Westport Energy Holdings Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - Westport Energy Holdings Inc.	v240472_ex32-1.htm
EX-31.1 - Westport Energy Holdings Inc.	v240472_ex31-1.htm
EX-31.2 - Westport Energy Holdings Inc.	v240472_ex31-2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011.

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

For the transition period from __________ to __________ .

Commission file number 000-28887

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 þ No o

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	o	Accelerated Filer	o
Non-Accelerated Filer	o	Smaller Reporting Company	þ

(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 o No þ

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 o No þ

As of November 11, 2011 the Registrant had the following number of shares of its capital stock outstanding: 2,879,307,140 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

		Page
Part I. Financial Information
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010		3
Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2011 and 2010 (with cumulative totals since inception)		4
Condensed Consolidated Statement of Changes in Stockholders’ Deficiency for the period December 23, 2008 (Inception) through September 30, 2011		5
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2011 and 2010 (with cumulative totals since inception)		6
Notes to Condensed Consolidated Financial Statements		7
Item 2: Management’s Discussion and Analysis		12
Item 3: Quantitative and Qualitative Disclosures About Market Risk		15
Item 4: Controls and Procedures		15
Part II. Other Information		16
Item 1: Legal Proceedings		16
Item 1A: Risk Factors		16
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		16
Item 3: Defaults Upon Senior Securities		16
Item 4: Removed and Reserved		16
Item 5: Other Information		16
Item 6: Exhibits		16
Signatures		17
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATIONS

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 Carbonics Capital Corporation (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, 2010 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

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	September 30, 2011			December 31, 2010
ASSETS
Assets
Current assets:
Cash and cash equivalents	$	9,626		$	180,030
Restricted cash		21,752			461,259
Trading securities - Restricted		716,875			276,686
Prepaid and other current assets		85,216			206
Total current assets		833,469			918,181
Oil and gas properties, unproven		21,100,000			21,100,000
Total assets	$	21,933,469		$	22,018,181
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Senior secured convertible debenture, net of discount	$	27,070,796		$	25,895,212
Account payable and accrued expenses		386,400			125,000
Line of credit		17,679			8,407
Convertible debentures		5,738,026			4,586,026
Promissory notes		118,000			-
Accrued interest		4,798,562			2,421,861
Derivative liability		1,299,000			4,611,000
Total current liabilities		39,428,463			37,647,506
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; 10,000,000,000 shares authorized; 2,879,307,140 shares issued and outstanding		287,931			287,931
Additional paid-in capital		(9,872,115	)		(9,872,115	)
Accumulated deficiency during exploration stage		(7,911,731	)		(6,046,062	)
Total stockholders' deficiency		(17,494,994	)		(15,629,325	)
Total liabilities and stockholders' deficiency	$	21,933,469		$	22,018,181

See accompanying notes to condensed consolidated financial statements.

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,						Cumulative Period from December 23, 2008 (inception) to September 30,
	2011			2010			2011			2010			2011
Net sales	$	-		$	-		$	-		$	-		$	-
Cost of sales		-			-			-			-			-
		-			-			-			-			-
Operating expenses
Impairment loss		-			-			-			1,331,215			3,041,518
General and administrative expenses		214,476			162,669			584,118			488,006			1,595,242
Total operating expenses		214,476			162,669			584,118			1,819,221			4,636,760
Loss from operations		(214,476	)		(162,669	)		(584,118	)		(1,819,221	)		(4,636,760	)
Interest income (expense)		(1,562,919	)		(354,047	)		(4,627,796	)		(1,062,140	)		(7,694,641	)
Change in fair value of derivative liability		734,000			-			3,357,000			-			4,431,000
Gains (Losses) from trading securities		(5,607	)		94			(10,755	)		381			(11,330	)
Loss before income tax provision		(1,049,002	)		(516,622	)		(1,865,669	)		(2,880,980	)		(7,911,731	)
Income tax provision		-			-			-			-			-
Net loss	$	(1,049,002	)	$	(516,622	)	$	(1,865,669	)	$	(2,880,980	)	$	(7,911,731	)
Basic and diluted loss per common share	$	-		$	-		$	-		$	-
Weighted average number of common shares outstanding, basic and diluted		2,879,307,000			2,879,307,000			2,879,307,000			2,110,579,000

See accompanying notes to condensed consolidated financial statements.

