| Short-Term and Long-Term Borrowings | NOTE
11 — SHORT-TERM AND LONG-TERM BORROWINGS: Current
Debt Note Payable
– Related Party At February
29, 2016 and February 28, 2015, the CompanyÂ’s Chairman, President and Chief Executive Officer had loaned the Company an aggregate
$250,100 during the years ended February 29, 2012 and February 28, 2013, that was used for a variety of corporate purposes including
an escrow requirement on a loan commitment; extension fees on third party loans; and a reduction of principal on the CompanyÂ’s
credit line with UBS Bank. These loans are non-interest bearing loans and repayment will be made upon a mutually agreeable date
in the future. Line
of Credit The Company
has an existing $890,000 line of credit for working capital purposes with UBS Bank USA (“UBS”), established pursuant
to a Credit Line Agreement dated October 24, 2011 that is secured by the personal guarantee of the CompanyÂ’s Chairman, President
and Chief Executive Officer. At February 29, 2016 and February 28, 2015, the Line of Credit had an outstanding balance of $843,807
and $869,865, respectively. Interest is payable monthly at a stated reference rate of 0.249% + 337.5 basis points and totaled
$31,442 and $31,498 for the years ended February 29, 2016 and February 28, 2015, respectively. The reference rate is based on
the 30 day LIBOR (“London Interbank Offered Rate”) and is subject to change from UBS. 12% Subordinated
Notes The CompanyÂ’s
12% Subordinated Notes (“the Notes”) issued pursuant to a March 2010 private placement (of which $250,000 was from
a related party) accrue interest at 12% per annum, payable semi-annually on January 29th and July 29th. On January 29, 2015, the
Company and 12 of the 13 note holders agreed to extend the maturity date of the Notes from January 29, 2015 for an additional
two years. The note principal is payable in full at the amended maturity date of the Notes, which is January 29, 2017. Should
the Board of Directors, on the amended maturity date, decide that the payment of the principal and any unpaid interest would impair
the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal
and interest into the CompanyÂ’s common stock at a conversion rate equal to 75% of the average closing price of the CompanyÂ’s
common stock over the 20 consecutive trading days preceding December 31, 2016. The Notes consist of the following:
February
29, 2016 February
28, 2015
12% Subordinated Notes $ 315,000 $ 315,000
12% Subordinated Notes – related party 250,000 250,000
$ 565,000 $ 565,000 In conjunction
with the Notes private placement, a total of 1,190,000 common stock purchase warrants were issued at a rate of two warrants for
every dollar raised through the private placement. The warrants have an exercise price of $0.14 and an amended expiration date
of January 29, 2017. The 12% Note warrants that have been exercised are set forth in the table below.
Fiscal
Period Warrants Exercised Shares
of Common
Stock Issued Number
of Accredited Investors
Year Ended February
28, 2014 100,000 100,000 1
Year Ended February
28, 2015 50,000 50,000 1
Year Ended February
29, 2016 - - -
Totals
150,000 150,000 2 Maximilian
Loan On October
31, 2012, the Company entered into a loan agreement with Maximilian, which provided for a revolving credit facility
of up to $20 million, maturing on October 31, 2016, with a minimum commitment of $2.5 million. The loan had annual interest of
18% and a monthly commitment fee of 0.5%. The Company also granted Maximilian a 10% working interest in its share of the oil and
gas leases in Kern County, California. The relative fair value of this 10% working interest amounting to $515,638 was recognized
as a debt discount and is being amortized over the term of the loan. Amortization expense was $132,114 and $138,988 for the years
ended February 29, 2016 and February 28, 2015, respectively. Unamortized debt discount amounted to $71,951 as of February 29,
2016. In 2012, the
Company also issued 2,435,517 warrants to third parties who assisted in the closing of the loan. The warrants have an exercise
price of $0.044; contain a cashless exercise provision; have piggyback registration rights; and are exercisable for a period of
five years expiring on October 31, 2017. The fair value of the warrants, as determined by the Black-Scholes option pricing model,
was $98,084 and included the following assumptions: a risk free interest rate of 0.72%; stock price of $0.04, volatility of 153.44%;
and a dividend yield of 0.0%. The fair value of the warrants was recognized as a financing cost and is being amortized as a part
of deferred financing cost over the term of the loan. Amortization expense for the year ended February 29, 2016 amounted to $127,513.
