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EX-31.1 - EXHIBIT 31.1 - Westport Energy Holdings Inc.v314105_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Westport Energy Holdings Inc.v314105_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Westport Energy Holdings Inc.v314105_ex32-1.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2012.

 

¨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   (I.R.S. Employer
incorporation or organization)   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 R 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 R

(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 R

 

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 R

 

As of May 21, 2012 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 2
   
Item 1: Financial Statements (Unaudited) 2
   
Condensed Consolidated Balance Sheets at March 31, 2012 (unaudited) and December 31, 2011 2
   
Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2012 and 2011 (with cumulative totals since inception) (Unaudited) 3
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the period December 28, 2008 (Inception) through March 31, 2012 (Unaudited) 4
   
Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2012 and 2011 (with cumulative totals since inception) (Unaudited) 5
   

Notes to Condensed Consolidated Financial Statements

6
   
Item 2: Management’s Discussion and Analysis 11
   
Item 3: Quantitative and Qualitative Disclosures About Market Risk 14
   
Item 4: Controls and Procedures 14
   
Part II. Other Information 15
   
Item 1: Legal Proceedings 15
   
Item 1A: Risk Factors 15
   
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 15
   
Item 3: Defaults Upon Senior Securities 15
   
Item 4: Removed and Reserved 15
   
Item 5: Other Information 15
   
Item 6: Exhibits 15
   
Signatures 16
   
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, 2011 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)

 

   March 31,   December 31, 
   2012   2011 
ASSETS          
           
Assets          
Cash and cash equivalents  $357,661   $856,061 
Restricted cash   690,474    178,021 
Trading securities - Restricted   107,952    567,175 
Prepaid and other current assets   42,683    70,821 
Total current assets   1,198,770    1,672,078 
           
Oil and gas properties, unproven   10,475,000    10,475,000 
           
Total assets  $11,673,770   $12,147,078 
           
LIABILITIES AND STOCKHOLDERS' DEFICIENCY          
           
Current Liabilities:          
Senior secured convertible debenture, net of discount  $28,569,007   $28,150,507 
Account payable and accrued expenses   225,250    472,425 
Line of credit   593    18,238 
Convertible debentures   6,083,026    6,083,026 
Accrued interest   6,422,764    5,605,401 
Derivative liability   3,127,000    4,009,000 
Total current liabilities   44,427,640    44,338,597 
           
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   (23,170,607)   (22,608,256)
Total stockholders' deficiency   (32,753,870)   (32,191,519)
Total liabilities and stockholders' deficiency  $11,673,770   $12,147,078 

 

 
 

 

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   Three Months Ended March 31,   Cumulative Period 
           from December 23, 
           2008 (inception) to 
   2012   2011   March 31, 2012 
             
Net sales  $-   $-   $- 
Cost of sales   -    -    - 
    -    -    - 
                
Operating expenses               
Impairment loss   -    -    13,666,518 
General and administrative expenses   206,886    150,638    2,009,285 
                
Total operating expenses   206,886    150,638    15,675,803 
                
Loss from operations   (206,886)   (150,638)   (15,675,803)
                
Interest expense   (1,236,025)   (1,528,520)   (10,471,612)
Change in fair value of derivative liability   882,000    2,472,000    2,993,000 
Losses from trading securities   (1,440)   (288)   (16,192)
                
Income (loss) before income tax provision   (562,351)   792,554    (23,170,607)
                
Income tax provision   -    -    - 
                
Net income (loss)  $(562,351)  $792,554   $(23,170,607)
                
Basic and diluted loss per common share  $0.00   $0.00      
                
Weighted average number of common shares outstanding, basic and diluted   2,879,307,000    2,879,307,000      

 

 
 

 

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FOR THE PERIOD DECEMBER 23, 2008 (INCEPTION) TO MARCH 31, 2012

(UNAUDITED) 

 

   Series C Voting Convertible
preferred stock issued
   Common Stock Issued       Deficit Accumulated     
   Shares   Amount   Shares   Amount   Additional Paid-in
Capital
   During Exploration
Stage
   Total Stockholders'
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   -    -    -    -    -    (16,562,194)   (16,562,194)
                                    
Balance, December 31, 2011   921,890   $921    2,879,307,140   $287,931   $(9,872,115)  $(22,608,256)  $(32,191,519)
                                    
Net loss   -    -    -    -    -    (562,351)   (562,351)
                                    
Balance, March 31, 2012   921,890   $921    2,879,307,140   $287,931   $(9,872,115)  $(23,170,607)  $(32,753,870)

