserves
with any federal authority or agency since the beginning of our last fiscal
year.
The following schedule sets forth the capitalized costs relating to oil and
gas producing activities by us for the past three fiscal years.
Years ended December 31,
--------------------------------------------
2006 2005 2004
----------- ----------- -----------
Proved oil and gas
producing properties
and related lease
and well equipment $ 6,208,786 $ 6,134,651 $ 7,093,676
Unproved oil and gas
properties 10,156 64,004 95,945
Accumulated depreciation
and depletion (1,569,997) (4,038,399) (3,870,874)
----------- ----------- -----------
Net Capitalized Costs $ 4,648,945 $ 2,160,256 $ 3,318,747
=========== =========== ===========
The following schedule summarizes changes in the standardized measure of
discounted future net cash flows relating to our proved oil and gas reserves.
Years ended December 31,
--------------------------------------------
2006 2005 2004
----------- ----------- -----------
Standardized measure,
beginning of year $23,044,241 $ 4,438,836 $ 1,864,377
Oil and gas sales, net
of production costs (580,885) (392,855) (125,966)
Sales of mineral in place -- -- --
Purchases -- -- 2,375,205
Net change due to revisions
in quantity estimates
and accretion of discount 4,913,361 18,998,260 325,220
------------ ----------- -----------
Standardized measure,
end of year $ 27,376,717 $23,044,241 $ 4,438,836
============ =========== ===========
-14-
We do not anticipate investing in or purchasing assets and/or property for
the purpose of capital gains. It is our intention to purchase assets and/or
property for the purpose of enhancing our primary business operations. We are
not limited as to the percentage amount of our assets we may use to purchase any
additional assets or properties.
Item 3. Legal Proceedings
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 the
Company for non-payment of an account payable. The judgment calls for monthly
payments of $351 and is bearing interest at 10.00% per annum. At December 31,
2006, the Company had accrued a balance of $14,062 plus accrued interest of
$7,250 which is included in judgments payable. The balance due on this judgment
including the related interest was paid in full on February 28, 2007.
On July 1, 1998, RR Donnelly 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 December 31, 2006, the
Company has accrued a balance of $63,705 plus accrued interest of $33,029 which
is included in judgments payable. Each of the judgments were paid in full on
February 28, 2007. The balance due on this judgment including the related
interest was paid in full on February 28, 2007.
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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our securities holders during the fourth
quarter of the fiscal year ended December 31, 2006.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Our common stock is quoted on the OTC Bulletin Board under the symbol TENG.
Prior to the effectiveness of our reverse stock split on January 28, 2005, our
stock traded under the symbol of TSRG. Set forth in the table below are the
quarterly high and low prices of our common stock as obtained from the OTC
Bulletin Board for the past two fiscal years and adjusted for the one share for
150 shares reverse stock split.
High Low
-------- --------
2006
----
First Quarter $ 0.90 $ 0.58
Second Quarter $ 0.70 $ 0.50
Third Quarter $ 0.85 $ 0.51
Fourth Quarter $ 1.00 $ 0.66
2005
----
First Quarter $ 2.55 $ 1.55
Second Quarter $ 1.97 $ 0.70
Third Quarter $ 1.85 $ 1.10
Fourth Quarter $ 1.75 $ 0.71
-15-
As of March 29, 2007, there were approximately 388 holders of record of our
common stock, which figure does not take into account those shareholders whose
certificates are held in the name of broker-dealers or other nominee accounts.
Dividend Policy
We have not declared or paid cash dividends or made distributions in the
past, and we do not anticipate that we will pay cash dividends or make
distributions in the foreseeable future. We currently intend to retain and
reinvest future earnings to finance operations.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following information should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-KSB.
Results of Operations
The following table sets forth the percentage relationship to total
revenues of principal items contained in the statements of operations of the
consolidated financial statements included herewith for the two most recent
fiscal years ended December 31, 2006 and 2005. It should be noted that
percentages discussed throughout this analysis are stated on an approximate
basis.
Fiscal Years Ended
December 31,
----------------------
2006 2005
----- -----
Total revenues........................................................ 100% 100%
Total costs and expenses.............................................. 151 115
Total other income (expenses)......................................... 19 (6)
Loss before income taxes and discontinued operations ................ (32) (21)
Discontinued operations............................................... (27) --
Income taxes.......................................................... -- --
Net (loss)............................................................ (59) (21)
For the Year Ended December 31, 2006 Compared to the Year Ended December 31,
2005
Total revenues of $1,420,802 for the year ended December 31, 2006 ("2006")
decreased 7% compared to $1,526,728 for the year ended December 31, 2005
("2005"), due primarily to the loss of the Cobham revenues for 2005 partially
offset by the increase of oil and gas prices in 2006. In 2006, oil made up 25%
of total revenues compared to 23% in 2005, and gas represented 75% of revenues
in 2006 compared to 77% in 2005 The changes were considered minimal representing
only a slight difference in percentage points.
We had an operating loss of $1,685,316 for 2006 compared to our operating
loss of $951,813 in 2005. Total operating expenses increased 25% in 2006
primarily due to the 141% increase in selling, general and administrative. These
increases were offset by a 40%% decrease in production costs for the period. The
increase in selling, general and administrative expenses was primarily due to
the recording of $1,686,450 in expense for the value of common stock issued to
employees and consultants. As we reorganized our management team after the sale
of Arvilla we found it necessary to issue shares to attract the caliber of
people we need to move the Company forward. We do not expect this stock
compensation expense to reoccur in 2007. We realized a loss on the sale of
assets of $178,393 in 2005 compared to a gain of $678,319 in 2006.
Other income (expenses) as a percentage of revenues increased from negative
7% in 2005 to a positive 7% in 2006. This change is attributed to a gain on
extinguishment of debt in 2006 offset by an increase in interest expense from
$126,885 in 2005 to $221,210 in 2006 due to the borrowing of debt for well
drilling and improvement. We realized a gain on extinguishment of debt of
$315,365 in 2006, compared to $9,685 in 2005.
Our net loss for 2006 was $2,948,528 versus a net loss of $1,050,119 for
2005. The increase in net loss in 2006 is primarily attributed to increase in
general and administrative expenses as described above and the loss from
disposal of discontinued operations of $1,541,142.
-16-
Net Operating Losses
--------------------
We have accumulated approximately $25 million of net operating loss
carryforwards as of December 31, 2006, which may be offset against future
taxable income through 2026. The use of these losses to reduce future income
taxes will depend on the generation of sufficient taxable income prior to the
expiration of the net operating loss carryforwards. In the event of certain
changes in control, there will be an annual limitation on the amount of net
operating loss carryforwards which can be used. No tax benefit has been reported
in the financial statements for the year ended December 31, 2006 because the
potential tax benefits of the loss carryforward is offset by valuation allowance
of the same amount.
Liquidity and Capital Resources
Historically, working capital needs have been satisfied through our
operating revenues and from borrowed funds. Our working capital deficit at
December 31, 2006 was $2,610,953 compared with a deficit of $3,012,700 at
December 31, 2005. We anticipate meeting working capital needs during the 2007
fiscal year with revenues from operations and possibly from capital raised
through the sale of either equity or debt securities. We have no other current
agreements or arrangements for additional funding and there can be no assurance
such funding will be available to us, or if available, such funding will be on
acceptable or favorable terms to us.
As of December 31, 2006, we had total assets of $6,251,409 and
stockholders' equity of $710,396 compared to total assets of $10,934,424 and
total stockholders' equity of $497,076 at December 31, 2005. The decrease in
total assets and increase in stockholders' equity at December 31, 2006 is
attributed to the disposal of Arvilla and the settlement of debt for common
stock. We have recorded a long-term liability of $190,364 as an asset retirement
obligation that relates to, in part, the estimated cost to plug wells in the
event it becomes necessary.
