| Convertible Debentures, Derivative Liability and Debt Discount | 5. Convertible Debentures, Derivative Liability,
and Debt Discount The following is a summary of the Companys
convertible debenture arrangements: Convertible debentures:
Conversion Price September 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 Companys stock for the thirty days preceding conversion,
subject to adjustment and beneficial ownership limitations. The following is a summary of the Companys
senior secured convertible debenture arrangements: Senior secured convertible debentures:
Conversion Price September 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% 0.45 462,000 -
Debt discount - (564,000 ) -
Total senior secured convertible debentures $ 30,881,000 $ 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. 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 September 30, 2014, $77,946 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 September 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 Companys 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, 2014 December 31, 2013
Risk Free Interest Rate 1 % 1 %
Volatility 98 % 138 %
Term .17 years .08 years
Dividend Rate 0 % 0 %
Closing Price of Common Stock $ 0.50 $ 0.50 |