 

 
 

 

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Three Months Ended   Cumulative Period from 
   March 31,   December 23, 2008 
  2012   2011   (inception) to March 31, 2012 
Operating activities:             
Net Income (loss)  $(562,351)  $792,554   $(23,170,607)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:               
Impairment of long-lived assets   -    -    13,666,518 
Change in fair value of derivative liability   (882,000)   (2,472,000)   (2,993,000)
Unrealized (gains) losses on marketable securities   18    288    12,683 
Amortization of debt discount   418,500    746,700    5,195,884 
Changes in Assets and Liabilities               
Prepaid and other current assets   28,138    (24,749)   (42,683)
Decrease in accounts payable and accrued expenses   (247,175)   (8,000)   225,250 
Increase in accrued interest   817,363    781,925    5,268,571 
Net cash used in operating activities   (427,507)   (183,282)   (1,837,384)
                
Investing activities:               
Restricted cash   (512,453)   449,849    (690,474)
Proceeds from sale of trading securities   567,159    -    2,110,944 
Purchases of trading securities   (107,954)   (441,056)   (2,231,579)
Net cash used in investing activities   (53,248)   8,793    (811,109)
                
Financing activities               
Line of credit   (17,645)   -    593 
Proceeds from advances   -    -    732,497 
Proceeds from issuance of senior secured convertible debenture   -    -    1,852,411 
Proceeds from issuance of promissory notes   -    -    168,000 
Retirement of promissory notes in exchange for convertible debenture   -    -    (168,000)
Capital contribution   -    -    420,653 
Net cash used in financing activities   (17,645)   -    3,006,154 
                
(Decrease) increase in cash   (498,400)   (174,489)   357,661 
                
Cash and cash equivalents, beginning of period   856,061    180,030    - 
Cash and cash equivalents, end of period  $357,661   $5,541   $357,661 
                
NONCASH INVESTING AND FINANCING ACTIVITIES               
Oil and gas properties, unproven  $-   $-   $24,141,518 
Debt discount derived from derivative liability - Convertible debentures   -    -    406,000 
Debt discount derived from derivative liability - Senior Secured convertible debentures   -    -    5,714,000 
                
Reverse merger liabilities and equity adjustments               
Accrued interest   -    -    1,154,193 
Senior secured convertible debenture   -    -    27,640,712 
Convertible debentures   -    -    6,083,026 
                
   $-   $-   $65,139,449 

 

 
 

 

 

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 Pink Sheets under the symbol CICS.

 

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 March 31, 2012, 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.

 

Recent Accounting Pronouncements

 

In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." Under ASU 2011-04, the guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. ASU 2011-04 is effective for public entities during interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company does not believe that the adoption of ASU 2011-04 will have a material impact on the Company's results of operation and financial condition.

 

 
 

 

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

  

2.  Summary of Significant Accounting Policies

 

There have been no material changes during 2012 in the Company’s significant accounting policies to those previously disclosed in the 2011 Form 10K.

 

Fair Value Framework

 

The following table reconciles, for the three months ended March 31, 2012, 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, 2011  $4,009,000 
      
Change in fair value during period   (882,000)
      
Balance at March 31, 2012  $3,127,000 

 

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 63% at March 31, 2012.

 

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:

 

   March 31, 2012   March 31, 2011 
         
Net income (loss) attributable to common stockholders  $(562,000)  $793,000 
           
Weighted-average common shares outstanding   2,879,307,000    2,879,307,000 
           
Basic and diluted net income (loss) per share  $-   $- 

  

 
 

 

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2.  Summary of Significant Accounting Policies (Continued)

 

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:

 

   March 31, 2012   March 31, 2011 
         
Warrants   2,750,000    2,750,000 
           
Senior secured convertible debentures   233,203,000,000*   99,358,000,000*
           
Convertible debentures   65,908,000,000*   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.

 

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 March 31, 2012 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)
3 months ended March 31, 2012   -    -    - 
Inception through March 31, 2012  $24,141,000   $(13,666,000)  $10,475,000 

 

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 2011 and 2010, the Company determined that the carrying cost of the Coos Bay property exceeded the fair value of the property by approximately $10,625,000 and $1,710,000, 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.

 

 
 

 

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

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 three months ended March 31, 2012 and 2011. 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
   March 31, 
2012
   December 31, 
2011
 
Due December 2010 – 5%   0.00010   $592,000   $592,000 
Due December 2010 – 12%   0.00009    570,000    570,000 
Due December 2010 – 5%   0.00010    921,000    921,000 
Due December 2011– 12%   0.00009    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 $.10 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.

