Restatement to Certain Quarterly Unaudited Information

12 Months Ended

Dec. 31, 2012

Restatement to Certain Quarterly Unaudited Information [Abstract]

RESTATEMENT TO CERTAIN QUARTERLY UNAUDITED INFORMATION

NOTE 1 – RESTATEMENT TO CERTAIN QUARTERLY UNAUDITED INFORMATION

On April 15, 2013, Trans Energy, Inc. (“Trans Energy”, or the “Company”) announced that it had identified an accounting error related to certain puttable warrants issued in conjunction with a Credit Agreement (the “ASD Credit Agreement”) that the Company’s wholly owned subsidiary, American Shale Development, Inc. (“American Shale” or “ASD”), entered into on February 29, 2012. The ASD Credit Agreement includes financing from several banks and other financial institutions, and Chambers Energy Management, LP, as administrative agent (“Chambers”).

For participation in the ASD Credit Agreement, American Shale, for and in consideration of $2 million, entered into a Warrant Agreement (“Warrant”) with Chambers. The Warrant provides Chambers the option to purchase up to 19.5% of the common shares of ASD at an exercise price of $5,137,000 for a period of three years ending on February 28, 2015. The Warrant also includes a feature under which Chambers has the option (the “Put Option”), at its sole discretion, to put (i.e., sell) the Warrant back to the Company at the three year anniversary date (if not earlier due to other factors), in return for a cash payment equal to the excess of i) the fair market value of an ASD common share over ii) the Warrant strike price of $263.44. In addition, the Warrant strike price will be reduced to equal the offering price of any common shares subsequently sold below $263.44 (the “Down-Round Provision”).

Trans Energy initially reported the cash consideration of $2 million received for issuing the Warrant as Additional Paid in Capital (“APIC”) within Stockholders’ Equity in the Quarterly Reports on Form 10-Q previously filed for the periods ended June 30, 2012 and September 30, 2012, respectively.

However, upon further analysis, the Company has determined that the Put Option and Down-Round Provision result in the Warrants qualifying as derivative liabilities, rather than equity instruments. The Company’s conclusion is based on the following: i) the Put Option embodies an obligation that permits Chambers to require the Company to repurchase the Warrants by transferring assets (cash), pursuant to Accounting Standards Codification (“ASC”) 480-10, “Distinguishing Liabilities from Equity”; and ii) the Down-Round Provision is not indexed to the Company’s own stock, as it could result in the exercise price of the Warrants being modified based upon a variable that is not an input to the fair value of a ‘fixed-for-fixed’ option, pursuant to ASC 815-40, “Derivatives and Hedging—Contracts in an Entity’s Own Stock”.

As such, the Company should have recorded the $2 million in cash consideration paid by Chambers, which represents the fair value of the Warrant on the issuance date, as a warrant derivative liability (rather than APIC). Subsequent to the issuance, the warrant liability should be recorded at fair value at each reporting date, with changes in such fair value being recorded through other income (expense) on the Company’s Statement of Operations. The Company determined the fair value of the Warrants at inception and each subsequent reporting date using a lattice model.

The aforementioned accounting error represent non-cash, items that result in the understatement of warrant derivative liabilities, overstatement of stockholders’ equity and under/overstatement of other income (expense) for the periods ended June 30, 2012 and September 30, 2012, as noted in the table below. The Company appropriately accounted for the Warrants as of, and for the period ended, December 31, 2012.

On April 10, 2013, the Audit Committee of the Company’s Board of Directors concluded that due to the error and failure of recognizing the Warrant as derivative liabilities, the Company’s previously issued unaudited consolidated financial statements as of, and for the periods ended June 30, 2012 and September 30, 2012 should no longer be relied upon. The Company intends to correct the effect of the accounting error described above by amending the previously filed the Form 10-Q for the periods ended June 30, 2012 and September 30, 2012.

Summary effects of restatement on unaudited quarterly periods

The following tables set forth the effects of the restatement on the Company’s previously reported Unaudited Quarterly Consolidated Financial Statements for the period ended June 30, 2012 and September 30, 2012.

	As of
	June 30, 2012						September 30, 2012
Unaudited Quarterly Information	As Previously Reported			As Restated			As Previously Reported			As Restated
Consolidated Balance Sheets
Warrant Derivative Liability	$	0		$	1,156,660		$	0		$	1,219,683
Total Liabilities		50,768,194			51,924,854			50,528,447			51,748,130
Shareholders’ Equity		26,249,913			25,093,253			23,260,533			22,040,850
	Three Months Ended
	June 30, 2012						September 30, 2012
Unaudited Quarterly Information	As Previously Reported			As Restated			As Previously Reported			As Restated
Consolidated Statements of Operations
Gain (Loss) on Derivatives	$	0		$	843,340		$	0		$	(63,023	)
Total Other Income (Expenses)		(1,426,154	)		(582,814	)		(1,655,966	)		(1,718,989	)
Net (loss)		(2,713,761	)		(1,870,421	)		(3,506,749	)		(3,569,772	)
Per share amounts:
Basic earnings (loss) per share	$	(0.21	)	$	(0.14	)	$	(0.27	)	$	(0.27	)
Diluted earnings (loss) per share		(0.21	)		(0.14	)		(0.27	)		(0.27	)
	Six Months Ended						Nine Months Ended
	June 30, 2012						September 30, 2012
Unaudited Quarterly Information	As Previously Reported			As Restated			As Previously Reported			As Restated
Consolidated Statements of Operations
Gain on Derivatives	$	639		$	843,979		$	639		$	780,956
Total Other Income (Expenses)		(1,857,066	)		(1,013,726	)		(3,513,033	)		(2,732,716	)
Net (loss)		(4,210,229	)		(3,366,889	)		(7,716,979	)		(6,936,662	)
Per share amounts:
Basic earnings (loss) per share	$	(0.32	)	$	(0.26	)	$	(0.59	)	$	(0.53	)
Diluted earnings (loss) per share		(0.32	)		(0.26	)		(0.59	)		(0.53	)