Unamortized deferred financing cost of these warrants was $191,270 as of February 29, 2016. There were 316,617 of these warrants
that remained unexercised as of February 29, 2016. Maximilian
Loan - Amended and Restated Loan Agreement In connection
with the CompanyÂ’s acquisition of a working interest from App in the Twin Bottoms Field in Lawrence County, Kentucky, the
Company amended its loan agreement with Maximilian on August 28, 2013. The amended loan agreement provided for an increase in
the revolving credit facility from $20 million to $90 million and a reduction in the annual interest rate from 18% to 12%. The
monthly commitment fee of 0.5% per month on the outstanding principal balance remained unchanged. Advances under the amended loan
agreement will mature on August 28, 2017. The obligations under the amended loan agreement continue to be secured by a perfected
first priority security interest in substantially all of the personal property of the Company, and a mortgage on the CompanyÂ’s
leases in Kern County, California. The amended loan agreement also provided for the revolving credit facility to be divided into
two borrowing sublimits. The first borrowing sublimit is $50 million and is for borrowing by the Company, primarily for its ongoing
oil and gas exploration and development activities. The second borrowing sublimit, of $40 million, is for loans to be extended
by the Company, as lender, to App, as borrower pursuant to a Loan and Security Agreement entered into between the Company and
App on August 28, 2013 (See Note 8 – Note Receivable). The amended
loan agreement contains customary covenants for loan of such type, including among other things, covenants that restrict the CompanyÂ’s
ability to make capital expenditures, incur indebtedness, incur liens and dispose of property. The amended loan agreement also
contains various events of default, including failure to pay principal and interest when due, breach of covenants, materially
incorrect representations and bankruptcy or insolvency. If an event of default occurs, all of the CompanyÂ’s obligations
under the amended loan agreement could be accelerated by Maximilian, causing all loans outstanding (including accrued interest
and fees payable thereunder) to be declared immediately due and payable. As consideration
for Maximilian facilitating the CompanyÂ’s transactions with App and entering into the amended loan agreement, the Company
(a) issued to Maximilian approximately 6.1 million common shares, representing 9.99% of the CompanyÂ’s outstanding common
stock on a fully-diluted basis at the time of grant, and (b) issued approximately 6.1 million warrants to purchase shares of the
CompanyÂ’s common stock representing the right to purchase up to an additional 9.99% of the CompanyÂ’s outstanding common
stock on a fully-diluted basis, calculated as of the date of grant. The warrants have an exercise price of $0.10; contain a cash
exercise provision and are exercisable for a period of three years expiring on August 28, 2016 shares and warrants as described
in the paragraph below. The Company also granted to Maximilian a 50% net profits interest in the CompanyÂ’s 25% working interest,
after the Company recovers its investment, in the CompanyÂ’s working interest in its Kentucky Acreage, pursuant to an Assignment
of Net Profits Interest entered into as of August 28, 2013 by and between the Company and Maximilian. The fair value
of the 6.1 million shares was determined to be $979,609 based on the CompanyÂ’s stock price on the grant date of $0.16. The
fair value of the warrants, as determined by the Black-Scholes option pricing model, was $898,299 and included the following assumptions:
a risk free interest rate of 2.48%; stock price of $0.16, volatility of 184.53%; and a dividend yield of 0.0%. The Company determined
that the common shares and warrants were issued in connection with the increase in CompanyÂ’s borrowing limit and AppÂ’s
$40 million revolving credit facility for which the Company was granted a 25% working interest. Consequently, the fair value of
the common shares and warrants totaling $1,877,907 was allocated to deferred financing costs ($804,816) and unproved oil and gas
properties ($1,073,091) based on the amount of the increase in the revolving credit facility that is attributable to Daybreak
and App. On February
14, 2014, the Company at the request of Maximilian, amended the warrant agreement related to the above issuance of approximately
6.1 million warrants to include a warrant exercise blocker provision that would effectively prevent any exercise of the warrants
if such exercise and related issuance of common stock would increase the Maximilian holdings of the CompanyÂ’s common stock
to more than 9.99% of the currently issued and outstanding shares at the time of the exercise. All other terms of the original
warrant agreement remained unchanged. The Company
also issued 309,503 warrants to third parties who assisted in the closing of the amended and restated loan agreement. The warrants
have an exercise price of $0.214; contain a cashless exercise provision; have piggyback registration rights; and are exercisable
for a period of five years expiring on August 28, 2018. The fair value of the warrants, as determined by the Black-Scholes option
pricing model, was $47,420 and included the following assumptions: a risk free interest rate of 2.48%; stock price of $0.16, volatility
of 184.53%; and a dividend yield of 0.0%. The fair value of the warrants was recognized as a financing cost and is being amortized
as a part of deferred financing cost over the term of the revolving credit facility. The Company
evaluated the amendment of the revolving credit facility under ASC 470-50-40 and determined that the CompanyÂ’s borrowing
capacity under the amended loan agreement exceeded its borrowing capacity under the old loan agreement. Consequently, the unamortized
discount and deferred financing costs as of the date of amendment of approximately $400,349 and the new deferred financing costs,
