NOTE 10 - NOTES PAYABLE

On April 26, 2012, American Shale closed a Credit Agreement transaction (hereafter the “Chambers Credit Agreement”) with several banks and other financial institutions or entities that from time-to-time will be parties to the Chambers Credit Agreement (the “Lenders”), and Chambers Energy Management, LP as the administrative agent (“Agent” or “Chambers”).

The Chambers 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 due annually. These OID costs were netted against notes payable and were being amortized over the life of the loan using the straight-line method, which approximated the effective interest method. For the years ended December 31, 2015 and 2014, $0 and $1,189,400 of the OID was amortized as interest expense, respectively.

On February 28, 2013, American Shale, the Lenders and the Agent amended and restated the Chambers 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 was due monthly at 10% plus the greater of 1% or the 3 month LIBOR rate (11% at time of payoff). Principal was due at maturity, February 28, 2015. We were required 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. American Shale was obligated to pay a “Termination Fee” with respect to the $25 million loan upon the earliest to occur of (i) a Change of Control, (ii) repayment in full of the loans under the Chambers Credit agreement and (iii) certain defaults under the Chambers Credit Agreement related to seeking relief from creditors or generally being unable to repay debts as they come due. The Termination Fee was defined as $12.5 million less all interest payments actually made with respect to the $25 million loan prior to such date.

The Company estimated its liability related to the Termination Fee to be approximately $6.8 million ($12.5 million gross fee, less $5.7 million in interest payments) (the “Termination Fee Liability”).The Termination Fee Liability was recorded on the Company’s condensed consolidated balance sheet as an addition to the related debt balance, offset by an equal debt discount of $6.8 million (the “Termination Fee Debt Discount”). The Termination Fee Debt Discount was being amortized to interest expense through the expected payment date of February 28, 2015; however, such amortization was accelerated upon payment of the Termination Fee in conjunction with the Credit Agreement. At repayment of the loan the Termination Fee was computed to be $9,077,778. For the years ended December 31, 2015 and 2014, the Company recorded $0 and $3,940,689 of amortization related to the Termination Fee, respectively. For the years ended December 31, 2015 and 2014, the Company recorded interest of $0 and $1,115,280 related to amortization of the Termination Fee Debt Discount, respectively.

The Chambers Credit Agreement included a contingent interest provision that added 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. American Shale’s Consolidated Leverage Ratio exceeded the allowed level at September 30, 2012, and quarterly thereafter. Therefore, the contingent interest provision had been applied and $1,149,969 was added to the principal balance and interest expense in 2014 (through the date of the repayment).

On May 21, 2014, American Shale, entered into a credit agreement (hereafter the “Credit Agreement”) by and among American Shale, several lenders (the “Lenders”), and Morgan Stanley Capital Group Inc. as the administrative agent (“Agent”). Trans Energy is a guarantor of the Credit Agreement as is Prima, another of our wholly owned subsidiaries. The Credit Agreement initially provided that the Lenders would lend American Shale up to $200 million, including an initial draw of $102.5 million plus a PIK fee of $593,750, a contingent committed amount of $47.5 million and an uncommitted amount of $50 million (the “Loans”). The initial draw under the facility was used primarily to repay all of the outstanding debt under the Chambers Credit Agreement, as well as to fund certain fees and expenses incurred in connection with the Credit Agreement.

The Loans initially bore interest at a per annum rate equal to 9% plus the greater of 1% or LIBOR, for a three month interest period. The interest rate will be automatically lowered if American Shale improves the ratio of the value of its proved developed producing (“PDP PV9”) properties to its funded debt, less cash and other liquid assets, as further defined under the Credit Agreement (the “Net Debt Ratio”). Upon the occurrence of certain events of default, the loans will bear interest at an additional 2% per annum above the initial rate, and with respect to other events of default, may bear interest at the higher default rate. Interest is due and payable monthly in arrears. For the years ended December 31, 2015 and 2014, the Company recorded interest expense of $14,985,439 and $5,884,793 related to the Credit Agreement, respectively.

