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 September 30, 2013.
[ ] 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 August 7, 2015 the Registrant had the following number of shares of its capital stock outstanding: 578,346 shares of Common Stock, par value $0.0001 and 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
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, 2012 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.
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | September 30, 2013 | | | December 31, 2012 | |
| ASSETS | | |
| Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 26,370 | | | $ | 35,049 | |
| Restricted cash | | | 677,193 | | | | 675,997 | |
| Accounts Receivable | | | 19,000 | | | | - | |
| Prepaid and other current assets | | | 25,365 | | | | 22,072 | |
| Total current assets | | | 747,928 | | | | 733,118 | |
| | | | | | | | | |
| Note receivable | | | 150,000 | | | | - | |
| Oil and gas properties, unproven | | | 4,717,000 | | | | 4,717,000 | |
| | | | | | | | | |
| Total assets | | $ | 5,614,928 | | | $ | 5,450,118 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | | | |
| | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Senior secured convertible debenture, net of discount | | $ | 30,298,890 | | | $ | 29,612,640 | |
| Account payable and accrued expenses | | | 308,049 | | | | 183,999 | |
| Convertible debentures | | | 6,083,026 | | | | 6,083,026 | |
| Accrued interest | | | 11,423,355 | | | | 8,909,386 | |
| Derivative liability | | | 1,643,000 | | | | 3,959,000 | |
| Total current liabilities | | | 49,756,320 | | | | 48,748,051 | |
| | | | | | | | | |
| 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 | | | (34,558,129 | ) | | | (33,714,670 | ) |
| Total stockholders’ deficiency | | | (44,141,392 | ) | | | (43,297,933 | ) |
| Total liabilities and stockholders’ deficiency | | $ | 5,614,928 | | | $ | 5,450,118 | |
See accompanying notes to condensed consolidated financial statements.
WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| Net sales | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Cost of sales | | | - | | | | - | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | |
| Impairment loss | | | - | | | | - | | | | - | | | | - | |
| General and administrative expenses | | | 181,349 | | | | 273,298 | | | | 509,079 | | | | 884,097 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 181,349 | | | | 273,298 | | | | 509,079 | | | | 884,097 | |
| | | | | | | | | | | | | | | | | |
| Loss from operations | | | (181,349 | ) | | | (273,298 | ) | | | (509,079 | ) | | | (884,097 | ) |
| | | | | | | | | | | | | | | | | |
| Interest income (expense) | | | (1,021,968 | ) | | | (1,117,742 | ) | | | (2,947,380 | ) | | | (3,595,053 | ) |
| Change in fair value of derivative liability | | | (270,000 | ) | | | 164,000 | | | | 2,554,000 | | | | 2,942,000 | |
| Losses from trading securities | | | - | | | | - | | | | - | | | | (1,440 | ) |
| Other Income | | | 26,500 | | | | - | | | | 59,000 | | | | - | |
| Income (Loss) before income tax provision | | | (1,446,817 | ) | | | (1,227,040 | ) | | | (843,459 | ) | | | (1,538,590 | ) |
| | | | | | | | | | | | | | | | | |
| Income tax provision | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (1,446,817 | ) | | $ | (1,227,040 | ) | | $ | (843,459 | ) | | $ | (1,538,590 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted income (loss) per common share | | $ | (2.50 | ) | | $ | (2.12 | ) | | $ | (1.46 | ) | | $ | (2.66 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average number of common shares outstanding - Basic | | | 578,000 | | | | 578,000 | | | | 578,000 | | | | 578,000 | |
See accompanying notes to condensed consolidated financial statements.
WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
| | | Nine Months Ended September 30, | |
| | | 2013 | | | 2012 | |
| Operating activities: | | | | | | | | |
| Net Loss | | $ | (843,459 | ) | | $ | (1,538,590 | ) |
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | | | | | | | | |
| Change in fair value of derivative liability | | | (2,554,000 | ) | | | (2,942,000 | ) |
| Unrealized (gains) losses on marketable securities | | | - | | | | 18 | |
| Amortization of debt discount | | | 399,250 | | | | 1,127,655 | |
| Other non-cash financing costs | | | 35,169 | | | | | |
| Changes in Assets and Liabilities | | | | | | | | |
| Accounts receivable | | | (19,000 | ) | | | - | |
| Prepaid and other current assets | | | 11,538 | | | | 31,933 | |
| Increase in accounts payable and accrued expenses | | | 124,050 | | | | (323,925 | ) |
| Increase in accrued interest | | | 2,513,969 | | | | 2,467,913 | |
| Net cash used in operating activities | | | (332,483 | ) | | | (1,176,996 | ) |
| | | | | | | | | |
| Investing activities: | | | | | | | | |
| Restricted cash | | | (1,196 | ) | | | (497,635 | ) |
| Proceeds from sale of trading securities | | | - | | | | 675,129 | |
| Purchases of trading securities | | | - | | | | (107,972 | ) |
| Net cash used in investing activities | | | (1,196 | ) | | | 69,522 | |
| | | | | | | | | |
| Financing activities | | | | | | | | |
| Line of credit | | | - | | | | (18,238 | ) |
| Proceeds from issuance of senior secured convertible debenture | | | 325,000 | | | | 300,000 | |
| Net cash provided by financing activities | | | 325,000 | | | | 281,762 | |
| | | | | | | | | |
| (Decrease) increase in cash | | | (8,679 | ) | | | (825,712 | ) |
| | | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 35,049 | | | | 856,061 | |
| Cash and cash equivalents, end of period | | $ | 26,370 | | | $ | 30,349 | |
| | | | | | | | | |
| 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 | | | 238,000 | | | | 114,000 | |
| Total | | $ | 602,831 | | | $ | 114,000 | |
See accompanying notes to condensed consolidated financial statements.
