UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2007
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-23530
TRANS ENERGY, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 93-0997412
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
210 Second Street, P.O. Box 393, St. Marys, West Virginia 26170
(Address of principal executive offices)
Registrant's telephone no., including area code: (304) 684-7053
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes (X) No ( )
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
or any amendment to this Form 10-KSB. (X)
Indicate by check mark whether the registrant is a shell company (as
defined by Rule 12b-2) of the Exchange Act. Yes ( ) No (X)
State the issuer's revenues for its most recent fiscal year. $1,519,377
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. $3,804,818 (Based on price of $.80 per share on March 31, 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 31, 2008
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Common Stock, $.001 par value 10,160,065
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
TRANS ENERGY, INC.
Table of Contents
Page
----
PART I.
Item 1. Description of Business..............................................3
Item 2. Description of Property..............................................9
Item 3. Legal Proceedings...................................................11
Item 4. Submission of Matter to a Vote of Security Holders..................12
PART II
Item 5. Market for common Equity and Related Stockholder Matters............12
Item 6. Management's Discussion and Analysis or Plan of Operation...........13
Item 7. Financial Statements................................................17
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................17
Item 8A. Controls and Procedures.............................................18
Item 8B. Other Information...................................................20
PART III
Item 9. Directors, Executive Officers, Promoters and Control persons;
Compliance with Section 16(a) of the Exchange Act...................21
Item 10. Executive Compensation..............................................22
Item 11. Security Ownership of Certain Beneficial Owners and Management......23
Item 12. Certain Relationships and Related Transactions......................23
Item 13. Exhibits............................................................24
Item 14. Principal Accountant Fees and Services..............................25
Signatures..........................................................26
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PART 1
Item 1. Description of Business
-----------------------
History
Trans Energy, Inc. is engaged in the exploration, development and
production of natural gas and oil, and, to a lesser extent, the marketing and
transportation of natural gas. We own interests in and operate approximately 271
oil and gas wells in West Virginia. We also own and operate an aggregate of over
24 miles of 4-inch, 6-inch, and 8-inch gas transmission lines located within
West Virginia in the counties of Marion, Doddridge, Ritchie, Wetzel and Tyler.
We also have approximately 25,638 gross acres under lease in West Virginia
primarily in the counties of Wetzel, Marion, and Doddridge.
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
-------------
Trans Energy began drilling its first of three exploratory joint
venture wells located in Wetzel County, West Virginia to an approximate total
depth of 7,500 feet, with the primary target being the Marcellus Shale. The
total cost per well is estimated to be $850,000 to $1,000,000, of which Republic
Partners will pay for 100% of the cost of one exploratory well in 2007 and two
exploratory wells in 2008 to earn a 50% working interest. Drilling began on
October 15, 2007 and was completed on November 14, 2007 on the first well. Also,
drilling began on a second 2007 well in Wetzel County, West Virginia to an
approximate total depth of 7,500 feet, with the primary target also being the
Marcellus Shale, on November 29, 2007 and was completed on February 23, 2008.
Republic Partners elected to obtain a 50% paid working interest in this well as
permitted by the terms in the joint venture contract. The two 2007 exploration
wells are expected to be completed and begin flow in May 2008.
During 2007, we drilled seven new wells in Doddridge County, West
Virginia to the Gordon formation of which we own a 100% working interest in each
well. In addition, we drilled eleven new wells in Wetzel County, West Virginia
to various formations, including the Gordon and Fourth Sand, of which we own a
100% working interest in each well.
Trans Energy began the construction of an 8 inch pipeline located in
Wetzel County, West Virginia which will transport gas from the new wells drilled
during the year ended December 31, 2007, in addition to transporting gas for
third parties. The pipeline was completed on December 28, 2007 at a cost of
$1,372,149.
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.
The Company has been an oil and gas developer for more than twenty
years, but began a more aggressive focus on development and growth in early
2006. At that time, the Company reorganized with a new CEO and installed a new
controller. In addition, we began an effort to leverage the company's acreage
and reserves to fund development, and have since drilled more than 30 wells
since early 2006 and significantly increased production and reserves. 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.
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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
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 2008.
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
made under short-term delivery contracts at market prices. These prices
fluctuate with natural gas contracts as posted in national publications and on
the New York Mercantile Exchange.
Natural gas delivered through our pipeline network is transported for
third party producers through a contract with Sancho Oil and Gas Corporation to
Dominion Hope Gas, a local utility. Under our contract with Sancho, we have the
right to transport 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 a
transportation fee less a $.05 per Mcf marketing fee paid to Sancho.
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.
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 and haul it via truck.
Management believes that we are not dependent upon any one customer due
to the fact that we have multiple marketing agreements with many third party
purchasers.
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, sometimes enabling them to identify and acquire more
economically desirable energy producing properties and drilling prospects than
us. We are more of a regional operator, and have the traditional competitive
strengths of one, including long established contacts and in-depth knowledge of
the local geography. Additionally, there is increasing 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. If that situation were to change, management believes the Company would
command a competitive price if it became part of a larger company.
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,
have issued rules and regulations binding on the oil and gas industry and its
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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, 2007, we employed
twenty-five full-time employees, consisting of five executives and managers, six
marketing, lease acquisition and clerical persons, and fourteen field operations
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
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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 currently occupy 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 the principal business of the exploration,
development and, production of natural gas and oil. We are also involved in
pipeline transportation and marketing of natural gas and oil. Reference is made
to the statements of operations contained in the financial statements included
herewith for a statement of our revenues 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.
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Since our revenues only increased approximately 7% during the fiscal
year ended December 31, 2007, 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, 2007, our net operating loss carryforward was approximately $27 million and
our accumulated deficit was approximately $35 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,
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.
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As of December 31, 2007, we had a working capital deficit of $686,549.
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.
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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.
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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.
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 dependent 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
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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.
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Our common stock is presently traded on the Pink Sheets, 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:
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* 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.
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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
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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.
Possible "Penny Stock" Regulation
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Trading of our common stock on the Pink Sheets 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 of working and royalty interests owned by us in
various oil and gas wells and leases located in West Virginia. Our proved
reserves as of December 31, 2007 and 2006 are set forth below:
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As of December 31,
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2007 2006
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Natural Natural
Oil Gas Oil Gas
(BBL) (MCF) (BBL) (MCF)
---------- ---------- ---------- ----------
Developed Producing 182,056 4,531,463 56,567 2,340,352
Developed Non-Producing 433,232 2,602,236 274,003 969,809
Proved Undeveloped 1,566,305 16,158,889 1,010,394 9,851,193
---------- ---------- ---------- ----------
Total Proved 2,181,593 23,292,588 1,340,964 13,161,354
========== ========== ========== ==========
Productive Gas Wells
--------------------
The following table summarizes the total number of wells and undrilled
locations to which proved developed reserves and proved undeveloped reserves,
respectively, are attributed. Wells are shown on a gross basis.
As of December 31,
-------------------------------------------------
2007 2006
----------------------- -----------------------
Natural Natural
Oil Gas Oil Gas
---------- ---------- ---------- ----------
Producing Wells 3 130 14 90
Non-Producing Wells 1 137 1 140
Undrilled Well Locations -- 141 -- 92
---------- ---------- ---------- ----------
Total Wells and Well Locations 4 408 15 322
========== ========== ========== ==========
The following table summarizes the Company's productive oil and gas
wells in which we owned an interest as of December 31, 2007 and 2006. Productive
wells are wells that are capable of producing natural gas or oil.
Productive Wells (a)
--------------------
Oil Gas Drilling Wells (b)
--------- --------- -----------------
2007
Gross 4 267 2
Net 4 267 1
2006
Gross 15 230 --
Net 15 230 --
a) Includes active wells and wells temporarily shut-in.
b) Consists of exploratory and development wells.
Oil and Gas Acreage
-------------------
The following table summarizes our gross and net developed and
undeveloped oil and gas acreage under lease as of December 31, 2007 and 2006.
Developed Acres Undeveloped Acres Total
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Gross Net Gross Net Gross Net
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West Virginia:
2007 20,243 20,243 5,395 5,395 25,638 25,638
2006 19,800 19,800 200 200 20,000 20,000
Kansas:
2007 -- -- 3,120 1,755 3,120 1,755
The estimates for 2006 and 2007 are based upon the reports of
Schlumberger Technology Corporation, independent petroleum consultants.
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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.
The following table sets forth certain information regarding production
volumes, revenue, average prices received and average production costs
associated with our sales of oil and natural gas for the periods noted.