The initial loan was advanced as a single funding of $102.5 million plus a PIK fee of $593,750 on the Funding Date of May 31, 2014. Additional amounts up to $47.5 million were originally allowed to be drawn within the two year period after the Funding Date provided that the Net Debt Ratio, pro forma for such subsequent drawdowns, based on the level of PDP PV9 that is projected six months from the date of each drawdown, meets certain pre-defined targets. All principal will be due on December 31, 2018 (the “Maturity Date”), if not accelerated before that date (see below for details regarding the First Amendment and Waiver). Scheduled amortization of the principal amount of the loans may begin on May 1, 2015, unless the Net Debt Ratio exceeds certain defined parameters, in which case scheduled amortization may begin as late as May 1, 2016. No amortization is required if American Shale’s Net Debt Ratio meets certain criteria. The minimum amortization required each month will be the greater of (i) 0.75% of the then outstanding balance (after May 1, 2016) or (ii) the amortization amount that would be required for American Shale to achieve a predetermined Net Debt Ratio within six months. Such ratios increase over time.

The principal amount of the Loans may be prepaid, but not reborrowed. If the Loans are prepaid on or prior to the first anniversary of the Funding Date, a make-whole amount will be charged equal to 4.0% of the principal balance of the Loans, plus the sum of the remaining scheduled payments of interest prior to the first anniversary of the Funding Date. Up to $25 million of prepayments from specified sources will be exempt from this provision if payments are made prior to the first anniversary of the Funding Date. If the Loans are prepaid on or after the first anniversary of the Funding Date but prior to the second anniversary of the Funding Date, a make-whole amount equal to 4.0% of the principal balance of the Loans will be charged. Prepayments between the second and third anniversary of the Funding Date will be charged 3.0% of the principal balance of the Loans.

The Credit Agreement includes certain customary affirmative covenants such as minimum hedging requirements, delivery of financial information, operation and maintenance of properties, and maintenance of books and records. Financial covenants include a maximum leverage ratio (latest twelve months EBITDA to net debt) and minimum current ratio (consolidated current assets to consolidated current liabilities). The definition of net debt includes funded debt plus accounts payable, offset by cash as well as accounts receivable. American Shale is also required to apply toward approved capital expenditures a minimum of 50% of the proceeds of any equity issuance that occurs subsequent to the first anniversary of the Funding Date.

Negative covenants include limitations on indebtedness, liens, fundamental changes, dispositions of property, payment of dividends or distributions, capital expenditures, investments and transactions with affiliates. There are also limitations on hedging transactions, creation or acquisition of subsidiaries, use of proceeds, drilling without providing title opinions, amending certain documents and appointing non-approved officers or directors.

Upon the occurrence of a change of control (as defined in the Credit Agreement), the Lenders may require American Shale to pay all of the outstanding interest, make-wholes and fees in addition to 101% of the principal amounts of the Loans under the Credit Agreement.

On the Funding Date, American Shale also entered into a Net Profits Interest Agreement (the “NPI Agreement”) with the Agent. The NPI Agreement provides that subsequent to the repayment of the Loans, American Shale will pay a net profits interest to the Agent (the “NPI”). The NPI is to be calculated based on production revenues less certain expenditures, including operating costs, general and administrative expenses, interest and capital expenditures. The amount of interest expense and general and administrative expenses that can be charged are limited based on the amounts that were previously expensed prior to repayment of the Loans. The NPI is earned based on amounts borrowed under the Credit Agreement. As of the Funding Date, a NPI of 6.5% of the net profits, as defined under the NPI Agreement, has been earned. The Agent will earn up to an additional 2.5% of the net profits pro rata for any subsequent borrowing by American Shale under the $47.5 million contingent commitment. At June 30, 2014, the Company recorded a discount related to the NPI of $3,339,376 on proved property and $733,034 on unproved property. The total value recorded as a discount on loan payable related to the NPI is $4,072,410. For the years ended December 31, 2015 and 2014, the Company recorded interest expense related to accretion of the NPI discount in the amount of $1,411,188 and $518,307, respectively, which is computed using the straight line method over the life of the loan (see below for details regarding the First Amendment and Waiver).

