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EX-31.1 - Westport Energy Holdings Inc.ex31-1.htm
EX-32.1 - Westport Energy Holdings Inc.ex32-1.htm
EX-31.2 - Westport Energy Holdings Inc.ex31-2.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2014.

 

[  ] Transition report under Section 13 or 15(d) of the Exchange Act

 

For the transition period from                            to                                 .

 

Commission file number 000-28887

 

WESTPORT ENERGY HOLDINGS INC.

(Formerly Carbonics Capital Corporation)

(Exact name of registrant as specified in its Charter)

 

 Delaware    22-3328734

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

100 Overlook Center, 2nd Floor

Princeton, NJ 08540

(Address of Principal Executive Offices)

 

(609) 498-7029

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer and “smaller reporting company” in Rule 12b-2 or the Exchange Act. (Check one):

 

  Large Accelerated filer [  ] Accelerated Filer [  ]
         
  Non-Accelerated Filer [  ] Smaller Reporting Company [X]
(Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

 

Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes [  ] No [X]

 

As of November 2, 2015 the Registrant had the following number of shares of its capital stock outstanding: 578,346 shares of Common Stock, par value $0.0001and 921,890 shares of Series C Preferred Stock, par value $0.001, which are convertible, in accordance with their terms, into a number of shares of Common Stock equal to 73.75% of the fully-diluted outstanding shares of Common Stock.

 

 

 

   
 

 

Table of Contents

 

  Page

Part I. Financial Information

F-1
   
Item 1: Financial Statements (Unaudited) F-1
   
Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013 F-1
   
Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2014 and 2013 F-2
   
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2014 and 2013 F-3
   
Notes to Condensed Consolidated Financial Statements F-4
   
Item 2: Management’s Discussion and Analysis 4
   
Item 3: Quantitative and Qualitative Disclosures About Market Risk 7
   
Item 4: Controls and Procedures 7
   
Part II. Other Information 8
   
Item 1: Legal Proceedings 8
   
Item 1A: Risk Factors 8
   
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 8
   
Item 3: Defaults Upon Senior Securities 8
   
Item 4: Mine Safety Disclosures 8
   
Item 5: Other Information 8
   
Item 6: Exhibits 8
   
Signatures 9

  

  2 
 

  

Disclosure Regarding Forward-Looking Statements

 

Certain statements in the Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission, all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Westport Energy Holdings Inc. (the “Company”) or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words, “plan”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “may”, “will”, “would”, “could”, “should”, “seeks”, or “scheduled to”, or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. The Company cautions investors that any forward-looking statements made by the Company are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to the Company, include, but are not limited to, the risks and uncertainties affecting its businesses described in Items 1 and 1A of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2013 and in registration statements and other securities filings by the Company. Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any of the forward-looking statements and are subject to change due inherent risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.

  

  3 
 

 

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

 

WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

  

   June 30, 2014   December 31, 2013 
ASSETS          
           
Assets          
Cash and cash equivalents  $370,235   $54,157 
Restricted cash   426,390    677,193 
Prepaid and other current assets   14,883    20,687 
Total current assets   811,508    752,037 
           
Note receivable   150,000    150,000 
Oil and gas properties, unproven   4,717,000    4,717,000 
           
Total assets  $5,678,508   $5,619,037 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY          
           
Current Liabilities:          
Senior secured convertible debenture, net of discount  $30,443,223   $30,643,123 
Account payable and accrued expenses   264,884    395,817 
Convertible debentures   6,083,026    6,083,026 
Accrued interest   14,022,368    12,306,160 
Derivative liability   3,075,000    3,424,000 
Total current liabilities   53,888,501    52,852,126 
           
Long-Term Liabilities:          
Senior secured convertible debenture, net of discount   310,729    - 
Total liabilities   54,199,230    52,852,126 
           
Stockholders’ Deficiency:          
Preferred stock, $0.001 par value, 1,000,000 shares authorized
Series C Voting Convertible, 921,890 shares issued and outstanding
 
 
 
 
 
921
 
 
 
 
 
 
 
921
 
 
Common stock, $0.0001 par value; 2,000,000,000 shares authorized; 578,346 shares issued and outstanding   58    58 
Additional paid-in capital   (9,584,242)   (9,584,242)
Accumulated deficit   (38,937,459)   (37,649,826)
Total stockholders’ deficiency   (48,520,722)   (47,233,089)
Total liabilities and stockholders’ deficiency  $5,678,508   $5,619,037 

