NOTE 7 — NOTES PAYABLE

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 a previous Credit Agreement, as well as to fund certain fees and expenses incurred in connection with the Credit Agreement. 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 was projected six months from the date of each drawdown, met certain pre-defined targets.

In connection with obtaining financing in May 2014 and subsequent borrowings, we incurred fees and expenses of $6,242,874. Per the guidance of ASU 2015-03 the loan costs are presented as a reduction to the notes payable - current on the accompanying Condensed Consolidated Balance Sheets and will be amortized to interest expense over the life of the note using the interest rate method (see Note 1). At March 31, 2016 and December 31, 2015, the balance of the notes payable was reduced by $2,662,638 and $3,550,184 related to the loan costs, respectively, and the Company had recognized $3,580,236 and $2,692,690, respectively, of cumulative interest expense related to the amortization of the loan costs.

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 has subsequently increased in connection with the First Amendment and Waiver, as more fully described below. Interest is due and payable monthly in arrears. For the three months ended March 31, 2016 and 2015, the Company recorded interest expense of $5,370,581 and $2,967,969 related to the Credit Agreement, respectively.

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 was $4,072,410. For the three months ended March 31, 2016 and 2015, the Company recorded interest expense related to accretion of the NPI discount in the amount of $535,729 and $222,131, respectively, which is computed using the straight line method (as it approximated the effective interest 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 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;

•

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%;

•

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 was 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.

In accordance with the First Amendment and Waiver, interest of $5,370,581 for the months of January, February, and March 2016 was added to the principal balance of the loan. Effective October 1, 2015, the Company is paying a default interest rate of 17%.

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 $3.1 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 its call right, an asset and liability continues to be recorded. As of March 31, 2016, the Company has recorded a long-term asset of $3.1 million, net of depreciation of $179,994, and a long-term note payable in the amount of $2,230,955.

The following table summarizes the components of total debt recorded on the Company’s consolidated balance sheets as of March 31, 2016 and December 31, 2015:


	March 31,			December 31,
	2016			2015
	(unaudited)			(audited)
Credit Agreement - Morgan Stanley	$	126,789,603		$	121,493,646
Credit Agreement - Morgan Stanley PIK Fee		1,786,564			1,711,940
Credit Agreement - Morgan Stanley NPI		(1,607,186	)		(2,142,915	)
M3 Appalachia Gathering LLC Note Payable		2,230,955			2,134,018
Debt issuance costs		(2,662,638	)		(3,550,184	)

Total debt	$	126,537,298		$	119,646,505

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 March 31, 2016 and December 31, 2015.

As of March 31, 2016, we were not in compliance with our debt covenants with our debt facility with Morgan Stanley.

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, March 31, 2016, April 30, 2016, May 31, 2016, and June 30, 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 and the quarters ended March 31, 2016 and June 30, 2016;

6. American Shale has failed to timely provide the Reserve Report pursuant to Section 5.06 (d) for the year ended December 31, 2015 and the quarters ended March 31, 2016 and June 30, 2016;

7. American Shale has failed to timely provide the Quarterly Report on Hedging pursuant to Section 5.06 (g) for the quarters ended September 30, 2015 December 31, 2015, March 31, 2016, and June 30, 2016.

On August 17, 2016, (“Effective Date”) Trans Energy and American Shale executed an agreement with the Agent for the Lenders under the Credit Agreement, as amended. Under the terms of the agreement (the “Forbearance”), the Agent and the Lenders agreed to forbear from taking any enforcement actions with respect to various defaults under the Credit Agreement, provided that (a) no further defaults occur other than those (i) specified in the Forbearance as having already occurred or (ii) anticipated to occur in the future and (b) the Borrower achieves certain milestones with respect to a process to sell certain assets of the Borrower, with such milestones to be agreed upon among the Borrower and the Agent.

If these defaults under the Credit Agreement are not resolved in the manner contemplated by the Forbearance, 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.

In addition, the Forbearance provides for a sharing of the proceeds that might result from any such sale process, according to the following formula:

(i)

first, 100% to the Lenders, until the Lenders have received $80,000,000 plus interest from and after the Effective Date, at a rate of 12.00% per annum;

(ii)

second, 78.75% to the Lenders and 21.25% to the Borrower, until the Lenders have the sum of (a) $57,167,819 plus interest from and after the Effective Date at 15.00% per annum and (b) the amount of any fees and expenses payable by the Borrower pursuant to the Credit Agreement that are incurred after the Effective Date plus interest from and after the Effective Date at 15.00% per annum; and thereafter

(iii)

15.00% to the Lenders and 85.00% to the Borrower.

The Lenders have further agreed to re-convey the NPI to the Borrower with respect to any assets that are sold in accordance with the terms of the Forbearance.

The Forbearance further provides that the Borrower has the option to retire all obligations due to the Lenders, including the NPI, for $142,384,848, provided that the Borrower enters into definitive documentation with a third party by November 15, 2016 to finance the repurchase, and that such repurchase occurs by December 31, 2016. Both dates can be extended by thirty days to accommodate regulatory requirements, if necessary. Such amount will increase to the extent that the Lenders incur professional fees after the Effective Date that are payable by the Borrower under the terms of the Credit Agreement.