| Short-Term and Long-Term Borrowings | NOTE 7 — SHORT-TERM AND LONG-TERM
BORROWINGS: Convertible Promissory Note Payable –
Related Party During the twelve months ended February 29,
2020, the Company’s Chairman, President and Chief Executive Officer loaned the Company $27,835 for general operating expenses
under a Convertible Note Purchase Agreement. The Note had a maturity date of July 12, 2020 and carried no interest, fees or penalties.
By the terms of the Convertible Note Purchase Agreement, Mr. Westmoreland had also agreed to loan up to an additional $22,165 in
funding for the Company, if and when agreed upon, but this additional amount was not ever loaned pursuant to the Note. On July 12, 2020, the Convertible Promissory
Note issued on January 14, 2020 matured. The Note was not repaid in full on or prior to the maturity date, so, pursuant to the
terms of the conversion feature of the Convertible Promissory Note, the $27,835 balance of the Convertible Note was automatically
converted into the Company’s common stock shares on July 13, 2020. The conversion price was $0.004 per share resulting in
6,958,758 shares being issued. The balance of the Note was $-0- and $27,835 at August 31, 2020 and February 29, 2020, respectively. 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. As of August 31, 2020, no conversion of the unpaid principal
and interest into the Company’s common stock has occurred. The accrued interest on the 12% Notes at August 31, 2020 and February
29, 2020 was $306,421 and $272,428, respectively. There was no unamortized debt discount remaining at August 31, 2020 and February
29, 2020, respectively. 12% Note balances at August 31, 2020 and February
29, 2020 are set forth in the table below:
August 31, 2020 February 29, 2020
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 12% Note balances – accrued interest
at August 31, 2020 and February 29, 2020 are set forth in the table below:
August 31, 2020 February 29, 2020
Accrued interest 12% Subordinated Notes $ 78,914 $ 59,962
Accrued interest 12% Subordinated Notes – related party 227,507 212,466
Total accrued interest 12% Subordinated Notes $ 306,421 $ 272,428 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 Production Revenue Payable Since December 2018, the Company has been conducting
a fundraising program 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 will receive a production revenue payment on future wells to be drilled in California
and Michigan in exchange for their purchase. As of August 31, 2020, the production revenue payment program balance was $950,100
of which $550,100 was owed to 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 (8%) of $1.3
million on its net production payments from the relevant wells to each of the purchasers. However, if the total raised is less
than the target $1.3 million, then the payment will be a proportionate amount of the eight percent (8%). Additionally, 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 $1,188,117 as of August 31, 2020, 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 six months ended August 31, 2020 and 2019, amortization of the debt discount on these payables amounted to $66,652
and $215,129, respectively, which has been included in interest expense in the statements of operations. Production revenue payable balances at August
31, 2020 and February 29, 2020 are set forth in the table below:
August 31, 2020 February 29, 2020
Estimated payments of production revenue payable $ 2,138,217 $ 2,054,766
Less: unamortized discount (683,294 ) (666,495 )
1,454,923 1,388,271
Less: current portion (64,798 ) (43,069 )
Net production revenue payable – long-term $ 1,390,125 $ 1,345,202 Paycheck Protection Program (PPP) Loan On March 27, 2020, President Trump signed into
law the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act. One component of the CARES Act
was the paycheck protection program (“PPP”) which provides small business with the resources needed to maintain their
payroll and cover applicable overhead. The PPP is implemented by the Small Business Administration (“SBA”) with support
from the Department of the Treasury. The PPP provides funds to pay up to eight weeks of payroll costs including benefits. Funds
can also be used to pay interest on mortgages, rent, and utilities. The Company applied for, and was accepted to participate in
this program. On May 11, 2020, the Company received funding for approximately $74,355. The loan is a two-year loan with a maturity
date of May 5, 2022. The loan bears an annual interest rate of 1%. The loan shall be payable monthly with the first six monthly
payments deferred. It is the Company’s intent to apply for loan forgiveness under the provisions of Section 1106 of the CARES
Act. Loan forgiveness is subject to the sole approval of the SBA. The Company is eligible for loan forgiveness in an amount equal
to payments made during the 8-week period beginning on the Loan date, with the exception that no more than 25.0% of the amount
of loan forgiveness may be for expenses other than payroll expenses. The Company used all loan proceeds to partially subsidize
direct payroll expenses. 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, a $700,000 portion 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. 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. During the six months ended August 31, 2020
and 2019, the Company received advances on the line of credit of $-0- and $49,000, respectively. During the six months ended August
31, 2020 and 2019, the Company made payments to the line of credit of $30,000 and $30,000, respectively. Interest converted to
principal for the six months ended August 31, 2020 and 2019 was $14,706 and $15,684, respectively. At August 31, 2020 and February
29, 2020, the line of credit had an outstanding balance of $857,107 and $872,401, 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 twelve months ended February
29, 2020. 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 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 August 31,
2020, we had no encumbrances on our crude oil project in Michigan. |
