| Short-Term and Long-Term Borrowings | NOTE
13 — SHORT-TERM AND LONG-TERM BORROWINGS: Note Payable
– Related Party At February
28, 2017 and February 29, 2016, the Company’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; maturity 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 the Company’s Chairman, President
and Chief Executive Officer. At February 28, 2017 and February 29, 2016, the Line of Credit had an outstanding balance of $817,622
and $843,807, respectively. Interest is payable monthly at a stated reference rate of 0.249% + 337.5 basis points and totaled
$33,815 and $31,442 for the years ended February 28, 2017 and February 29, 2016, respectively. The reference rate is based on
the 30 day LIBOR (“London Interbank Offered Rate”) and is subject to change from UBS. Maximilian
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 Company also granted Maximilian a 10% working
interest in its share of the oil and gas leases in Kern County, California, which was recognized as a discount to debt. The debt
discount was fully amortized at February 28, 2017. Maximilian
Loan - Amended and Restated Loan Agreement In connection
with the Company’s acquisition of a working interest from App Energy, LLC, a Kentucky limited liability company (“App
Energy”) in the Twin Bottoms Field in Lawrence County, Kentucky, the Company amended its loan agreement with Maximilian
on August 28, 2013. The amendment increased the amount of the debt facility to $90 million and reduced the annual interest rate
to 12%. 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. 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 Company’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 evaluated the
amendment of the revolving credit facility under ASC 470-50-40 and determined that the Company’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 are amortized over the term of the amended loan agreement.
Amortization expense of deferred financing costs was $423,331 and $427,331 for the twelve months ended February 28, 2017 and
February 29, 2016, respectively. Unamortized deferred financing costs were $238,598 at February 28, 2017. 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. 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. 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 “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 held 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 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 20% fee was 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 Third 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. On October
31, 2016, the Company entered into a Fourth Amendment to the Amended and Restated Loan and Security Agreement with Maximilian,
which amended the Company’s loan agreement with Maximilian (the “Restructuring Agreement”). Pursuant to the
Restructuring Agreement, in exchange for the proceeds it received from the Kentucky Sale, Maximilian and the Company have agreed
to: (1) the deemed payment in full and/or forgiveness of approximately $8.3 million in outstanding indebtedness under the Daybreak
Loan Agreement (which includes approximately $5.4 million in indebtedness that was loaned by the Company to App Energy pursuant
to the Loan and Security Agreement between the parties dated as of August 28, 2013, as amended from time to time); (2) a commitment
by Maximilian to forgive an additional amount of indebtedness under the Daybreak Loan Agreement, currently estimated to be $3.2
million, in the event of the future issuance of senior preferred stock by the Company to it; (3) the deemed payment in full and
termination of the App Loan Agreement; (4) the termination and release of all liens, security interests and other interests held
by Maximilian or its affiliates in any of the Company’s or App Energy’s Kentucky oil and natural gas assets, including
the termination of the overriding royalty interests and net profits interests held by Maximilian and/or its affiliates; (5) amendments
to the Daybreak Loan Agreement to suspend principal and interest payments for up to six months and extend the maturity date to
February 28, 2020; (6) a commitment by Maximilian to advance up to $250,000 in financing to the Company over the next six months;
(7) the pursuit of the Michigan Joint Venture using the $250,000 set aside from the Kentucky Sale. The Company recognized a gain
on debt settlement in aggregate of approximately $3.9 million through the sale of the Kentucky property and reduction in the outstanding
credit facility balance. As a result
of the decline in hydrocarbon prices, the Company has been currently unable to make the interest or principal payments required
under the terms of its credit facility with Maximilian. A series of waivers have been granted by Maximilian for the principal
and interest payments that have not been made. 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 restructuring the credit
facility terms during this period of lower hydrocarbon prices, but there can be no assurances that this cooperation will continue.