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FOR THE PERIOD DECEMBER 23, 2008 (INCEPTION) TO SEPTEMBER 30, 2011

(UNAUDITED)

	Series C Voting Convertible preferred stock issued						Common Stock Issued				Additional Paid-in			Deficit Accumulated During Exploration			Total Stockholders'
	Shares			Amount			Shares		Amount		Capital			Stage			Deficiency
December 23, 2008 contribution of assets		-		$	-			-	$	-	$	24,141,518		$	-		$	24,141,518
Reverse merger recapitalization		805,767			806			127,279,406		12,728		(13,534	)		-			-
Balance, December 31, 2008		805,767			806			127,279,406		12,728		24,127,984			-			24,141,518
Shares issued prior to reverse merger by acquiree		166,275			-			355,562,697		-		-			-			-
Capital contribution		-			-			-		-		732,497			-			732,497
Reverse merger recapitalization		-			166			-		35,556		(35,722	)		-			-
Net loss		-			-			-		-		-			(213,110	)		(213,110	)
Balance, December 31, 2009		972,042			972			482,842,103		48,284		24,824,759			(213,110	)		24,660,905
Shares issued prior to reverse merger by acquiree		(50,152	)		-			2,396,465,037		-		-			-			-
Capital contribution		-			-			-		-		420,653			-			420,653
Reverse merger recapitalization		-			(51	)		-		239,647		(35,117,527	)		-			(34,877,931	)
Net loss		-			-			-		-		-			(5,832,952	)		(5,832,952	)
Balance, December 31, 2010		921,890			921			2,879,307,140		287,931		(9,872,115	)		(6,046,062	)		(15,629,325	)
Net loss		-			-			-		-		-			(1,865,669	)		(1,865,669	)
Balance, September 30, 2011		921,890		$	921			2,879,307,140	$	287,931	$	(9,872,115	)	$	(7,911,731	)	$	(17,494,994	)

See accompanying notes to condensed consolidated financial statements.

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,						Cumulative Period from December 23, 2008 (inception) to September 30,
Operating activities:	2011			2010			2011
Net Loss	$	(1,865,669	)	$	(2,880,980	)	$	(7,911,731	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Impairment of long-lived assets		-			1,331,215			3,041,518
Change in fair value of derivative liability		(3,357,000	)		-			(4,431,000	)
Unrealized losses (gains) on marketable securities		5,609			(94	)		6,379
Amortization of debt discount		2,252,584			-			4,045,084
Changes in Assets and Liabilities
Increase in prepaid and other current assets		(85,010	)		(805	)		(85,216	)
Increase in accounts payable and accrued expenses		261,400			63,949			386,400
Increase in accrued interest		2,385,973			1,054,199			3,653,641
Net cash used in operating activities		(402,113	)		(432,516	)		(1,294,925	)

Investing activities:
Receipt of restricted cash		439,507			109,007			(21,752	)
Proceeds from sale of trading securities		302,053			355,000			1,116,449
Purchases of trading securities		(747,851	)		(736,960	)		(1,839,703	)
Net cash used in investing activities		(6,291	)		(272,953	)		(745,006	)

Financing activities
Proceeds from line of credit		-			6,994			8,407
Proceeds from advances		-			-			732,497
Proceeds from issuance of senior secured convertible debenture		120,000			650,000			770,000
Proceeds from issuance of promissory notes		118,000			-			118,000
Capital contribution		-			420,653			420,653
Net cash provided by financing activities		238,000			1,077,647			2,049,557