 

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

 

Senior secured convertible debentures:

 

   Conversion
Price
   March 31,
2012
   December 31,
2011
 
Due August 2012 – 9%   0.00013   $27,641,000   $27,641,000 
Due August 2012 – 9%   0.00009    650,000    650,000 
Due August 2012 – 9%   0.00009    120,000    120,000 
Due December 2013– 9%   0.00009    910,000    910,000 
Due December 2013– 9%   0.00009    172,000    172,000 
Debt discount of $3,853,000 and 3,435,000   -    (924,000)   (1,342,000)
Total senior secured convertible debentures       $28,569,000   $28,151,000 

 

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.

 

 
 

 

CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Technical default

 

As of March 31, 2012 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.

 

5.  Convertible Debentures, Derivative Liability, and Debt Discount (Continued)

 

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:

 

   March 31,   December 31, 
   2012   2011 
         
Risk Free Interest Rate   1%   1%
Volatility   63%   67%
Term   .6  years    .7 years 
Dividend Rate   0%   0%
Closing Price of Common Stock  $0.0001   $0.0001 

 

6.  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 certificates of deposit and a money market account presented in restricted cash. The cash is restricted for the cleanup and restoration expenses that could be incurred upon the completion of the project or expiration of the leases.

 

 
 

 

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 March 31, 2012 compared to three months ended March 31, 2011

 

Revenues

 

There were no revenues from continuing operations for the three months ended March 31 2012 and 2011.

 

Cost of Revenues

 

There was no cost of revenues for the three months ended March 31, 2012 and 2011.

 

Net Income (Loss)

 

The Company had a net loss of approximately $562,000 for the three months ended March 31, 2012 versus net income of approximately $793,000 for the three months ended March 31, 2011.

 

The increase in net loss was predominately the result of the change in derivative liability, which resulted in a gain of approximately $2,472,000 in the three months ended March 31, 2010 compared to a gain of approximately $882,000 during the three months ended March 31, 2012. This difference was offset by a decrease in interest expense of approximately $292,000 from approximately $1,528,000 during the three months ended March 31, 2011 to approximately $1,236,000 during the three months ended March 31, 2012.

 

Operating Expenses:

 

General and administrative expenses

 

General and administrative fees and professional fees increased approximately $56,000 from approximately $151,000 for the first quarter of 2011 to approximately $207,000 for the first quarter of 2012.

 

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 March 31, 2012 and 2011 are as follows. Mineral right lease expense decreased approximately $17,000 from approximately $31,000 in the three months ended March 31, 2011 compared to $14,000 in the three months ended March 31, 2012. Insurance expense increased approximately $17,000 from approximately $5,000 in the three months ended March 31, 2011 to approximately $22,000 in the three months ended March 31, 2012. Investment and bank service charges increased approximately $15,000 from approximately $0 in the three months ended March 31, 2011 to approximately $15,000 in the three months ended March 31, 2012.

 

Consulting and professional fees increased approximately $33,000 from approximately $99,000 during the three months ended March 31, 2011 to approximately $132,000 during the three months ended March 31, 2012.

 

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 trading securities were approximately $1,156,000 as of March 31, 2012. As of March 31, 2012 our working capital deficit was approximately $43 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 three months ended March 31, 2012, the Company had a net decrease in cash of approximately $498,000. Our principal sources and uses of funds were as follows:

 

Cash used in operating activities. For the three months ended March 31, 2012, the Company used approximately $428,000 in cash for operating activities as compared to approximately $183,000 for the three months ended March 31, 2011. This increase of approximately $245,000 was due primarily to the payment of general and administrative expenses accrued during the end of 2011 and the current quarter.

 

Cash used in investing activities. For the three months ended March 31, 2012, the Company used approximately $53,000 in net cash from investing activities as compared to receiving approximately $9,000 for the three months ended March 31, 2011. This increase of approximately $62,000 was due primarily to activity in trading securities during the period.

 

Cash provided by financing activities. For the three months ended March 31, 2012, the Company used approximately $18,000 in cash from financing activities as compared to approximately $0 for the three months ended March 31, 2010. This increase of approximately $18,000 was due primarily to the proceeds from the drawings on the line of credit 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 March 31, 2012, 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 March 31, 2012, 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 March 31, 2012 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 March 31, 2012, 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: May 21, 2012 By:  /s/ Stephen J. Schoepfer  
  Name:  Stephen J. Schoepfer  
  Title:  Chief Executive Officer  
     
Date: May 21, 2012 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