Attached files
file | filename |
---|---|
EX-31.2 - Westport Energy Holdings Inc. | v206443_ex31-2.htm |
EX-32.1 - Westport Energy Holdings Inc. | v206443_ex32-1.htm |
EX-31.1 - Westport Energy Holdings Inc. | v206443_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(MARK
ONE)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2010
|
|
o
|
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, 2ndFloor,
Princeton, NJ 08540
|
(Address
of Principal Executive Offices) (Zip Code)
|
Registrant’s
Telephone Number, Including Area Code: (609)
498-7029
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 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 o Nox
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
definitions of “large accelerated filer” and “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
(Do
not check if a smaller reporting company)
|
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
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Number of
shares of common stock, par value $.0001, outstanding as of December 23, 2010:
2,879,307,140.
TABLE
OF CONTENTS
Page
|
||
PART
I - FINANCIAL INFORMATION
|
||
Item
1.
|
Unaudited
Financial Statements
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2010 and December 31,
2009
|
4
|
|
Condensed
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2010 and 2009 and cumulative period from December 23, 2008
through September 30, 2010
|
5
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2010 and 2009 and the cumulative period from December 23, 2008 through
September 30, 2010
|
6
|
|
Condensed
Consolidated Statement of Changes in Stockholders’ Deficiency for the
period of inception through September 30, 2010
|
7
|
|
Notes
to Condensed Consolidated Financial Statements
|
8
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
Item
4.
|
Controls
and Procedures
|
19
|
PART
II - OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
20
|
Item
1A.
|
Risk
Factors
|
20
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
20
|
Item
3.
|
Defaults
Upon Senior Securities
|
20
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
20
|
Item
5.
|
Other
Information
|
20
|
Item
6.
|
Exhibits
|
20
|
Signatures
|
21
|
When we
use the terms “Carbonics”, the “Company”, “we”, “us” and “our”, we mean
Carbonics Capital Corporation and its consolidated subsidiaries.
Forward
Looking Statements
This
quarterly report on Form 10-Q contains statements that constitute
“forward-looking statements” within the meaning of the safe harbor provisions of
The Private Securities Litigation Reform Act of 1995. In some cases,
you can identify these statements by forward-looking words such as “may,”
“might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “potential” or “continue,” and the negative of these
terms and other comparable terminology. These forward-looking
statements, which are subject to known and unknown risks, uncertainties and
assumptions about us, may include projections of our future financial
performance based on our growth strategies and anticipated trends in our
business. These statements are only predictions based on our current
expectations and projections about future events. There are important
factors that could cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or implied by the forward-looking
statements. In particular, you should consider the numerous risks and
uncertainties described under Part I Item 1A. - Risk Factors in our Annual
Report on Form 10-K for the fiscal year December 31, 2009 (“2009 Form
10-K”).
These
risks and uncertainties are not exhaustive. Other sections of the
2009 Form 10-K and of this report describe additional factors that could
adversely impact our business and financial performance. Moreover, we
operate in a very competitive and rapidly changing environment. New
risks and uncertainties emerge from time to time, and it is not possible to
predict all risks and uncertainties, nor can we assess the impact of all factors
on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements.
Although
we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy or completeness of any of these forward-looking
statements. You should not rely upon forward-looking statements as
guarantees of future events. We disclaim any duty to update any of
these forward-looking statements after the filing of this report to conform our
prior statements to actual results or revised expectations and we do not intend
to do so, and these forward-looking statements should not be relied upon as
representing our views as of any date subsequent to the filing of this
report.
We
expressly qualify in their entirety all forward-looking statements attributable
to us or any person acting on our behalf by the cautionary statements contained
or referred to in this section.
3
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2010
|
December 31, 2009
|
|||||||
ASSETS
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 428,921 | $ | 165,750 | ||||
Trading
securities
|
737,026 | 354,972 | ||||||
Prepaid
and other current assets
|
805 | - | ||||||
Total
current assets
|
1,166,752 | 520,722 | ||||||
Oil
and gas properties, unproven
|
23,887,325 | 25,218,540 | ||||||
Total
assets
|
25,054,077 | 25,739,262 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
|
||||||||
Current
Liabilities:
|
||||||||
Account
payable and accrued expenses
|
$ | 63,949 | $ | - | ||||
Line
of credit
|
8,329 | 1,335 | ||||||
Accrued
interest
|
1,536,356 | - | ||||||
Convertible
debentures, net of discount
|
6,058,396 | - | ||||||
Derivative
liability
|
9,475,000 | - | ||||||
Total
current liabilities
|
17,142,030 | 1,335 | ||||||
Senior
secured convertible debenture, net of discount
|
19,512,378 | - | ||||||
Total
Liabilities
|
36,654,408 | 1,335 | ||||||
Stockholders'
Equity (Deficiency):
|
||||||||
Preferred
stock, $0.0001 par value, 1,000,000 shares authorized Series C Voting
Convertible, 921,890 and 972,042 shares issued and
outstanding
|
921 | 972 | ||||||
Common
stock, $0.0001 par value; 10,000,000,000 shares authorized; 2,879,307,140
and 482,842,103 shares issued and outstanding
|
287,931 | 48,284 | ||||||
Additional
Paid-in Capital
|
(8,795,093 | ) | 25,901,781 | |||||
Accumulated
deficiency during exploration stage
|
(3,094,090 | ) | (213,110 | ) | ||||
Total
stockholders' equity (deficiency)
|
(11,600,331 | ) | 25,737,927 | |||||
Total
liabilities and stockholders' equity (deficiency)
|
$ | 25,054,077 | $ | 25,739,262 |
See
accompanying notes to condensed consolidated financial
statements.