as mentioned above, were amortized over the term of the amended loan agreement. On May 28,
2014, at MaximilianÂ’s request, the Company finalized a share-for-warrant exchange agreement in which Maximilian returned
to the Company 427,729 common shares and was in turn issued the same number of warrants containing the same provisions as the
originally issued warrants. This share-for-warrant exchange occurred so that Maximilian would hold no more than 9.99% of the CompanyÂ’s
common shares, issued and outstanding. The Company determined that the share-for-warrant exchange did not result in any incremental
fair value. On August
21, 2014, the Company entered into a First Amendment to Amended and Restated Loan and Security Agreement and Share Repurchase
Agreement (the “Amendment”) with Maximilian under its Amended and Restated Loan and Security Agreement dated as of
August 28, 2013. The Amendment secured for the Company an additional advance of $2,200,000 under its credit facility with Maximilian
since the advances made by Maximilian had already exceeded its minimum funding commitment. Additionally, Maximilian agreed to
temporarily reduce the required monthly payment made by the Company until it has paid $1,000,000 less than principal payments
required by the previous agreement. As of February 28, 2015, the Company had recognized $700,000 of the reduced monthly principal
payments program. Furthermore, Maximilian agreed to reduce the regular interest rate applicable to the loan from 12% per annum
to 9% per annum and the default interest rate by 3%. The additional
advance, the reduction in the required monthly payment and the reduction in the interest rate were facilitated through the CompanyÂ’s
acquisition of 5,694,823 shares of its common stock held by Maximilian. The repurchased shares were cancelled and restored to
the status of authorized, but unissued stock. The Company paid for the share repurchase transaction through an advance of $1,708,447
under the existing loan agreement with Maximilian. On May 20,
2015, the Company entered into a Second Amendment to Amended and Restated Loan and Security Agreement (the “Second Amendment”)
with Maximilian. The Second Amendment modified the calculation of the required monthly payment for a three-month period ending
June 30, 2015. As consideration for entering into the loan modification, the Company agreed to modify the exercise price of the
warrants Maximilian currently holds from $0.10 to $0.04. No other terms of the warrant agreement were changed. The modification
did not result to any accounting since these warrants were deemed to be investor warrants. On October
14, 2015, the Company entered into a Third Amendment to the Amended and Restated Loan and Security Agreement and Second Warrant
Amendment with Maximilian, (the “Third Amendment”). Pursuant to the Third Amendment, Maximilian agreed to a reduction
in the CompanyÂ’s monthly payments under the loan agreement to $50,000 per month for a period of six months ending on February
29, 2016. The reduction in monthly payments allows for additional funds to be used by the Company in drilling and completing additional
wells in Kentucky. As consideration for the reduction in the monthly payment amount, the Company agreed that twenty percent (20%)
of the amount by which the monthly payment was reduced would be added to the loan balance, and the portion of the monthly payment
savings that constitutes savings in interest or commitment fees would be treated as an additional advance of principal under the
loan agreement (the “Deemed Advances”). The 20% fee is being recognized as additional interest expense. The Company
also agreed to grant to Maximilian an overriding royalty interest of 1.5% of its working interest in four wells in Kentucky. As
part of the Maximilian Amendment, the Company also agreed to extend the expiration date of the warrants held by Maximilian to
purchase up to 6,550,281 shares of common stock of the Company to August 28, 2018. The Company determined that the accounting
of the loan modification was not substantial. Likewise, the Company determined that the modification of the warrant term did not
result in any accounting since these warrants were deemed to be investor warrants. With the cooperation
of Maximilian, the Company is currently working with an investment banking firm to assist in securing refinancing of its debt
with Maximilian, since the long-term commitment needed to develop the Kentucky and California projects no longer fits the Maximilian
business model. As a result of the decline in hydrocarbon prices, we are currently unable to make the interest or principal payments
required under the terms of our credit facility with our lender, Maximilian. A series of waivers have been granted by Maximilian
for the principal and interest payments that have not been made since December 2015. Due to the waivers granted by Maximilian,
the Company is currently not considered to be in default under terms of the credit facility. Maximilian is continuing to work
with the Company in modifying the credit facility terms during this period of lower hydrocarbon prices, but there can be no assurances
that this cooperation will continue. Further, there can be no assurances that Maximilian will not declare the Company to be in
default under the credit facility. In accordance with guidance from ASC-470-10-45, since the Company has been unable to make the
above referenced payments the entire balance of the Maximilian credit facility is presented under the current liabilities section
of the financial statements. Current debt
balances at February 29, 2016 and February 28, 2015 are set forth in the table below:
February
29, 2016 February
28, 2015
Maximilian Note $ 14,381,131 $ 4,823,325
Maximilian Note Discount (71,951) (132,114)
$ 14,309,180 $ 4,691,211 Non-current
debt balances at February 29, 2016 and February 28, 2015 are set forth in the table below:
February
29, 2016 February
28, 2015
Maximilian Note $ - $ 8,663,458
Maximilian Note Discount - (71,951)
$ - $ 8,591,507 |