  

  F-1 
 

 

WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2014   2013   2014   2013 
Net sales  $-   $-   $-   $- 
Cost of sales   -    -    -    - 
    -    -    -    - 
                     
Operating expenses                    
General and administrative expenses   209,361    135,382    456,750    327,730 
                     
Total operating expenses   209,361    135,382    456,750    327,730 
                     
Loss from operations   (209,361)   (135,382)   (456,750)   (327,730)
                     
Interest income (expense)   (961,044)   (997,759)   (1,859,883)   (1,925,412)
Change in fair value of derivative liability   (1,022,000)   1,827,000    1,029,000    2,824,000 
Other income   -    32,500    -    32,500 
Income (Loss) before income tax provision   (2,192,405)   726,359    (1,287,633)   603,358 
                     
Income tax provision   -    -    -    - 
                     
Net income (loss)  $(2,192,405)  $726,359   $(1,287,633)  $603,358 
                     
Basic income (loss) per common share  $(3.79)  $1.26   $(2.23)  $1.04 
                     
Diluted income (loss) per common share  $(3.79)  $0.01   $(2.23)  $0.01 
                     
Weighted average number of common shares outstanding - Basic   578,000    578,000    578,000    578,000 
                     
Weighted average number of common shares outstanding - Diluted   578,000    237,927,000    578,000    237,927,000 

 

  F-2 
 

 

WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

   Six Months Ended 
   June 30, 
   2014   2013 
Operating activities:          
Net Income (Loss)  $(1,287,633)  $603,358 
Adjustments to Reconcile Net Income (Loss) to Net Cash Used in Operating Activities:          
Change in fair value of derivative liability   (1,029,000)   (2,824,000)
Amortization of debt discount   137,782    225,750 
Changes in Assets and Liabilities          
Increase in Accounts receivable   -    (6,000)
Decrease in Prepaid and other current assets   5,804    15,073 
Increase (decrease) in accounts payable and accrued expenses   (124,940)   75,550 
Increase in accrued interest   1,716,208    1,700,330 
Net cash used in operating activities   (581,779)   (209,939)
           
Investing activities:          
Cash released from (placed under) restriction   250,803    (856)
           
Financing activities          
Proceeds from issuance of senior secured convertible debenture   647,054    200,000 
           
(Decrease) increase in cash   316,078    (10,795)
           
Cash and cash equivalents, beginning of period   54,157    35,049 
Cash and cash equivalents, end of period  $370,235   $24,254 
           
NONCASH INVESTING AND FINANCING ACTIVITIES          
Issuance of senior secured convertible debenture in exchange for note receivable  $-   $200,000 
Note receivable and accrued interest received in exchange for senior secured convertible debenture   -    164,831 
Debt discount derived from derivative liability - Senior Secured convertible debentures   720,000    211,000 
Debt discount on Senior Secured convertible debentures   28,235    - 
Other non-cash financing costs   5,993    35,169 
           
Total  $685,993   $511,000 

  

  F-3 
 

 

WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. Basis of Presentation and Nature of Organization

 

Nature of Operations

 

Westport Energy Holdings Inc.’s wholly owned subsidiary, Westport Acquisition LLC and its wholly owned subsidiary, Westport Energy, LLC (the Company), was formed in December 2008, in the State of Delaware, as a limited liability company. Westport Energy is an exploration stage company engaged in the exploration for coalbed methane in the Coos Bay region of Oregon. Westport Energy holds leases to approximately 62,668.07 acres of prospective coalbed methane lands in the Coos Bay Basin.

 

The Company’s common stock is traded on the OTC Pink Marketplace under the symbol WPTH.

 

Basis of Presentation of Interim Financial Statements

 

The accompanying unaudited condensed consolidated financial statements were prepared by the Company pursuant to the rules and regulations of the SEC and, in the opinion of management, include all adjustments (consisting of normal recurring accruals and adjustments necessary for adoption of new accounting standards) necessary to present fairly the results of the interim periods shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. The results for the interim periods are not necessarily indicative of results for the full year.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Westport Energy Holdings Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Liquidity and Going Concern

 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has recurring deficits, a large accumulated deficit and is in the exploration stage of development, and has no revenues. These items raise substantial doubt about the Company’s ability to continue as a going concern. In view of these matters, realization of the assets of the Company is dependent upon the Company’s ability to meet its financial requirements and the success of future operations.

