Edgar Filing: TRANS ENERGY INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company

10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No.2)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-23530

TRANS ENERGY, INC.

(Exact name of registrant as specified in its charter)

Nevada

93-0997412

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

210 Second Street, P.O. Box 393, St. Marys, West Virginia 26170

(Address of principal executive offices)

Registrant’s telephone number, including area code: (304) 684-7053

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding as of August 6, 2012
Common Stock, $0.001 par value		13,156,578

EXPLANATORY NOTE

The purpose of this Amendment No. 2 (this “Amendment”) on Form 10-Q/A is to amend and restate in their entirety the following items of our Quarterly Report on Form 10-Q for the period ended June 30, 2012 as originally filed with the Securities and Exchange Commission (the “SEC”) on August 14, 2012 (the “Original Form 10-Q”): (i) Item 1 of Part I “Financial Information”, (ii) Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and we have also updated the signature page and our financial statements formatted in Extensible Business Reporting Language (“XBRL”) in Exhibits 101. No other sections were affected, but for the convenience of the reader, this report on Form 10-Q/A restates in its entirety, as amended, our Original Form 10-Q. This report on Form 10-Q/A is presented as of the filing date of the Original Form 10-Q and does not reflect events occurring after that date, or modify or update disclosures in any way other than as required to reflect the restatement described below.

We have determined that our previously reported results for the period ended June 30, 2012 erroneously included the cash consideration which represents the fair value of certain puttable warrant on the issuance date in additional paid in capital (“APIC”) rather than a derivative warrant liability. Additionally, the warrant liability was not recorded at fair value as of June 30, 2012, with changes in such fair value being recorded through other income on our Unaudited Consolidated Statement of Operations. The Unaudited Consolidated Balance Sheets as of June 30, 2012 included in this Form 10-Q/A have been restated to remove the $2 million in cash consideration from APIC and reported a derivative warrant liability of $1.2 million which represents its fair value as of the reporting date. The Unaudited Consolidated Statements of Operations for the period ended June 30, 2012 included in this Form 10-Q/A have been restated to include the effect of the $0.8 million of change in the fair value of the derivative warrant liability. Certain adjustments have been made in the Unaudited Consolidated Statement of Stockholders’ Equity and Unaudited Consolidated Statements of Cash Flows to correspond to the income statement and balance sheet adjustments as described in Note 1 of the Notes to the Unaudited Consolidated Financial Statements included in this filing. In addition, we have made necessary conforming changes in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” resulting from the correction of this error.

Table of Contents


Heading	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		2
Consolidated Balance Sheets — June 30, 2012 (Unaudited) and December 31, 2011 (Audited)		2
Consolidated Statements of Operations — Six Months Ended June 30, 2012 and 2011 (Unaudited)		4
Consolidated Statement of Stockholders’ Equity — Six Months Ended June 30, 2012 (Unaudited)		5
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2012 and 2011 (Unaudited)		6
Notes to Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operations		15
Item 4. Controls and Procedures		18
PART II OTHER INFORMATION		19
Item 1. Legal Proceedings		19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 3. Defaults Upon Senior Securities		19
Item 4. Mine Safety Disclosures		19
Item 5. Other Information		19
Item 6. Exhibits		19
Signatures		20

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TRANS ENERGY, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	June 30, 2012			December 31, 2011
	Unaudited			Audited
ASSETS
CURRENT ASSETS
Cash	$	12,766,348		$	7,885,652
Accounts receivable, trade		1,652,454			2,074,851
Accounts receivable, related parties		18,500			18,500
Advance Royalties		171,452			114,099
Prepaid Expenses		187,334			73,098
Drilling advances, net		1,718.285			1,754,020
Deferred financing costs, net of amortization of $93,744 and $712,500		569,409			237,500


Total Current Assets		17,083,782			12,157,720
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $841,549 and $762,132, respectively		1,047,253			1,081,378
OIL AND GAS PROPERTIES, USING SUCCESSFUL EFFORTS ACCOUNTING
Proved properties		61,403,291			48,335,664
Unproved properties		10,916,188			9,507,789
Pipelines		1,387,440			1,387,440
Accumulated depreciation, depletion and amortization		(16,164,717	)		(14,545,126	)


Oil and gas properties, net		57,542,202			44,685,767
OTHER ASSETS
Financing costs		1,043,918			—
Other assets		300,952			300,952

Total Other Assets		1,344,870			300,952


TOTAL ASSETS	$	77,018,107		$	58,225,817

See notes to unaudited consolidated financial statements.

TRANS ENERGY, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (continued)


	June 30, 2012			December 31, 2011
	Unaudited			Audited
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable, trade	$	1,483,197		$	14,333,750
Accounts and notes payable, related party		1,500			2,150
Accrued expenses		1,378,558			1,152,885
Revenue payable		148,487			451,825
Income tax payable		270,708			270,708
Notes payable — current		22,707			14,308,579


Total Current Liabilities		3,305,157			30,519,897
LONG-TERM LIABILITIES
Notes payable, net		47,195,243			5,612
Asset retirement obligations		267,794			256,651
Warrant derivative liability		1,156,660			—


Total Long-Term Liabilities		48,619,697			262,263


Total Liabilities		51,924,854			30,782,160


COMMITMENTS AND CONTINGENCIES		—			—
STOCKHOLDERS’ EQUITY
Preferred stock; 10,000,000 shares authorized at $0.001 par value; -0- shares issued and outstanding		—			—
Common stock; 500,000,000 shares authorized at $0.001 par value; 13,158,578 and 12,981,828 shares issued, respectively, and 13,156,578 and 12,979,828 shares outstanding, respectively		13,159			12,982
Additional paid-in capital		40,316,502			39,300,194
Treasury stock, at cost, 2,000 shares		(1,950	)		(1,950	)
Accumulated deficit		(15,234,458	)		(11,867,569	)


Total Stockholders’ Equity		25,093,253			27,443,657


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	77,018,107		$	58,225,817

See notes to unaudited consolidated financial statements.