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 104,000 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 September 30, 2013, 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.
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 2013 in the Company’s significant accounting policies to those previously disclosed in the 2012 Form 10K.
Fair Value Framework
The following table reconciles, for the six months ended September 30, 2013, 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, 2012 | | $ | 3,959,000 | |
| Additional liability incurred | | | 238,000 | |
| Change in fair value during period | | | (2,554,000 | ) |
| | | | | |
| Balance at September 30, 2013 | | $ | 1,643,000 | |
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 72% at September 30, 2013.
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.
The computation of basic and diluted net loss attributable to common stockholders is as follows:
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, 2013 | | | September 30, 2012 | | | September 30, 2013 | | | September 30, 2012 | |
| Income (loss) attributable to common stockholders | | $ | (1,447,000 | ) | | $ | (1,227,000 | ) | | $ | (843,459 | ) | | $ | (1,539,000 | ) |
| Weighted-average common shares outstanding - basic | | | 578,000 | | | | 578,000 | | | | 578,000 | | | | 578,000 | |
| Basic and diluted income (loss) per share | | $ | (2.50 | ) | | $ | (2.12 | ) | | $ | (1.46 | ) | | $ | (2.66 | ) |
WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
| | | September 30, 2013 | | | September 31, 2012 | |
| Warrants | | | - | | | | 600 | |
| | | | | | | | | |
| Senior secured convertible debentures | | | 48,974,000 | | | | 47,307,400 | |
| | | | | | | | | |
| Convertible debentures | | | 13,181,600 | | | | 13,181,600 | |
3. Oil and Gas Properties, Unproven
Summary
As of September 30, 2013 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 | ) |
| 9 months ended September 30, 2013 | | | - | | | | - | | | | - | |
| Total | | $ | 24,141,000 | | | $ | (19,424,000 | ) | | $ | 4,717,000 | |
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.
WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine months ended September 30, 2013 and 2012. 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 | | | September 30, 2013 | | | December 31, 2012 | |
| 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.
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 | | | September 30, 2013 | | | December 31, 2012 | |
| 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 | | | | - | |
| Due December 2013 – 9% | | | 0.45 | | | | 50,000 | | | | - | |
| Due December 2013 – 9% | | | 0.45 | | | | 50,000 | | | | - | |
| Due December 2013 – 9% | | | 0.45 | | | | 25,000 | | | | - | |
| Due December 2013 – 9% | | | 0.45 | | | | 200,000 | | | | - | |
| Due December 2013 – 9% | | | 0.45 | | | | 25,000 | | | | - | |
| Due December 2013 – 9% | | | 0.45 | | | | 25,000 | | | | - | |
| Due December 2013 – 9% | | | 0.45 | | | | 100,000 | | | | - | |
| Debt discount | | | - | | | | (244,000 | ) | | | (405,000 | ) |
| Total senior secured convertible debentures | | | | | | $ | 30,299,000 | | | $ | 29,613,000 | |
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.
Technical default
As of September 30, 2013 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.
WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Assumptions utilized to calculate the fair value of the derivative liability were as follows:
| | | September 30, 2013 | | | December 31, 2012 | |
| Risk Free Interest Rate | | | 1 | % | | | 1 | % |
| Volatility | | | 72 | % | | | 47 | % |
| Term | | | .2 years | | | | .9 years | |
| Dividend Rate | | | 0 | % | | | 0 | % |
| Closing Price of Common Stock | | $ | 0.50 | | | $ | 0.50 | |
6. Subsequent Events
On various dates between October 1, 2013 the date of this report, the Company issued to YA Global, L.P., two senior secured convertible debentures, with aggregate principal amounts totaling $100,000. The debentures bear interest at the rate of 9% per annum, payable at maturity. The maturity date of the notes was December 31, 2013. The holder of the debentures 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 debentures.
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.
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.
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”).
WESTPORT ENERGY HOLDINGS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 $59,698 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 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 9,781 acres.
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 July 31, 2015, Westport maintains oil and gas leases covering approximately 26,708 acres, 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.