 

In addition, as of June 30, 2014, the Company is not compliant with the repayment terms of the convertible notes and is in technical default. The senior secured convertible debentures have cross-default provisions within the agreement, which necessitated their classification as a current liability. All convertible debentures are currently due and the Company continues to work with the note holders to remediate the default.

 

The Company’s future success is dependent upon its ability to achieve profitable operations and raise the appropriate funds needed. There is no guarantee whether the Company will be able to generate enough revenue and or raise capital to support these operations.

 

The Company cannot predict how long it will continue to incur further losses or whether it will ever become profitable, or if its business will improve. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

  

  F-4 
 

 

WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2. Summary of Significant Accounting Policies

 

There have been no material changes during 2014 in the Company’s significant accounting policies to those previously disclosed in the 2013 Form 10K.

 

Fair Value Framework

 

The following table reconciles, for the six months ended June 30, 2014, the beginning and ending balances for financial instruments that are recognized at fair value using level 3 inputs in the condensed consolidated financial statements:

 

Balance of derivative liability as of December 31, 2013  $3,424,000 
Additional liability incurred   680,000 
Change in fair value during period   (1,029,000)
      
Balance at June 30, 2014  $3,075,000 

 

Level 3 financial instruments consist of certain embedded conversion features in the Company’s convertible debentures and senior secured convertible debentures. The fair value of these embedded conversion features are measured using the Black-Scholes model. The Company computes valuations each quarter, using Black-Scholes model calculations. The unobservable input used by the Company was the estimation of the volatility of the Company’s stock price over the remaining term of the convertible debentures, which were measured at 110% at June 30, 2014.

 

Changes in unobservable input values would likely cause material changes in fair value of the Company’s Level 3 financial instruments. The significant unobservable input used in the fair value measurement is the estimation of the volatility of the Company’s common stock. A significant increase (decrease) in the volatility would result in a higher (lower) fair value measurement.

 

Net Loss per Share of Common Stock

 

The Company’s basic loss per common share is based on net loss for the relevant period, divided by the weighted average number of common shares outstanding during the period. Diluted income per common share is based on net income, divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options and beneficial conversion of related party accounts. Diluted loss per share does not include common stock equivalents, as these shares would have no effect. The computation of diluted loss per share also does not assume conversion, exercise or contingent exercise of securities due to the beneficial conversion of related party accounts, as this would be anti-dilutive.

 

  F-5 
 

 

WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The computation of basic and diluted net loss attributable to common stockholders is as follows:

 

   Three Months Ended   Six Months Ended 
   June 30, 2014   June 30, 2013   June 30, 2014   June 30, 2013 
                 
Income (loss) attributable to common stockholders  $(2,192,405)  $726,359   $(1,287,633)  $603,358 
–Effect on interest expense – convertible debenture conversions   -    834,376    -    1,665,160 
–Numerator for diluted earnings per share after assumed debenture conversions   (2,192,405)   1,560,735    (1,287,633)   2,268,518 
Weighted average common shares outstanding   578,000    578,000    578,000    578,000 
Dilutive Securities:                    
Shares underlying convertible preferred stock and secured and senior secured convertible debentures   -    237,349,000    -    237,349,000 
Diluted weighted average common shares outstanding and assumed conversion   578,000    237,927,000    578,000    237,927,000 
Basic income (loss) per share  $(3.79)  $1.26   $(2.23)  $1.04 
Diluted income (loss) per share  $(3.79)  $0.01   $(2.23)  $0.01 

 

Potentially Dilutive Securities

 

The following table summarizes the potentially dilutive securities which were excluded from the above computation of basic net loss per share of common stock due to their anti-dilutive effect in a net loss situation:

 

   June 30, 2014 
Senior secured convertible debentures   48,696,000 
      
Convertible debentures   13,182,000 
      
Series C convertible preferred stock   175,472,000 

 

3. Oil and Gas Properties, Unproven

 

Summary

 

As of June 30, 2014 the remaining capitalized costs of Oil and Gas Properties, unproved are summarized as follows:

 

