Derivatives

9 Months Ended

Sep. 30, 2012

Derivatives [Abstract]

DERIVATIVES

NOTE 7 — DERIVATIVES

Trans Energy has determined that the put option and the Down-Round Provision result in the warrants issued in conjunction with the ASD Credit Agreement qualifying as derivative liabilities. Pursuant to Accounting Standards Codification (“ASC”) 480-10, “Distinguishing Liabilities from Equity”, the put option embodies an obligation that permits Chambers to require Trans Energy to repurchase the warrant by transferring assets (cash). Additionally, the Down-Round Provision is not indexed to Trans Energy’s own stock, as it could result in the exercise price of the warrant 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”.

The warrant derivative liability is recorded at fair value and reported as a Long-Term Liability on the Consolidated Balance Sheets with the change in fair value recorded in the Consolidated Statements of Operations in Other Income (Expense). As of September 30, 2012, the warrant derivative liability had a fair value of $1,219,683. The change in the fair value of the warrant derivative liability amounted to an unrealized loss of $63,023 and an unrealized gain of $780,317 for the three and nine month periods ended September 30, 2012, respectively.