| Short-Term and Long-Term Borrowings | NOTE
8 — SHORT-TERM AND LONG-TERM BORROWINGS: Current
debt (Short-term borrowings) Note
Payable – Related Party At
May 31, 2017 and February 28, 2017, the Company had a loan balance of $250,100 with the Company’s Chairman, President and
Chief Executive Officer which were obtained 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 its Chairman, President and Chief
Executive Officer. At May 31, 2017 and February 28, 2017, the Line of Credit had an outstanding balance of $811,681 and $817,622,
respectively. Interest is payable monthly at a stated reference rate of 0.249% + 337.5 basis points and was $9,059 and $8,913,
respectively for the three months ended May 31, 2017 and 2016. The reference rate is based on the 30 day LIBOR (“London
Interbank Offered Rate”) and is subject to change from UBS. Maximilian
Loan Agreement (Credit Facility) On October
31, 2012, the Company entered into a loan agreement with Maximilian Resources LLC, a Delaware limited liability company and successor
by assignment to Maximilian Investors LLC (either party, as appropriate, is referred to in these notes to the financial statements
as “Maximilian”), which provided for a revolving credit facility of up to $20 million, that matured on October 31,
2016, with a minimum commitment of $2.5 million. On October 31, 2016 through the Fourth Amendment to the Amended and Restated
Loan and Security Agreement, the maturity date of the loan was changed to February 28, 2020. 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 credit facility to $90 million and reduced the annual interest rate
to 12%. 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 being amortized over the term of the amended
loan agreement. 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 a commitment by Maximilian to advance up to $250,000 in financing to the Company over the following six month period and the
pursuit of the Michigan exploratory joint drilling project using the $250,000 set aside from the Kentucky Sale. As a result
of the decline in hydrocarbon prices that started in June of 2014, the Company has been unable to make any type of interest or
principal payments required under the amended terms of its credit facility with Maximilian since December of 2015. Under the terms
of the Restructuring Amendment all unpaid interest is currently being accrued. Historically, 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
Promissory Note – Michigan Exporatory Joint Drilling Project As of May
31, 2017, the Company had received $94,650 in aggregate from multiple advances starting in the year ended February 28, 2017 from
Maximilian under a separate promissory note agreement dated January 17, 2017 and amended on February 10, 2017 regarding the development
of an exploratory joint drilling 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 exploratory joint
drilling 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 exploratory joint drilling project or (b)
December 31, 2017. If there is not a well scheduled to be spudded at the Michigan exploratory joint drilling 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 exploratory joint drilling 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. 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. 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 in ASC 835-30 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 May 31, 2017 and February 28, 2017, respectively. Current debt
balances at May 31, 2017 and February 28, 2017 are set forth in the table below:
May
31, 2017 February
28, 2017
Credit facility balance $ 8,995,444 $ 8,960,444
Less unamortized discount and debt issuance
costs (136,148) (238,598)
Subtotal – O&G operating debt 8,859,296 8,721,846
Michigan exploratory joint drilling debt 94,650 84,000
Net debt $ 8,953,946 $ 8,805,846
May
31, 2017 February
28, 2017
Deferred financing costs – loan fees $ 181,648 $ 181,648
Deferred financing costs – loan commissions 630,662 630,662
Deferred financing costs – fair value
of warrants 530,488 530,488
Deferred financing costs – fair value
of common stock 419,832 419,832
1,762,630 1,762,630
Accumulated amortization (1,626,482) (1,524,032)
$ 136,148 $ 238,598 Deferred
financing cost balances of $136,148 and $238,598 at May 31, 2017 and February 28, 2017, respectively includes the fair value of
common shares and warrants issued to Maximilian and to a third party that assisted in both the original and the amended financing
transactions. The unamortized deferred financing costs are netted against debt in the balance sheets. Amortization expense of
deferred financing costs was $102,450 and $107,524, respectively for the three months ended May 31, 2017 and 2016. Encumbrances The Company’s
debt obligations, pursuant to the above mentioned credit facility loan agreement and promissory notes entered into by and between
Maximilian and the Company are secured by a perfected first priority security interest in substantially all of the personal property
of the Company, and two mortgages; one covering its leases in California and the other covering its leases in Michigan. 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 offering to accredited investors,
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 Notes were extended
for an additional two years to January 29, 2019. There are ten noteholders, holding 980,000 warrants, who have not yet exercised
their warrants. The exercise price of the associated warrants was lowered from $0.14 to $0.07 as a part of the Note maturity extension.
The Notes principal of $565,000 is payable in full at the amended maturity date of the Notes. 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. Amortization expense was $3,635 and $-0-, respectively at May 31, 2017 and 2016. The
unamortized debt discount at May 31, 2017 and February 28, 2017 was $24,229 and 27,864, respectively. 12% Note balances
at May 31, 2017 and February 28, 2017 are set forth in the table below:
May
31, 2017 February
28, 2017
12% Subordinated Notes $ 315,000 $ 315,000
Debt discount (13,508) (15,535)
Net 12% Subordinated Note balance $ 301,492 $ 299,465 12% Note balances
– related parties at February 28, 2017 and February 29, 2016 are set forth in the table below:
May
31, 2017 February
28, 2017
12% Subordinated Notes – related party $ 250,000 $ 250,000
Debt discount (10,721) (12,329)
Net 12% Subordinated Note – related party
balance $ 239,279 $ 237,671 |