Because we have generated significant losses from operations through
December 31, 2006 and have a working capital deficit at December 31, 2006, there
exists substantial doubt about our ability to continue as a going concern.
Revenues have not been sufficient to cover operating costs and to allow us to
continue as a going concern. Potential proceeds from the future sale of common
stock, other contemplated debt and equity financing, and increases in operating
revenues from new development would enable 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.
In the opinion of management, inflation has not had a material effect on
the operations of Trans Energy.
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:
-17-
* 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 technology
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.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies
related guidance within GAAP and does not require any new fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. Earlier adoption is encouraged. The Company does not expect the
adoption of SFAS No. 157 to have a significant effect on its financial position
or results of operation.
In June 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109", which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company does
not expect the adoption of FIN 48 to have a material impact on its financial
reporting, and the Company is currently evaluating the impact, if any, the
adoption of FIN 48 will have on its disclosure requirements.
-18-
Item 7. Financial Statements
Our financial statements as of and for the fiscal years ended December 31,
2006 and 2005 have been examined to the extent indicated in their report by
Malone & Bailey, PC and H J & Associates, LLC, independent certified public
accountants, respectively, and have been prepared in accordance with generally
accepted accounting principles and pursuant to Regulation S-B as promulgated by
the SEC. The aforementioned financial statements are included herein starting
with page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On September 8, 2006, HJ & Associates, LLC was terminated as the certifying
accountant. HJ & Associates, LLC has served from the inception of the Company as
the certifying accountant. From the date on which HJ & Associates LLC was
engaged until the date HJ & Associates, LLC was terminated, there were no
disagreements with HJ & Associates, LLC on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of HJ & Associates, LLC
would have caused HJ & Associates, LLC to make reference to the subject matter
of the disagreements in connection with any reports it would have issued, and
there were no "reportable events" as that term is defined in Item 304(a)(1)(iv)
of Regulation S-B.
On September 8, 2006, the Company entered into an engagement letter with
Malone & Bailey, PC to assume the role of its new certifying accountant. During
the two most recent fiscal years and the subsequent interim periods prior to the
engagement of Malone & Bailey, PC, the Registrant did not consult with Malone &
Bailey, PC with regard to the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements; or any
matter that was either the subject of a disagreement or a reportable event (as
described in Item 304(a)(1)(iv) of Regulation S-B).
The decision to change principal auditors and the engagement of the new
principal auditor was recommended and approved by the Registrant's Board of
Directors.
Item 8A. Controls and Procedures
As of the end of the period covered by this annual report, we carried out
an evaluation, under the supervision and with the participation of management,
including our chief executive officer and chief 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. In designing and evaluating the disclosure controls and
procedures, management recognizes that there are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their desired control
objectives. Additionally, in evaluating and implementing possible controls and
procedures, management is required to apply its reasonable judgment.
Based upon the required evaluation, our chief executive officer and chief
financial officer concluded as of December 31, 2006, our disclosure controls and
procedures were not effective in timely alerting them to material information
relating to the company 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. Our
auditors had several adjusting entries for the year ended December 31, 2006. We
are working to improve our processes and our communications with our auditors.
There have been no significant changes in our internal controls over financial
reporting or in other factors that could significantly affect internal controls
over financial reporting subsequent to the date we carried out our evaluation.
Item 8B. Other Information
None.
Reports on Form 8-K
Since the beginning of our fiscal fourth quarter commencing October 1, 2006
through the date of this report, we have filed current reports on Form 8-K
reporting the following:
October 9, 2006 - reporting under Item 3.02 that Trans Energy has
Issued an aggregate of 4,247,461 shares of common stock to 13 persons
for debt owed and services rendered.
-19-
January 7, 2007 - reporting under Item 2.01 the completion of the
assignment for cash of all rights, title and interest in six oil and/or
gas wells to Leatherwood, Inc., a Pennsylvania corporation.
Reporting also the acquisition of 75% of the rights and interests in
certain oil and gas leases in and under certain tracts of land
containing approximately 3,120 acres located in Trego County, Kansas.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth the names, ages, and offices held by our
directors and executive officers:
Name Position Director Since Age
---- -------- -------------- ---
James K. Abcouwer C.E.O., President and Chairman April 2006 52
Loren E. Bagley Vice President and Director August 1991 64
William F. Woodburn Secretary / Treasurer August 1991 64
Chief Operating Officer
and Director
Robert L. Richards Director September 2001 59
John G. Corp Director February 2005 46
On January 6, 2006, our board of directors elected James K. Abcouwer as our
new President and Chief Executive Officer. On April 27, 2006 Mr. Abcouwer was
elected as a member of the board of directors and its Chairman.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. There are no
agreements with respect to the election of directors. We have not compensated
our directors for service on the Board of Directors or any committee thereof,
but directors are reimbursed for expenses incurred for attendance at meetings of
the Board and any committee thereof. Executive officers are appointed annually
by the Board and each executive officer serves at the discretion of the Board.
The Executive Committee of the Board of Directors, to the extent permitted under
Nevada law, exercises all of the power and authority of the Board in the
management of the business and affairs of Trans Energy between meetings of the
Board.
The business experience of each of the persons listed above during the past
five years is as follows:
James K. Abcouwer became President and C.E.O. in January 2006. Mr. Abcouwer
has 25 years of experience in the energy industry and is the former C.E.O. of
Columbia Natural Resources, Inc., an independent natural gas producer in the
Appalachian Basin. He has also served as President and C.E.O. of EnergyUSA, a
unit of NiSource Inc. Mr. Abcouwer is a 1975 graduate of the United States
Military Academy at West Point, and received a Masters in Business
Administration degree from Harvard Business School in 1982. Additionally, he is
co-owner of Northstar Energy Corp. of Charleston, W Va., an independent oil and
gas development company.
-20-
Loren E. Bagley served as our President and C.E.O. from September 1993 to
September 2001, at which time he resigned as President and was appointed Vice
President. From 1979 to the present, Mr. Bagley has been self-employed in the
oil and gas industry as president, C.E.O. or vice president of various
corporations which he has either started or purchased, including Ritchie County
Gathering Systems, Inc. Mr. Bagley's experience in the oil and gas industry
includes acting as a lease agent, funding and drilling of oil and gas wells,
supervising production of over 175 existing wells, contract negotiations for
purchasing and marketing of natural gas contracts, and owning a well logging
company specializing in analysis of wells. Prior to becoming involved in the oil
and gas industry, Mr. Bagley was employed by the United States government with
the Agriculture Department. Mr. Bagley attended Ohio University and Salem
College and earned a B.S. Degree.
John G. Corp became a director on February 28, 2005. Mr. Corp has more than
25 years of extensive experience in drilling, production and oilfield service
operations in the Appalachian Basin. Prior to joining Trans Energy, Inc., he
held various management positions with Belden & Blake Corp. from 1987-2004. He
has a BS degree in Petroleum Engineering from Marietta (Ohio) College and is a
member of the Society of Petroleum Engineers, the Ohio Oil & Gas Association and
is chairman of the Technical Advisory Committee or the Ohio Department of
Natural Resources.
