| Short-Term Borrowings | NOTE
9 — SHORT-TERM BORROWINGS: Note Payable
– Related Party As of August
31, 2016 and February 29, 2016, the Company’s President and Chief Executive Officer had loaned the Company $250,100 in aggregate
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 Company’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 our President and Chief Executive
Officer. At August 31, 2016 and February 29, 2016, the Line of Credit had an outstanding balance of $830,947 and $843,807, respectively.
Interest is payable monthly at a stated reference rate of 0.249% + 337.5 basis points and was $8,227 for the six months ended
August 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 Company’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 Company’s common stock at a conversion rate equal to 75% of the average closing price of the Company’s
common stock over the 20 consecutive trading days preceding December 31, 2016. 12% Note balances
at August 31, 2016 and February 29, 2016 are set forth in the table below:
August
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 (Credit Facility) 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 discount
to debt and is being amortized over the original term of the loan. Amortization expense was $55,912 for the six months ended August
31, 2016. Unamortized debt discount was $16,039 at August 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. As of August 31, 2016, there were 316,617 of these warrants remaining that
were unexercised and outstanding. Maximilian
Credit Facility - Amended and Restated Loan Agreement In connection
with the Company’s acquisition of a working interest from App Energy 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 Company’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 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 6 – Note Receivable). The amended
loan agreement contains customary covenants for loans of such type, including among other things, covenants that restrict the
Company’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 Company’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 Company’s transactions with App Energy and entering into the amended loan agreement, the
Company (a) issued to Maximilian approximately 6.1 million common shares, representing 9.99% of the Company’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 Company’s common stock representing the right to purchase up to an additional 9.99% of the Company’s outstanding
common stock on a fully-diluted basis, calculated as of the date of grant. The warrants had 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
blocker provision that prevents any exercise of the warrants if such exercise and related issuance of common stock would increase
the Maximilian holdings of the Company’s common stock to more than 9.99% of the Company’s currently issued and outstanding
shares at the time of the exercise. The Company also granted to Maximilian a 50% net profits interest in the Company’s approximate
25% working interest, after the Company recovers its investment, in the Company’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. On May 28,
2014 at Maximilian’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 Company’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 had 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 Company’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 “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, which amended the Company’s loan agreement with Maximilian (the “Maximilian Amendment”).
Pursuant to the Maximilian Amendment, Maximilian agreed to a reduction in the Company’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 allowed
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 twenty percent (20%) fee is being recognized as additional interest expense. The Company 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 all 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 modification of the warrant expiration date did not result
in any incremental fair value. 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 six months ended August 31, 2016, interest
of $1,149,261 and debt modification fees of $775,562 were added to the outstanding loan balance with Maximilian. Due to the
waivers granted by Maximilian for the six months ended August 31, 2016, and for the months of September and October 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 and because the loan maturity date is less than the 12 months in the future, the entire
balance of the Maximilian loan is presented under the current liabilities section of the balance sheets. In accordance with the
guidance found in ASC 835-35 the net amount of the deferred finance costs associated with the credit facility are included with
the debt discount as a reduction of the loan balance shown on the Balance Sheets as of August 31, 2016 and February 29, 2016,
respectively. For the six months ended August 31, 2016, the Company recognized amortization expense of $215,047 in deferred financing
costs and $55,912 in debt discount. Current debt
balances at August 31, 2016 and February 29, 2016 are set forth in the table below:
August
31, 2016 February
29, 2016
Principal Amount $ 16,305,954 $ 14,381,131
Less unamortized
discount and debt issuance costs (442,067) (713,026)
Net debt less
unamortized discount and debt issuance costs $ 15,863,887 $ 13,668,105 |
