| Short-Term and Long-Term Borrowings | NOTE
10 SHORT-TERM AND LONG-TERM BORROWINGS: Current
Debt (Short-Term Borrowings) Note
Payable Related Party As of May
31, 2016 and February 29, 2016, the Companys Chairman, President and Chief Executive Officer had loaned the Company $250,100
in aggregate that has been 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 Companys 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 our Chairman, President and Chief
Executive Officer. At May 31, 2016 and February 29, 2016, the Line of Credit had an outstanding balance of $837,720 and $843,807,
respectively. Interest is payable monthly at a stated reference rate of 0.249% + 337.5 basis points and totaled $8,913 for the
three months ended May 31, 2016. 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 Companys
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 holders of the Notes agreed to extend the maturity date of the Notes for an additional two years. The
note principal of $565,000 is payable in full at the amended maturity date of the Notes, which is January 29, 2017. Should the
Board of Directors, on the 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 Companys common stock at a conversion rate equal to 75% of the average closing price of the Companys common
stock over the 20 consecutive trading days preceding December 31, 2016. 12% Note balances
at May 31, 2016 and February 29, 2016 are set forth in the table below:
May
31, 2016 February
29, 2016
12% Subordinated
Notes $ 315,000 $ 315,000
12% Subordinated
Notes, related party 250,000 250,000
$ 565,000 $ 565,000 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
natural 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 $29,235 for the
three months ended May 31, 2016. Unamortized debt discount amounted to $42,716 at May 31, 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. On March 10, 2014, one of the third parties exercised 2,118,900 warrants
resulting in the issuance of 1,873,554 shares of the Companys common stock. Maximilian
Loan - Amended and Restated Loan Agreement In connection with the
Companys 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 Companys 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 natural 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 Energy, as borrower pursuant to a
Loan and Security Agreement entered into between the Company and App Energy on August 28, 2013 (See Note 7 Note
Receivable). The amended
loan agreement contains customary covenants for loans of such type, including among other things, covenants that restrict the
Companys 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 Companys 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 Companys 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 Companys 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
Companys common stock representing the right to purchase up to an additional 9.99% of the Companys 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; and contain an exercise provision
blocker that prevents any exercise of the warrants if such exercise and related issuance of Common Stock would increase the Maximilian
holdings of the Companys Common Stock to more than 9.99% of the Companys currently issued and outstanding shares
at the time of the exercise. The Company also granted to Maximilian a 50% net profits interest in the Companys 25% working
interest, after the Company recovers its investment, in the Companys 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. On May 28,
2014, at Maximilians 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-to-warrant exchange occurred so that Maximilian would hold no more than 9.99% of the Companys
common shares issued and outstanding. The Company determined that the share-to-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. 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 Companys
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 2 nd nd 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 Companys 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. Due to a decline in crude oil and natural gas revenues, the Company has been unable to make the interest or principal
payments required under the terms of the credit facility with Maximilian. The unpaid monthly interest payments and fees have been
added to the principal balance including the previously mentioned 20% fee. A series of waivers have been granted by Maximilian
for the principal and interest payments that have not made since December 2015. During the three months ended May 31, 2016 $924,701
in interest and fees were added to the outstanding loan balance with Maximilian. Due
to the waivers granted by Maximilian for the first quarter ended May 31, 2016, and for the months June and July 2016, 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 assurance this cooperation
will continue. Furthermore, there can be no assurances that Maximilian will not declare the Company to be in default under the
terms of the credit facility. In accordance with the guidance found in ASC-470-10-45, the entire balance of the Maximilian loan
is presented under the current liabilities section of the balance sheets. In accordance
with the guidance found ASC 835-35 the net amount of the deferred finance costs are included with the debt discount as a reduction
of the loan balance shown on the Balance Sheets as of May 31, 2016 and February 29, 2016, respectively. Current debt
balances at May 31, 2016 and February 29, 2016 are set forth in the table below:
May
31, 2016 February
29, 2016
Principal amount $ 15,305,832 $ 14,381,131
Less unamortized
discount and debt issuance costs (576,267) (713,026)
Net debt less
unamortized discount and debt issuance costs $ 14,729,565 $ 13,668,105 |