William F. Woodburn has served as our Vice President from August 1991 to
September 2001, at which time he resigned as Vice President and was appointed
Secretary / Treasurer. In January 2006, Mr. Woodburn was named as our Chief
Operating Officer. Mr. Woodburn has been actively engaged in the oil and gas
business in various capacities for the past twenty years. For several years
prior to 1991, Mr. Woodburn supervised the production of oil and natural gas and
managed the pipeline operations of Tyler Construction Company, Inc. and Tyler
Pipeline, Inc. Mr. Woodburn is a stockholder and serves as President of Tyler
Construction Company, Inc., and is also a stockholder of Tyler Pipeline, Inc.
which owns and operates oil and gas wells in addition to natural gas pipelines,
and Ohio Valley Welding, Inc. which owns a fleet of heavy equipment that
services the oil and gas industry. Prior to his involvement in the oil and gas
industry, Mr. Woodburn was employed by the United States Army Corps of Engineers
for twenty four years and was Resident Engineer on several construction
projects. Mr. Woodburn graduated from West Virginia University with a B.S. in
civil engineering.
Robert L. Richards became a director and was appointed President and C.E.O.
in September 2001. On February 28, 2004, Mr. Richards relinquished his position
as C.E.O., but remained as a director. From 1982 to the present, he has been
President of Robert L. Richards, Inc. a consulting geologist firm with 27 years
experience in the petroleum industry. He has also served as a geologist with
Exxon, exploration geologist with Union Texas Petroleum, and regional
exploration manager for Carbonit Exploration, Inc. From 2000 to the present, he
has been President and C.E.O. of Derma - Rx, Inc., a formulator and marketer of
skin care products. Also, from 1992 to August 2000, Mr. Richards was C.E.O. of
Kaire Nutraceuticals, Inc., a developer and marketer of health and nutritional
products. Mr. Richards served as Vice President of Continental Tax Corporation
from March 1989 to August 1992. He has five and one-half years experience in the
United States Air Force as an Instructor Pilot. Mr. Richards holds a B.S. degree
in geology from Brigham Young University.
Item 10. Executive Compensation
We currently have a bonus and profit sharing compensation plan for the
benefit of employees and officers of the company. The program is primarily
focused on senior officers, but certain elements of the plan are made available
to key managers and to any employee in certain circumstances. In addition,
management is presently in the process of developing a deferred compensation
plan for employees and officers of the company, which will be presented to the
board of directors later in 2007. We currently have an employment contract with
Mr. Abcouwer with a two year term that includes bonus compensation for
accomplishment of certain objectives related to value creation and enhancement.
For the fiscal year ended December 31, 2006, our Chief Executive Officer
was paid cash compensation of $120,000. No other executive officers received
cash compensation greater than $60,000 in any of the past three fiscal years.
-21-
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, to the best of our knowledge as
December 31, 2006, with respect to each person known by us to own beneficially
more than 5% of our outstanding common stock, each director and all directors
and officers as a group. Unless otherwise noted, the address of each person
listed below is that of Trans Energy, 210 Second Street, St. Marys, West
Virginia 26170.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class(1)
------------------- -------------------- -----------
James K. Abcouwer * 1,467,610(2) 15.5%
Robert L. Richards * 261,754(3) 2.8%
Loren E. Bagley * 1,191,874(4) 12.6%
William F. Woodburn * 1,746,626(5) 18.5%
John G. Corp.* 45,000 0.5%
All directors and executive officers
a group (5 persons) 49.9%
----------------------
* Indicates director and/or executive officer at December 31, 2006
(1) Based upon 9,450,565 shares of common stock outstanding. (2) Includes
1,287,500 shares of common stock held in the name of the Abcouwer
Family Limited Partnership Trust.
(3) Includes 80,087 shares held in the name of Argene Richards, wife of Mr.
Richards.
(4) Includes 33,543 shares held in the name of Carolyn S. Bagley, wife of
Mr. Bagley, over which Mrs. Bagley retains voting power.
(5) Includes 133,670 shares in the name of Janet L. Woodburn, wife of Mr.
Woodburn, over which shares Mrs. Woodburn retains voting power, and
314,070 in the name of a corporation in which William and Janet
Woodburn are officers and shareholders.
Item 12. Certain Relationships and Related Transactions
During the past two fiscal years, there have been no transactions between
us and any officer, director, nominee for election as director, or any
shareholder owning greater than five percent (5%) of our outstanding shares, nor
any member of the above referenced individuals' immediate family, except as set
forth below.
Loren E. Bagley is President of Sancho, a principal purchaser of our
natural gas. Mr. Bagley's wife, Carolyn S. Bagley is a director and owner of 33%
of the outstanding capital stock of Sancho. Under our contract with Sancho, we
have the right to sell natural gas subject to the terms and conditions of a
20-year contract, as amended, that Sancho entered into with Hope Gas in 1988.
This agreement is a flexible volume supply agreement whereby we receive the full
price which Sancho receives less a $.05 per Mcf marketing fee paid to Sancho.
The price of the natural gas is based upon the greater of the residential gas
commodity index or the published Inside F.E.R.C. Index, at our option, for the
first 1,500 Mcf purchased per day by Hope Gas and thereafter the price is the
Inside F.E.R.C. Index. The residential gas commodity index does not directly
fluctuate with the overall price of natural gas. The Inside F.E.R.C. Index
fluctuates monthly with the change in the price of natural gas. While such
option provides certain price protection for us there can be no assurance that
prices paid by us to suppliers will be lower than the price which we would
receive under the Hope Gas arrangement. During 2006, we paid Sancho an aggregate
of approximately $20,195 pursuant to such contract.
-22-
It is our policy that any future material transactions between us and
members of management or their affiliates shall be on terms no less favorable
than those available from unaffiliated third parties.
Item 13. Exhibits
Exhibits
Exhibit No. Exhibit Name
----------- ------------
2.1(1) Stock Acquisition Agreement between Trans Energy and Loren E.
Bagley and William F. Woodburn
2.2(1) Asset Acquisition Agreement between Trans Energy and Dennis L.
Spencer
2.3(1) Asset Acquisition Agreement between Trans Energy and Tyler
Pipeline, Inc.
2.4(1) Stock Exchange Agreement between Trans Energy and Ritchie County
Gathering Systems, Inc.
2.5(1) Plan and Agreement of Merger between Trans Energy, Inc. (Nevada)
and Apple Corp. (Idaho), to facilitate the change of our
corporate domicile to Nevada
2.6(2) Agreements related to acquisition of Vulcan Energy Corporation
2.7(5) Agreement and Plan of Reorganization with Arvilla, Inc. 3.1(1)
Articles of Incorporation and all amendments pertaining thereto,
for Apple Corp., an Idaho corporation
3.2(1) Articles of Incorporation for Trans Energy, Inc., a Nevada
corporation
3.3(1) Articles of Merger for the States of Nevada and Idaho 3.4(1)
By-Laws
4.1(1) Specimen Stock Certificate 10.1(1) Marketing Agreement with
Sancho Oil and Gas Corporation 10.2(1) Gas Purchase Agreement
with Central Trading Company
10.3(1) Price Agreement with Key Oil Company
10.4(3) Settlement Agreement and Mutual Release
10.5(4) Agreement with Texas Energy Trust Company
10.6(4) Assignment and Agreement with Texas Energy Trust Company and
Cobham Gas Industries, Inc.
10.7(7) Asset Purchase Agreement with Texas Energy Trust Company.
10.8(8) Definitive Agreement to sell Arvilla Oilfield Services, LLC
10.9(9) First Amendment to Definitive Agreement
21.1(6) Subsidiaries of Registrant (Revised)
31.1 Certification of C.E.O. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Accounting Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
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
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
99.1(1) Reserve Estimate and Evaluation of oil and gas properties
99.2(1) Reserve Estimate and Evaluation for Dennis L. Spencer wells
----------------------
(1) Previously filed as exhibit to Form 10-SB.