TRANS ENERGY, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2012			2011			2012			2011
REVENUES	$	2,464,702		$	3,894,316		$	5,382,230		$	5,524,415
COSTS AND EXPENSES
Production costs		1,108,251			840,321			2,729,417			1,266,408
Depreciation, depletion, amortization and accretion		742,050			1,850,178			1,753,048			2,403,920
Selling, general and administrative		1,909,215			1,581,112			3,321,990			2,642,890


Total costs and expenses		3,759,516			4,271,611			7,804,455			6,313,218
Gain on sale of assets		7,207			—			69,062			12,624,365


(LOSS) INCOME FROM OPERATIONS		(1,287,607	)		(377,295	)		(2,353,163	)		11,835,562
OTHER INCOME (EXPENSES)
Interest income		5,987			221			13,180			468
Interest expense		(1,432,141	)		(442,923	)		(1,870,885	)		(850,117	)
Gain on derivative contracts		843,340			12,654			843,979			10,019


Total other income (expenses)		(582,814	)		(430,048	)		(1,013,726	)		(839,630	)


NET (LOSS) INCOME BEFORE INCOME TAXES		(1,870,421	)		(807,343	)		(3,366,889	)		10,995,932
INCOME TAX BENEFIT (EXPENSE)		—			20,000			—			(250,000	)


NET (LOSS) INCOME	$	(1,870,421	)	$	(787,343	)	$	(3,366,889	)	$	10,745,932


NET (LOSS) INCOME PER SHARE — BASIC	$	(.14	)	$	(.06	)	$	(.26	)	$	.84
NET (LOSS) INCOME PER SHARE — DILUTED	$	(.14	)	$	(.06	)	$	(.26	)	$	.80
WEIGHTED AVERAGE SHARES — BASIC		12,989,130			12,736,831			12,984,479			12,736,080
WEIGHTED AVERAGE SHARES — DILUTED		12,989,130			12,736,831			12,984,479			13,410,084

See notes to unaudited consolidated financial statements.

TRANS ENERGY, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 30, 2012

(Unaudited)


	Common Stock				Additional Paid in		Treasury			Accumulated			Total
	Stock		Amount		Capital		Stock			Deficit			Total
Balance, Dec. 31, 2011		12,981,828	$	12,982	$	39,300,194	$	(1,950	)	$	(11,867,569	)	$	27,443,657

Stock option compensation expense						535,475								535,475

Stock issued for service		176,750		177		480,833								481,010
Net loss											(3,366,889	)		(3,366,889	)


Balance, June 30, 2012		13,158,578	$	13,159	$	40,316,502	$	(1,950	)	$	(15,234,458	)	$	25,093,253

See notes to unaudited consolidated financial statements.

TRANS ENERGY, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


	For the Six Months Ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(3,366,889	)	$	10,745,932
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
Depreciation, depletion, amortization and accretion		1,753,048			2,403,920
Amortization of financing cost and debt discount		497,911			237,500
Share-based compensation		1,016,485			416,764
Gain on sale of assets		(69,062	)		(12,624,365	)
Interest and legal expense added to principal		557,226			—
(Gain)/loss on derivative contracts		(843,340	)		110,904
Changes in operating assets and liabilities
Accounts receivable, trade		422,397			(2,496,254	)
Drilling advances		35,735			11,161
Prepaid expenses and other current assets		(171,589	)		753,285
Other assets		(250,000	)		—
Accounts payable and accrued expenses		(13,064,544	)		5,091,823
Revenue payable		(303,338	)		2,882,135
Accounts payable related party		(650	)		—
Income tax payable		—			250,000


Net cash (used) provided by operating activities		(13,786,610	)		7,782,805

CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on note receivable		—			27,295
Proceeds from sale of assets		284,629			13,782,281
Expenditures for oil and gas properties		(14,249,455	)		(12,009,262	)
Expenditures for property and equipment		(90,663	)		(27,322	)


Net cash (used) provided used for investing activities		(14,055,489	)		1,772,992


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of warrant derivative liability		2,000,000			—
Issuances of common stock		—			49,000
Financing costs paid		(1,407,071	)		—
Proceeds from notes payable		46,993,306			—
Payments on notes payable		(14,863,440	)		(5,031,499	)


Net cash provided (used) by financing activities		32,722,795			(4,982,499	)


NET CHANGE IN CASH		4,880,696			4,573,298

CASH, BEGINNING OF PERIOD		7,885,652			1,037,941


CASH, END OF PERIOD	$	12,766,348		$	5,611,239


SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid for interest	$	807,951		$	430,117
Cash paid for income taxes		—			—
Non-cash investing and financing activities:
Accrued expenditures for oil and gas properties		439,664			273,113
Reclass from accrued expenses to notes payable		—			725,000
Increase in asset retirement obligation		—			5,683
Accrued expenditures for debt refinancing		—			920,000

See notes to unaudited consolidated financial statements.

TRANS ENERGY, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 — BASIS OF FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited interim consolidated financial statements have been prepared by Trans Energy, Inc., (Trans Energy or the Company), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with such rules and regulations. The information furnished in the interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with Trans Energy’s most recent audited consolidated financial statements and notes thereto included in its December 31, 2011 Annual Report on Form 10-K. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Nature of Operations and Organization

Trans Energy is an independent energy company engaged in the acquisition, 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 Trans Energy and its wholly-owned subsidiaries, Prima Oil Company, Inc., Ritchie County Gathering Systems, Inc., Tyler Construction Company, Inc, and Tyler Energy, Inc. All significant inter-company balances and transactions have been eliminated in consolidation. During the quarter, we contributed assets to a new subsidiary called American Shale Development, Inc. See Note 6.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s financial statements are based on a number of significant estimates, including oil and gas reserve quantities which are the basis for the calculation of depreciation, depletion, amortization and impairment of oil and gas properties, and timing and costs associated with its asset retirement obligations. Reserve estimates are by their nature inherently imprecise.

Restatement of Financial Statements

The Unaudited Consolidated Balance Sheets as of June 30, 2012 included in this Form 10-Q/A have been restated to remove the $2 million in cash consideration related to the issuance of certain warrants and related put options from Additional Paid in Capital (“APIC”) and report a warrant derivative liability of $1.2 million which represents its fair value as of the reporting date. The Unaudited Consolidated Statements of Operations for the period ended June 30, 2012 included in this Form 10-Q/A have been restated to include the effect of the $0.8 million of change in the fair value of the derivative warrant liability. Certain adjustments have been made in the Unaudited Consolidated Statement of Stockholders’ Equity and Unaudited Consolidated Statements of Cash Flows to correspond to the income statement and balance sheet adjustments as described above. The following table summarizes the effects of the restatement resulting from the correction of this error.