Year Ended December 31,
--------------------------
2007 2006
--------------------------
Net Production:
Oil (Bbl) 4,022 5,758
Natural Gas (Mcf) 161,281 124,302
Natural Gas Equivalent (Mcfe) 185,413 158,850
Oil and Natural Gas Sales:
Oil $ 281,908 $ 297,928
Natural Gas 925,325 894,155
Total $1,207,233 $1,192,083
Average Sales Price:
Oil ($ per Bbl) $ 70.09 $ 51.74
Natural Gas ($ per Mcf) 5.74 7.19
Natural Gas Equivalent ($ per Mcfe) $ 6.51 $ 7.50
Oil and Natural Gas Costs:
Lease operating expenses $ 929,224 $ 534,065
Average production cost per Mcfe $ 5.01 $ 3.36
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 called for
monthly payments of $351 and accrued interest at 10.00% per annum. The balance
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due on this judgment including the related interest in the amount of $21,312 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 called for monthly payments of
$3,244 and accrued interest at 10.00% per annum. The balance due on this
judgment including the related interest in the amount of $96,734 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, 2007.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
Our common stock is quoted on the Pink Sheets under the symbol TENG.
Prior to the effectiveness of our delisting on April 27, 2007, our stock traded
on the OTC Bulletin Board under the symbol of TENG. Set forth in the table below
are the quarterly high and low prices of our common stock as obtained from the
Pink Sheets and the OTC Bulletin Board for the past two fiscal years.
High Low
--------- --------
2007
First Quarter $ 1.90 $ 0.72
Second Quarter $ 1.62 $ 0.70
Third Quarter $ 1.15 $ 0.70
Fourth Quarter $ 1.05 $ 0.70
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
As of March 31, 2008, 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. We estimate there to be approximately 2,000 such shareholders.
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.
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Item 6. Management's Discussion and Analysis
------------------------------------
The following information should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-KSB.
Business Strategy
-----------------
Trans Energy is an independent energy company engaged in the
exploration, development, and acquisition of natural gas and crude oil
properties, with interests in West Virginia. The Company completed a major
financing and executed a major increase in development activity and leasehold
acquisition during the year ended December 31, 2007. In addition, we had good
success on the shallow drilling program, adding both natural gas and crude oil
reserves to the Company's proved reserve base. Furthermore, the Company
established major interconnects with interstate pipelines to allow increased
access to the market. The Company's significant overall increase in reserves
combined with a strengthening pricing environment has greatly increased the
present value of our forecasted cash flows.
We intend to focus our development and exploration efforts in our West
Virginia properties and utilize low risk drilling in the shallow zones such as
the Gordon and the Fourth Sand. We believe that our extensive acreage position
will allow us to grow through low risk drilling in the near term. We have
attractive opportunities to expand our reserve base through continuing to drill
higher risk/higher reward exploratory drilling to the Marcellus Shale for 2008
and beyond. We will evaluate our properties on a continuous basis in order to
optimize our existing asset base. We plan to employ the latest drilling,
completion and fracturing technology in all of our wells to enhance
recoverability and accelerate cash flows associated with these wells.
In summary, our strategy is to increase our oil and gas reserves and
production while keeping our development costs and operating costs as low as
possible. We will implement this strategy through drilling exploratory and
development wells from our inventory of available prospects that we have
evaluated for geologic and mechanical risk and future reserve or resource
potential. Success of this strategy is contingent on various risk factors, as
discussed elsewhere in this 10-KSB.
The implementation of our strategy requires that we continually incur
significant capital expenditures in order to replace current production and find
and develop new oil and gas reserves. In order to finance our capital and
exploration program, we depend on cash flow from operations or bank debt and
equity offerings as discussed below in Liquidity and Capital Resources.
Results of Operations
---------------------
The following table sets forth the percentage relationship to total
revenues of principal items contained in our consolidated statements of
operations for the two most recent fiscal years ended December 31, 2007 and
2006. It should be noted that percentages discussed throughout this analysis are
stated on an approximate basis.
Fiscal Years Ended
December 31,
2007 2006
-------- ------
Total revenues ............................................... 100% 100%
Total costs and expenses ..................................... (1965%) (220%)
Loss from operations ......................................... (96%) (120%)
Discontinued operations ...................................... -- (96%)
Other income (expense) ....................................... (59%) 8%
Net income (loss)............................................. (155%) (208%)
-13-
Total revenues of $1,519,377 for the year ended December 31, 2007
("2007") increased 7% compared to $1,420,802 for the year ended December 31,
2006 ("2006"), primarily due to new drilling, acquisitions, and increased
production from the efforts of the workover program. We focused our efforts
during 2007 on the implementation of our drilling program in Doddridge, Wetzel
and Marion Counties and on a workover program on our wells located in Wetzel and
Marion Counties, West Virginia. We expect more aggressive production increases
from the drilling program, the workover program and from new pipeline
connections throughout 2008.
Production costs increased 74% for 2007 as compared to 2006, primarily
due to expenses associated with our field production.
Depreciation, depletion and amortization expense increased 10% for 2007
as compared to the 2006, due to the increase in production and additions of oil
and gas properties.
Interest expense increased 327% for 2007 as compared to 2006, primarily
due to increased borrowings for our drilling field production.
Our loss from operations for 2007 was $1,455,098 compared to a loss
from operations of $1,699,442 for 2006. This decrease is primarily due to a
decrease in selling, general and administrative expenses. This decrease in
selling, general and administrative expenses is related to the value of shares
issued as part of the Company's Long-term Incentive Bonus Program for the
Company's officers and directors during 2006.
We recorded a loss from disposal of discontinued operations in 2006 of
$1,541,142 due to the disposal of Arvilla Oilfield Services, LLC. Our net loss
for 2007 was $2,349,017 compared to a net loss of $2,948,528 for 2006.
We have accumulated approximately $27 million of net operating loss
carryforwards as of December 31, 2007, which may be offset against future tax
obligations through 2027. 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 would 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, 2007 because the
potential tax benefit of the loss carryforward is offset by a valuation
allowance of the same amount.
Liquidity and Capital Resources
-------------------------------
Historically, we have satisfied our working capital needs with
operating revenues and from borrowed funds. At December 31, 2007, we had a
working capital deficit of $686,549 compared to a working capital deficit of
$2,610,953 at December 31, 2006. This decrease in working capital deficit is
primarily attributed to the sale of wells in Marion County from which we
realized net cash proceeds of $1,444,639, increased efforts from our work over
program, as well as cash borrowed as part of our long-term debt financing, a
portion of which was used to pay short-term obligations.
During 2007, net cash used by operating activities was $972,781
compared to $834,422 in 2006. This increased negative cash flow from operating
activities is primarily attributable to our decision to pay off the outstanding
payables, as well as increased expenses related to the workover program and the
exploration in Kansas.
We expect our cash flow provided by operations for 2008 to increase
because of higher projected production from the drilling program, workovers and
acquisitions, combined with oil and gas prices consistent with 2007 and steady
operating, general and administrative, interest and financing costs per Mcfe.
-14-
Excluding the effects of significant unforeseen expenses or other
income, our cash flow from operations fluctuates primarily because of variations
in oil and gas production and prices, or changes in working capital accounts and
actual well performance. In addition, our oil and gas production may be
curtailed due to factors beyond our control, such as downstream activities on
major pipelines causing us to shut-in production for various lengths of time.
During 2007, net cash used by investing activities was $8,011,832
compared to net cash used of $2,183,855 in 2006. We used $9,123,872 for the
purchase of oil and gas properties and $282,599 to purchase property and
equipment and $1,444,639 was received from the sale of wells during 2007
compared to $2,624,488 for the purchase of oil and gas properties and $511,091
to purchase property and equipment and $951,724 was received from the sale of
wells during 2006.
During 2007, net cash provided by financing activities was $10,478,171
compared to $2,787,834 in 2006. In 2007, we borrowed $14,666,800, net of
financing cost and cash discount, and repaid $3,378,140 in notes payable.
We anticipate meeting our working capital needs with revenues from our
ongoing operations, particularly from our wells in Wetzel, Marion and Doddridge
Counties, West Virginia and new transportation of gas for third parties in our
6-inch pipeline West Virginia. In the event revenues are not sufficient to meet
our working capital needs, we will explore the possibility of additional funding
from either the sale of debt or equity securities. There can be no assurance
such funding will be available to us or, if available, it will be on acceptable
or favorable terms. In addition, we have an available credit facility of
$3,286,854 which we plan to use to fund our drilling program in Wetzel, Marion,
and Doddridge Counties, West Virginia.
