| Short-Term and Long-Term Borrowings | NOTE
8 — SHORT-TERM AND LONG-TERM BORROWINGS: Notes 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. Interest continues to accrue on the unpaid $565,000 principal balance. 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 November 30, 2019 and February 28, 2019. 12% Note balances
at November 30, 2019 and February 28, 2019 are set forth in the table below:
November
30, 2019 February
28, 2019
12% Subordinated Notes $ 315,000 $ 315,000
12% Subordinated Notes, related party 250,000 250,000
Total 12% Subordinated Notes balance $ 565,000 $ 565,000 12% Note balances
– accrued interest at November 30, 2019 and February 28, 2019 are set forth in the table below:
November
30, 2019 February
28, 2019
Accrued interest 12% Subordinated Notes $ 50,538 $ 21,955
Accrued interest 12% Subordinated Notes –
related party 204,986 182,301
Total accrued interest 12% Subordinated Notes $ 255,524 $ 204,256 The accrued
interest owed on the 12% Subordinated Note to the related party is presented on the Company’s Balance Sheets under the caption
Accounts payable – related party Accrued interest 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 percentage interest rate of 3.244% with interest payable monthly. On July 10, 2019, the 24 month fixed term
loan amount of $700,000 was renewed at the same annual percentage interest rate of 3.244% for an additional 24 months. 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. 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 to the vendor as a part of the settlement. Based on the closing price of the Company’s common stock on
the date of the settlement, the value of the common stock transaction was determined to be $6,000. The common stock shares
were issued during the nine months ended November 30, 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 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 program
balance of $950,100 has been 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 $1,666,614
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 nine months ended November 30, 2019, amortization of the debt discount on these payables amounted
to $336,658 which has been included in interest expense in the statements of operations. Production
revenue payable balances at November 30, 2019 and February 28, 2019 are set forth in the table below:
November
30, 2019 February
28, 2019
Estimated payments of production revenue payable $ 2,616,714 $ 2,020,353
Less: unamortized discount (1,253,368) (1,243,765)
1,363,346 776,588
Less: current portion (283,315) (247,868)
Net production revenue payable – long
term $ 1,080,031 $ 528,720 Encumbrances On October
17, 2018, a working interest partner in California filed a UCC financing statement in regards to payable amounts owed to the partner
by the Company. As of November 30, 2019, we had no encumbrances on our crude oil project in Michigan. |
