| Short-Term and Long-Term Borrowings | NOTE
8 — SHORT-TERM AND LONG-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. The 980,000 warrants held by ten noteholders expired
on January 29, 2019. The Company
has informed the Note holders that the payment of principal and final interest will be late and is subject to future financing
being completed. The Notes principal of $565,000 was payable in full at the amended maturity date of the Notes, and has
not been paid. The terms of the Notes, state that should the Board of Directors 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. There
was no unamortized debt discount remaining at May 31, 2019 and February 28, 2019. 12% Note balances at May 31, 2019 and February
28, 2019 are set forth in the table below:
May
31, 2019 February
29, 2019
12% Subordinated
Notes $ 315,000 $ 315,000
12% Subordinated
Notes, related party 250,000 250,000
Total 12% Subordinated
Note balance $ 565,000 $ 565,000 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. During the
three months ended May 31, 2019 and 2018, the Company received advances on the line of credit of $29,000 and $-0-, respectively.
During the three months ended May 31, 2019 and 2018, the Company made payments to the line of credit of $15,000 and $65,000,
respectively. Interest converted to principal for the three months ended May 31, 2019 and 2018 was $7,787 and $7,563, respectively.
At May 31, 2019 and February 28, 2019, the line of credit had an outstanding balance of $848,640 and $826,853, respectively. Note Payable In December
2018, the Company was able to settle an outstanding balance owed to one of its third-party vendors. This settlement resulted
in a $120,000 note payable issued to the vendor. Additionally, the Company agreed to issue 2,000,000 shares of the Company’s
common stock as a part of the settlement agreement. Based on the closing price of the Company’s common
stock on the date of the settlement agreement, the value of the common stock transaction was determined to be $6,000. The
common stock shares were issued during the three months ended May 31, 2019. The note has a maturity date of January 1, 2022
and bears an interest rate of 10% rate per annum. Monthly interest is accrued and payable on January 1 st Production
Revenue Payable Since December
2018, the Company has been selling interests in certain portions of its production in order to fund the drilling of future wells
in California and Michigan and to settle some of its historical debt. The purchasers of production payment interests receive
a production revenue payment on future wells to be drilled in California and Michigan in exchange for their purchase. As
of May 31, 2019, the sales of production payment interests had raised $700,000 of which $300,000 of proceeds were received from
a related party - the Company’s Chairman, President and Chief Executive Officer. The production
payment interest entitles the purchasers to receive production payments equal to twice their original amount paid, payable from
a percentage of the Company’s future net production payments from wells drilled after the date of the purchase and until
the Production Payment Target (as described below) is met. The Company shall pay fifty percent of its net production payments
from the relevant wells to the purchasers until each purchaser has received two times the purchase price (the “Production
Payment Target”). Once the Company pays the purchasers amounts equal to the Production Payment Target, it shall thereafter
pay a pro-rated eight percent of $1.3 million on its net production payments from the relevant wells to each of the purchasers.
However, if the Production Payment Target is not met within the first three years, the Company shall pay seventy-five percent
of its production payments from the relevant wells to the purchasers until the Production Payment Target is met. The Company
accounted for the amounts received from these sales in accordance with ASC 470-10-25 and 470-10-35 which require amounts recorded
as debt to be amortized under the interest method as described in ASC 835-30, Interest Method. Consequently, the net proceeds
received of $700,000 was recognized as a production revenue payable. The Company determined an effective interest rate based
on future expected cash flows to be paid to the holders of the production payment interests. This rate represents the discount
rate that equates estimated cash flows with the initial proceeds received from the sales and is used to compute the amount of
interest to be recognized each period. Estimating the future cash outflows under this agreement requires the Company to
make certain estimates and assumptions about future revenues and payments and such estimates are subject to significant variability.
Therefore, the estimates are likely to change which may result in future adjustments to the accretion of the interest expense
and the amortized cost based carrying value of the related payables. Accordingly,
the Company has estimated the cash flows associated with the production revenue payments and determined a discount of $1,320,353
which is being accounted as interest expense over the estimated period over which payments will be made based on expected future
revenue streams. For the three months ended May 31, 2019, amortization of the debt discount on these payables amounted to
$124,923 which has been included in interest expense in the statements of operations. Production
revenue payable balances at May 31, 2019 and February 28, 2019 are set forth in the table below:
May
31, 2019 February
28, 2019
Estimated payments of production revenue payable $ 2,020,353 $ 2,020,353
Less: unamortized discount (1,118,842) (1,243,765)
901,511 776,588
Less: current portion (469,386) (247,868)
Net production revenue payable – long
term $ 432,125 $ 528,720 Encumbrances On October
17, 2018, a working interest partner in California filed a UCC financing statement in regards to payables owed to the partner
by the Company. As of May 31, 2019, we had no encumbrances on our crude oil project in Michigan. |