(2) Previously filed as exhibit to Form 8-K dated August 7, 1995.
(3) Previously filed as exhibit to Form 8-K file January 23, 2004.
(4) Previously filed as exhibit to Form 8-K filed November 11, 2004.
-23-
(5) Previously filed as exhibit to the Preliminary Information Statement
pursuant to Section 14C filed with the SEC on December 8, 2004.
(6) Previously filed as exhibit to Form 10-KSB for year ended December 31,
2004 filed April 27, 2005.
(7) Previously filed as exhibit to Form 8-K dated September 1, 2005.
(8) Previously filed as exhibit to Form 8-K dated January 3, 2006.
(9) Previously filed as exhibit to Form 8-K filed April 13, 2006
Item 14. Principal Accountants Fees and Services
We do not have an audit committee and as a result our entire board of
directors performs the duties of an audit committee. Our board of directors will
approve in advance the scope and cost of the engagement of an auditor before the
auditor renders audit and non-audit services. As a result, we do not rely on
pre-approval policies and procedures.
Audit Fees
----------
The aggregate fees billed by our independent auditors, Malone & Bailey, PC
and H J & Associates, LLC for professional services rendered for the audit of
our annual financial statements included in our Annual Reports on Form 10-KSB
for the years ended December 31, 2006 and 2005, and for the review of quarterly
financial statements included in our Quarterly Reports on Form 10-QSB for the
quarters ending March 31, June 30 and September 30, 2006 and 2005, were:
2006 2005
----------- ---------
Malone & Bailey PC $ 38,500 $ -0-
HJ& Associates, LLC $ 97,249 $ 105,000
Audit Related Fees
------------------
For the years ended December 31, 2006 and 2005, there were no fees billed
for assurance and related services by Malone & Bailey, PC or H J & Associates,
LLC relating to the performance of the audit of our financial statements which
are not reported under the caption "Audit Fees" above.
Tax Fees
--------
For the years ended December 31, 2006 and 2005, fees billed by Malone &
Bailey, PC or H J & Associates, LLC, respectively, for tax compliance, tax
advice and tax planning were $-0- and $2,300, respectively.
We do not use the auditors for financial information system design and
implementation. These services, which include designing or implementing a system
that aggregates source data underlying the financial statements or generates
information that is significant to our financial statements, are provided
internally or by other service providers. We do not engage the auditors to
provide compliance outsourcing services.
The board of directors has considered the nature and amount of fees billed
by Malone & Bailey, PC and H J & Associates, LLC and believes that the provision
of services for activities unrelated to the audit is compatible with maintaining
Malone & Bailey, PC's and H J & Associates, LLC's independence.
-24-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TRANS ENERGY, INC.
BY: /S/ JAMES K. ABCOUWER
--------------------------------------------
James K. Abcouwer,
President and C.E.O.
Dated: April 17, 2007
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/S/ JAMES K. ABCOUWER President, C.E.O. and Chairman April 17, 2007
---------------------------------- (Principal Executive Officer)
James K. Abcouwer
/S/ LISA A. CORBITT Principal Financial April 17, 2007
---------------------------------- and Accounting Officer
Lisa A. Corbitt
/S/ LOREN E. BAGLEY Vice President and Director April 17, 2007
----------------------------------
Loren E. Bagley
/S/ JOHN G. CORP Director April 17, 2007
----------------------------------
John G. Corp
/S/ WILLIAM F. WOODBURN Secretary, Treasurer, April 17, 2007
---------------------------------- C.O.O. and Director
William F. Woodburn
/S/ ROBERT L. RICHARDS Director April 17, 2007
----------------------------------
Robert L. Richards
-27-
TRANS ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
C O N T E N T S
Reports of Independent Registered Public Accounting Firms ................ F-2
Consolidated Balance Sheet ............................................... F-4
Consolidated Statements of Operations .................................... F-6
Consolidated Statements of Stockholders' Equity .......................... F-7
Consolidated Statements of Cash Flows .................................... F-8
Notes to the Consolidated Financial Statements ........................... F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Trans Energy, Inc. and Subsidiaries
St. Marys, West Virginia
We have audited the accompanying consolidated balance sheet of Trans Energy,
Inc. and Subsidiaries (the Company) as of December 31, 2006 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
Decemger 31, 2006 and the results of their operations and their cash flows for
the year then ended, in conformity with United States generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has generated significant losses
from operations, has an accumulated deficit of $33,026,735 and has a working
capital deficit of $2,610,953 at December 31, 2006, which together raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Malone & Bailey, PC
----------------------------
www.malone-bailey.com
Houston, Texas
April 12, 2007
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Trans Energy, Inc. and Subsidiaries
St. Marys, West Virginia
We have audited the accompanying consolidated statements of operations, stock-
holders' equity and cash flows of Trans Energy, Inc. and Subsidiaries (the
Company) for the year ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
the Company for the year ended December 31, 2005, in conformity with United
States generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 8 to the
December 31, 2005 consolidated financial statements, the Company had generated
significant losses from operations, had an accumulated deficit of $30,078,207
and had a working capital deficit of $3,012,700 at December 31, 2005, which
together raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note 8 to the December 31, 2005 financial statements. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ HJ & Associates, LLC
----------------------------
HJ & Associates, LLC
Salt Lake City, Utah
May 23, 2006
F-3
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
December 31,
2006
--------------
CURRENT ASSETS
Cash $ 208,815
Accounts receivable, related parties 275,272
Accounts receivable, net 569,600
Prepaid expenses 22,500
--------------
Total Current Assets 1,076,187
--------------
PROPERTY AND EQUIPMENT, Net of accumulated
depreciation of $84,510 490,753
--------------
Oil and gas properties, using successful efforts accounting:
Proved properties 4,816,138
Unproved properties 10,156
Pipelines 1,392,648
Accumulated depreciation, depletion and amortization (1,569,997)
--------------
Net oil and gas properties 4,648,945
--------------
OTHER ASSETS 35,524
--------------
TOTAL ASSETS $ 6,251,409
==============
See notes to consolidated financial statements.
F-4
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
2006
--------------
CURRENT LIABILITIES
Accounts payable - trade $ 1,165,846
Related party payables 237,347
Accrued expenses 357,781
Judgments payable 118,046
Notes payable - current portion 1,258,381
Notes payable - related parties 549,739
--------------
Total Current Liabilities 3,687,140
--------------
LONG-TERM LIABILITIES
Notes payable, net 1,663,509
Asset retirement obligation 190,364
--------------
Total Long-Term Liabilities 1,853,873
--------------
Total Liabilities 5,541,013
--------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock; 10,000,000 shares authorized at $0.001 par
value; -0- shares issued and outstanding --
Common stock; 500,000,000 shares authorized at $0.001 par
value; 9,450,565 shares issued and outstanding 9,451
Additional paid-in capital 33,727,680
Accumulated deficit (33,026,735)
--------------
Total Stockholders' Equity 710,396
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,251,409
==============
See notes to consolidated financial statements.