Because of our continued losses, working capital deficit, and need for
additional funding, there exists substantial doubt about our ability to continue
as a going concern. Historically, our revenues have not been sufficient to cover
operating costs. We will need to rely on increased operating revenues from new
development or proceeds from debt or equity financings to allow us to continue
as a going concern. There can be no assurance that we can or will be able to
complete any debt or equity financing.
Inflation
---------
In the opinion of our management, inflation has not had a material
overall effect on our operations of Trans Energy.
Recent Events
-------------
Trans Energy began drilling its first of three exploratory joint
venture wells located in Wetzel County, West Virginia to an approximate total
depth of 7,500 feet, with the primary target being the Marcellus Shale. The
total cost per well is estimated to be $850,000 to $1,000,000, of which Republic
Partners will pay for 100% of the cost of one exploratory well in 2007 and two
exploratory wells in 2008 to earn a 50% working interest. Drilling began on
October 15, 2007 and was completed on November 14, 2007 on the first well. Also,
drilling began on a second 2007 well in Wetzel County, West Virginia to an
approximate total depth of 7,500 feet, with the primary target also being the
Marcellus Shale, on November 29, 2007 and was completed on February 23, 2008.
Republic Partners elected to obtain a 50% paid working interest in this well as
permitted by the terms in the joint venture contract. The two 2007 exploration
wells are expected to be completed and begin flow in May 2008.
Trans Energy has constructed an 8-inch pipeline located in Wetzel
County, West Virginia, which will transport gas from the new Wetzel County Wells
drilled during the year ended December 31, 2007, in addition to transporting gas
for third parties. The pipeline was completed on December 28, 2007 at a cost of
$1,372,149.
-15-
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 our
future plans of operations, business strategy, operating results, and financial
position. We caution readers that a variety of factors could cause our actual
results to differ materially from the anticipated results or other matters
expressed in forward-looking statements. These risks and uncertainties, many of
which are beyond our control, include:
o the sufficiency of existing capital resources and our ability to
raise additional capital to fund cash requirements for future
operations;
o uncertainties involved in the rate of growth of our business and
acceptance of any products or services;
o success of our drilling activities;
o volatility of the stock market, particularly within the energy
sector; and
o general economic conditions.
Although we believe the expectations reflected in these forward-looking
statements are reasonable, such expectations cannot guarantee future results,
levels of activity, performance or achievements.
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 adoption
of FIN 48 had no material impact to the Company's consolidated financial
statements. The Company files tax returns in the United States and states in
which it has operations and is subject to taxation. Tax years subsequent to 2004
remain open to examination by U.S. federal and state tax jurisdictions.
-16-
Item 7. Financial Statements
--------------------
Our consolidated financial statements as of December 31, 2007 and for
the fiscal years ended December 31, 2007 and 2006 have been audited to the
extent indicated in their report by GBH CPAs, PC, independent registered public
accounting firm, 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.
On October 1, 2007, Malone & Bailey, PC was terminated as the
certifying accountant. Malone & Bailey, PC has served since September 8, 2006 as
the certifying accountant. From the date on which Malone & Bailey, PC was
engaged until the date Malone & Bailey, PC was terminated, there were no
disagreements with Malone & Bailey, PC 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 Malone & Bailey, PC would
have caused Malone & Bailey, PC 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 October 1, 2007, the Company entered into an engagement letter with
GBH CPAs, 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 GBH CPAs, PC , the Registrant did not consult with GBH CPAs, 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 Company's Board of
Directors.
-17-
Item 8A. Controls and Procedures
-----------------------
Disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) are
designed to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms and that such information is accumulated and communicated to
management, including the Chief Executive Officer and Principal Accounting
Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this Annual Report on Form
10-KSB, our management, with the participation of our Chief Executive Officer
and our Principal Accounting Officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures as of December 31, 2007,
as required by Rule 13a-15 of the Exchange Act. Based on the evaluation
described above, our management, including our principal executive officer and
principal accounting officer, have concluded that, as of December 31, 2007, our
disclosure controls and procedures were not effective
Notwithstanding the existence of the material weaknesses described
below, we concluded that the consolidated financial statements in this Annual
Report on Form 10-KB present fairly, in all material respects, the Company's
financial condition, results of its operations and cash flows for the year ended
December 31, 2007 in conformity with U.S. generally accepted accounting
principles ("GAAP").
Management's Report on Internal Control over Financial Reporting
----------------------------------------------------------------
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal
control over financial reporting is a process designed under the supervision of
our principal executive and principal financial officers to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP.
Due to inherent limitations, internal control over financial reporting
may not prevent or detect misstatements and, even when determined to be
effective, can only provide reasonable, not absolute, assurance with respect to
financial statement preparation and presentation. Projections of any evaluation
of effectiveness to future periods are subject to risk that controls may become
inadequate as a result of changes in conditions or deterioration in the degree
of compliance.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Principal Accounting Officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2007 based on the criteria framework
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO").
As a result of the material weaknesses described below, management
concluded that as of December 31, 2007, we did not maintain effective internal
control over financial reporting based on the criteria established in Internal
Control - Integrated Framework, issued by COSO.
A material weakness in internal controls is a significant deficiency,
or a combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the financial statements would not be
prevented or detected on a timely basis by the Company. While our control
deficiencies have not resulted in any material misstatements of account balances
or disclosures that we are aware of, they could result in misstatements or
disclosures which could cause a material misstatement of annual or interim
financial statements that would not be prevented or detected. Accordingly,
-18-
management has determined that these control deficiencies constitute a material
weakness. An evaluation of entity level and process level controls was completed
during the year. Controls and procedures were created and implemented. Some of
these controls did not execute a sufficient number of times to allow for a
determination of operational effectiveness. In connection with management's
evaluation of our internal control over financial reporting, we identified the
following material weaknesses in our internal control over financial reporting
as of December 31, 2007 that had not been fully remedied or fully assessed as a
result of having not executed sufficient times to test:
1. Deficiencies in the Company's Entity Level Controls. The Company's
entity level control environment did not sufficiently promote
effective internal control over financial reporting throughout the
organization. This material weakness exists as a result of
multiple deficiencies such as failure to: a) establish and
maintain delegation of authority regarding the expenditure of
Company funds; b) involve the board in a timely and sufficient
manner in the annual financial reporting process; c) establish an
effective risk assessment process for the identification of fraud
risks or management override and d) establish a whistleblower
policy or program as a testament to the company's commitment to
integrity and ethics.
2. Deficiencies in Segregation of Duties. The Principal Accounting
Officer is actively involved in the preparation and approval of
financial schedules, journal entries and therefore cannot provide
an independent review and quality assurance function within the
accounting and financial reporting group. The limited number of
accounting personnel results in an inability to have independent
review and approval of financial accounting entries. There is a
risk that a material misstatement of the financial statements
could be caused, or at least not be detected in a timely manner,
due to insufficient segregation of duties.
3. Deficiencies in the documentation and consistent performance of
controls surrounding account balances. We did not maintain
effective controls over reconciliations. Specifically, our
controls over the preparation, review and monitoring of account
reconciliations were ineffective to provide reasonable assurance
that account balances were accurate and agreed to appropriate
supporting detail, calculations or other documentation. There is a
risk that a material misstatement of the financial statements
could be caused, or at least not be detected in a timely manner,
due the deficiencies in these controls
Remediation Initiatives
-----------------------
During fiscal 2008, we plan to implement a number of remediation
measures to address the material weaknesses described above. These
organizational and process changes will improve our internal controls
environment. The changes made through the date of this annual report includes
our retention of an outside consulting firm to assist us in the evaluation and
testing of our internal control system and to identify improvement opportunities
related to our accounting and financial reporting processes in order to
streamline and improve the effectiveness of these processes. The Company's
remediation plans include complete implementation and execution of controls and
procedures identified in management's assessment of the entity level, financial
reporting and other process level controls.
Management recognizes that many of these enhancements require continual
monitoring and evaluation for effectiveness. The development of these actions is
an iterative process and will evolve as the Company continues to evaluate and
improve our internal controls over financial reporting. The results of
management's assessment were reviewed with our Board of Directors.
Management will review progress on these activities on a consistent and
ongoing basis at the Chief Executive Officer and senior management level in
conjunction with our Board of Directors. We also plan to take additional steps
to elevate Company awareness about, and communication of, these important issues
through formal channels such as Company meetings, departmental meetings, and
training.
-19-
This annual report does not include an attestation report of the
company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management's report in this annual report.