	June 30, 2012
Unaudited Quarterly Information	As Previously Reported			Adjustment			As Restated

Consolidated Balance Sheets
Warrant Derivative Liability	$	—		$	1,156,660		$	1,156,660
Total Long-Term Liabilities		47,463,037			1,156,660			48,619,697
Total Liabilities		50,768,194			1,156,660			51,924,854
Additional Paid-in Capital		42,316,502			(2,000,000	)		40,316,502
Accumulated deficit		(16,077,798	)		843,340			(15,234,458	)
Shareholders’ Equity		26,249,913			(1,156,660	)		25,093,253


	Three Months Ended								Six Months Ended
	June 30, 2012								June 30, 2012
Unaudited Quarterly Information	As Previously Reported			Adjustment		As Restated			As Previously Reported			Adjustment		As Restated

Consolidated Statements of Operations
Gain on Derivatives	$	—		$	843,340	$	843,340		$	—		$	843,340	$	843,340
Total Other Income (Expenses)		(1,426,154	)		843,340		(582,814	)		(1,857,066	)		843,340		(1,013,726	)
Net earnings (loss)		(2,713,761	)		843,340		(1,870,421	)		(4,210,229	)		843.340		(3,366,889	)
Per share amounts:
Basic earnings (loss) per share	$	(0.21	)		0.07		(0.14	)	$	(0.32	)	$	0.06	$	(0.26	)
Diluted earnings (loss) per share		(0.21	)		0.07		(0.14	)		(0.32	)		0.06		(0.26	)


	Six Months Ended
	June 30, 2012
Unaudited Quarterly Information	As Previously Reported			Adjustment			As Restated

Consolidated Statements of Stockholders’ Equity
Warrants issued – American Shale Development, Inc.	$	2,000,000		$	(2,000,000	)	$	—
Additional Paid in Capital		42.316,502			(2,000,000	)		40,316,502
Net loss		(4,210,229	)		843,340			(3,366,889	)
Accumulated deficit		(16,077,798	)		843,340			(15,234,458	)
Shareholders’ Equity		26,249,913			(1,156,660	)		25,093,253


	Six Months Ended
	June 30, 2012
Unaudited Quarterly Information	As Previously Reported			Adjustment			As Restated

Consolidated Statements of Cash Flows
Net loss	$	(4,210,229	)	$	843,340		$	(3,366,889	)
Adjustment to reconcile net loss to net cash (used) provided by operating activities:
Unrealized gain on derivatives		—			(843,340	)		843,340	)

Cash

Financial instruments that potentially subject the Company to a concentration of credit risk include cash. At times, amounts may exceed federally insured limits and may exceed reported balances due to outstanding checks. Management does not believe it is exposed to any significant credit risk on cash.

Receivables

Accounts receivable and notes receivable are carried at their expected net realizable value. The allowance for doubtful accounts is based on management’s assessment of the collectability 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. No allowance for doubtful accounts is deemed necessary at June 30, 2012 and December 31, 2011 by management and no bad debt expense was incurred during the six months ended June 30, 2012 and 2011.

Financing Cost

In connection with obtaining new financing in April 2012, we incurred $1,707,071 in fees during the second quarter of 2012. These fees were recorded as financing costs and are being amortized over the life of the loan using the straight-line method. Amortization of financing cost for the six months ended June 30, 2012 and 2011 were $331,244 and $237,500, respectively. Fully amortized financing costs on prior debt have been written off.

Derivatives

Derivatives and Embedded Derivatives, if applicable, are measured at fair value and recognized in the consolidated balance sheets as an asset or a liability. Derivatives are classified in the balance sheet as current or non-current based on whether net-cash settlement is expected within twelve months from the balance sheet date. The changes in the fair value of the derivatives are included in other income (expense) on the consolidated statement of operations. The pricing models used for valuation often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements.

The Company has determined that the warrant and related put option issued for one of its wholly-owned subsidiaries has an embedded derivative. The Company also enters into derivative commodity contracts at times to manage or reduce commodity price risk related to its production. Usually these commodity contracts are not designated as hedges, so changes in the fair value are recognized in other income (expense).

Asset Retirement Obligations

The Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. For the Company, these obligations include dismantlement, plugging and abandonment of oil and gas wells and associated pipelines and equipment. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its then present value each period, and capitalized costs are depleted over the estimated useful life of the related asset.

The following is a description of the changes to Trans Energy’s asset retirement obligations for the six months ended June 30:


	2012		2011
Asset retirement obligations at beginning of period	$	256,651	$	219,478
Liabilities incurred during the period		—		5,683
Accretion expense		11,143		10,037


Asset retirement obligations at end of period	$	267,794	$	235,198

At June 30, 2012 and 2011, the Company’s current portion of the asset retirement obligation was $0.

Income Taxes

At June 30, 2012, the Company had net operating loss carry forwards (NOLS) for future years of approximately $9,860,000. These NOLS will expire at various dates through 2030. The current tax provision is -0- for the six months ended June 30, 2012 due to a net operating loss for the period. No tax benefit has been recorded in the consolidated financial statements for the remaining NOLs or AMT credit since the potential tax benefit is offset by a valuation allowance of the same amount. Utilization of the NOLs could be limited if there is a substantial change in ownership of the Company and is contingent on future earnings.

The Company has provided a valuation allowance equal to 100% of the total net deferred asset in recognition of the uncertainty regarding the ultimate amount of the net deferred tax asset that will be realized.

Commitments and Contingencies

The Company operates exclusively in the United States, entirely in West Virginia, in the business of oil and gas acquisition, exploration, development, exploitation and production. The Company operates in an environment with many financial risks, including, but not limited to, the ability to acquire additional economically recoverable oil and gas reserves, the inherent risks of the search for, development of and production of oil and gas, the ability to sell oil and gas at prices which will provide attractive rates of return, the volatility and seasonality of oil and gas production and prices, and the highly competitive and, at times, seasonal nature of the industry and worldwide economic conditions. The Company’s ability to expand its reserve base and diversify its operations is also dependent upon the Company’s ability to obtain the necessary capital through operating cash flow, borrowings or equity offerings. Various federal, state and local governmental agencies are considering, and some have adopted, laws and regulations regarding environmental protection which could adversely affect the proposed business activities of the Company. The Company cannot predict what effect, if any, current and future regulations may have on the results of operations of the Company.