   Acquisition Costs   Impairment   Total 
Coos Bay Basin Property               
Year ended 2008  $24,141,000   $-   $24,141,000 
Year ended 2009   -    -    - 
Year ended 2010   -    (3,041,000)   (3,041,000)
Year ended 2011   -    (10,625,000)   (10,625,000)
Year ended 2012   -    (5,758,000)   (5,758,000)
Year ended 2013   -    -    - 
6 months ended June 30, 2014   -    -    - 
Total  $24,141,000   $(19,424,000)  $4,717,000 

 

  F-6 
 

 

WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Impairment – Chehalis Basin Property

 

In January 2010, the Company determined that the cost to continue exploration of the Chehalis Basin Property outweighed the benefit in which they projected. Therefore, lease agreements were not renewed with the owners and the asset balance was fully impaired. This resulted in an impairment of approximately $1,331,000 during the first quarter of 2010.

 

On May 13, 2010, the Company received formal notice from Washington State Department of Natural Resources that these leases had been cancelled and forfeited effective May 7, 2010.

 

Impairment

 

During the fourth quarter of 2012 and 2011, the Company determined that the carrying cost of the Coos Bay property exceeded the fair value of the property by approximately $5,758,000 and $10,625,000, respectively. The fair value of the property was independently valued based upon a discounted cash flow using management’s estimates, which are considered level 3 inputs. The differences were recorded as impairment charges in the statement of operations.

 

On February 26, 2014 Westport entered into an agreement with the State of Oregon, acting through the Department of State Lands (“DSL”) pursuant to which (i) Westport would pay to DSL $59,648 in delay rent pursuant to nine separate oil and gas leases between Westport and DSL (the “DSL Leases”); (ii) Westport would quitclaim all of its right, title and interest in all lands subject to the DSL Leases and thereby surrender and terminate the DSL Leases; and (iii) DSL would return directly to Westport’s issuing bank for cancellation of the $250,000 letter of credit issued pursuant to the DSL leases. Immediately following the agreement, all of the required acts pursuant to the agreement were consummated by each party resulting in the quitclaim by Westport of a total of 11,936.8 acres.

  

4. Environmental Matters

 

The Company has established procedures for a continuing evaluation of its operations to identify potential environmental exposures and to assure compliance with regulatory policies and procedures. Management monitors these laws and regulations and periodically assesses the propriety of its operational and accounting policies related to environmental issues. The nature of the Company’s business requires routine day-to-day compliance with environmental laws and regulations. The Company incurred no material environmental investigation, compliance and remediation costs for the six months ended June 30, 2014 and 2013. The Company is unable to predict whether its future operations will be materially affected by these laws and regulations. It is believed that legislation and regulations relating to environmental protection will not materially affect the results of operations of the Company.

  

5. Convertible Debentures, Derivative Liability, and Debt Discount

 

The following is a summary of the Company’s convertible debenture arrangements:

 

Convertible debentures:

 

   Conversion Price   June 30, 2014   December 31, 2013 
Due December 2010 – 5%   0.50   $592,000   $592,000 
Due December 2010 – 12%   0.45    570,000    570,000 
Due December 2010 – 5%   0.50    921,000    921,000 
Due December 2011– 12%   0.45    4,000,000    4,000,000 
Debt discount   -    -    - 
Total convertible debentures       $6,083,000   $6,083,000 

 

The convertible debentures (“debentures”), plus accrued interest are convertible into common stock of the Company at a conversion rate generally based on the lower of $500 or 90% of the average of the three lowest closing market prices of the Company’s stock for the thirty days preceding conversion, subject to adjustment and beneficial ownership limitations.

 

  F-7 
 

 

WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following is a summary of the Company’s senior secured convertible debenture arrangements:

 

Senior secured convertible debentures:

 