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:
November 23, 2007 - reporting under item 8.01 the announcement of an
approved common share buy-back program.
-20-
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:
Director
Name Position Since Age
--------------------------------------------------------------------------------
James K. Abcouwer C.E.O., President April 2006 54
and Chairman
Loren E. Bagley Vice President
and Director August 1991 65
William F. Woodburn Secretary / Treasurer August 1991 65
Chief Operating Officer
and Director
Robert L. Richards Director September 2001 60
John G. Corp Director February 2005 47
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 more than 25 years of experience in the energy industry and is the
former CEO 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., as well as SVP 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.
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.
-21-
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 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 long-term incentive and bonus program 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 has established a 401(K) plan for employees and officers of the
company, which became effective July 1, 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.
Name and Principal Stock Options Total
Position Year Salary Bonus Awards Awards Compensation
-----------------------------------------------------------------------------------
James K. Abcouwer 2007 $132,000 -- $123,000 $ 51,620 $306,620
Name and Principal Stock Options Total
Position Year Salary Bonus Awards Awards Compensation
-----------------------------------------------------------------------------------
James K. Abcouwer 2006 $120,000 -- $450,000 $ 30,972 $600,972
-22-
For the fiscal year ended December 31, 2007 and 2006, our Chief
Executive Officer was paid cash compensation of $132,000 and $120,000,
respectively. No other executive officers received cash compensation greater
than $75,000 in any of the past three fiscal years.
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, 2007, 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* 1,528,789 16.1%
Robert L. Richards* 261,754 2.8%
Loren E. Bagley* 1,191,874 12.5%
William F. Woodburn* 1,746,626 18.4%
John G. Corp.* 45,000 0.5%
All directors and executive officers
a group (5 persons) 50.3%
----------------------
* Indicates director and/or executive officer at December 31, 2007
(1) Based upon 9,530,065 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 contract holder of the
natural gas which we transport. 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 transport 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 a transporation fee less a $.05 per Mcf marketing fee paid to
Sancho.
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.
-23-
Item 13. 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 CEO 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 CEO 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
99.3 Reserve Estimate and Evaluation of oil and gas properties -
2007
-----------------------
(1) Previously filed as exhibit to Form 10-KSB
(2) Previously filed as exhibit to Form 8-K dated August 7, 1995.
(3) Previously filed as exhibit to Form 8-K filed January 23, 2004.
(4) Previously filed as exhibit to Form 8-K filed November 11, 2004.
(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 Decebmer 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 From 8-K filed April 13, 2006.
-24-
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 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, 2007 and
2006, 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, 2007 and 2006 were:
2007 2006
-------- --------
GBH CPAs, PC $ 48,000 $ --
Malone & Bailey PC 52,500 38,500
HJ& Associates, LLC -- 97,249
-------- --------
Total $100,500 $145,749
======== ========
Audit Related Fees
------------------
For the years ended December 31, 2007 and 2006, fees billed for
assurance and related services relating to the performance of the audit of our
financial statements which are not reported under the caption "Audit Fees" above
were as follows:
2007 2006
-------- --------
GBH CPAs, PC $ 8,000 $ --
Malone & Bailey PC 3,000 --
HJ& Associates, LLC -- --
-------- --------
Total $ 11,000 $ --
======== ========
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 the auditors and believes that the provision of services for
activities unrelated to the audit is compatible with maintaining their
independence.
-25-
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 14, 2008
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 14, 2008
------------------------- (Principal Executive Officer)
James K. Abcouwer
/s/ LISA A. CORBITT Principal Financial April 14, 2008
------------------------- and Accounting Officer
Lisa A. Corbitt
/s/ LOREN E. BAGLEY Vice President and Director April 14, 2008
-------------------------
Loren E. Bagley
/s/ JOHN G. CORP Director April 14, 2008
-------------------------
John G. Corp
/s/ WILLIAM F. WOODBURN Secretary, Treasurer, April 14, 2008
------------------------- C.O.O. and Director
William F. Woodburn
/s/ ROBERT L. RICHARDS Director April 14, 2008
-------------------------
Robert L. Richards
-26-
TRANS ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm.....................F-2
Consolidated Balance Sheet..................................................F-3
Consolidated Statements of Operations.......................................F-5
Consolidated Statements of Stockholders' Equity.............................F-6
Consolidated Statements of Cash Flows.......................................F-7
Notes to the Consolidated Financial Statements..............................F-9
-27-
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, 2007 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2007 and 2006. 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 audits.
We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. 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 audits provide 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
December 31, 2007 and the results of their operations and their cash flows for
the years ended December 31, 2007 and 2006, 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 and has a working capital deficit at December 31, 2007, 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/ GBH CPAs, PC
----------------
GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
April 14, 2008
-28-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
2007
------------
ASSETS
CURRENT ASSETS
Cash $ 1,702,373
Accounts Receivable, net of allowance for doubtful
accounts of $-0- 285,204
Accounts Receivable - related parties 478,160
Advances to non-operator, net 243,666
Deferred Financing Costs 167,429
Derivative - current 43,095
Prepaid Expenses 8,000
------------
Total Current Assets 2,927,927
------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $174,311 664,942
OIL AND GAS PROPERTIES, USING SUCCESSFUL EFFORTS ACCOUNTING
Proved Properties 10,764,411
Unproved Properties 250,670
Pipelines 2,764,797
Accumulated depreciation, depletion and amortization (1,801,262)
------------
Net oil and gas properties 11,978,616
------------
OTHER ASSETS
Deferred Financing Costs, net of amortization of $119,136 242,467
Derivative - non-current 135,369
Advances to operator 557,715
Other Assets 58,334
------------
Total Other Assets 993,885
------------
TOTAL ASSETS $ 16,565,370
============
See notes to consolidated financial statements.
-29-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (continued)
December 31,
2007
-------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable, trade $ 2,318,852
Accounts Payable - related party 248,364
Accrued Expenses 929,288
Accrued Expenses - related party 31,000
Notes Payable - current portion 86,972
------------
Total Current Liabilities 3,614,476
------------
LONG-TERM LIABILITIES
Notes Payable, net of unamortized discount
of $791,070 14,033,528
Asset Retirement Obligations 166,895
------------
Total Long - Term Liabilities 14,200,423
------------
Total Liabilities 17,814,899
------------
STOCKHOLDERS' DEFICIT
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;
9,530,065 shares issued and 9,529,065 shares outstanding 9,530
Additional paid-in capital 34,117,443
Treasury Stock, at cost, 1,000 shares (750)
Accumulated deficit (35,375,752)
------------
Total Stockholders' Deficit (1,249,529)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 16,565,370
============
See notes to consolidated financial statements.
-30-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended
December 31,
2007 2006
----------- -----------
REVENUES $ 1,519,377 $ 1,420,802
----------- -----------
COSTS AND EXPENSES
Production Costs 929,224 534,065
Depreciation, Depletion, Amortization and Accretion 354,895 337,115
Exploration Costs 169,105 --
Dry Hole Expense 89,747 --
Selling, General and Administrative 2,206,643 2,927,383
Gain on Sale of Assets (775,139) (678,319)
----------- -----------
Total Costs and Expenses 2,974,475 3,120,244
----------- -----------
LOSS FROM OPERATIONS (1,455,098) (1,699,442)
----------- -----------
OTHER INCOME (EXPENSES)
Interest Income 41,382 --
Gain on Extinguishment of Debt 103,060 315,365
Interest Expense (944,651) (207,084)
Loss on Derivative Instruments (93,710) --
----------- -----------
Total Other Income (Expenses) (893,919) 108,281
----------- -----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (2,349,017) (1,591,161)
INCOME TAXES -- --
----------- -----------
LOSS FROM CONTINUING OPERATIONS (2,349,017) (1,591,161)
INCOME FROM DISCONTINUED OPERATIONS -- 183,775
LOSS FROM DISPOSAL OF DISCONTINUED OPERATIONS -- (1,541,142)
----------- -----------
NET LOSS $(2,349,017) $(2,948,528)
=========== ===========
LOSS PER SHARE - BASIC AND DILUTED
Continuing Operations $ (0.25) $ (0.25)
Discontinued Operations -- (0.21)
----------- -----------
Total Loss Per Share - Basic and Diluted $ (0.25) $ (0.46)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 9,484,918 6,432,839
=========== ===========
See notes to consolidated financial statements.