Revenue and Cost Recognition

Trans Energy recognizes gas revenues upon delivery of the gas to the customers’ pipeline from Trans Energy’s pipelines when recorded as received by the customer’s meter. Trans Energy recognizes oil revenues when pumped and metered by the customer. Trans Energy recognized $4,909,344 and $5,253,094 in oil and gas revenues for the six months ended June 30, 2012 and 2011, respectively. Trans Energy uses the sales method to account for sales and imbalances of natural gas. Under this method, revenues are recognized based on actual volumes sold to purchasers. The volumes sold may differ from the volumes to which Trans Energy 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. Trans Energy had no material imbalances as of June 30, 2012 and December 31, 2011. Costs associated with production are expensed in the period incurred.

Revenue payable represents cash received but not yet distributed to third parties.

Transportation revenue is recognized when earned and we have a contractual right to receive payment. We recognized $187,688 and $245,043 of transportation revenue for the six months ended June 30, 2012 and 2011, respectively.

NOTE 2 — GOING CONCERN

Trans Energy’s unaudited interim consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Trans Energy has incurred cumulative operating losses through June 30, 2012 of $(15,234,458). At June 30, 2012, Trans Energy had stockholders’ equity of $25,093,253.

Revenues during the six months ended June 30, 2012 were not sufficient to cover its operating costs and interest expense 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 Trans Energy to continue as a going concern. On April 26, 2012, a wholly owned subsidiary of the company closed a new $50 million credit agreement. The proceeds of the loan must be used for drilling and leasehold acquisitions. See Note 6 for details on the new credit agreement.

During 2012, we have drilled 7 gross wells and 2.84 net wells. As of June 30, 2012, 1.44 net wells have been completed and fractured. We expect the 2.84 net wells to be put online during the fourth quarter of 2012, which will improve cash flow.

NOTE 3 — DRILLING ADVANCES

Trans Energy has advanced $7,581,461 for drilling costs which is offset by $5,863,176 owed by Trans Energy to third parties.

NOTE 4 — OIL AND GAS PROPERTIES

Total additions for oil and gas properties for the six months ended June 30, 2012 and 2011 were $14,249,455 and $12,288,058, respectively. Depreciation, depletion, and amortization expenses on oil and gas properties were $1,630,574 and $2,298,898 for the six months ended June 30, 2012 and 2011, respectively.

NOTE 5 — SALE OF OIL AND GAS ACREAGE

On March 31, 2011, the Company sold 2,950 net acres to Republic Energy Ventures, LLC (“Republic”) at $4,750 per net acre for total pretax proceeds of $13,767,281. Acreage sold to Republic was distributed across the Company’s undeveloped acreage. Proceeds from this transaction were used to repay $5 million to CIT in April 2011, with the remainder being used to partially fund the drilling and completion expenses for certain wells.

NOTE 6 — NOTES PAYABLE

On June 22, 2007, Trans Energy finalized a financing agreement with CIT Capital USA Inc. (“CIT”) for $30,000,000.

Interest payment due dates are elected at the time of borrowing and range from monthly to six months. Principle payments were due at maturity on June 15, 2010 for all borrowing outstanding on that date.

The Company worked with its financial advisor and investment banker in an effort to restructure the credit agreement since its maturity date. In July 2010, the Company repaid $15,000,000 from the sale of certain assets. Then the Company repurchased its net profit interest from CIT with the $1,780,404 purchase price added to the outstanding balance. Amendment fees and interest totaling $539,835 were added to the principal in 2010, resulting in a balance of $17,320,239 due to CIT as of December 31, 2010. Between June and December 2010, the Company was charged $725,000 in forbearance fees by CIT, to be paid in cash or five year warrants. The $725,000 of forbearance fees were included in accrued expenses at December 31, 2010.

On March 31, 2011, the Company and CIT entered into the Sixth Amendment to the Credit Agreement. The Sixth Amendment and other related agreements extended the maturity date of the Credit Agreement to March 31, 2012. The Sixth Amendment confirmed that the principal amount due under the Credit Agreement prior to the application of a portion of the proceeds from the acreage sale to Republic under the March 31, 2011 Purchase and Sale Agreement (the “PSA”) was $17,320,239 plus accrued interest of $139,748, plus forbearance fees of $725,000 to be added to the principal balance. Thus, the total amount owed under the Credit Agreement, as per the Sixth Amendment, was $18,184,978. After the payment of accrued interest and a principal payment of $5,000,000 on April 2, 2011, and the accrued interest of $1,245,697 for the period April 1, 2011 thru December 31, 2011 being added to the loan, the Company owed $14,290,936 as of December 31, 2011. During the first quarter of 2012, the Company added $557,226 of interest, legal and administrative expense to the loan balance. On April 2, the Company paid $125,000 on the principal amount outstanding and the remainder of the principal was paid with proceeds received from the American Shale Development, Inc. Credit Agreement.

As part of the Sixth Amendment, the Company also granted to CIT a 1.5% overriding royalty interest in each of the Stout #2H, Groves #1H and Lucey #1H wells, as well as a 1.5% overriding royalty interest in the next six horizontal wells drilled in the Marcellus Shale, which have commercial production for a period of at least 30 consecutive days and in which the Company, or any of its subsidiaries, has an interest. Each 1.5% overriding royalty interest is to be proportionately reduced to the extent the Company or its subsidiary owns less than the full working interest in the leases, or to the extent such oil and gas leases cover less than the full mineral interest. CIT still retains ownership of the 1.5% overriding royalty interest after the payoff.

On March 30, 2012, the Company and CIT entered into the Eighth Amendment to the Credit Agreement. The Eighth Amendment and other related agreements extended the maturity date of the Credit Agreement to April 30, 2012. The Eighth Amendment also waived specific items of default.