F-5
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended
December 31,
2006 2005
----------- -----------
REVENUES $ 1,420,802 $ 1,526,728
----------- -----------
OPERATING EXPENSES
Production costs 534,065 893,457
Depreciation and amortization 322,989 297,693
Selling, general and administrative 2,927,383 1,108,998
(Gain) loss on disposition of assets (678,319) 178,393
----------- -----------
Total Operating Expenses 3,106,118 2,478,541
----------- -----------
LOSS FROM OPERATIONS (1,685,316) (951,813)
----------- -----------
OTHER INCOME (EXPENSE)
Other income -- 2,871
Gain on extinguishment of debt 315,365 9,665
Interest expense (221,210) (131,185)
----------- -----------
Total Other Income (Expense) 94,155 (118,649)
----------- -----------
LOSS BEFORE INCOME TAXES (1,591,161) (1,070,462)
INCOME TAXES -- --
----------- -----------
LOSS FROM CONTINUING OPERATIONS (1,591,161) (1,070,462)
INCOME FROM DISCONTINUED OPERATIONS 183,775 20,343
LOSS FROM DISPOSAL OF DISCONTINUED OPERATIONS (1,541,142) --
----------- -----------
NET LOSS $(2,948,528) $(1,050,119)
=========== ===========
LOSS PER SHARE - BASIC AND DILUTED
Continuing operations $ (0.25) $ (0.22)
Discontinued operations (0.21) --
----------- -----------
Total $ (0.46) $ (0.22)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 6,432,839 4,678,294
=========== ===========
See notes to consolidated financial statements.
F-6
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Common Stock
-------------------------- Capital in
Excess of Treasury Accumulated
Shares Amount Par Value Stock Deficit Total
------------ ----------- ------------ ----------- ------------ ------------
Balance, December 31, 2004 3,555,074 $ 3,555 $ 27,854,647 $ -- $(29,028,088) $(1,169,886)
Common stock issued for
services 50,000 50 92,450 -- -- 92,500
Fractional shares issued in
reverse stock split 382 -- -- -- -- --
Common stock issued for
acquisition 1,185,024 1,185 2,368,863 -- -- 2,370,048
Contributed services -- -- 250,000 -- -- 250,000
Common stock issued for debt 141,668 142 254,858 -- -- 255,000
Treasury shares received for
assets -- -- -- (286,467) -- (286,467)
Common stock issued for
services 20,000 20 35,980 -- -- 36,000
Net loss for the year -- -- -- -- (1,050,119) (1,050,119)
------------ ----------- ------------ ----------- ------------ ------------
Balance, December 31, 2005 4,952,148 4,952 30,856,798 (286,467) (30,078,207) 497,076
Treasury shares received for
subsidiary -- -- -- (302,418) -- (302,418)
Treasury shares cancelled (766,044) (766) (588,119) 588,885 -- --
Common stock issued for
acquisition 1,000,000 1,000 679,000 -- -- 680,000
Common stock issued for
services 2,807,000 2,807 1,683,643 -- -- 1,686,450
Common stock issued for
cash 337,500 338 269,662 -- -- 270,000
Common stock issued for debt 1,119,961 1,120 608,016 -- -- 609,136
Fair value of options granted -- -- 196,159 -- -- 196,159
Imputed interest on notes
Payable to related parties -- -- 22,521 -- -- 22,521
Net loss for the year -- -- -- -- (2,948,528) (2,948,528)
------------ ----------- ------------ ----------- ------------ -----------
Balance, December 31, 2006 9,450,565 $ 9,451 $ 33,727,680 $ -- $(33,026,735) $ 710,396
============ ============ ============ =========== ============ ===========
See notes to consolidated financial statements.
F-7
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
2006 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,948,528) $ (1,050,119)
Adjustments to reconcile net loss to net cash used by
operating activities:
(Income) loss from discontinued operations (183,775) (20,343)
Loss on disposal of discontinued operations 1,541,142 --
Depreciation, depletion and amortization 322,989 297,693
Accretion expense 14,126 37,650
(Gain) loss on disposition of assets (678,319) 176,037
Gain on debt distinguishment (315,365) --
Share-based compensation 1,882,609 378,500
Imputed interest on loans payable to related parties 22,521 --
Changes in operating assets and liabilities:
Accounts receivable 551,824 (742,779)
Prepaid expenses and other assets (9,620) 37,407
Accounts payable (1,138,564) 823,054
Related party payables 43,435 136,303
Accrued expenses (122,672) 15,510
------------- -------------
Net Cash Provided (Used) by Operating Activities:
Continuing operations (1,018,197) 88,913
Discontinued operations 183,775 298,045
------------- -------------
Net Cash Provided (Used) by Operating Activities (834,422) 386,958
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of oil and gas properties 951,724 203,280
Expenditures for oil and gas properties (2,624,488) --
Expenditures for property and equipment (511,091) (33,670)
------------- -------------
Net Cash Provided (Used) by Investing Activities (2,183,855) 169,610
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,408,627 --
Repayments of notes payable (291,111) (196,972)
Loan fees paid (27,994) --
Proceeds from notes payable - related parties 450,000 --
Repayments of notes payable - related parties (21,688) --
Common stock issued for cash 270,000 --
------------- -------------
Net Cash Provided (Used) by Financing Activities 2,787,834 (196,972)
------------- -------------
NET INCREASE (DECREASE) IN CASH (230,443) 359,596
CASH, BEGINNING OF YEAR 439,258 79,662
------------- ------------
CASH, END OF YEAR $ 208,815 $ 439,258
============= ============
See notes to consolidated financial statements.
F-8
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended
December 31,
2006 2005
------------ ------------
CASH PAID FOR:
Interest $ 214,713 $ 129,034
Income taxes $ -- $ --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
2006:
The Company acquired oil and gas properties for 1,000,000 shares of its
common stock valued at $680,000.
The Company received 521,411 shares of its common stock as consideration
for Arvilla, Inc. valued at $469,270. The Company assumed a note payable
for $291,239 as part of the sale of Arvilla, Inc.
The Company issued 1,119,961 shares of its common stock for debt of
$608,016.
2005:
The Company disposed of a portion of Cobham Gas Industries, Penine
Resources, Inc., and Belmont Energy, Inc. The Company received 244,633
shares of its common stock valued at $286,467 for net assets of $857,100.
The Company issued 141,668 shares of common stock for debt relief of
$255,000.
The Company issued 1,185,024 shares of common stock for Arvilla, Inc. for
net assets of $2,370,048.
See notes to consolidated financial statements.
F-9
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2006 and 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was incorporated in the State of Idaho on January 16,
1964. On January 11, 1988, the Company changed its name to Apple
Corporation. In 1988, the Company acquired oil and gas leases and
other assets from Ben's Run Oil Company (a Virginia limited
partnership) and has since engaged in the business of oil and gas
production.
On November 5, 1993, the Board of Directors caused to be incorporated
in the State of Nevada, a new corporation by the name of Trans Energy,
Inc., with the specific intent of effecting a merger between Trans
Energy, Inc. of Nevada and Apple Corp. of Idaho, for the sole purpose
of changing the domicile of the Company to the State of Nevada. On
November 15, 1993, Apple Corp. and the newly formed Trans Energy, Inc.
executed a merger agreement whereby the shareholders of Apple Corp.
exchanged all of their issued and outstanding shares of common stock
for an equal number of shares of Trans Energy, Inc. common stock.
Trans Energy, Inc. was the surviving corporation and Apple Corp. was
dissolved.
Principles of Consolidation
The consolidated financial statements include the Company and its
wholly-owned subsidiaries, Prima Oil Company, Inc., Ritchie County
Gathering Systems, Inc., Tyler Construction Company, Inc, and Tyler
Energy, Inc. In addition, the consolidated financial statements
include two of the Company's other subsidiaries, Arvilla Oilfield
Services, LLC which was disposed of subsequent to December 31, 2005
and has been presented as "discontinued operations" in these
consolidated financial statements. All significant intercompany
accounts and transactions have been eliminated.