   Conversion Price   June 30, 2014   December 31, 2013 
Due August 2012 – 9%   0.65   $27,641,000   $27,641,000 
Due August 2012 – 9%   0.45    650,000    650,000 
Due August 2012 – 9%   0.45    120,000    120,000 
Due December 2013– 9%   0.45    910,000    910,000 
Due December 2013– 9%   0.45    172,000    172,000 
Due December 2013– 9%   0.45    200,000    200,000 
Due December 2013– 9%   0.45    25,000    25,000 
Due December 2013– 9%   0.45    25,000    25,000 
Due December 2013– 9%   0.45    50,000    50,000 
Due December 2013– 9%   0.45    50,000    50,000 
Due December 2013– 9%   0.45    75,000    75,000 
Due December 2013– 9%   0.45    100,000    100,000 
Due December 2013– 9%   0.45    50,000    50,000 
Due December 2013– 9%   0.45    50,000    50,000 
Due December 2013– 9%   0.45    50,000    50,000 
Due December 2013– 9%   0.45    25,000    25,000 
Due December 2013– 9%   0.45    200,000    200,000 
Due December 2013– 9%   0.45    25,000    25,000 
Due December 2013– 9%   0.45    25,000    25,000 
Due December 2013– 9%   0.45    100,000    100,000 
Due December 2013– 9%   0.45    -    100,000 
Due December 2013– 9%   0.45    -    50,000 
Due December 2013– 9%   0.45    -    50,000 
Due February 2016– 9%   0.45    540,000    - 
Due February 2016– 9%   0.45    381,000    - 
Debt discount   -    (610,000)   - 
Total senior secured convertible debentures       $30,754,000   $30,643,000 

 

The senior secured convertible debentures (“senior debentures”), plus accrued interest are convertible into common stock at various conversion rates which are subject to adjustment and beneficial ownership limitations. The conversion rates are subject to reduction based on the volume weighted average price (“VWAP”) for the period preceding the conversion date or other date of determination, based upon the contractual provisions included in the debenture agreements.

 

The senior debentures are secured by a Guaranty and Security agreement dated August 17, 2010 provided by Westport Energy and Westport Acquisition provided to NEC and YA Global pursuant to which the guarantors unconditionally and irrevocably guarantee the full payment and performance of obligations the Company owes to NEC. In addition, the grantors of the security agreement grant to NEC security interest in all the assets and personal property of each grantor in order to secure the obligations under the NEC note.

 

In May 2013, the Company issued a senior secured convertible debenture to YA Global in the principal amount of $200,000. The debenture was issued in consideration for the assignment from YA Global to the Company of a debenture issued by another entity to YA Global with an original principal amount of $150,000 plus accrued interest of $14,831. The Company recognized the remaining $35,169 as a financing fee included as interest expense.

 

On February 5, 2014, the Company entered into a securities purchase agreement (the “SPA”) with YA Global Investments, L.P., pursuant to which YA Global agreed to purchase a convertible debenture in the original principal amount of $1,080,000. This debenture has a maturity date of February 6, 2016 and bears interest at the rate of 12% per annum, which interest shall be paid in eighteen consecutive monthly payments no later than the fifteenth day of each month commencing on August 15, 2014. The holder of this debenture is entitled to convert the principal and accrued interest on the debenture into common stock of the Company at a conversion rate equal to 90% of the lowest daily VWAP of the common stock during the 10 consecutive trading days immediately preceding the conversion date or other date of determination, subject to adjustment as provided for in the debentures.

 

  F-8 
 

 

WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Pursuant to the terms of the SPA, the purchase price for Debenture CICS-28 was paid as follows: (A) $200,000 was paid by the surrender by YA Global for cancelation of Secured Convertible Debenture No. CICS-25 issued by Westport to YA Global on August 20, 2013 in the original principal amount of $100,000, Secured Convertible Debenture No. CICS-26 issued by Westport to YA Global on November 1, 2013 in the original principal amount of $50,000 and Secured Convertible Debenture No. CICS-27 issued by Westport to YA Global on December 19, 2013 in the original principal amount of $50,000 and (B) $800,000 was paid by wire transfer of immediately available funds to the account of Westport. As of June 30, 2014, $152,946 of these funds remained unpaid.

 

Pursuant to the SPA, Westport and YA Global also entered into a Royalty Agreement dated February 5, 2014 pursuant to which Westport agreed to pay YA Global a royalty equal to 25% of “Net Sales” from certain gas wells identified as the “Allocated Wells” under the SPA (the “Initial YA Royalty Agreement”).

 

Following the execution of the SPA, Debenture CICS-28 and the Initial YA Royalty Agreement, YA Global entered into a Non-Recourse assignment agreement with Queensbury, Inc. (“Queensbury”), dated February 5, 2014, pursuant to which YA Global assigned one-half (1/2) of its 25% royalty under the Initial YA Royalty Agreement to Queensbury (the “Queensbury Assignment”) and notified Westport of such assignment by letter dated February 5, 2014 (the “Assignment Notice Letter”).