On April 26, 2012 (“Funding Date”), our newly created, wholly owned subsidiary, American Shale Development, Inc. (“American Shale or ASD”), closed a Credit Agreement transaction (hereafter the “ASD Credit Agreement”) that was entered into on February 29, 2012 by and among American Shale, several banks and other financial institutions or entities that from time-to-time will be parties to the ASD Credit Agreement (the “Lenders”), and Chambers Energy Management, LP as the administrative agent (“Agent”). Trans Energy is a guarantor of the ASD Credit Agreement as is Prima Oil Company, Inc. (“Prima”), another of our 100% wholly owned subsidiaries. The ASD Credit Agreement provides that Lenders will lend American Shale up to $50 million, which funds will be used to develop wells and properties that we have transferred to American Shale. Trans Energy received a portion of the funds from the ASD Credit Agreement to repay CIT and certain outstanding debts.

In order to accommodate the terms of the ASD Credit Agreement we have transferred certain assets and properties to American Shale. Trans Energy is not a direct party to the ASD Credit Agreement, but is a guarantor of loans to be made thereunder and has received a portion of the loan proceeds to repay certain outstanding debts. The assets and properties transferred are referred to herein as the “Marcellus Properties.” These consist of working interests in 13 gross, 7.60 net, producing Marcellus shale liquids-rich gas wells and approximately 22,000 net acres of Marcellus shale leasehold rights, located in Northwestern West Virginia in the counties of Wetzel, Marshall, Marion, Tyler, and Doddridge.

The ASD Credit Agreement is for a notional amount of $50 million, which was received at closing net of a $3 million Original Issue Discount (OID) and a $50,000 administrative fee. These $3,000,000 of costs are netted against Notes Payable. $166,167 of the OID was amortized as interest expense for the six months ended June 30, 2012. The administrative fee is due annually. Interest is due monthly at 10% plus the greater of 1% or the 3 month LIBOR rate (11% at June 30, 2012). Principle is due at maturity, February 28, 2015.

The ASD Credit Agreement is collateralized by American Shale’s natural gas and oil reserves and is guaranteed by Trans Energy. The ASD credit agreement includes reporting, financial and other restricted covenants. ASD was in compliance with the covenants at June 30, 2012. The Company has to pay the interest through April 26, 2014 on any principal prepayments prior to April 26, 2014, at the time of the prepayment.

The ASD Credit Agreement also required American Shale to sell the Lenders for a total of $2 million a warrant for 19,500 shares representing 19.5% of ASD’s stock, at $263.44 per share. The warrant expires on February 28, 2015. The warrant includes a put option whereby the Lenders could require ASD to repurchase the warrant as of February 28, 2015, or earlier if certain events occur. Under the put option, ASD would pay the excess of the fair market value per share of the stock over $263.44 times the number of shares exercisable less any distributions or similar payments defined by the agreement. In addition, the warrant strike price will be reduced to equal the offering price of any common shares sold below $1.63 (the “Down-Round Provision”). Under certain circumstance ASD has the option to transfer working interests in all of its wells equal to the value of the excess value instead of paying in cash.

As of June 30, 2012 and December 31, 2011, the Company owed $51,283 and $23,256, respectively, for other loans, primarily for vehicles.

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 June 30, 2012, the warrant derivative liability had a fair value of $1,156,660. The change in the fair value of the warrant derivative liability amounted to an unrealized gain of $843,340 for both three and six month periods ended June 30, 2012.

NOTE 8 — STOCKHOLDERS’ EQUITY

On April 8, 2009, Trans Energy granted 375,000 common stock options to four key employees under the long term incentive bonus program. These options are being amortized to share-based compensation expense quarterly over the vesting period, for which $70,534 of the share-based compensation expense was recorded during the six month period ended June 30, 2010. As of June 30, 2010, these options have been fully expensed. 50,000 of these options were exercised in June 2011.

On May 14, 2009, Trans Energy granted 50,000 shares of common stock to one key employee under the long term incentive bonus program. The 50,000 shares are not performance based and vest quarterly over one year, subject to ongoing employment. These shares were valued at $57,500 using the fair market value of the common stock at the date of grant and will be amortized to compensation expense quarterly over one year. During the year ended December 31, 2010, Trans Energy recorded $14,375 of share-based compensation related to these shares. As of June 30, 2010, this award has been fully expensed in 2010. In addition, Trans Energy also granted 50,000 common stock options to this employee under the long term incentive bonus program. The options are being amortized to share-based compensation expense over the vesting period, for which $9,405 of share-based compensation expense was recorded during the year ended December 31, 2010. These options have been fully expensed in 2010.

In December 2010, Trans Energy granted 136,500 shares of stock to nine employees under the long-term incentive bonus program. The 136,500 shares are not performance based and vest semi-annually over six years, subject to ongoing employment. These shares

were valued at $409,500 using fair market value of the common stock at the date of grant and will be amortized to compensation expense over six years. During the six months ended June 30, 2012 and 2011, we recorded $50,250 and $50,250, respectively, of share based compensation related to these shares. During the three months ended June 30, 2012 and 2011, we recorded $25,125 and $16,125, respectively of share based compensation related to these shares.

In December 2010, Trans Energy granted 332,000 common stock options to nine employees and one outside board member. These options vest semi-annually over six years and have a five year term. These stock options were granted at an exercise price of $3.00 per common share, which was equal to the fair market value of the common stock at the date of grant and were valued using the Black Scholes valuation model. The options are being amortized to share-based compensation expense over the vesting period. During the six months ended June 30, 2012 and 2011, we recorded $114,246 and $101,886 of share based compensation related to these options, and for the three months ended June 30, 2012 and 2011, we recorded $57,125 and $38,569 related to these options. 36,000 of the options were cancelled in June 2011.

In May 2011, Trans Energy granted 420,000 shares of stock to eight employees and six outside board members under the long-term incentive bonus program. The 420,000 shares are not performance based and vest semi-annually over a six year period, subject to ongoing employment. These shares were valued at $1,125,600 using fair market value of the common stock at the date of grant and will be amortized to compensation expense over six years. During the six months ended June 30, 2012 and 2011, we recorded $187,600 of share-based compensation expense related to these shares, and for the three months ended June 30, 2012 and 2011, we expensed $93,800 and $187,600, respectively.