Oil and Gas Properties
The Company uses the successful efforts method of accounting for oil
and gas producing activities. Costs to acquire mineral interests in
oil and gas properties, to drill and equip exploratory wells that find
proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find proved
reserves, geological and geophysical costs, and costs of carrying and
retaining unproved properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is
recognized at the time of impairment by providing an impairment
allowance. Other unproved properties are amortized based on the
Company's experience of successful drilling and average holding
period. Capitalized costs of producing oil and gas properties, after
considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the
unit-of-production method. Support equipment and other property and
equipment are depreciated over their estimated useful lives.
On the sale or retirement of a complete unit of a proved property, the
cost and related accumulated depreciation, depletion, and amortization
are eliminated from the property accounts, and the resultant gain or
loss is recognized. On the retirement or sale of a partial unit of
proved property, the cost is charged to accumulated depreciation,
depletion, and amortization with a resulting gain or loss recognized
in income.
F-10
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2006 and 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Oil and Gas Properties (Continued)
On the sale of an entire interest in an unproved property for cash or
cash equivalent, gain or loss on the sale is recognized, taking into
consideration the amount of any recorded impairment if the property
had been assessed individually.
If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest
retained.
Loss per Share of Common Stock
The basic loss per share of common stock is based on the weighted
average number of shares issued and outstanding during the year. Fully
diluted loss per share is the same as basic loss per share as the
common stock equivalents are antidilutive in nature.
For the Years Ended
December 31,
----------------------------
2006 2005
----------- -------------
Numerator:
Loss from operations $(1,591,161) $ (1,070,462)
Discontinued operations (1,357,367) 20,343
----------- -------------
Net Loss $(2,948,528) $ (1,050,119)
=========== =============
Denominator - weighted average shares 6,795,734 4,678,294
=========== =============
Net loss per share:
Continuing operations $ (0.25) $ (0.22)
Discontinued operations (0.21) --
----------- -------------
Total Loss Per Share $ (0.46) $ (0.22)
=========== =============
Provision for Taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Revenue Recognition Policy
The Company recognizes gas revenues upon delivery of the gas to the
customers' pipeline from the Company's pipelines when recorded as
received by the customer's meter. The Company recognizes oil revenues
when pumped and metered by the customer.
F-11
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2006 and 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Fixed assets are stated at cost. Depreciation on vehicles, machinery
and equipment is provided using the straight line method over expected
useful lives of five years. Depreciation on pipelines is provided
using the straight-line method over the expected useful lives of
fifteen years.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Long-Lived Assets
The Company reviews long-lived assets and identifiable intangibles
whenever events or circumstances indicate that the carrying amounts of
such assets may not be fully recoverable. The Company evaluates the
recoverability of long-lived assets by measuring the carrying amounts
of the assets against the estimated undiscounted cash flows associated
with these assets. At the time such evaluation indicates that the
future undiscounted cash flows of certain long-lived assets are not
sufficient to recover the assets' carrying value, the assets are
adjusted to their fair values (based upon discounted cash flows).
Accounts Receivable
Accounts receivable are carried at the expected net realizable value.
The allowance for doubtful accounts is based on management's
assessment of the collectibility of specific customer accounts and the
aging of the accounts receivables. If there were a deterioration of a
major customer's creditworthiness, or actual defaults were higher than
historical experience, our estimates of the recoverability of the
amounts due to us could be overstated, which could have a negative
impact on operations.
Recent Accounting Pronouncements
The Company does not expect the adoption of any recently issued
accounting pronouncements to have a significant effect on its material
position or results of operations.
F-11
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2006 and 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Share Based Compensation
As permitted by FASB Statement No. 123 "Accounting for Stock Based
Compensation", the Company elected to measure and record compensation
cost relative to employee stock option costs in accordance with
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations and make pro forma
disclosures of net income and earnings per share as if the fair value
method of valuing stock options had been applied. Under APB Opinion 25,
compensation cost is recognized for stock options granted to employees
when the option price is less than the market price of the underlying
common stock on the date of grant.
In January 2006, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123R. Under FASB Statement
123R, 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 68.35% and 68.72%; risk-free interest rate
of 5.00% and 4.08% and expected lives of 10 years for the years
ended December 31, 2006 and 2005, respectively.
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, pertaining to the vested portion of
the options, for the year ended December 31, 2005. Also under these
same provisions, the Company's net loss would have been changed by the
pro forma amounts indicated below:
For the Year Ended
December 31, 2005
Net loss: -------------------
As reported $ (1,050,119)
Pro forma $ (1,887,535)
Basic loss per share:
As reported $ (0.22)
Pro forma $ (0.40)
Reclassifications
Certain amounts in prior financial statements have been reclassified
to conform to the 2006 financial statement presentation.
NOTE 2 - GOING CONCERN
The Company's consolidated financial statements are prepared using United States
generally accepted accounting principles 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 December 31, 2006 of $33,026,735 and has a working capital deficit at
December 31, 2006 of $2,610,953.
F-13
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2006 and 2005
NOTE 2 - GOING CONCERN (Continued)
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 - DISCONTINUED OPERATIONS
On January 3, 2006 the Company entered into a definitive agreement to
sell its well servicing and maintenance business, Arvilla Oilfield
Services, LLC, a West Virginia limited liability company, to Clarence
E. Smith and Rebecca L. Smith, both directors of the Company. As a
result of consummating the definitive agreement, Clarence and Rebecca
Smith returned to the Company 521,411 shares of Trans Energy common
stock. Clarence and Rebecca Smith also conveyed to the Company all of
their interest in and to five oil and gas wells located in Tyler
County, West Virginia. Upon execution of the definitive agreement,
Clarence Smith resigned as our Chief Executive Officer, but remained
on our board of directors until the closing effective on March 31,
2006. On April 7, 2006 both Clarence and Rebecca Smith resigned from
the board of directors.
The Company has accounted for the financial statements of Arvilla
Oilfield Services, LLC as discontinued operations and recorded a loss
from discontinued operations of $1,541,141, which is included in the
statement of operations for the year ended December 31, 2006.
The accompanying financial statements have been presented to reflect
the operations of Arvilla Oil Field Services, LLC as discontinued.
Operating results for the years ended December 31, 2006 and 2005 are
as follows:
2006 2005
---------------- ---------------
Revenues $ 2,684,858 $ 10,218,520
Cost of sales (1,471,481) (6,679,099)
General and administrative (988,655) (3,251,257)
Other income (expense) (40,947) (267,821)
---------------- --------------
Net income $ 183,775 $ 20,343
================= ==============
NOTE 4 - PROPERTY AND EQUIPMENT
At December 31, 2006, property and equipment consisted of:
Vehicles $ 159,693
Machinery and equipment 381,050
Furniture and Fixtures 31,695
Leasehold improvements 2,825
Accumulated depreciation (84,510)
--------------
Total Fixed Assets $ 490,753
==============
NOTE 5 - OIL AND GAS PROPERTIES
On April 12, 2006 the Company finalized a definitive agreement for
sale of certain wells, overriding royalties and undeveloped acreage
located in Campbell County, Wyoming. The assets were sold at public
auction through the Oil & Gas Asset Clearinghouse in Houston, Texas.
The gross sales price for the properties was $1,003,000, with net
proceeds of $951,725 to the Company.
On August 14, 2006, the Company purchased various oil and gas wells
and interests as well as equipment in West Virginia for 1,000,000
shares of the Company's common stock valued at $680,000 and cash of
$660,000.
NOTE 6 - JUDGMENTS PAYABLE
On July 28, 1999, Core Laboratories, Inc. obtained a judgment against
the Company for non-payment of an account payable. The judgment calls
for monthly payments of $351 and is bearing interest at 10.00% per
annum. At December 31, 2006, the Company had accrued a balance of
$14,062 plus accrued interest of $7,250, which are included in
judgments payable. The balance due on this judgment including the
related interest was paid in full on February 28, 2007.