The NPI Agreement provides the Agent with the option to sell its NPI for fair value, as defined in the NPI Agreement, alongside American Shale or Trans Energy in the event that either American Shale or Trans Energy sells interests, including partial interests, in the subject properties at a fair value for the NPI that meets or exceeds $1.5 million for each 1.0% of NPI earned by the Agent prior to such date. In such event, American Shale can also require the Agent to sell all of its NPI to American Shale (or, alternatively, to the buyer of any subject interests) for fair value. In the event of a sale of all or substantially all of the assets of American Shale, fair value is defined as the net cash received that is attributable to the equity interests of either American Shale or Trans Energy in such transaction.

On August 20 and October 3, 2014, American Shale made $5 million draws in accordance with the Credit Agreement.

On April 27, 2015, American Shale entered into a consent and agreement (the “Consent and Agreement”) that amended the Credit Agreement and the associated NPI agreement. The Consent and Agreement reduced the contingent borrowing availability under the Tranche B facility from $47.5 million to $10.0 million, and eliminated the Tranche C facility. Potential borrowings under the Tranche B facility had been contingent on American Shale’s ability to meet certain levels of PV-9 value for its producing properties, and as such there was no additional availability under Tranche B as of the signing of the Consent and Agreement. There were no other changes to the terms of the Tranche A facility loans under the Credit Agreement. The NPI agreement was amended to set the contingent NPI percentage at approximately 2.53%.

Under the Consent and Agreement, the administrative agent also consented to the monetization of a portion of American Shale’s natural gas hedges and the disposition of a portion of American Shale’s working and net revenue interests in wells in Marion County, West Virginia (the “Working Interests”) that have been recently drilled but not completed.

On the same date, American Shale entered into an agreement with Republic Energy Operating, LLC. Under this agreement, American Shale agreed to use the proceeds from the aforementioned hedge monetization as well as the sale of the Working Interests to pay all amounts due under the March 2015 joint interest billing statement in the amount of approximately $13.8 million provided by Republic Energy Operating, LLC. American Shale reserved the option to reacquire the Working Interests pursuant to a notice of election at agreed upon prices set forth in the agreement.

On July 31, 2015, American Shale entered into an amendment and waiver (the “First Amendment and Waiver”) that amended the Credit Agreement and the associated NPI agreement. Under the terms of the First Amendment and Waiver, the parties agreed to:

•

Increase the Applicable Margin to 12% in the event that interest is paid in cash, and 14% if paid in kind (which represented a change from the 9% Applicable Margin then currently payable in cash);

•

Change the Maturity Date to December 31, 2016;

•

Remove the Leverage Ratio covenant;

•

Add a covenant requiring the PV-9 of American Shale’s proved reserves to be greater than 1.5 times the net debt, with a minimum PDP component of proved reserves that increases over time;

•

Eliminate the make-whole premium and any other prepayment penalties related to debt paydowns;

•

Require American Shale to limit its capital expenditures and other monthly expenditures to amounts agreed upon in the First Amendment and Waiver;

•

Require American Shale to close the sale of assets in Wetzel County and pay down at least $30 million of debt by September 30, 2015;

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Allow American Shale to use the next $17 million of proceeds from the Wetzel County sale, plus 50% of any proceeds thereafter, primarily for expenditures in connection with an approved plan of development;

•

Begin a process to refinance the debt facility, or otherwise effect its paydown through a sale of assets, during the first quarter of 2016;

•

Defer any payment related to the NPI on the Wetzel County assets until the loans are repaid in full;

•

Increase the NPI on the assets remaining after the Wetzel County sale by 2%, to approximately 11%;

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Pay total fees to the administrative agent of $4 million, of which $1 million was added to the loan balance upon execution of the First Amendment and Waiver. The remainder is to be added to the loan balance upon the closing of the sale of the Wetzel County assets.

In accordance with the First Amendment and Waiver, interest of $3,917,077 for the months of July, August, and September, 2015, was added to the principal balance of the loan. In addition, $1,000,000 was added to the principal balance of the loan upon execution of the First Amendment and Waiver. These fees were recorded as financing costs and are being amortized over the life of the loan using the straight-line method, which approximates the effective interest method.