-31-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
For the years ended December 31, 2007 and 2006
Common Stock
--------------------------- Additional
Paid in Treasury Accumulated
Shares Amount Capital Stock Deficit Total
------------ ------------ ------------ ------------ ------------ ------------
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
Amortization of option expense -- -- 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
Amortization of option expense -- -- 326,922 -- -- 326,922
Shares issued for debt conversion 62,500 62 49,938 -- -- 50,000
Shares issued for services 17,000 17 12,903 -- -- 12,920
Treasury shares repurchased -- -- -- (750) -- (750)
Net loss for the year -- -- -- -- (2,349,017) (2,349,017)
------------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2007 9,530,065 $ 9,530 $ 34,117,443 $ (750) $(35,375,752) $ (1,249,529)
============= ============ ============= ============= ============ ============
See notes to consolidated financial statements.
-32-
TRANS ENERGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
----------------------------
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,349,017) $ (2,948,528)
Loss from discontinued operations -- 1,357,367
------------ ------------
Loss from continuing operations (2,349,017) (1,591,161)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation, depletion, amortization and accretion 354,895 337,115
Share-based compensation 339,842 1,882,609
Gain on debt extinguishment (103,060) (315,365)
Gain on sale of assets (775,139) (678,319)
Amortization of financing cost and debt discount 292,243 --
Dry hole expense 89,747 --
Unrealized loss on derivative contract 131,536 --
Changes in operating assets and liabilities:
Accounts receivable (9,932) 551,824
Accounts receivable - related party 91,440 --
Accounts receivable - non-operator (243,666) --
Prepaid expenses and other assets 14,500 (9,620)
Advances to operator (557,715) --
Accounts payable and accrued expenses 1,858,574 (1,261,236)
Accounts payable - related party 11,017 65,956
Judgments payable (118,046) --
------------ ------------
Net cash provided (used) in operating activities:
Continuing operations (972,781) (1,018,197)
Discontinued operations -- 183,775
------------ ------------
Net cash used in operating activities (972,781) (834,422)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 1,444,639 951,724
Expenditures for oil and gas properties (9,123,872) (2,624,488)
Expenditures for property and equipment (282,599) (511,091)
Cash paid for certificate of deposit (50,000) --
------------ ------------
Net cash used by investing activities (8,011,832) (2,183,855)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for treasury shares (750) --
Common stock issued for cash -- 270,000
Cash paid for derivative contracts (310,000) --
Proceeds from notes payable, net of financing costs and cash
discount of $791,070 and 27,994, respectively 14,666,800 2,380,633
Payments on notes payable (3,378,140) (291,111)
Proceeds from related party notes payable -- 450,000
Payments on related party debt (499,739) (21,688)
------------ ------------
Net cash provided by financing activities 10,478,171 2,787,834
------------ ------------
NET CHANGE IN CASH 1,493,558 (230,443)
CASH, BEGINNING OF PERIOD 208,815 439,258
------------ ------------
CASH, END OF PERIOD $ 1,702,373 $ 208,815
============ ============
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 465,870 $ 214,713
============ ============
Income taxes $ -- $ --
============ ============
Non-cash investing and financing activities
Common stock issued for debt $ -- $ 609,135
Investments purchased by the assumption of debt $ -- $ 207,608
Property acquired for common stock $ -- $ 680,000
Treasury stock cancelled $ -- $ 755,737
Discount on debt for net profits interest $ 765,000 $ --
Conversion of related-party debt to common stock $ 50,000 $ --
Increase in asset retirement obligation $ 16,518 $ --
Revision of asset retirement obligation $ 53,966 $ --
See notes to consolidated financial statements.
-33-
TRANS ENERGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Organization
-------------------------------------
Trans Energy, Inc. is an independent energy company that 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 been engaged in the business of oil and gas
exploration, development and 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. Since then, Trans Energy has been engaged in the exploration,
development, exploitation and production of oil and natural gas. Its operations
are presently focused in the State of West Virginia.
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 the Company's other
subsidiary, Arvilla Oilfield Services, LLC which was disposed of in fiscal 2006
and has been presented as "discontinued operations" in these consolidated
financial statements. All significant inter-company balances and transactions
have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of these 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 amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The most critical estimate we make is the engineering estimate of
proved oil and gas reserves. This estimate affects the application of the
successful efforts method of accounting, the calculation of depreciation,
depletion and amortization of oil and gas properties and the estimate of the
impairment of our oil and gas properties. It also affects the estimated lives
used to determine asset retirement obligations.
*****
Reclassifications
-----------------
Certain amounts in prior periods have been reclassified to conform to
the 2007 financial statement presentation.
-34-
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash in banks and certificates of
deposit which mature within three months of the date of purchase. The Company
may, in the normal course of operations, maintain cash balances in excess of
federally insured limits. At December 31, 2007, $1,406,338 was not within FDIC
insured limits. Included in Other Assets is a $50,000 certificate of deposit
which is assigned to the State of West Virginia Department of Environmental
Protection as collateral, so long as the Company operates in West Virginia.
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.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation on vehicles,
machinery and equipment is computed using the straight-line method over expected
useful lives of three to five years. Depreciation on pipelines is computed using
the straight-line method over the expected useful lives of fifteen years.
Additions are capitalized and maintenance and repairs are charged to expense as
incurred. Gains and losses on dispositions of equipment are reflected in total
operating costs and expenses.
Oil and Gas Properties
----------------------
The Company uses the successful efforts method of accounting for oil
and gas producing activities. Under the successful efforts method, 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 as incurred.
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.
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.
In April 2005, the FASB issued Staff Interpretation No. 19-1 ("FSP
19-1") Accounting for Suspended Well Costs, which provides guidance on the
accounting for exploratory well costs and proposes an amendment to FASB
-35-
Statement No. 19 ("FASB 19"), Financial Accounting and Reporting by Oil and Gas
Producing Companies. The guidance in FSP 19-1 applies to enterprises that use
the successful efforts method of accounting as described in FASB 19. The
guidance in FSP 19-1 did not have a material impact our consolidated financial
position, results of operations, or cash flows. The Company had no capitalized
exploratory well costs at December 31, 2007 and 2006.
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.
Deferred Financing Costs
------------------------
In connection with debt financing, Trans Energy paid $500,000 in fees
for the year ended December 31, 2007. These fees were recorded as deferred
financing costs and are being amortized using the effective interest method over
the life of the loan.
Derivatives
-----------
Derivative financial instruments, utilized to manage or reduce
commodity price risk related to Trans Energy's production, are accounted for
under the provisions of SFAS No. 133, "Accounting for Derivative Instruments and
for Hedging Activities", and related interpretations and amendments. Under this
statement, derivatives are carried on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income or loss and are recognized in the
statement of operations when the hedged item affects earnings. If the derivative
is not designated as a hedge, changes in the fair value are recognized in other
expense. Ineffective portions of changes in the fair value of cash flow hedges
are also recognized in loss on derivative liabilities.
Asset Retirement Obligations
----------------------------
The Company follows SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires entities to record the fair value of a liability
for legal obligations associated with the retirement obligations of tangible
long-lived assets in the period in which it is incurred. The fair value of asset
retirement obligation liabilities has been calculated using an expected present
value technique. When the liability is initially recorded, the entity increases
the carrying amount of the related long-lived asset. Over time, accretion of the
liability is recognized each period, and the capitalized cost is amortized over
the useful life of the related asset. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or incurs a gain or
loss upon settlement. This standard requires the Company to record a liability
for the fair value of the dismantlement and plugging and abandonment costs,
excluding salvage values.
Debt
----
The Company accounts for debt at fair value and recognizes interest
expense for accrued interest payable under the terms of the debt. Principal and
interest payments due within one year are classified as current, whereas
principal and interest payments for periods beyond one year are classified as
long term.
-36-
Provision for Taxes
-------------------
We account for income taxes pursuant to SFAS No 109, "Accounting for
Income Taxes," which requires recognition of deferred income tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in our financial statements or tax returns. We provide for deferred
taxes on temporary differences between the financial statements and tax basis of
assets using the enacted tax rates that are expected to apply to taxable income
when the temporary differences are expected to reverse. 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.
In July 2006, the FASB issued "Accounting for Uncertainty in Income
Taxes," an interpretation of FAS 109 ("FIN 48"), effective for years beginning
after December 15, 2006. FIN 48 establishes a more-likely-than-not threshold for
recognizing the benefits of tax return positions in the financial statements.
Also, FIN 48 implements a process for measuring those tax positions which meet
the recognition threshold of being ultimately sustained upon examination by the
taxing authorities. The adoption of FIN 48 had no material impact to the
Company's consolidated financial statements. The Company files tax returns in
the United States and states in which it has operations and is subject to
taxation. Tax years subsequent to 2004 remain open to examination by U.S.
federal and state tax jurisdictions.