Further, our lender is under no obligation to advance us any additional funding and, rather, there can be no assurances that out
lender will not declare the Company to be in default under the credit facility. A change of control or management of our lender,
among other reasons, could also result in our loan being called due and payable. Maximilian
Loan Agreement – Michigan Project At February
28, 2017, the Company had received $84,000 in advances from Maximilian under a separate promissory note agreement dated January
17, 2017 and amended on February 10, 2017 regarding the development of an oilfield project in Michigan. Advances under this agreement
are subject to a 5% (five percent) per annum interest rate. If a well that the Company elects to participate in is scheduled to
be spudded at the Michigan oilfield project on or before December 31, 2017, then the advances under the promissory note must be
repaid in full upon the earlier of (a) the time that is ten days prior to the first well being spudded on the Michigan oilfield
project or (b) December 31, 2017. If there is not a well scheduled to be spudded at the Michigan oilfield project on or before
December 31, 2017 that the Company elects to participate in, then the Company will assign to Maximilian its working interest in
the Michigan oilfield project, in full payment and satisfaction of the advances under the promissory note. Advances under the
promissory note may be prepaid at any time without penalty, and are secured by a mortgage on the Company’s working interest
in the Michigan oilfield project. In the event of a default of any of the Company’s obligations under the promissory note,
the amounts due may be called immediately due and payable at Maximilian’s option. Current debt
balances at February 28, 2017 and February 29, 2016 are set forth in the table below:
February
28, 2017 February
29, 2016
Principal Balance $ 8,960,444 $ 14,381,131
Less unamortized discount and debt issuance
costs (238,598) (713,026)
Subtotal – O&G operating debt 8,721,846 13,668,105
Michigan project debt 84,000 -
Net debt $ 8,805,846 $ 13,668,105 App Energy
Note Receivable - Loan Agreement On October
31, 2016, the Company and App Energy, LLC, a Kentucky limited liability company (“App Energy”), sold their interests
in the Twin Bottoms field in Kentucky. The note receivable from App Energy for funds advanced by the company to App Energy for
drilling in Kentucky was considered to be paid in full as a part of the sale of the Twin Bottoms Field. The $3.9 million App Energy
received from the sale of their working interest in Kentucky was used to pay down a portion of the associated note receivable.
The remaining balance of approximately $1.5 million was recorded as a loss on the settlement of note receivable. The associated
debt the Company owed to Maximilian Resources LLC (“Maximilian”) of approximately $5.4 million was eliminated through
the sale of the Twin Bottoms Field. Non-current
debt (Long-term borrowings) 12% Subordinated
Notes The Company’s
12% Subordinated Notes (“the Notes”) issued pursuant to a January 2010 private placement, resulted in $595,000 in
gross proceeds (of which $250,000 was from a related party) to the Company and 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 to January 29, 2017. Effective January 29, 2017, the maturity date of the Notes
and the expiration date of the warrants that were issued in conjunction with the 12% Subordinated Notes from the January 2010
private placement offering to accredited investors were extended for an additional two years to January 29, 2019. The Notes principal
of $565,000 is payable in full at the amended maturity date of the Notes. The exercise price of the warrants was lowered from
$0.14 to $0.07 as a part of the warrant modification. The warrant expiration extension applied to noteholders who chose to extend
the maturity date of the 12% Subordinated Notes for an additional two years and had not already exercised the associated warrants.
Ten noteholders had the expiration date of their warrants extended to January 29, 2019. The fair value of the warrant modification,
as determined by the Black-Scholes option pricing model, was $29,075 and was recognized as a discount to debt and is being amortized
over the extended maturity date of the Notes. The Black-Scholes valuation encompassed the following weighted average assumptions:
a risk free interest rate of 1.22%; volatility of 378.73%; and dividend yield of 0.0%. 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 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, 2018. At February 28, 2017 and February 29, 2016, amortization expense was $1,211 and $-0-,
respectively. The unamortized debt discount at February 28, 2017 and February 29, 2016 was $27,864 and $-0-, respectively. 12% Note balances
at February 28, 2017 and February 29, 2016 are set forth in the table below:
February
28, 2017 February
29, 2016
12% Subordinated
Notes $ 315,000 $ 315,000
Debt discount (15,535) -
Net 12% Subordinated
Note balance $ 299,465 $ 315,000 12% Note balances
– related parties at February 28, 2017 and February 29, 2016 are set forth in the table below:
February
28, 2017 February
29, 2016
12% Subordinated Notes – related party $ 250,000 $ 250,000
Debt discount (12,329) -
Net 12% Subordinated Note – related party
balance $ 237,671 $ 250,000 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 $0.07 and an amended expiration date
of January 29, 2019. The 12% Note warrants that have been exercised are set forth in the table below. At February 28, 2017, there
were 980,000 warrants that were not exercised and had not expired.
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 - - -
Year Ended February
28, 2017 - - -
Totals
150,000 150,000 2 |