 

Following the Queensbury Assignment and receipt by Westport of the Assignment Notice Letter, YA Global and Westport cancelled Debenture CICS-28 and the Initial YA Royalty Agreement and Westport then (i) issued to YA Global Debenture No. CICS-28A in the original principal amount of $540,000, which debenture was identical in form to Debenture No. CICS-28, except for the original principal amount of Debenture CICS-28A; (ii) issued to Queensbury Debenture No. CICS-28B in the original principal amount of $540,000, which debenture was identical in form to Debenture No. CICS-28, except for the original principal amount of Debenture CICS-28B; (iii) entered into a new Royalty Agreement with YA Global dated February 5, 2014, which was identical in form to the Initial YA Royalty Agreement except that the royalty thereunder is equal to 12.5% of the “Net Sales” from the Allocated Wells; and (iv) entered into a Royalty Agreement with Queensbury dated February 5,2014, which was identical in form to the Initial YA Royalty Agreement except that the royalty thereunder is equal to 12.5% of the “Net Sales” from the Allocated Wells.

 

Technical default

 

As of June 30, 2014 the Company is not compliant with the repayment terms of the convertible notes and is in technical default. The senior secured convertible debentures have cross-default provisions within the agreement, which necessitated their classification as a current liability. All convertible debentures are currently due and the Company continues to work with the note holders to remediate the default.

 

Derivative Liability –Conversion Option

 

Price protection features of the convertible debentures required the Company to treat the conversion options in the Company’s senior secured convertible debentures and convertible debentures as a derivative liability. The Company used the Black-Scholes option pricing model to calculate the fair value of the conversion options.

 

  F-9 
 

 

WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Assumptions utilized to calculate the fair value of the derivative liability were as follows:

 

   June 30, 2014   December 31, 2013 
Risk Free Interest Rate   1%   1%
Volatility   110%   138%
Term   .19 years    .08 years 
Dividend Rate   0%   0%
Closing Price of Common Stock  $0.50   $0.50 

 

6. Subsequent Events

 

On April 28, 2015, Westport quitclaimed all of its right, title and interest in all lands subject to the oil and gas lease between Westport and Coos County, a political subdivision of the State of Oregon (“Coos County”) dated June 19, 2002 (the “Coos County Lease”) and thereby surrendered and terminated the Coos County Lease. In addition, the $100,000 letter of credit issued pursuant to the Coos County Lease was returned by Coos County directly to Westport’s issuing bank for cancellation. Westport quitclaimed a total of 29,002 acres as a result of the surrender and termination of the Coos County Lease.

 

As of October 2015, Westport maintains oil and gas leases covering approximately 26,708acres, but intends to concentrate its CBM gas development efforts on wells sites located on the property leased under Westport’s oil and gas lease with Menasha Development Corporation (the “Menasha Lease”). The Menasha Lease covers 16,427.23 acres and can accommodate approximately 51 wells, five of which are already drilled and in the final stages of connection to the nearby gas pipeline.

 

On September 9, 2015, the Company issued to YA Global, L.P., a senior secured convertible debenture in the principal amount $150,000. The debenture bears interest at the rate of 9% per annum, payable at maturity. The maturity date of the note was December 31, 2016. The holder of the debenture is entitled to convert the principal and accrued interest into common stock of the Company at a conversion rate equal to the lesser of $15 (fixed conversion price) or 90% of the lowest daily VWAP of the common stock during the 10 consecutive trading days immediately preceding the conversion date or other date of determination, subject to adjustment as provided for in the debenture.

  

  F-10 
 

 

Item 2. Management’s Discussion and Analysis

 

Certain statements set forth under this caption constitute “forward-looking statements.” See “Disclosure Regarding Forward-Looking Statements” on page 1 of this Report for additional factors relating to such statements. The following discussion should also be read in conjunction with the condensed consolidated financial statements of the Company and Notes thereto included elsewhere herein and the Company’s Annual Report on Form 10-K.

 

The financial statements contained herein include the results of Westport Energy Holdings Inc. and its subsidiaries, which are collectively referred to as the “Company.”

 

Results of Operations – six months ended June 30, 2014 compared to six months ended June 30, 2013

 

Revenues

 

There were no revenues from continuing operations for the six months ended June 30, 2014 and 2013.