(Decrease) Increase in cash		(170,404	)		372,178			9,626

Cash and cash equivalents, beginning of period		180,030			56,743			-
Cash and cash equivalents, end of period	$	9,626		$	428,921		$	9,626
NONCASH INVESTING AND FINANCING ACTIVITIES
Oil and gas properties, unproven	$	-		$	-		$	24,141,518
Debt discount derived from derivative liability - Convertible debentures		-			44,000			406,000
Debt discount derived from derivative liability - Senior Secured convertible debentures		45,000			9,431,000			5,324,000

Reverse merger liabilities and equity adjustments								-
Accrued interest		-			1,154,193			1,154,193
Senior secured convertible debenture		-			18,209,712			27,640,712
Convertible debentures		-			6,039,026			6,083,026

Total	$	45,000		$	34,877,931		$	64,749,449

See accompanying notes to condensed consolidated financial statements.

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation and Nature of Organization

Nature of Operations

Carbonics Capital Corporation’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 Over-the-Counter Bulletin Board under the symbol CICSE.OB.

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 Carbonics Capital Corporation 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, 2011, 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.

2. Summary of Significant Accounting Policies

There have been no material changes during 2011 in the Company’s significant accounting policies to those previously disclosed in the 2010 Form 10K.

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2. Summary of Significant Accounting Policies (Continued)

Fair Value Framework

The following table reconciles, for the nine months ended September 30, 2011, 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, 2010	$	4,611,000
Additional liability incurred		45,000
Change in fair value during period		(3,357,000	)
Balance at September 30, 2011	$	1,299,000

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, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Loss attributable to common stockholders	$	(1,049,000	)	$	(517,000	)	$	(1,866,000	)	$	(2,881,000	)
Weighted-average common shares outstanding		2,879,307,000			2,879,307,000			2,879,307,000			2,110,579,000

Basic and diluted loss per share	$	-		$	-		$	-		$	-

Potentially Dilutive Securities

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

	September 30, 2011			September 30, 2010
Warrants		2,250,000			-
Senior secured convertible debentures		100,691,000,000	*		-
Convertible debentures		65,908,000,000	*		-

*	The convertible debentures exceeded the number of authorized common shares and as a result weighted average shares outstanding, fully diluted, is the maximum authorized number of common shares, 10,000,000,000.

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2. Summary of Significant Accounting Policies (Continued)

Reclassifications

Certain reclassifications have been made in prior years’ consolidated financial statements to conform to the current year’s presentation.

3. Oil and Gas Properties, Unproven

Summary

As of September 30, 2011 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	)
9 months ended September 30, 2011		-		-			-
Inception through September 30, 2011	$	24,141,000	$	(3,041,000	)	$	21,100,000

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.

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, 2011 and 2010. 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.

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

5. Convertible Debentures, Derivative Liability, and Debt Discount

The following is a summary of the Company’s convertible debenture arrangements as of September 30, 2011:

Current portion of convertible debentures:
Convertible debenture payable to YA Global due December 2010 – 5%	$	592,000
Convertible debenture payable to YA Global due December 2010 – 12%		570,000
Convertible debenture payable to YA Global due December 2010 – 5%		921,000
Convertible debenture payable to YA Global due December 2011– 12%		4,000,000
Debt discount (original debt discount of $2,685,000)		(345,000	)
Total current convertible debentures	$	5,738,000

The following is a summary of the Company’s senior secured convertible debenture arrangements as of September 30, 2011:

Current portion of senior secured convertible debentures:
Senior secured convertible debenture payable to YA Global due August 2012 – 9%	$	27,641,000
Senior secured convertible debenture payable to YA Global due August 2012 – 9%		650,000
Senior secured convertible debenture payable to YA Global due August 2012 – 9%		120,000
Debt discount (original debt discount of $3,045,000)		(1,340,000	)
Total current senior secured convertible debentures	$	27,071,000

Technical default

As of September 30, 2011 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.