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 – nine months ended September 30, 2013 compared to nine months ended September 30, 2012
Revenues
There were no revenues from continuing operations for the nine months ended September 30, 2013 and 2012.
Cost of Revenues
There was no cost of revenues for the nine months ended September 30, 2013 and 2012.
Net Loss
The Company had a net loss of approximately $843,000 for the nine months ended September 30, 2013 versus a net loss of approximately $1,539,000 for the nine months ended September 30, 2012.
The decrease in net loss was predominately the result of a decrease in general and administrative expenses, which decreased from $884,000 to $509,000 combined with a change in interest expense from approximately $3,595,000 during the nine months ended September 30, 2012 to approximately $2,947,000 during the nine months ended September 30, 2013. This decrease was partially offset by the change in derivative liability, which resulted in a gain of approximately $2,554,000 in the nine months ended September 30, 2013 compared to a gain of approximately $2,942,000 during the nine months ended September 30, 2012.
Operating Expenses:
General and administrative expenses
General and administrative fees and professional fees decreased approximately $375,000 from approximately $884,000 for the nine months ended September 30, 2012 to approximately $509,000 for the nine months ended September 30, 2013.
Variance in individual expenses included in general and administrative fees and professional fees that constituted greater than 5% of total operating expenses during the nine months ended September 30, 2013 and 2012 are as follows. Mineral rights lease expense decreased from approximately $48,000 during the nine months ended September 30, 2012 to approximately $40,000 during the nine months ended September 30, 2013. Consulting and professional fees decreased from approximately $585,000 during the nine months ended September 30, 2012 to approximately $404,000 during the nine months ended September 30, 2013.
We expect to incur significant additional professional fees as we continue to proceed with our exploration activities.
Results of Operations – three months ended September 30, 2013 compared to three months ended September 30, 2012
Revenues
There were no revenues from continuing operations for the three months ended September 30, 2013 and 2012.
Cost of Revenues
There was no cost of revenues for the three months ended September 30, 2013 and 2012.
Net Loss
The Company had a net loss of approximately $1,447,000 for the three months ended September 30, 2013 versus a net loss of approximately $1,227,000 for the three months ended September 30, 2012.
The increase in net loss was predominately the result of the change in derivative liability, which resulted in a loss of approximately $270,000 in the three months ended September 30, 2013 compared to a gain of approximately $164,000 during the three months ended September 30, 2012. This difference was offset by a decrease in interest expense from approximately $1,117,000 during the three months ended September 30, 2012 to approximately $1,022,000 during the three months ended September 30, 2013.
Operating Expenses:
General and administrative expenses
General and administrative fees and professional fees decreased approximately $92,000 from approximately $273,000 for the three months ended September 30, 2012 to approximately $181,000 for the three months ended September 30, 2013.
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 September 30, 2013 and 2012 are as follows. Mineral rights lease expense decreased from approximately $17,000 during the three months ended September 30, 2012 to approximately $14,000 during the three months ended September 30, 2013. Consulting and professional fees decreased from approximately $192,000 during the three months ended September 30, 2012 to approximately $149,000 during the nine months ended September 30, 2013.
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 $704,000 as of September 30, 2013. As of September 30, 2013 our working capital deficit was approximately $49 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 nine months ended September 30, 2013, the Company had a net decrease in cash of approximately $9,000. Our principal sources and uses of funds were as follows:
Cash used in operating activities. For the nine months ended September 30, 2013, the Company used approximately $332,000 in cash for operating activities as compared to approximately $1,177,000 for the nine months ended September 30, 2012. This decrease of approximately $845,000 was due primarily to the payment of general and administrative expenses accrued during the end of 2011 and during 2012.
Cash provided by investing activities. For the nine months ended September 30, 2013, the Company used approximately $1,000 in net cash from investing activities as compared to receiving approximately $70,000 for the nine months ended September 30, 2012. This change of approximately $71,000 was due primarily to activity in trading securities during the period.
Cash provided by financing activities. For the nine months ended September 30, 2013, the Company received approximately $325,000 in cash from financing activities as compared to approximately $282,000 for the nine months ended September 30, 2012. This increase of approximately $43,000 was due primarily to the proceeds from the issuance of senior secured convertible debentures 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 September 30, 2013, 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 September 30, 2013, 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.
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 September 30, 2013, 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 September 30, 2013.
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 September 30, 2013 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 September 30, 2013, 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.
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 |
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: August 12, 2015 | By: | /s/ Stephen J. Schoepfer |
| | Name: | Stephen J. Schoepfer |
| | Title: | Chief Executive Officer |
| | | |
| Date: August 12, 2015 | By: | /s/ Stephen J. Schoepfer |
| | Name: | Stephen J. Schoepfer |
| | Title: | Chief Financial Officer |
EXHIBIT INDEX
| 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** |
| | | |
| | | |
| | | |
| * | | 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.” |