 

Cost of Revenues

 

There was no cost of revenues for the six months ended June 30, 2014 and 2013.

 

Net Loss

 

The Company had a net loss of approximately $1,288,000 for the six months ended June 30, 2014 versus a net loss of approximately $603,000 for the six months ended June 30, 2013.

 

The increased net loss was predominately the result of the decreased change in derivative liability, which resulted in a gain of approximately $1,029,000 in the six months ended June 30, 2014 compared to a gain of approximately $2,824,000 during the six months ended June 30, 2013. The overall decreased net income was also attributable to an increase in operating expenses from $328,000 during the six months ended June 30, 2013 to $457,000 during the six months ended June 30, 2014. This difference was offset by an increase in interest expense from approximately $1,925,000 during the six months ended June 30, 2013 to approximately $1,860,000 during the six months ended June 30, 2014, which was due to a decrease in debt discount amortization.

 

Operating Expenses:

 

General and administrative expenses

 

General and administrative fees and professional fees increased from approximately $328,000 for the six months ended June 30, 2013 to approximately $457,000 for the six months ended June 30, 2014.

 

Variance in individual expenses included in general and administrative fees and professional fees that constituted greater than 5% of total operating expenses during the six months ended June 30, 2014 and 2013 are as follows. Consulting and professional fees increased from approximately $255,000 during the six months ended June 30, 2013 to approximately $306,000 during the six months ended June 30, 2014. License fees increased from $14,000 during the six months ended June 30, 2013 to approximately $70,000 during the six months ended June 30, 2014.

 

We expect to incur significant additional professional fees as we continue to proceed with our exploration activities.

 

  4 
 

 

Results of Operations – three months ended June 30, 2014 compared to three months ended June 30, 2013

 

Revenues

 

There were no revenues from continuing operations for the three months ended June 30, 2014 and 2013.

 

Cost of Revenues

 

There was no cost of revenues for the three months ended June 30, 2014 and 2013.

 

Net Loss

 

The Company had a net loss of approximately $2,192,000 for the three months ended June 30, 2014 versus a net income of approximately $726,000 for the three months ended June 30, 2013.

 

The increased net loss was predominately the result of the decreased change in derivative liability, which resulted in a loss of approximately $1,022,000 in the three months ended June 30, 2014 compared to a gain of approximately $1,827,000 during the three months ended June 30, 2013. This difference was offset by a decrease in interest expense from approximately $998,000 during the three months ended June 30, 2013 to approximately $961,000 during the three months ended June 30, 2014.

 

Operating Expenses:

 

General and administrative expenses

 

General and administrative fees and professional fees increased approximately $74,000 from approximately $135,000 for the three months ended June 30, 2013 to approximately $209,000 for the three months ended June 30, 2014.

 

Variance in individual expenses included in general and administrative fees and professional fees that constituted greater than 5% of total operating expenses during the three months ended June 30, 2014 and 2013 are as follows. Consulting and professional fees increased from approximately $117,000 during the three months ended June 30, 2013 to approximately $185,000 during the three months ended June 30, 2014.

 

We expect to incur significant additional professional fees as we continue to proceed with our exploration activities.

 

Liquidity and Capital Resources

 

Our liquid assets, consisting of cash on hand, restricted cash and certificates of deposit were approximately $797,000 as of June 30, 2014. As of June 30, 2014 our working capital deficit was approximately $53 million.

 

We expect to incur significant additional professional fees as we proceed with our exploration activities, which will require additional financing. In addition, the Company will need to re-negotiate terms with the holders of our debentures as they become due. Currently, we do not have sufficient capital to meet the needs of our note holders and cannot predict when operations will commence, and if so, will provide enough capital resources to meet those needs.

 

During the six months ended June 30, 2014, the Company had a net increase in cash of approximately $316,000. Our principal sources and uses of funds were as follows:

 

Cash used in operating activities. For the six months ended June 30, 2014, the Company used approximately $582,000 in cash for operating activities as compared to approximately $210,000 for the six months ended June 30, 2013. This increase of approximately $372,000 was due primarily to the payment of general and administrative expenses accrued during the end of 2013 and during 2014.

 

Cash used in investing activities. For the six months ended June 30, 2014, the Company received approximately $251,000 in net cash from investing activities as compared to using approximately $1,000 for the six months ended June 30, 2013. This increase of approximately $250,000 was due primarily to the liquidation of a certificate of deposit account in connection with the quitclaim of certain lease rights.