In May 2011, Trans Energy also granted 378,000 common stock options to eight employees and four outside board members. These options vest semi-annually over five years and have a five year term. These stock options were granted at an exercise price of $2.68 per common share, which was equal to the fair market value of the common stock at the date of grant and were valued using the Black Scholes valuation model. The options are being amortized to share-based compensation expense over the vesting period. During the six months ended June 30, 2012 and 2011, we recorded $108,662 and $65,197, respectively, of share-based compensation expense related to these options. During the three months ended June 30, 2012 and 2011, we recorded $54,331 and $65,197, respectively, of share-based compensation expense related to these options.

In December, 2011, Trans Energy granted 12,000 shares of common stock and 36,000 common stock options to an employee with the same vesting terms as the May 2011 issuances. These shares were valued at $5,360 using fair market value of common stock at the date of grant. The stock options were granted at an exercise price of $2.68 per common share and were valued using the Black Scholes valuation model and similar assumptions as the May 2011 options. During the six months ended June 30, 2012, we recorded $5,360 and $10,349 of share based compensation for these common shares and stock options, respectively. During the three months ended June 30, 2012 and 2011, we recorded $2,680 and $5,175 of share-based compensation for these common shares and stock options, respectively.

Effective April 26, 2012, Trans Energy granted 804,000 common stock options to nine employees and four board members. These options vest semi-annually over five years and have a five year term. The stock options were granted at an exercise price of $2.30 per common share which was equal to the fair market value of the common stock at the date of the grant and were valued using the Black Scholes valuation model. The model uses key estimates such as estimated useful lives of the options and the estimated volatility of our stock price. The options are being amortized to share-based compensation expense over the vesting period. During the second quarter of 2012, we recorded $117,480 of share-based compensation expense related to these options.

The following are assumptions made in computing the option fair value:


Average risk-free interest rate	1.72	%
Dividend yield	0	%
Expected term	5 years
Average expected volatility	77.09	%

In March 2012, Trans Energy granted 60,000 shares of stock to six employees under the long-term incentive bonus, which became effective April 26, 2012. The 60,000 shares are not performance based and vest semi-annually over a six year period, subject to ongoing employment. These shares were valued at $138,000 using fair market value of the common stock at the date of grant and will be amortized to compensation expense over six years. During the second quarter of 2012, we recorded $23,000 of share-based compensation expense related to these shares.

In August 2006, Trans Energy granted 800,000 common stock options to two employees with an expiration date of August 16, 2011. Trans Energy extended those options in June 2011 to August 16, 2012. Trans Energy recorded $11,831 of additional stock-based compensation related to the one year extension.

Due to severance agreements, effective in June 2012, certain employees became vested 100% on their stock options and stock awards, we recorded an additional $399,536 of share-based compensation expense for accelerating the vesting of these stock options and stock awards. (See Note 10.)

As a result of the above stock and option transactions, Trans Energy recorded total share-based compensation of $1,016,485 and $416,764 for the six months ended June 30, 2012 and 2011, respectively.

NOTE 9 — EARNINGS PER SHARE

Basic income (loss) per share of common stock for the periods ended June 30, 2012 and 2011 is determined by dividing net income (loss) by the weighted average number of shares of common stock during the period.

The following table reconciles the weighted average shares outstanding used for basic and diluted earnings per share for the periods ending June 30, 2012 and 2011.


	For the Six Months Ended June 30,
	2012		2011
Weighted average number of common shares outstanding used in the basic earnings per common share calculations		12,984,479		12,736,080
Dilutive effect of stock options		—		674,004


Weighted average number of common shares outstanding adjusted for effective of dilutive options		12,984,479		13,410,084

The stock options were anti-dilutive for the three months ended June 30, 2012 and 2011 and for the six months ended June 30, 2012.

The Company paid no cash distributions to its stockholders during the six months ended June 30, 2012 and 2011.

NOTE 10 — RELATED PARTY TRANSACTIONS

Employment separation agreements were executed between the Company and Messrs. Loren Bagley, Mark Woodburn and William Woodburn on June 26, 2012. Messrs. Loren Bagley, Mark Woodburn and William Woodburn are collectively referred to as the parties. Messrs, Loren Bagley and William Woodburn remain on the Company’s Board of Directors. Mr. Mark Woodburn is a beneficial owner of the Company.

In consideration of the execution of the severance agreement, the parties received cash compensation of $50,000 each net of taxes. The Company also agreed to immediately vest all unvested stock options and waive the 90 day termination language in current stock option agreements. $184,736 of share-based compensation was recorded during the 2nd quarter of 2012 for accelerating the vesting of these stock options. The Company also agreed to immediately vest and issue all unvested stock awards which increased share-based compensation expense by an additional $214,800.

NOTE 11 — BUSINESS SEGMENTS

Trans Energy’s principal operations consist of exploration and production with Trans Energy, American Shale Development, and Prima Oil Company, 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 Three Months Ended June 30,		Exploration and Production		Pipeline Transmission		Corporate			Total
Revenue		2012	$	2,137,362	$	94,375	$	232,965		$	2,464,702
		2011		3,798,469		85,487		10,360			3,894,316
Income (loss) from operations		2012		110		55,354		(1,343,071	)		(1,287,607	)
		2011		1,110,484		82,916		(1,570,695	)		(377,295	)
Interest expense		2012		1,432,141		—		—			1,432,141
		2011		442,923		—		—			442,923
Depreciation, depletion, amortization and accretion		2012		741,969		81		—			742,050
Depreciation, depletion, amortization and accretion		2011		1,847,662		2,516		—			1,850,178
Property and equipment acquisitions, including oil and gas properties		2012		13,266,501		—		—			13,266,501
		2011		5,125,815		—		—			5,125,815


	For the Six Months Ended June 30,		Exploration and Production		Pipeline Transmission		Corporate			Total
Revenue		2012	$	4,909,344	$	187,688	$	285,198		$	5,382,230
		2011		5,253,094		245,043		26,278			5,524,415
Income (loss) from operations		2012		243,577		106,873		(2,703,613	)		(2,353,163	)
		2011		14,212,162		239,956		(2,616,556	)		11,835,562
Interest expense		2012		1,870,855		—		—			1,870,855
		2011		850,117		—		—			850,117
Depreciation, depletion, amortization and accretion		2012		1,752,887		161		—			1,753,048
Depreciation, depletion, amortization and accretion		2011		2,398,888		5,032		—			2,403,920
Property and equipment acquisitions, including oil and gas properties		2012		14,340,118		—		—			14,340,118
		2011		12,315,380		—		—			12,315,380
Total assets, net of intercompany accounts:
June 30, 2012			$	76,980,229	$	37,878	$	—		$	77,018,107
December 31, 2011			$	57,994,415	$	231,202	$	—		$	58,225,817