4
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
Cumulative
Period
from
December 23,
2008
(inception) to
|
||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
September
30, 2010
|
||||||||||||||||
Net
Sales
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Cost
of Sales
|
- | - | - | - | - | |||||||||||||||
- | - | - | - | - | ||||||||||||||||
Operating
Expenses
|
||||||||||||||||||||
Impairment
loss
|
- | - | 1,331,215 | - | 1,331,215 | |||||||||||||||
General
and administrative expenses
|
162,669 | 70,532 | 488,006 | 211,595 | 697,728 | |||||||||||||||
Total
Operating Expenses
|
162,669 | 70,532 | 1,819,221 | 211,595 | 2,028,943 | |||||||||||||||
Loss
from operations
|
(162,669 | ) | (70,532 | ) | (1,819,221 | ) | (211,595 | ) | (2,028,943 | ) | ||||||||||
Interest
expense
|
(354,047 | ) | (499 | ) | (1,062,140 | ) | (1,498 | ) | (1,065,528 | ) | ||||||||||
Unrealized
trading gains from trading securities
|
94 | - | 381 | - | 381 | |||||||||||||||
Loss
before Income tax provision
|
(516,622 | ) | (71,031 | ) | (2,880,980 | ) | (213,093 | ) | (3,094,090 | ) | ||||||||||
Income
tax provision
|
- | - | - | - | - | |||||||||||||||
Net
Loss
|
$ | (516,622 | ) | $ | (71,031 | ) | $ | (2,880,980 | ) | $ | (213,093 | ) | $ | (3,094,090 | ) | |||||
Basic
and diluted loss per common share
|
(0.00 | ) | (0.00 | ) | (0.00 | ) | (0.00 | ) | ||||||||||||
Weighted
average share of common stock outstanding, basic and
dilutive
|
2,879,307,140 | 313,287,800 | 2,110,578,724 | 198,826,036 |
See
accompanying notes to condensed consolidated financial
statements.
5
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER
30,
|
Cumulative
Period from
December
23, 2008 (inception)
|
|||||||||||
|
2010
|
2009
|
to
September 30, 2010
|
|||||||||
Operating
activities:
|
||||||||||||
Net
Loss
|
$ | (2,880,980 | ) | $ | (213,093 | ) | $ | (3,094,090 | ) | |||
Adjustments
to Reconcile Net Loss to Net Cash Used in Operating
Activities:
|
||||||||||||
Impairment
of long-lived assets
|
1,331,215 | - | 1,331,215 | |||||||||
Changes
in Assets and Liabilities
|
||||||||||||
Prepaid
and other current assets
|
(805 | ) | - | (805 | ) | |||||||
Increase
in accounts payable and accrued expenses
|
63,949 | - | 63,949 | |||||||||
Increase
in accrued interest
|
1,054,199 | - | 1,054,199 | |||||||||
Net
cash (used in) operating activities
|
(432,422 | ) | (213,093 | ) | (645,532 | ) | ||||||
Investing
activities:
|
||||||||||||
Proceeds
from sale of trading securities
|
355,000 | - | (737,026 | ) | ||||||||
Purchases
of trading securities
|
(737,054 | ) | (461,901 | ) | ||||||||
Net
cash (used in) investing activities
|
(382,054 | ) | (461,901 | ) | (737,026 | ) | ||||||
Financing
activities
|
||||||||||||
Line
of credit
|
6,994 | - | 8,329 | |||||||||
Proceeds
from advances
|
- | 691,302 | - | |||||||||
Proceeds
from issuance of senior secured convertible debenture
|
650,000 | - | 650,000 | |||||||||
Capital
contribution
|
420,653 | 1,051 | 1,153,150 | |||||||||
Net
cash provided by financing activities
|
1,077,647 | 692,353 | 1,811,479 | |||||||||
Increase
in cash
|
263,171 | 17,359 | 428,921 | |||||||||
Cash
and cash equivalents, beginning of period
|
165,750 | - | - | |||||||||
Cash
and cash equivalents, end of period
|
$ | 428,921 | $ | 17,359 | $ | 428,921 | ||||||
Supplemental
cash flow information:
|
||||||||||||
Interest
paid
|
$ | - | $ | - | $ | - | ||||||
Income
tax expense
|
$ | - | $ | - | $ | - | ||||||
NONCASH
INVESTING AND FINANCING ACTIVITIES
|
||||||||||||
Oil
and gas properties, unproven
|
$ | - | $ | - | $ | 25,218,540 | ||||||
Debt
discount
|
9,475,000 | - | 9,475,000 | |||||||||
Reverse
merger liabilities and equity adjustments
|
||||||||||||
Accrued
interest
|
1,154,193 | - | 1,154,193 | |||||||||
Senior
secured convertible debenture
|
18,209,712 | - | 18,209,712 | |||||||||
Convertible
debentures
|
6,039,026 | - | 6,039,026 | |||||||||
Total
|
$ | 34,877,931 | $ | - | $ | 60,096,471 |
See
accompanying notes to condensed consolidated financial
statements.