Revenue and Cost Recognition
----------------------------
The Company uses the sales method to account for sales of crude oil and
natural gas. Under this method, revenues are recognized based on actual volumes
of oil and gas sold to purchasers. The volumes sold may differ from the volumes
to which the Company is entitled based on our interest in the properties. These
differences create imbalances which are recognized as a liability only when the
imbalance exceeds the estimate of remaining reserves. The Company had no
imbalances as of December 31, 2007 and December 31, 2006. Costs associated with
production are expensed in the period incurred. 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.
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.
On January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123(R). Under FASB Statement 123(R), the
Company estimates the fair value of each stock option award at the grant date by
using the Black-Scholes option pricing model. During the year ended December 31,
2006, stock options were valued with the following weighted average assumptions
used for grants; dividend yield of zero percent; expected volatility of 68.35%;
risk-free interest rate of 5.00% and expected lives of 10 years. During the year
ended December 31, 2007 no stock options were granted. Compensation expense
related to options granted in 2006 was $196,159 and $326,922 for the years ended
December 31, 2007 and 2006, respectively.
Loss per Share of Common Stock
------------------------------
Basic loss per share is calculated based on the weighted average number
of shares of common stock outstanding during each period. Diluted loss per share
is based on the weighted average numbers of shares of common stock outstanding
for the periods, including the dilutive effects of stock options. Dilutive
-37-
options that are issued during a period or that expire or are canceled during a
period are reflected in the computations for the time they were outstanding
during the periods being reported.
For the Years Ended
December 31,
2007 2006
----------- -----------
Numerator:
Loss from continuing operations $(2,349,017) $(1,591,161)
Discontinued operations -- (1,357,367)
----------- -----------
Net Loss $(2,349,017) $(2,948,528)
=========== ===========
Denominator - weighted average shares 9,484,918 6,432,839
=========== ===========
Net loss per share:
Continuing operations $ (0.25) $ (0.25)
=========== ===========
Discontinued operations $ 0 $ (0.21)
----------- -----------
Total loss per share $ (0.25) $ (0.46)
=========== ===========
Recent Accounting Pronouncements
--------------------------------
The Company does not expect the adoption of any recently issued
accounting pronouncements to have a significant effect on its financial position
or results of operations.
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, 2007 of $35,375,752 and has a
working capital deficit at December 31, 2007 of $686,549.
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.
-38-
The Company has accounted for Arvilla Oilfield Services, LLC as
discontinued operations and recorded a loss from discontinued operations of
$1,541,142, which is included in the statement of operations for the year ended
December 31, 2006.
NOTE 4 - PROPERTY AND EQUIPMENT
At December 31, 2007, property and equipment consisted of:
Vehicles $ 346,973
Machinery and equipment 402,587
Furniture and Fixtures 38,618
Leasehold improvements 7,075
Land 44,000
Accumulated depreciation (174,311)
---------------
Total Fixed Assets $ 664,942
==============
NOTE 5 - ASSET RETIREMENT OBLIGATIONS
The following is a description of the changes to the Company's asset
retirement obligations for 2007 and 2006:
2007 2006
--------- ---------
Asset retirement obligations at beginning of year $ 190,364 $ 799,393
Acquisition of oil and gas properties -- 312,963
Exploratory and Development drilling 16,518 --
Accretion expense 13,979 15,144
Revision in cost estimates (53,966) (937,136)
--------- ---------
Asset retirement obligations at end of year $ 166,895 $ 190,364
========= =========
NOTE 6 - PROVISION FOR TAXES
At December 31, 2007, the Company had net operating loss carryforwards
of approximately $27 million that may be offset against future taxable income
from the year 2008 through 2027. No tax benefit has been reported in the
December 31, 2007 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,
2007:
2007
Deferred tax assets:
NOL carryover $11,844,000
Unrealized loss on derivative
contract 57,000
Other 25,000
-----------
Total deferred tax assets 11,926,000
Valuation allowance (11,926,000)
-----------
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 to pretax
income from continuing operations for the years ended December 31, 2007 and 2006
primarily due to expense related to stock and options issued for services and
the valuation allowance.
-39-
NOTE 7 - 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 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.
In June 2007, the Company issued 62,500 shares of common stock for the
conversion of a promissory note valued at $50,000.
In December 2007, the Company issued 17,000 shares of common stock for
employee compensation valued at $12,920.
In December 2007, the board elected to award 630,000 shares of common
stock valued at $516,600 as part of the Long-Term Incentive and Bonus Program.
As of December 31, 2007, these shares were recorded as stock payable included in
accrued expenses in the balance sheet and were issued in February 2008.
In December 2007, we purchased 1,000 shares of common stock for treasury
at a cost of $750.
-40-
NOTE 8 - STOCK OPTIONS
A summary of the status of the options granted under various agreements
at December 31, 2007 and 2006, and changes during the years then ended is
presented below:
December 31, 2007 December 31, 2006
----------------------- ----------------------
Weighted Weighted
Average Exercise Average Exercise
Shares Price Shares Price
--------- ----------- --------- ----------
Outstanding at beginning of year 1,503,324 $ 1.13 553,324 $ 1.95
Granted -- -- 950,000 0.65
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
--------- ----------- --------- ----------
Outstanding at end of year 1,503,324 $ 1.13 1,503,324 $ 1.13
========= =========== ========= ==========
A summary of the status of the options granted under various agreements
at December 31, 2007 is presented below:
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Remaining Number Exercise Exercise
Exercise Prices Outstanding Contractual Life Exercisable Price Price
---------------------------------------------------------------------------------------------------------
$ .065 950,000 3.63 years $ 0.65 950,000 $0.65
$ 1.95 553,324 6.75 years $ 1.95 553,324 $1.95
-- 1,503,324 -- -- 1,503,324
========= =========
The intrinsic value of options outstanding at December 31, 2007 was $161,500.
NOTE 9 - SIGNIFICANT EVENTS
Effective January 9, 2007, Trans Energy completed the sale to
Leatherwood Inc. for net cash proceeds of $667,000 of six oil and/or gas wells
located in West Virginia. Trans Energy assigned all of its rights, title,
operating rights and interest including the right to produce, operate and
maintain the wells. No gain or loss was recorded on this sale.
Effective January 10, 2007, Trans Energy acquired from National Gulf
Production, Inc. 75% of National Gulf's rights and interest 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
$146,250. In addition, cash of $138,750 was paid in advance for Trans Energy's
proportionate 75% share of the seismic acquisition, processing and
interpretation cost, which was subsequently expensed. As of October 1, 2007,
Trans Energy's share was reduced to 56.25% upon sale to a third party.
Effective February 7, 2007, Trans Energy 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 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, Trans
Energy paid the sum of $10,000 as a down payment to be applied against the
purchase price, with the unpaid balance of $128,000 which was paid in full
during the first six months of 2007.
Effective April 4, 2007, Trans Energy farmed out 11,200 acres of
unproven leases in Wetzel County to Republic Partners VI, LP. Under the terms of
the farm out agreement, Trans Energy and Republic Partners will drill one
exploratory well in 2007 and two exploratory wells in 2008. The total cost per
well is expected to be $850,000 to $1,000,000, of which Republic Partners will
pay for 100% of the cost to earn a 50% working interest. Trans Energy was
permitted by the terms of the joint venture to drill two additional wells in
2007, of which Republic Partners can elect to obtain a 50% paid working
interest. One additional well was drilled in 2007.
-41-
Effective June 19, 2007, Trans Energy completed the sale to Leatherwood
Inc. of three non-producing well bores located in West Virginia for net cash
proceeds of $774,505. Trans Energy assigned all of its right, title, operating
rights and interest, including the right to produce, operate and maintain the
wells. Trans Energy recorded a gain on sale of the property of $774,505.
Effective June 20, 2007, Trans Energy completed the purchase of 3.75
acres located in Wetzel County, West Virginia for cash in the amount of $44,000.
This acreage was purchased for the purpose of installing a tap into Dominion's
transmission line to create an additional point of sale for future wells drilled
in Wetzel County, West Virginia.
Effective July 1, 2007, Trans Energy implemented an employee 401(k)
plan whereby Trans Energy will make basic safe-harbor matching contributions to
those employees electing to participate in the plan.
