| Short-Term and Long-Term Borrowings | NOTE
9 — SHORT-TERM AND LONG-TERM BORROWINGS: Current
debt (Short-term borrowings) Note
Payable – Related Party 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 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%. The Notes
principal of $565,000 is payable in full at the amended maturity date of the Notes. 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 $3,634 and $3,635, respectively at May 31, 2018 and 2017. The
unamortized debt discount at May 31, 2018 and February 28, 2018 was $9,692 and $13,326, respectively. 12% Note balances
at May 31, 2018 and February 28, 2018 are set forth in the table below:
May
31, 2018 February
28, 2018
12% Subordinated notes $ 315,000 $ 315,000
Debt discount (5,403) (7,429)
12% Subordinated notes balance, net $ 309,597 $ 307,571 12% Note balances
– related parties at May 31, 2018 and February 28, 2018 are set forth in the table below:
May
31, 2018 February
28, 2018
12% Subordinated notes – related party $ 250,000 $ 250,000
Debt discount (4,289) (5,897)
12% Subordinated notes – related party
balance, net $ 245,711 $ 244,103 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 amended 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, 2018,
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 - - -
Year Ended February
28, 2018 - - -
Three Months May
31, 2018 - - -
Totals
150,000 150,000 2 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. In August
2013, the Company amended its loan agreement with Maximilian thereby increasing 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 were amortized
over the term of the loan agreement. Due to the Company’s default on the Maximilian loan, all unamortized discount and deferred
financing costs were fully amortized during the twelve months ended February 28, 2018. 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. Accrued interest on the credit facility loan at
May 31, 2018 and February 28, 2018 was $2,363,369 and $1,812,128, respectively. The Company is currently considered to be in default
under the terms of its credit facility loan and interest is being accrued at the rate of 23.8% since March 1, 2018. Maximilian
is currently in receivership. The United States District Court for the Eastern District of New York, Southern Division has hired
consultants to assist in finding a new lender to assume the Maximilian credit facility. No assurances can be made as to who the
new lender will be or how the structure of the loan will affect the Company. Maximilian Promissory Note –
Michigan Exploratory Joint Drilling Project The Company
has a note payable loan balance to Maximilian of $94,650 as of May 31, 2018 and February 28, 2018. The Company has received $94,650
in aggregate from multiple advances since January 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. 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. Due to a lack
of available funding from Maximilian, we have been unable to spud a well on the Michigan project. The Company is currently considered
to be in default under the terms of its loan agreement. Maximilian is currently in receivership. The United States District Court
for the Eastern District of New York, Southern Division has hired consultants to assist in finding a new lender. No assurances
can be made as to who the new lender will be or how the structure of the loan will affect the Company. Accrued interest on the
Michigan promissory note at May 31, 2018 and February 28, 2018 was $6,368 and $5,158, respectively. During the three months ended
May 31, 2018 and 2017, the Company received advances of $-0- and $10,650. The $10,650 was paid directly to the Operator of the
Michigan project by Maximilian on the Company’s behalf. In accordance
with the guidance found in ASC-470-10-45, the entire balance of both the Maximilian credit facility loan and the Michigan loan
is presented under the current liabilities section of the balance sheets. Current debt balances at May 31, 2018 and February 28,
2018 are set forth in the table below:
May
31, 2018 February
28, 2018
Credit facility balance $ 9,063,144 $ 9,063,144
Michigan exploratory joint drilling debt 94,650 94,650
Subtotal debt 9,157,794 9,157,794
Accrued interest on credit facility and Michigan
exploratory joint drilling debt 2,369,737 1,817,287
Total Maximilian debt $ 11,527,531 $ 10,975.081 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. 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. On July 10, 2017, $700,000 of the outstanding line of credit balance was converted to a 24 month fixed term
annual interest rate of 3.244% with interest payable monthly. The remaining principal balance of the line of credit has a stated
reference rate of 0.249% + 337.5 basis points with interest payable monthly. The reference rate is based on the 30 day LIBOR (“London
Interbank Offered Rate”) and is subject to change from UBS. At May 31,
2018 and February 28, 2018, the line of credit had an outstanding balance of $815,913 and $873,350, respectively. During the three
months ended May 31, 2018 and 2017, the Company made payments to the line of credit of $65,000 and $15,000, respectively. Interest
incurred for the three months ended May 31, 2018 and 2017 was $7,564 and $9,059, respectively. |