On September 3, 2015, American Shale entered into a Deposit Account Control Agreement (“DACA”) with Morgan Stanley Capital Group, Inc., administrative agent for the Lenders (“Agent”) and United Bank, Inc. Currently, the settlements related to the Company’s derivative and hedge financial instruments are deposited directly into depository accounts subject to the DACA. The agent exercises control of the depository accounts subject to the DACA and has the ability to prevent disbursements from those restricted accounts to our unrestricted cash accounts.

In accordance with the First Amendment and Waiver, interest of $5,194,760 for the months of October, November and December, 2015, was added to the principal balance of the loan. Currently the Company is paying a default interest rate of 17%, effective October 1, 2015.

In December 2014, M3 Appalachia Gathering, LLC (“M3”) completed a waterline to improve water supply and lower completion costs, as compared to trucking, with respect to the Company’s wells in Marion County, West Virginia. The Company’s cost of the waterline is approximately $3.2 million, which was being paid to M3 through 36 monthly payments of $105,730, at an internal rate of return to M3 of 15%. On December 1, 2015, the company assigned the waterline to M3 with an 18 month Call Right at which time the payments would resume. For a period of the earlier of 18 months or termination of the assignment, the company will pay M3 a water delivery fee of $2.94 per barrel for all water volumes delivered from the waterline. Since it is the intention of the Company to exercise their call right, an asset and liability continues to be recorded. As of December 31, 2015, the Company has recorded a long-term asset of $3.1 million, net of depreciation of $148,231, and a long-term note payable in the amount of $2,134,018.

The following table summarizes the components of total debt recorded on the Company’s consolidated balance sheets as of December 31, 2015 and 2014:


	December 31, 2015			December 31, 2014
	(audited)			(audited)
Credit Agreement - Morgan Stanley	$	121,493,646		$	112,500,000
Credit Agreement - Morgan Stanley PIK Fee		1,711,940			593,750
Credit Agreement - Morgan Stanley NPI		(2,142,915	)		(3,554,103	)
M3 Appalachia Gathering LLC Note Payable		2,134,018			—
Other loan - vehicles		—			4,402

Total debt	$	123,196,689		$	109,544,049

The debt balances under the Credit Agreements are presented as short-term liabilities and long-term liabilities on the Company’s balance sheet as of December 31, 2015 and 2014, respectively. On May 20, 2016, we notified the Agent that we determined that we were in default under numerous provisions under the Credit Agreement. The following defaults currently exist under the Credit Agreement:

1. American Shale has failed to maintain the Asset Coverage Ratio as set forth in Section 6.21 of the Credit Agreement since September 30, 2015;

2. American Shale has failed to timely provide the materials required pursuant to Sections 5.06 (r), (u), and (v) for the months ended December 31, 2015, January 31, 2016, February 29, 2016 and March 31, 2016;

3. American Shale has failed to timely effect the Tug Hill Disposition in accordance with Section 5.19;

4. American Shale has failed to timely engage a financial advisor reasonably acceptable to Administrative Agent and to commence the related refinancing activities in accordance with Section 5.20;

5. American Shale has failed to timely provide the annual financial statements pursuant to Section 5.06 (a) for the year ended December 31, 2015;

6. American Shale has failed to timely provide the Reserve Report pursuant to Section 5.06 (d) for the year ended December 31, 2015;

7. American Shale has failed to timely provide the Quarterly Report on Hedging pursuant to Section 5.06 (g) for the quarter ended September 30, 2015.

If these defaults under the Credit Agreement are not waived or otherwise resolved within the cure periods provided, the Administrative Agent will have the right to accelerate all of the outstanding indebtedness under the Credit Facility. If the Administrative Agent were to accelerate all of the obligations outstanding under the Credit Facility, we estimate that we would be required to pay approximately $135 million to the Administrative Agent and the Lenders.

We are currently in discussions with the Administrative Agent and the Lenders regarding a potential restructuring of the obligations outstanding under the Credit Agreement. While we hope to close the restructuring as soon as possible, definitive documentation is subject to negotiation. Additionally, we can provide no assurances that we will be able to successfully finalize such a restructuring, that the terms of any such restructuring will be acceptable to us or the timing or closing of such a restructuring.