Effective July 13, 2007, as required by the CIT Creditor Agreement,
Trans Energy purchased a commodity put option for $310,000 in cash. The terms of
the option establish a floor price of $7.35/MMBTU, Settlement Date Henry Hub
price of Natural Gas as quoted by the NYMEX, for volumes ranging from 8,241
MMBTU per month to 5,244 MMBTU per month, beginning settlement on August 2, 2007
and ending settlement on December 1, 2011. This put option places no limit on
the upside price for Trans Energy's gas production. If the monthly closing price
of Henry Hub gas index is below the floor price then Trans Energy receives
proceeds equal to the difference between the floor price and the closing price.
The cost of the put option and proceeds, if any, as well as changes in the fair
market value of the put options, are charged to other income (expense) as gain
(loss) on derivative instruments. As of December 31, 2007, Trans Energy had a
total loss on the derivative instrument of $93,710, of which $37,826 was a
realized gain and $131,536 was an unrealized loss.
On October 25, 2007, the CIT Capital debt agreement dated June 15, 2007
was amended to provide the Company additional time, until March 31, 2008, to
meet various financial statement ratio covenants.
On April 11, 2008, the CIT Capital debt agreement dated June 15, 2007
was again amended to provide the Company additional time, for fiscal year end
2007, to meet various covenants.
NOTE 10 - JUDGMENTS PAYABLE
On July 28, 1999, Core Laboratories, Inc. obtained a judgment against
the Company for non-payment of an account payable. The judgment called for
monthly payments of $351 and accrued interest at 10.00% per annum. The balance
due on this judgment including the related interest in the amount of $21,312 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 called for monthly payments of
$3,244 and accrued interest at 10.00% per annum. The balance due on this
judghment including the related interest in the amount of $96,734 was paid in
full on February 28, 2007.
NOTE 11 - NOTES PAYABLE
On January 10, 2007, Trans Energy repaid a short-term related party
note, dated September 11, 2006, bearing interest at the rate of 10% per annum,
with cash in the amount of $270,000 plus accrued interest, for a total paid of
$278,951.
On June 18, 2007, Trans Energy repaid a short-term related party note,
dated September 11, 2006, bearing interest at the rate of 10% per annum, with
cash in the amount of $100,000 plus accrued interest, for a total paid of
$107,589.
On June 18, 2007, Trans Energy repaid a short-term related party note,
dated September 11, 2006, bearing interest at the rate of 10% per annum, with
cash in the amount of $30,000 plus accrued interest, for a total paid of
$36,027. In addition, 62,500 shares of common stock were issued for the
remaining balance due of $50,000.
-42-
For the year ended December 31, 2007, Trans Energy also repaid various
other related party notes in the principal amount of $115,116. On June 22, 2007
Trans Energy finalized a financing agreement with CIT Capital USA Inc. Under the
terms of the agreement, CIT Capital USA Inc. will lend up to $18,000,000 (the
"Borrowing Base"), to Trans Energy in the form of a senior secured revolving
credit facility. Trans Energy has the ability, at additional cost, to increase
the credit facility to $30,000,000 in the future, with increases in its
reserves. Trans Energy gave CIT Capital USA Inc. a promissory note for all
borrowings under the terms of the agreement. The note contains customary default
provisions and additional financial covenants. Funds realized from the financing
agreement have been used to facilitate Trans Energy's 2007 drilling program. As
part of the financing agreement, Trans Energy conveyed to CIT Capital USA Inc. a
first priority continuing security interest in, lien on and right of setoff
against, all property, assets, security interests, related books and records,
and any proceeds from the sale of or revenue generated from the foregoing,
whether now owned or acquired at anytime in the future. In addition, Trans
Energy conveyed to CIT Capital USA Inc. a 2% Net Profits Interest, valued at
$765,000, in and to all oil and gas properties currently owned and any
additional oil and gas properties acquired in the future through to the date of
maturity. Under the terms of the financing agreement, CIT Capital USA Inc. can
elect after June 22, 2008, but on or prior to June 22, 2009 to sell the 2% NPI
to Trans Energy at a value equal to 2% of Trans Energy's total reserve report
value at the time. Trans Energy can elect after June 22, 2009, but on or prior
to June 22, 2010 to buy the 2% NPI from CIT Capital USA Inc. at a value equal to
3% of Trans Energy's total reserve report value at the time. Trans Energy can
elect after June 22, 2010, to buy the 2% NPI from CIT Capital USA Inc. at a
value equal to 2% of Trans Energy's total reserve report value at the time. The
reserve report value is to be based on proved reserves and to be calculated
using a 10% discount, no inflation adjustment for expenditures and differential
adjusted market pricing for revenues. The fair value of $765,000 has been
recorded as a reduction of oil and gas properties and a discount on the note
payable to CIT Capital USA Inc., with no gain recognized. The discount is being
amortized using the effective interest method over the term of the note.
Trans Energy also agreed to enter into the commodity put option
positions over the next five years on natural gas production volumes. Under the
terms of the agreement Trans Energy can elect varying interest payment terms and
a variable interest rate based on different posted rates, at no additional cost.
Borrowings under the note bear interest at either LIBOR plus a variable
margin based on the utilization of the Borrowing Base, ranging from 1.75% to
5.25%; or at the Prime Rate plus the Federal Funds Rate plus 0.5% plus a
variable margin based on the utilization of the Borrowing Base ranging from
1.75% to 5.25%.
Interest payment due dates are elected at the time of borrowing and
range from monthly to six months. Principal payments are due at maturity on June
15, 2010 for all borrowings outstanding on that date. Trans Energy shall have
the right at any time to prepay any borrowing in whole or in part, before the
date of maturity. Trans Energy also must pay CIT Capital USA Inc. a commitment
fee for any unused commitments, including related letters of credit. The
commitment fees range from 0.5% to 0.75% per annum of unused average
commitments. Trans Energy paid $500,000 in financing fees to a placement agent
in securing the CIT Capital USA Inc. financing agreement. These financing fees
are being deferred and amortized using the effective interest method over the
term of the note. Trans Energy paid $200,000 to CIT Capital USA Inc. as a
structuring fee in securing the note. The structuring fee has been recorded as a
discount on the note and is being amortized using the effective interest method
over the term of the note. For the year ended December 31, 2007, Trans Energy's
total borrowings from CIT amount to $14,713,146, leaving an unused available
credit facility of $3,286,854.
For the year ended December 31, 2007, Trans Energy had additional borrowings in
the amount of $654,671 to fund workover programs and various property and
equipment purchases. The interest rates vary from 6.75% to 13.24%, with
principal and interest payments due monthly. Total repayment terms range from 36
to 48 months maturity. The collateral securing the notes includes the related
assets purchased.
-43-
On June 22, 2007, Trans Energy also repaid the following notes payable balances
as they were on at that date:
Principal Interest
--------- --------
Wesbanco $ 240,226 $ 1,218
United Bank 1,817,952 24,719
Huntington National 932,255 9,458
Karla Spencer 292,078 - 0 -
NOTE 12 - DERIVATIVE FINANCIAL INSTRUMENTS
Trans Energy entered into a derivative contract to provide a measure of
stability in the cash flows associated with Trans Energy's gas production and to
manage exposure to commodity prices. None of the derivative contracts Trans
Energy entered into have been designated as cash flow hedges or fair value
hedges. Trans Energy recorded a total loss of $93,710 related to its derivative
instruments for the year ended December 31, 2007, of which $37,826 was a
realized gain and $131,536 was an unrealized loss.
Natural Gas Derivatives
Trans Energy entered into participating commodity put options on
natural gas whereby Trans Energy receives a floor price. The following table
shows the monthly volumes and the floor price.
Average
Start End Volume Floor
Month Month MMBTU/Month $/MMBTU
----- ----- ----------- -------
Jul `07 Dec `07 8,241 $ 7.350
Jan `08 Dec `08 6,915 $ 7.350
Jan `09 Nov `09 6,370 $ 7.350
Jan `10 Dec `10 5,560 $ 7.350
Jan `11 Dec `11 5,244 $ 7.350
NOTE 13 - BUSINESS SEGMENTS
Trans Energy's principal operations consist of oil and gas sales with
Trans Energy, and pipeline transmission with Ritchie County Gathering Systems
and Tyler Construction Company.