Property and equipment acquisitions include accrued amounts and reclassifications.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion will assist in the understanding of our financial position and results of operations. The information below should be read in conjunction with the consolidated financial statements, the related notes to consolidated financial statements and our 2011 Form 10-K. Our discussion contains both historical and forward-looking information. We assess the risks and uncertainties about our business, long-term strategy and financial condition before we make any forward-looking statements but we cannot guarantee that our assessment is accurate or that our goals and projections can or will be met. Statements concerning results of future exploration, development and acquisition expenditures as well as revenue, expense and reserve levels are forward-looking statements. We make assumptions about commodity prices, drilling results, production costs, administrative expenses and interest costs that we believe are reasonable based on currently available information. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control.

Our primary focus will continue to be the development of the Marcellus Shale through directional drilling. We believe that our acreage position will allow us to grow organically through drilling in the near term. This position continues to present attractive opportunities to expand our reserve base through field extensions.

We expect to maintain and utilize our technical and operations teams’ knowledge to enhance our growth prospects and reserve potential. We expect 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.

Results of Operations

Three months ended June 30, 2012 compared to June 30, 2011

The following table sets forth the percentage relationship to total revenues of principal items contained in our unaudited consolidated statements of operations for the three months ended June 30, 2012 and 2011. It should be noted that percentages discussed throughout this analysis are stated on an approximate basis.


	Three months ended June 30,
	2012			2011
Total revenues		100	%		100	%
Total costs and expenses		(152	%)		(110	%)
Gain on sale of assets		0	%		0	%

(Loss) income from operations		(52	%)		(10	%)
Other expenses		(24	%)		(11	%)
Income taxes		0	%		1	%

Net (loss) income		(76	%)		(20	%)

Total revenues of $2,464,702 for the three months ended June 30, 2012 decreased $1,429,614 or 37% compared to $3,894,316 for the three months ended June 30, 2011, primarily due to a decrease in pricing on natural gas and oil. The average price of oil decreased by $13.07 per barrel, going from an average price of $101.10 per barrel in 2011 to $88.03 per barrel in 2012. The average price of natural gas for the three months ended June 30, 2012 declined $3.01/Mcf or from $5.11/Mcf to $2.10/Mcf when compared to the same period in 2011. Production volumes of oil and natural gas for the three months ended June 30, 2012 remained fairly consistent when compared to the three months ended June 30, 2011. The decrease in oil and gas income was offset by an increase on natural gas liquid sales of approximately $346,000 for the three months ended June 30, 2012.

Production costs increased $267,930 or 32% for the three months ended June 30, 2012 as compared to the same period for 2011, primarily due to an increase in transportation fees and natural gas liquid processing fees. The Company incurs a one-time fee for newly constructed laterals to be connected to the transporter’s pipeline. As wells are added to the laterals, there are no future costs incurred by the Company. Processing and lateral fees totaled $379,944 for the three months ended June 30, 2012.

Depreciation, depletion, amortization and accretion expense decreased $1,108,128 or 60% for the three months ended June 30, 2012 as compared to the same period for 2011, primarily due to increases in the remaining volumes that were estimated to be recoverable per the reserve report as of December 31, 2011 compared to the reserve report from the previous year.

Selling, general and administrative expense increased $328,103 or 21% for the three months ended June 30, 2012 as compared to the same period for 2011, primarily due to approximately $400,000 of share-based compensation related to employee separation agreements.

Interest expense increased $989,218 or 223% for the three months ended June 30, 2012 as compared to the same period for 2011 due to a significantly higher loan balance after the refinancing.

Gain on derivatives increased $830,686 or 6,565% for the three months ended June 30, 2012 as compared to the same period for 2011 due primarily to an unrealized gain recognized on the warrant derivative liability in 2012 which represents the change in fair value of the warrant derivative liability.

The increase in the net operating loss of $1,083,078 when compared to the three months ended June 30, 2012 to June 30, 2011 is primarily due to a decrease in oil and gas revenues, the increase of production expenses, the result of recording additional interest expense due to the significantly higher loan balance and partially offset by an unrealized gain on derivative contracts in 2012.

Six months ended June 30, 2012 compared to June 30, 2011

The following table sets forth the percentage relationship to total revenues of principal items contained in our unaudited consolidated statements of operations for the six months ended June 30, 2012 and 2011. It should be noted that percentages discussed throughout this analysis are stated on an approximate basis.


	Six months ended June 30,
	2012			2011
Total revenues		100	%		100	%
Total costs and expenses		(145	%)		(114	%)
Gain on sale of assets		1	%		229	%

(Loss) income from operations		(44	%)		215	%
Other expenses		(19	%)		(15	%)
Income taxes		—			(5	%)

Net (loss) income		(63	%)		195	%

Total revenues of $5,382,230 for the six months ended June 30, 2012 decreased $142,185 or 3% compared to $5,524,415 for the six months ended June 30, 2011, primarily due to a decrease in the oil and natural gas prices. We expect production from the drilling program to increase beginning with the fourth quarter of 2012.

Production costs increased $1,463,009 or 116% for the six months ended June 30, 2012 as compared to the same period for 2011, primarily due to an increase in transportation fees and natural gas liquid processing fees, associated with the increased production in NGLs and one-time lateral fees. The Company incurs a one-time fee for newly constructed laterals to be connected to the transporter’s pipeline. As wells are added to the laterals, there are no future costs incurred by the Company. The Company incurred $138,000 in one-time lateral fees during the first six months of 2012.

Depreciation, depletion, amortization and accretion expense decreased $650,872 or 27% for the six months ended June 30, 2012 as compared to the same period for 2011, primarily due to increases in the remaining volumes that were estimated to be recoverable per the reserve report as of December 31, 2011 compared to the reserve report from the previous year.

Selling, general and administrative expense increased $679,100 or 26% for the six months ended June 30, 2012 as compared to the same period for 2011, due to increased legal and consulting fees for debt restructuring and share based compensation, including related one-time employment separation agreements.

