NOTE 5 — NOTES PAYABLE

On June 22, 2007, Trans Energy finalized a financing agreement with CIT Capital USA Inc. (“CIT”) for an amount that was ultimately increased to $30,000,000. Payment was due at maturity on June 15, 2010, for all borrowing outstanding on that date. During the subsequent period up to and including April 2, 2012, the Company and CIT made eight amendments to their initial agreement to, among other things, restructure the maturity date, confirm the principal amount following certain payments, and grant 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 three horizontal wells drilled in the Marcellus Shale, which have commercial production for a period of at least 30 consecutive days and in which Trans Energy, or any of its subsidiaries, has an interest. Each 1.5% overriding royalty interest is to be proportionately reduced to the extent we or our 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.

On April 2, 2012, we 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 (see further discussion below). CIT still retains ownership of the 1.5% overriding royalty interest after the payoff.

On April 26, 2012, our newly created, wholly owned subsidiary, American Shale , closed a Credit Agreement transaction (hereafter the “ASD Credit Agreement”) with 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 or Chambers”)., The ASD Credit Agreement provided that the Lenders will lend American Shale up to $50 million, which funds would be used to develop wells and properties that we transferred to American Shale. In order to accommodate the terms of the ASD Credit Agreement Trans Energy 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 as is Prima, another of our 100% wholly owned subsidiaries. We received a portion of the loan proceeds to repay CIT and certain other outstanding debts. The assets and properties transferred are referred to herein as the “Marcellus Properties,” which 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 was originally 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 OID costs are netted against notes payable and are being amortized over the life of the loan using the straight-line method, which approximates the effective interest method. Interest related to Tranche A for the three months ended September 30, 2013, was $2,424,322. For the nine months ended September 30, 2013, interest related to Tranche A was $7,280,196. Total accumulated OID amortization is $1,500,000 as of September 30, 2013. The administrative fee is due annually.

On February 28, 2013, American Shale, the Lenders and the Agent amended and restated the ASD Credit Agreement (as amended, the “A&R Credit Agreement”) in order to facilitate an increase in the principal amount of the borrowings under the facility to $75 million. The additional funds were received February 28, 2013. The other terms of the credit agreement were unchanged. Interest related to Tranche B for the three months ended September 30, 2013, was $786,793. For the nine months ended September 30, 2013, interest related to Tranche B was $1,726,376.

Interest is due monthly at 10% plus the greater of 1% or the 3 month LIBOR rate (11% at September 30, 2013). Principal is due at maturity, February 28, 2015. We have to pay interest through April 26, 2014, on any principal prepayments with respect to the original $50 million loan at the time of the prepayment prior to April 26, 2014. There is no make-whole amount with respect to the $25 million loan in the event of a prepayment. American Shale will be required to pay a “Termination Fee” with respect to the $25 million loan upon the earliest to occur of (I) a Change of Control (as defined in the A&R Credit agreement), (ii) the exercise of the Warrant Put Option (as defined in the Warrants) and (iii) certain defaults under the A&R Credit Agreement related to seeking relief from creditors or generally being unable to repay debts as they come due. The Termination Fee will be equal to $12.5 million less all interest payments actually made with respect to the $25 million loan prior to such date.

The Company expects to pay a Termination Fee upon Chambers’ of exercise the Warrant Put Option on or before February 28, 2015. The total amount of interest payments with respect to the $25 million through the February 28, 2015 maturity date is approximately $5.6 million; therefore, the Company believes it has a liability related to the Termination Fee of approximately $6.8 million ($12.5 million gross fee, less $5.7 million in interest payments) (the “Termination Fee Liability”).

The Termination Fee Liability is recorded on the Company’s condensed consolidated balance sheet as an addition to the related debt balance upon entering into the A&R Credit Agreement, offset by an equal debt discount of $6.8 million (the “Termination Fee Debt Discount”). The Termination Fee Debt Discount is being amortized to interest expense through the expected payment date of February 28, 2015; however, such amortization will be accelerated if payment of the Termination Fee occurs, or is probable of occurring, prior to such date.

During the three months ended September 30, 2013, the Company recorded interest expense of approximately $2 million related to the cumulative amortization of the Termination Fee Debt Discount since February 28, 2013. The table below summarizes the effect on prior quarterly periods had such amortization expense been previously recorded:


	Expense Attributable to the Three Months Ended						Total
	March 31,		June 30,		September 30,
	2013		2013		2013

Amortization expense — Termination Fee Debt Discount	$	288,114	$	845,755	$	855,049	$	1,988,918

The A&R Credit Agreement is collateralized by American Shale’s natural gas and oil reserves and the guarantees discussed earlier. The A&R Credit Agreement includes reporting, financial and other restrictive covenants, as well as a contingent interest provision that adds 1% of the outstanding principal amount of the loan to the loan balance for any quarter in which American Shale’s Consolidated Leverage Ratio exceeds certain levels, as defined in the ASD Credit Agreement. American Shale’s Consolidated Leverage Ratio exceeded the allowed level at September 30, 2012, and quarterly thereafter. Therefore, the contingent interest provision has been applied and $1,515,000 was added to the principal balance and interest expense in 2013. A contingent interest amount of $532,388 is included in accrued expenses in anticipation of exceeding the September 30, 2013 level.

For the months of August, September, and October 2013, Chambers amended the ASD Credit Agreement to add the interest due during those months to the principal balance of the loan. In addition, $375,000 was added to the principal balance of the loan in connection with this amendment. The $375,000 is being amortized over the three month period. August and September 2013 interest of $1,439,349 has been added to the principal balance of the loan.

The following table summarizes the components of total debt recorded on the Company’s consolidated balance sheets as of September 30, 2013 and December 31, 2012:


	September 30,			December 31,
	2013			2012
	(unaudited)			(audited)

ASD Credit Agreement	$	50,000,000		$	50,000,000
Original Issuance Discount — ASD		(1,500,000	)		(2,294,118	)
Contingent Interest		2,015,000			500,000
A&R Credit Agreement		25,000,000			—
Termination Fee — A&R		6,784,626			—
Termination Fee Debt Discount – A&R		(4,795,708	)		—
PIK Interest fee		375,000			—
PIK Interest — A&R		1,439,349			—
Other loans — vehicles		23,579			39,791

Total debt	$	79,341846		$	48,245,673