Certain financial information concerning Trans Energy's operations in
different segments is as follows:
For the
Year
Ended Oil and Gas Pipeline
December 31, Sales Transmission Corporate Total
----------- ------------ ------------ ------------ ------------
Revenue 2007 $ 1,207,233 $ 182,007 $ 130,137 $ 1,519,377
2006 1,157,957 227,063 35,782 1,420,802
Income (Loss) from 2007 (148,784) (123,729) (2,076,504) (2,349,017)
continuing operations 2006 1,178,221 121,006 (2,890,388) (1,591,161)
Depreciation, depletion, 2007 329,333 25,562 -- 354,895
amortization and accretion 2006 220,403 116,712 -- 337,115
Property and equipment 2007 8,034,322 1,372,149 -- 9,406,471
acquisitions, including 2006 3,982,661 -- -- 3,982,661
oil and gas properties
Total assets, net of intercompany accounts:
December 31, 2007 $ 14,502,036 $ 2,063,334 $ -- $ 16,565,370
December 31, 2006 5,514,899 736,510 -- 6,251,409
-44-
NOTE 14 - 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. The Company has an
accrued related party receivable from Sancho of $478,160 as of December 31,
2007.
b. Receivables and Payables
The Company has various payables to the officers and companies of the officers.
These amounts are reported in the balance sheet as related party accounts
payable and accrued expenses.
NOTE 15 - 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, 2007
and 2006. Another customer also generated 100% of Ritchie County sales in 2007
and 2006. Trans Energy, Inc. has five customers that represent 100% of its gross
oil and gas sales for the years ended December 31, 2007 and 2006.
NOTE 16 - SUBSEQUENT EVENTS
On April 11, 2008 the CIT Capital debt agreement dated June 15, 2007
was again amended to provide the Company additional time, for fiscal year end
2007, to meet various covenants.
NOTE 17 - SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
There are numerous uncertainties inherent in estimating quantities of
proved crude oil and natural gas reserves. Crude oil and natural gas reserve
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas that cannot be precisely measured. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment.
The Company retained Schlumberger Data & Consulting Services,
independent third-party reserve engineers, to perform an independent evaluation
of proved reserves as of December 31, 2007. Results of drilling, testing and
production subsequent to the date of the estimates may justify revision of such
estimates. Accordingly, reserve estimates are often different from the
quantities of crude oil and natural gas that are ultimately recovered. All of
the Company's reserves are located in the United States.
The following supplemental unaudited information regarding the
Company's oil and gas activities is presented pursuant to the disclosure
requirements of SFAS No. 69. The standardized measure of discounted future net
cash flows is computed by applying fiscal year-end prices of oil and gas to the
estimated future production of proved oil and gas reserves, less estimated
future expenditures (based on fiscal year-end cost estimates assuming
continuation of existing economic conditions) to be incurred in developing and
producing the proved reserves, less estimated future income tax expenses (based
on fiscal year-end statutory tax rates) to be incurred on pre-tax net cash flows
less tax basis of the properties and available credits, and assuming
continuation of existing economic conditions. The estimated future net cash
flows are then discounted using a rate of 10 percent per year to reflect the
estimated timing of the future cash flows.
Capitalized Costs and Accumulated Depreciation, Depletion and Amortization
Aggregate capitalized costs relating to the Company's crude oil and
natural gas producing activities, including asset retirement costs and related
accumulated depreciation, depletion, and amortization are as follows:
As of December 31, 2007
---------------------------
Proved oil and gas producing properties
and related lease, wells and equipment $ 13,529,208
Unproved Oil and Gas Properties 250,670
Accumulated Depreciation, Depletion
and Amortization (1,801,262)
------------
Net Capitalized Costs $ 11,978,616
============
All of the Company's operations are in the United States.
-45-
Costs Incurred in Oil and Gas Activities
----------------------------------------
Costs incurred in connection with the Company's crude oil and natural
gas acquisition, exploration and development activities for each of the periods
shown below:
For the Year Ended December 31,
-------------------------------
2007 2006
Acquisition of Properties: ---------- ----------
Proved $ 16,355 $1,848,740
Unproved 240,514 10,156
Exploration Costs 258,852 --
Development Costs 9,123,877 984,359
---------- ----------
Total Costs Incurred $9,639,598 $2,843,255
========== ==========
Results of Operations for Oil and Gas Producing Activities
----------------------------------------------------------
Aggregate results of operations, in connection with the Company's crude
oil and natural gas producing activities, for each of the periods shown below:
For the Year Ended December 31,
-------------------------------
2007 2006
----------- -----------
Sales $ 1,207,233 $ 1,157,957
Production Costs (a) (929,224) (534,065)
Depreciation, Depletion and Amortization (329,333) (220,403)
Income Tax Expense -- --
----------- -----------
Total Results of Operations for
Producing Activities (b) $ (51,324) $ 403,489
=========== ===========
(a) Production costs consist of oil and gas operations expense, production
and ad valorem taxes, plus general and administrative expense
supporting the Company's oil and gas operations.
(b) Excludes the activities of pipeline transmission operations, corporate
overhead and interest costs
Estimated Quantities of Proved Oil and Gas Reserves
---------------------------------------------------
The Company's proved oil and natural gas reserves have been estimated
by independent petroleum engineers. Proved reserves are the estimated quantities
that geologic and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are the quantities expected to
be recovered through existing wells with existing equipment and operating
methods. Due to the inherent uncertainties and the limited nature of reservoir
data, such estimates are subject to change as additional information becomes
available. The reserves actually recovered and the timing of production of these
reserves may be substantially different from the original estimate. Revisions
result primarily from new information obtained from development drilling and
production history; acquisitions of oil and natural gas properties; and changes
in economic factors.
The following schedule sets forth the proved reserves of the Company
during each of the periods presented:
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As of December 31,
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2007 2006
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Proved Reserves as of: Oil Gas Oil Gas
(BBL) (MCF) (BBL) (MCF)
----------- ----------- ----------- -----------
Beginning of the period 1,340,964 13,161,354 230,780 2,856,564
Revisions of previous estimates 64,040 788,619 535,724 5,941,466
Extensions and discoveries 807,430 9,767,123 -- 1,047,619
Improved recovery -- -- -- --
Production (4,022) (161,281) (5,758) (124,302)
Purchases of minerals in place -- -- 580,218 3,440,007
Sales of minerals in place (26,819) (263,227) -- --
----------- ----------- ----------- -----------
End of period 2,181,593 23,292,588 1,340,964 13,161,354
=========== =========== =========== ===========
Proved Developed Reserves, End of Year 182,056 4,531,463 56,567 2,340,352
=========== =========== =========== ===========
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves
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The following information is based on the Company's best estimate of
the required data for the Standardized Measure of Discounted Future Net Cash
Flows as of December 31, 2007 and 2006 in accordance with SFAS No 69,
"Disclosures About Oil and Gas Producing Activities" which requires the use of a
10% discount rate. This information is not the fair market value, nor does it
represent the expected present value of future cash flows of the Company's
proved oil and gas reserves.
As of December 31,
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2007 2006
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Future Cash Inflows $ 399,271,719 $ 166,383,422
Future Production Costs (a) (55,506,445) (34,891,269)
Future Development Costs (42,293,774) (23,508,739)
Future Income Tax Expense (120,671,129) (39,740,080)
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Future Net Cash Flows $ 180,800,371 $ 68,243,334
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Discounted for Estimated Timing
of Cash Flows $(127,712,969) $ (50,941,802)
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Standardized Measure of Discounted
Future Net Cash Flows $ 53,087,402 $ 17,301,531
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(a) Production costs include oil and gas operations expense, production ad
valorem taxes, transportation costs and general and administrative
expense supporting the Company's oil and gas operations.
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Summary of Changes in Standardized Measure of Discounted Future Net Cash Flow
Relating to Proved Oil and Gas Reserves
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Principal changes in the aggregate standardized measure of discounted
future net cash flows attributable to the Company's proved crude oil and natural
gas reserves, as required by SFAS No. 69, at year end are set forth in the table
below:
For the Year Ended December 31,
2007 2006
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Standardized Measure, Beginning of Year $ 17,301,531 $ 17,645,538
Oil and gas sales, net of production costs (278,009) (658,018)
Changes in prices and future production 4,524,643 (5,345,481)
Extensions, discoveries and improved 63,996,549 1,528,645
recovery, net of costs
Sales of Minerals in place (346,381) --
Change in estimated future development costs (24,247,420) (20,157,035)
Previously estimated development costs incurred 8,743,845 3,501,938
Revisions of previous quantity estimates (416,497) 26,059,401
Accretion of Discount 2,737,672 2,304,424
Net change in income taxes (25,356,803) (4,676,482)
Timing and Other 6,428,272 (2,901,397)
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Standardized Measure, End of Year $ 53,087,402 $ 17,301,531
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