Interest expense increased $1,020,768 or 120% for the six months ended June 30, 2012 as compared to the same period for 2011 due to a significantly higher loan balance after the refinancing.

Gain on derivatives increased $833,960 or 8,324% for the six months ended June 30, 2012 as compared to the same period for 2011 due primarily to an unrealized gain recognized on embedded derivative liability in 2012 which represents the change in fair value of the warrant derivative liability.

Net loss for the six months ended June 30, 2012 was $3,366,889 compared to a net income of $10,745,932 for the same period of 2011. This is primarily due to the sale of certain acreage assets that occurred in the first quarter of 2011 for a net gain of approximately $12.6 million. Increased operating losses, partially offset by an unrealized gain recognized on the warrant derivative liability, as described above explain the remaining change in 2012.

Liquidity and Capital Resources

Historically, we have satisfied our working capital needs with operating revenues, from borrowed funds and the proceeds of acreage sales. At June 30, 2012, we had working capital of $13,778,625 compared to a deficit of $18,362,177 at December 31, 2011. This increase in working capital is primarily due to the refinancing of the Company’s debt, which was reclassified from current debt to long-term debt and provided additional cash.

During the first six months of 2012, net cash used by operating activities was $13,786,787 compared to net cash provided of $7,782,805 for the same period of 2011. This decrease in cash flow from operating activities is primarily due to the fact that we decreased our accounts payable using proceeds from our refinancing during the six months ended June 30, 2012, whereas we increased accounts payable during 2011.

We expect our cash flow provided by operations for 2012, compared to the comparable period in 2011, to improve because of higher projected production from the drilling program during the fourth quarter of 2012, and the elimination of expenses related to refinancing. The proceeds of the loan must be used for drilling and leasehold acquisitions. However, if our drilling results or realized commodity prices miss expectations, or if there is a further delay in connecting our wells to sales lines, our cash flow provided by operations may also differ materially from our expectations.

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 the first six months of 2012, net cash used by investing activities was $14,055,489 compared to net cash provided of $1,772,992 in the same period of 2011. The change was primarily due to proceeds from the sale of acreage during 2011 and greater expenditures for oil and gas properties in 2012 which were repaid by the proceeds of our refinancing.

During the first six months of 2011, net cash provided by financing activities was $32,722,795 compared to cash used of $4,982,499 for 2011. This change reflects the refinancing of the Company’s debt and issuance of the ASD warrant.

We anticipate meeting our working capital needs with revenues from our ongoing operations, particularly from our wells in Marshall and Wetzel Counties, West Virginia and our new credit agreement which was funded April 26, 2012. We are currently pursuing the option of finding a buyer for our shallow well production as well as other alternatives.

Because of our continued losses, 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.

Critical accounting policies

We consider accounting policies related to our estimates of proved reserves, accounting for derivatives, share-based payments, accounting for oil and natural gas properties, asset retirement obligations and accounting for income taxes as critical accounting policies. The policies include significant estimates made by management using information available at the time the estimates are

made. However, these estimates could change materially if different information or assumptions were used. These policies are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011.

Inflation

In the opinion of our management, inflation has not had a material overall effect on our operations.

Forward-looking and Cautionary Statements

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance and similar matters. When used in this report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and 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:

•

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 the economic conditions generally, could have a negative effect on our business and on the price of our common stock.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

At the time that our Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2012 was filed on August 14, 2012, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of March 31, 2012. Subsequent to that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness discussed below, the Company’s disclosure controls and procedures were not effective as of March 31, 2012.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The Company did not maintain an effective financial reporting process to prepare financial statements in accordance with U.S. GAAP. Specifically, the Company did not properly report the fair value of its embedded derivative as a liability and the change in the liability’s fair value in its Consolidated Statement of Operations. This matter was discovered subsequent to December 31, 2012, and as a result, the Company restated its previously issued interim financial statements for 2012.

The Company intends to remediate the material weakness in the internal control over financial reporting identified above by adding additional controls over derivative accounting and the application of relevant accounting guidance.

During the period ended, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. 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 May 11, 2011, we filed an action in the U.S. District Court for the Northern District of West Virginia against EQT Corporation, a Pennsylvania corporation ( Trans Energy, Inc., et al. v. EQT Corporation ). The action relates to our attempt to quiet title to certain oil and gas properties referred to as the Blackshere Lease, consisting of approximately 22 oil and/or gas wells on the Blackshere Lease. The defendant, EQT Corporation, has filed with the Court an answer and counterclaim wherein it claims it holds title to the natural gas within and underlying the Blackshere Lease. We believe that we will ultimately prevail in the action, but it is too early in the proceedings to accurately assess the final outcome. Currently the Company has no plans to drill on this acreage.

On March 6, 2012, James K. Abcouwer (“Abcouwer”), former Chief Executive Officer of the Company, filed an action in the Circuit Court of Kanawha County, West Virginia against the Company (James K. Abcouwer vs. Trans Energy, Inc). The action relates to the Stock Option Agreement (the “Agreement”) entered into between the Company and Abcouwer on February 7, 2008. By his complaint, Abcouwer alleges that the Company has breached the Agreement by not permitting Abcouwer to exercise options that are the subject of the Agreement. The Company believes that per the terms of the Agreement all options and other rights described in the Agreement terminated ninety (90) days after termination of Abcouwer’s employment with the Company. Mr. Abcouwer is requesting an amount for his loss of the value of the stock options that are subject to the Agreement. Said amount has not been determined.

We may be engaged in various other lawsuits and claims, either as plaintiff or defendant, in the normal course of business. In the opinion of management, based upon advice of counsel, the ultimate outcome of these lawsuits will not have a material impact on our financial position or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit 31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document (1)

101.SCH		XBRL Taxonomy Extension Schema Document (1)

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (1)

101.LAB		XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (1)

(1)

Pursuant to Rule 406T of Regulation S-T, The interactive data files on Exhibits 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		TRANS ENERGY, INC.

Date:	April 18, 2013	By	/s/ John G. Corp
			JOHN G. CORP
			Principal Executive Officer

Date:	April 18, 2013	By	/s/ John S. Tumis
			JOHN S. TUMIS
			Chief Financial Officer