 

  5 
 

 

Cash provided by financing activities. For the six months ended June 30, 2014, the Company received approximately $647,000 in cash from financing activities as compared to approximately $200,000 for the six months ended June 30, 2013. This increase of approximately $447,000 was due primarily to the proceeds from the issuance of a senior secured convertible debenture during the period.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

 

We have identified below the accounting policies related to what we believe are most critical to our business operations and are discussed throughout Management’s Discussion and Analysis of Financial Condition or Plan of Operation where such policies affect our reported and expected financial results.

 

Oil and Gas Properties

 

The Company utilizes the successful efforts method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, interest costs relating to unproved properties, geological expenditures and direct internal costs are capitalized into the full cost pool. As of June 30, 2014, the Company has no properties with proven reserves. When the Company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects including capitalized interest, if any, are not amortized until proved reserves associated with the projects can be determined. If the future exploration of unproved properties is determined uneconomical, the amount of such properties will be added to the capitalized cost to be amortized. As of June 30, 2014, all of the Company’s oil and gas properties were unproved and were excluded from amortization.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Impairment of Long—Lived Assets

 

Long-lived assets, including oil and gas properties, are reviewed for impairment when circumstances indicate that the carrying value may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets with the future undiscounted net cash flows estimated by the Company to be generated by such assets. If the carrying amount exceeds the net undiscounted cash flows, the fair value of the assets are determined using appropriate valuation techniques. The impairment loss is the extent to which the carrying value of the assets exceeds the fair value of the assets.

 

Off Balance Sheet Arrangements

 

None.

 

  6 
 

 

Item 3. Quantative and Qualitative Disclosure About Market Risk

 

N/A

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2014.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statement for external purposes in accordance with U.S. generally accepted accounting principles. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Because of the inherent limitations in all control systems, internal controls over financial reporting may not prevent or detect misstatements. The design and operation of a control system must also reflect that there are resource constraints and management is necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls. Our management assessed the effectiveness of our internal controls over financial reporting for the quarter ended June 30, 2014 based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, our management concluded that during the period covered by this report, our internal controls over financial reporting were not effective. Management has identified the following material weaknesses in our internal controls over financial reporting:

 

lack of documented policies and procedures;
     
there is no effective separation of duties, which includes monitoring controls, between the members of management; and
     
lack of resources to account for complex and unusual transactions

 

Management is currently evaluating what steps, if any, can be taken in order to address these material weaknesses in light of our current management structure.

 

Changes in Internal Control over Financial Reporting

 

During the fiscal quarter ended June 30, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  7 
 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

N/A

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1 

  Section 302 Certification of Chief Executive Officer
     

31.2 

  Section 302 Certification of Chief Financial Officer
     

32.1 

  Section 906 Certification of Chief Executive Officer and Chief Financial Officer
     
101 INS   XBRL Instance Document
     
101 SCH   XBRL Schema Document
     
101 CAL   XBRL Calculation Linkbase Document
     
101 LAB   XBRL Label Linkbase Document
     
101 PRE   XBRL Presentation Linkbase Document
     
101 DEF   XBRL Definition Linkbase Document

 

  8 
 

  

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  WESTPORT ENERGY HOLDINGS INC.
     
Date: November 10, 2015 By: /s/ Stephen J. Schoepfer
  Name: Stephen J. Schoepfer
  Title: Chief Executive Officer
     
Date: November 10, 2015 By: /s/ Stephen J. Schoepfer
  Name: Stephen J. Schoepfer
  Title: Chief Financial Officer

 

  9 
 

 

EXHIBIT INDEX

 

31.1   Section 302 Certification of Chief Executive Officer*
     
31.2   Section 302 Certification of Chief Financial Officer*
     
31.3   Section 906 Certification of Chief Executive Officer and Chief Financial Officer*
     
101 INS   XBRL Instance Document**
     
101 SCH   XBRL Schema Document**
     
101 CAL   XBRL Calculation Linkbase Document**
     
101 LAB   XBRL Label Linkbase Document**
     
101 PRE   XBRL Presentation Linkbase Document**
     
101 DEF   XBRL Definition Linkbase Document**
     
     
*   Filed herewith
     
**   In accordance with Regulation S-T, the XBRL formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed.”

 

  10