On July 1, 1998, RR Donnelly 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
December 31, 2006, the Company has accrued a balance of $63,705 plus
accrued interest of $33,023, which is included in judgments payable.
Each of the judgments were paid in full on February 28, 2007. The
balance due on this judgment including the related interest was paid
in full on February 28, 2007.
F-14
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2006 and 2005
NOTE 7 - LONG-TERM DEBT
The Company had the following debt obligations at December 31, 2006:
Note payable to an individual, due on demand, bearing interest at 9.25%,
interest payments due monthly, secured by equipment $ 292,078
Union Bank of Tyler County, principal and interest payments
of $324 due monthly with interest at 6.25%, unsecured 7,581
Wesbanco, due on demand, interest at prime +1%, secured by
officers' personal assets 248,343
Union Bank of Tyler County, principal and interest payments of
$326 due monthly, interest at 5.0%, secured by a vehicle 6,536
United Bank, principal and interest payments of
$8,899 due monthly, interest at 8.75%, secured by equipment 157,197
Union Bank of Tyler County, principal and interest payments of $122 due
monthly with interest at 7.50%, secured by vehicle 2,809
Union Bank of Tyler County, principal and interest payments of $677 due
monthly with interest at 6.50%, secured by vehicle 20,924
Union Bank of Tyler County, principal and interest payments of $514 due
monthly with interest at 7.75%, secured by vehicle 15,290
Union Bank of Tyler County, principal and interest payments of $208 due
monthly with interest at 7.90%, secured by vehicle 4,058
Union Bank of Tyler County, principal and interest payments of $580 due
monthly with interest at 7.75%, secured by vehicle 14,819
United Bank, principal and interest payments beginning July 2007 of $35,083
due monthly with interest at 8.75%, secured by wells 1,700,000
Huntington National Bank, principal and interest payments beginning October
2008 of $95,051 due monthly with interest at 7.50%, secured by wells, unused
credit facility of $2,547,745 as of December 31, 2006 452,255
-----------
Total 2,921,890
Less Current Portion (1,258,381)
-----------
Total Long-Term Debt $ 1,663,509
============
Future maturities of long-term debt are as follows:
2007 $ 1,258,381
2008 577,746
2009 326,389
2010 313,542
2011 313,542
Thereafter 132,290
----------
Total $ 2,921,890
===========
F-15
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2006 and 2005
NOTE 8 - ASSET RETIREMENT OBLIGATION
The following is a description of the changes to the Company's asset
retirement obligation for 2006 and 2005:
Asset retirement obligation
at beginning of year $ 799,393 $ 1,571,749
Acquisition of oil and gas properties 312,963 --
Disposition of subsidiary -- (810,006)
Accretion expense 15,144 37,650
Revision in cost estimates (937,136) --
------------ ------------
Asset retirement obligation
at end of year $ 190,364 $ 799,393
============ ============
NOTE 9 - PROVISION FOR TAXES
At December 31, 2006, the Company had net operating loss carryforwards
of approximately $25,000,000 that may be offset against future taxable
income from the year 2006 through 2026. No tax benefit has been
reported in the December 31, 2006 consolidated financial statements
since the potential tax benefit is offset by a valuation allowance of
the same amount.
Due to the change in ownership provisions of the Tax Reform Act of
1986, net operating loss carryforwards for Federal income tax
reporting purposes are subject to annual limitations. Should a change
in ownership occur, net operating loss carryforwards may be limited as
to use in future years.
Net deferred tax assets consist of the following components as of
December 31, 2006 and 2005:
2006 2005
--------------- ---------------
Deferred tax assets:
NOL carryover $ 9,586,971 $ 9,874,400
Accrued expenses 82,589 283,800
---------------- ---------------
Total deferred tax assets 9,669,560 10,158,200
Valuation allowance (9,669,560) (10,158,200)
---------------- ---------------
Net deferred tax asset $ -- $ --
================ ===============
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal and state income tax rates of
39% to pretax income from continuing operations for the years ended
December 31, 2006 and 2005 due to the following:
2006 2005
-------------- --------------
Book income $ (582,302) $ (409,546)
Other 71,672 (7,934)
Stock and options for services 704,828 50,115
Contributed services -- 97,500
Capital loss carryover (280,416) 68,654
Accrued expenses (201,211) 6,049
Valuation allowance 287,429 195,162
--------------- --------------
$ -- $ --
=============== ==============
F-16
NOTE 10 - COMMITMENTS
On July 24, 2006, the Company entered into a one year lease for its
corporate office. Rent of $1,450 is due monthly. Future lease
obligations as of December 31, 2006 are $8,700.
NOTE 11 - STOCKHOLDERS' EQUITY
Preferred Stock -The Company has authorized 10,000,000 shares of $.001
par value preferred stock. The preferred stock shall have preference
as to dividends and to liquidation of the Company.
Common Stock - The Company has authorized 500,000,000 shares of $.001
par value common stock.
In January 2005, the Company issued 50,000 shares of common stock for
services valued at $92,500.
In January 2005, the Company issued 1,185,024 shares of common stock
for an acquisition of a subsidiary valued at $ 2,370,048.
In 2005, key employees of the Company contributed services valued at
$250,000.
In July 2005, the Company issued 141,668 shares of the common stock
for debt relief of $255,000.
In August 2005, the Company received 244,633 shares of the common
stock of the Company in return for the sale of certain assets of the
Company. These shares have been accounted for as treasury stock at a
cost basis of $286,467.
In December 2005, the Company issued 20,000 shares of common stock for
consulting services valued at $36,000.
In April 2006, the Company received 521,411 shares of the common stock
of the Company in return for the sale of certain assets of the Company
at a cost basis of $469,270. The Company then cancelled the 766,044
shares held in treasury.
In August 2006, the Company issued 1,000,000 shares of common stock
for an acquisition of oil and gas properties valued at $ 680,000.
In October 2006, the Company issued 2,807,000 shares of common stock
for consulting services valued at $1,686,450, 337,500 shares of common
stock for cash of $270,000 and 1,119,961 shares of common stock for
debt of $609,136.
NOTE 12 - STOCK OPTIONS
A summary of the status of the options granted under various
agreements at December 31, 2006 and 2005, and changes during the years
then ended is presented below:
December 31, 2006 December 31, 2005
---------------------------------------------
Weighted Weighted
Average Exercise Average Exercise
Shares Price Shares Price
---------------------- --------------------
Outstanding at beginning of year 553,324 $ 1.95 -- $ --
Granted 950,000 0.65 553,324 1.95
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
----------- -------- -------- -------------
Outstanding at end of year 1,503,324 $ 1.13 553,324 $ 1.95
=========== ======== ======== =============
F-17
A summary of the status of the options granted under various agreements
at December 31, 2006 is presented below:
Options Outstanding Options Exercisable
------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- -------- ----------- --------
$.065 950,000 9.50 years $ 0.65 950,000 $0.65
$1.95 553,324 7.75 years $ 1.95 553,324 $1.95
----------- ---------
1,503,324 1,503,324
=========== =========
NOTE 13 - RELATED PARTY TRANSACTIONS
a. 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, at the industrial
facilities near Sistersville, West Virginia, or 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.
b. Well Drilling and Operating Agreement
In June 2000, the Company entered into a well drilling and operating
agreement with Sancho Oil and Gas Corporation ("Sancho"), a company
controlled by the Vice President of the Company, on an on-going basis.