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

	September 30, 2011			December 31, 2010
Risk Free Interest Rate		1	%		2.5	%
Volatility		57	%		100	%
Term	.5 years			1.00 years
Dividend Rate		0	%		0	%
Closing Price of Common Stock	$	0.0001		$	0.0001

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. Promissory Note

On June 30, 2011, the Company issued to YA Global Investments, L.P., a short term promissory note in the principal amount of $30,000. On August 25, 2011, the Company issued to YA Global Investments, L.P., a promissory note in the principal amount of $88,000. The notes bear interest at the rate of 10% per annum, payable at maturity. The maturity dates of the notes are June 30 and August 31, 2012, respectively. The notes are secured by a pledge of all of the assets of the Company previously granted to the Lender.

7. Line of Credit

The Company has a $740,000 line of credit from a bank, which includes stand-by letters of credit totaling $675,000 related to the Company’s oil and gas properties. Advances under the line bear interest at approximately 4.2%. Borrowings are collateralized by treasury bonds held as trading securities and a money market account presented in restricted cash.

8. Subsequent Events

On October 25, 2011, the Company issued to YA Global Investments, L.P., a promissory note dated October 25, 2011 in the principal amount of $50,000. The note bears interest at the rate of 10% per annum, payable at maturity. The maturity date of the note is October 30, 2012. The note is secured by a pledge of all of the assets of the Company previously granted to the Lender.

On November 11, 2011 the Company received a notice of default from the State of Oregon with respect to several oil and gas leases the Company maintains with the State of Oregon due to the expiration of a letter of credit required to be maintained by the Company pursuant to those leases. The Company has been in contact with the State of Oregon to inform them that the Company's bank is no longer issuing letters of credit and that the Company is in the process of arranging for another bank to issue the required letter of credit. The Company intends to continue working with the State of Oregon to cure this event of default.

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 Carbonics Capital Corporation and its subsidiaries, which are collectively referred to as the “Company.”

Results of Operations – three months ended September 30, 2011 compared to three months ended September 30, 2010

Revenues

There were no revenues from continuing operations for the three months ended September 30, 2011 and 2010.

Cost of Revenues

There was no cost of revenues for the three months ended September 30, 2011 and 2010.

Net Loss

The Company had a net loss of approximately $1,049,000 for the three months ended September 30, 2011 versus a net loss of approximately $517,000 for the three months ended September 30, 2010.

The increase in net loss was predominately the result of the increase in interest expense, most of which is related to the debt obtained in the reverse merger that occurred in the third quarter of 2010. The Company also recognized a gain on the fair value of the derivative liability of approximately $734,000 in the third quarter of 2011.

Operating Expenses:

General and administrative expenses

General and administrative fees and professional fees increased approximately $51,000 from approximately $163,000 for the third quarter of 2010 to approximately $214,000 for the third quarter of 2011.

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, 2011 and 2010 are as follows. Mineral right lease expense increased approximately $27,000 from approximately $3,000 in the three months ended September 30, 2010 compared to $30,000 in the three months ended September 30, 2011. Consulting fees decreased approximately $17,000 from approximately $180,000 in the three months ended September 30, 2010 to approximately $163,000 in the three months ended September 30, 2011. Insurance expense decreased approximately $5,000 from approximately $12,000 during the three months ended September 30, 2010 to approximately $7,000 during the three months ended September 30, 2011.

Professional fees decreased approximately $86,000 from approximately $92,000 in the three months ended September 30, 2010 to approximately $6,000 during the three months ended September 30, 2011.

The decrease in consulting and professional fees during the three months ended September 30, 2011 can be attributed to the reverse merger which took place during the three months ended September 30, 2010. We expect to incur significant additional professional fees as we continue to proceed with our exploration activities.

Results of Operations – nine months ended September 30, 2011 compared to nine months ended September 30, 2010

Revenues

There were no revenues from continuing operations for the nine months ended September 30, 2011 and 2010.

Cost of Revenues

There was no cost of revenues for the nine months ended September 30, 2011 and 2010.

Net Loss

The Company had a net loss of approximately $1,866,000 for the nine months ended September 30, 2011 versus a net loss of approximately $2,881,000 for the nine months ended September 30, 2010.