Sancho provided seven drill-down wells located in Tyler County, West
Virginia and the Company was to pay 100% of the cost of drilling and
completing the well including any topside equipment needed and other
related equipment. The Company received 75% of the working interest in
each of the wells completed.
c. Receivables and Payables
The Company has various payables to the officers and companies of the
officers. These amounts have been grouped together with a net payable
of $379,616 and receivable of $554,100 at December 31, 2006.
NOTE 14 - ECONOMIC DEPENDENCE AND MAJOR CUSTOMERS
The Company's marketing arrangement with Sancho accounted for
approximately 100% of Tyler Construction Company's revenue for the
years ended December 31, 2006 and 2005. This marketing agreement is in
effect until December 1, 2008. Another customer also generated 100% of
Ritchie County sales in 2006 and 2005.
F-18
NOTE 15 - BUSINESS SEGMENTS
The Company conducts its operations principally as oil and gas sales
with Trans Energy, Prima Oil, and Cobham Gas & Oil, Inc., Penine
Resources, Inc., and Belmont Energy, Inc. 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
Years Ended Oil and Gas Pipeline Corporate
December 31, Sales Transmission Unallocated
------------ ------------ ------------ -----------
Oil and gas revenue 2006 $ 1,192,083 $ 228,719 $ --
2005 1,271,165 255,563 --
Operating (loss) income
applicable to industry
segment 2006 (1,336,567) (348,749) --
2005 (766,516) (6,902) --
Interest expense 2006 (188,148) (33,062) --
2005 (98,980) (30,054) --
Other income (expense) 2006 74,544 19,611 --
2005 (269,346) (27,698) --
Assets (net of
intercompany accounts) 2006 5,514,899 736,510 --
2005 2,570,645 1,605,263 6,672,688
Depreciation and
depletion 2006 206,277 116,712 --
2005 224,187 73,506 --
Property and equipment
acquisitions 2006 3,982,661 -- --
2005 33,670 -- 2,370,048
NOTE 16 - SUBSEQUENT EVENTS
On January 9, 2007 the Company completed the assignment for cash to
Leatherwood, Inc., of six oil and/or gas wells located in West Virginia. The
Company assigned all of its right, title, operating rights and interest,
including the absolute right to produce, operate and maintain the wells.
Also on January 10, 2007, the Company acquired from National Gulf
Production, Inc. 75% of National Gulf's rights and interests in and to certain
oil and gas leases covering the oil and gas in and under certain tracts of land
containing approximately 3,120 acres located in Trego County, Kansas for cash of
$285,000.
On February 7, 2007, the Company entered into an agreement with P.D. Farr
to purchase all rights, title and interests in the 384 acre Ezra Hays Lease in
West Virginia including , but not limited to, oil and gas wells, associated well
equipment, interest in the natural gas sales pipeline, all rights to Dominion
Gas sales meter and all pertinent rights-of-way for $138,000. On December 16,
2006 the Company paid the sum of $10,000 as a down payment to be applied against
the agreed to sales price as stated above, leaving an unpaid balance of $128,000
due in installments, to be paid in full by July 10, 2007.
F-19
TRANS ENERGY, INC. AND SUBSIDIARIES
Supplemental Oil and Gas Disclosures
(Unaudited)
Capitalized Costs Relating to Oil and Gas Producing Activities
December 31,
2006 2005
------------------------
Proved oil and gas producing properties and related
lease and well equipment $ 6,208,786 $ 6,134,651
Unproved oil and gas properties 10,156 64,004
Accumulated depreciation and depletion (1,569,997) (4,038,399)
----------- -----------
Net Capitalized Costs $ 4,648,945 $ 2,160,256
=========== ===========
Costs Incurred in Oil and Gas Property Acquisition, Exploration, and
Development Activities
For the Years Ended
December 31,
------------------------
2006 2005
------------------------
Acquisition of Properties
Proved $1,280,001 $ --
Unproved 660,000 --
Exploration Costs -- --
Development Costs 984,359 33,670
The Company does not have any investments accounted for by the equity method.
Results of Operations for Producing Activities
For the Year Ended
December 31,
---------------------------
2006 2005
---------------------------
Sales $ 1,420,802 $ 1,526,728
Production costs (534,065) (893,457)
Depreciation and depletion (322,184) (232,951)
Income tax expenses -- --
--------------------------
Results of operations for producing activities
(excluding the activities of the pipeline transmission
operations, corporate overhead and interest costs) $ 564,553 $ 400,320
==========================
F-20
TRANS ENERGY, INC. AND SUBSIDIARIES
Supplemental Oil and Gas Disclosures
(Unaudited)
Reserve Quantity Information
Oil Gas
BBL MCF
--------------- -------------
Proved developed and undeveloped reserves
End of the year 2005 215,844 4,263
Revisions of previous estimates 1,126,713 13,290,952
Improved recovery -- --
Purchases of minerals in place -- --
Extensions and discoveries -- --
Production (1,593) (133,861)
Sales of minerals in place -- --
---------------- -------------
End of the year 2006 1,340,964 13,161,354
================ =============
Proved developed reserves:
Oil Gas
BBL MCF
---------------- -------------
End of the year 2006 330,570 3,310,161
End of the year 2005 215,844 4,263
During the years ended December 31, 2006 and 2005, the Company had
reserve studies and estimates prepared on its various properties. The
difficulties and uncertainties involved in estimating proved oil and
gas reserves makes comparisons between companies difficult. Estimation
of reserve quantities is subject to wide fluctuations because it is
dependent on judgmental interpretation of geological and geophysical
data.
Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves
December 31,
----------------------------------
2006 2005
---- ----
Future cash inflows $ 166,383,422 $ 36,322,180
Future production and development costs (50,080,837) (7,990,879)
Future production tax expense (8,319,171) --
--------------- ---------------
Future net cash flows 107,983,414 28,331,301
Discounted for estimated timing of cash
flows (80,606,697) (5,287,060)
--------------- ---------------
Standardized measure of discounted future
net cash flows $ 27,376,717 $ 23,044,241
=============== ===============
Future income taxes were determined by applying the statutory income
tax rate to future pre-tax net cash flow relating to proved reserves.
F-21
TRANS ENERGY, INC. AND SUBSIDIARIES
Supplemental Oil and Gas Disclosures
December 31, 2006 and 2005
(Unaudited)
The following schedule summarizes changes in the standardized measure
of discounted future net cash flow relating to proved oil and gas
reserves:
For the Years Ended
December 31,
2006 2005
------------------ ----------------
Standardized measure, beginning of year $ 23,044,241 $ 4,438,836
Oil and gas sales, net of production costs (580,885) (392,855)
Sales of mineral in place -- --
Purchases -- --
Net change due to revisions in quantity estimates 4,367,637 18,750,298
Accretion of discount items 545,724 247,962
------------------ ----------------
Standardized measure, end of year $ 27,376,717 $ 23,044,241
================== ================
The above schedules relating to proved oil and gas reserves,
standardized measure of discounted future net cash flows and changes in
the standardized measure of discounted future net cash flows have their
foundation in engineering estimates of future net revenues that are
derived from proved reserves and prepared using the prevailing economic
conditions. These reserve estimates are made from evaluations conducted
by independent geologists, of such properties and will be periodically
reviewed based upon updated geological and production data. Estimates
of proved reserves are inherently imprecise. The above standardized
measure does not include any restoration costs due to the fact the
Company does not own the land.
Subsequent development and production of the Company's reserves will
necessitate revising the present estimates. In addition, information
provided in the above schedules does not provide definitive information
as the results of any particular year but, rather, helps explain and
demonstrate the impact of major factors affecting the Company's oil and
gas producing activities. Therefore, the Company suggests that all of
the aforementioned factors concerning assumptions and concepts should
be taken into consideration when reviewing and analyzing this
information.
F-22