The decrease in net loss was predominately the result of the decrease in the derivative liability of $3,357,000. The gain was offset by approximately $4,619,000 in interest expense incurred during the first nine months of 2011.

During the first nine months of 2010, the Company had an impairment loss of approximately $1,331,000 from the abandonment of the Chehalis Basin Property.

Operating Expenses:

General and administrative expenses

General and administrative fees and professional fees increased from approximately $488,000 for the nine months ended September 30, 2010 to approximately $584,000 for the nine months ended September 30, 2011, for an increase of approximately $96,000.

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, 2011 and 2010 are as follows. Mineral right lease expense decreased approximately $36,000 from approximately $127,000 in the nine months ended September 30, 2010 compared to $91,000 in the nine months ended September 30, 2011. Consulting fees increased approximately $208,000 from approximately $180,000 in the nine months ended September 30, 2010 to approximately $388,000 in the nine months ended September 30, 2011.

During the first nine months of 2010 the Company did not perform extensive activities on the properties owned, except for general maintenance to keep the leases in suitable working order. The increased level of overall expenses can be attributed to the increased levels of exploration activities in the first nine months of 2011. The decrease in the mineral right lease expense in 2011 is due in part to the abandonment of the Chehalis Basin Property in 2010.

Professional fees decreased approximately $106,000 from approximately $155,000 in the nine months ended September 30, 2010 to approximately $49,000 during the nine months ended September 30, 2011.

The decrease in professional fees during the nine months ended September 30, 2011 can be attributed to the reverse merger which took place during the three months ended September 30, 2010. We expect to incur significant additional professional fees as we continue to proceed with our exploration activities.

Impairment loss

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 owners and the asset balance was fully impaired. This resulted in an impairment of approximately $1,331,000 during the first quarter of 2010.

Liquidity and Capital Resources

Our liquid assets, consisting of cash on hand, restricted cash and trading securities were approximately $748,000 as of September 30, 2011. As of September 30, 2011 our working capital deficit was approximately $39 million.

We expect to incur significant additional professional fees as we begin to 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, 2011, the Company had a net decrease in cash of approximately $170,000. Our principal sources and uses of funds were as follows:

Cash used in operating activities. For the nine months ended September 30, 2011, the Company used approximately $402,000 in cash for operating activities as compared to approximately $433,000 for the nine months ended September 30, 2010. This increase of approximately $22,000 was due primarily to the increase in general and administrative expenses as a result of increased operations during the first nine months of the year.

Cash used in investing activities. For the nine months ended September 30, 2011, the Company used approximately $6,000 in net cash from investing activities as compared to using approximately $273,000 for the nine months ended September 30, 2010. This decrease of approximately $267,000 was due primarily to activity in trading securities during the year.

Cash provided by financing activities. For the nine months ended September 30, 2011, the Company received approximately $238,000 in cash from financing activities as compared to approximately $1,078,000 for the nine months ended September 30, 2010. This decrease of approximately $831,000 was due primarily to the proceeds from debt issuance and capital contributions received during the first nine months of 2010, offset by the proceeds from issuance of debt in the first half of 2011.

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, 2011, 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, 2011, 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

(a) Evaluation of Disclosure Controls and Procedures:

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 principals. 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, 2011 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; and

•

there is no effective separation of duties, which includes monitoring controls, between the members of management.

•

lack of resources to account for complex and unusual transactions

Management is currently evaluating what steps can be taken in order to address these material weaknesses.

(b) Changes in Internal Control over Financial Reporting:

During the fiscal quarter ended September 30, 2011, 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. (Removed and Reserved)

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.

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.

	CARBONICS CAPITAL CORPORATION

Date: November 14, 2011	By:	/s/ Stephen J. Schoepfer
		Name: Stephen J. Schoepfer
		Title: Chief Executive Officer

Date: November 14, 2011	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

Westport Energy Holdings Inc. - FORM 10-Q - November 14, 2011

Attached files

Westport Energy Holdings Inc. Reports