6
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
FOR
THE PERIOD DECEMBER 23, 2008 (INCEPTION) TO SEPTEMBER 30, 2010
(UNAUDITED)
Series
C Voting
Convertible
preferred
stock
issued
|
Common
Stock Issued
|
Additional
Paid-
|
Deficit
Accumulated
During
Exploration
|
Total
Stockholders'
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
in
Capital
|
Stage
|
Deficiency
|
||||||||||||||||||||||
December
23, 2008 contribution of assets
|
- | $ | - | - | $ | - | $ | 25,218,540 | $ | - | $ | 25,218,540 | ||||||||||||||||
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 | 25,205,006 | - | 25,218,540 | |||||||||||||||||||||
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 | 25,901,781 | (213,110 | ) | 25,737,927 | ||||||||||||||||||||
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
|
- | - | - | - | - | (2,880,980 | ) | (2,880,980 | ) | |||||||||||||||||||
Balance,
September 30, 2010
|
921,890 | $ | 921 | 2,879,307,140 | $ | 287,931 | $ | (8,795,093 | ) | $ | (3,094,090 | ) | $ | (11,600,331 | ) |
See
accompanying notes to condensed consolidated financial
statements.
7
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, was formed in December of 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.
Reverse
Merger
On August
17, 2010 Carbonics Capital Corporation (“Carbonics”), Westport Acquisition,
Inc., a Delaware corporation (and a recently organized wholly-owned subsidiary
of Carbonics) (“Westport Acquisition”),and the preferred shareholder completed a
reverse merger, pursuant to an LLC Membership Interest Purchase Agreement (the
“Agreement”) with Westport Energy, LLC, a Delaware Limited Liability Company
(“Westport Energy”) (a wholly-owned subsidiary of New Earthshell
Corporation).
Pursuant
to the Agreement and as a condition to consummation of the reverse merger, the
Company issued New Earthshell Corporation (“NEC”) a Senior Secured Convertible
Debenture in the principal amount of $27,640,712, in consideration for the
acquisition of the membership interest in Westport Energy. New Earthshell
Corporation is 100% owned by YA Global.
At the
time of the closing, Viridis Capital LLC, in exchange for $10 transferred to 4
Sea-sons, LLC all of the shares of Series C Preferred Stock issued by Carbonics,
which were owned by Viridis Capital LLC. 4Sea-sons, LLC is 100% owned
by Stephen J. Schoepfer, who subsequent to closing, was elected chairman of the
Board of Directors, Chief Executive and Financial Officer and Secretary of
Carbonics and President of Westport Acquisition and Energy. The transferred
preferred stock represents 80% of the voting interest on an as converted basis.
As a result of such transfer and its ownership interest in the Series C
Preferred Stock, the Preferred Shareholder now owns the majority of the equity
in Carbonics.
The
Company accounted for the transaction as a business combination, with Westport
Energy deemed to be the accounting acquirer. The assets and liabilities and the
historical operations reflected in the financial statements are those of
Westport Energy and are presented at the historical cost basis, along with the
fair value of the liabilities acquired from Carbonics at the date of
acquisition, August 17, 2010. The liabilities acquired were recorded
as a reduction in the historical additional paid-in capital of Westport Energy.
All recapitalization entries have been appropriately recorded with a resulting
elimination of Carbonics’ historical accumulated deficit and additional paid-in
capital.
The
following table summarizes the amounts recorded into the historical books and
records of Westport Energy as of the date of acquisition:
Recognized
Amounts of Identifiable Liabilities Assumed
|
||||
Accrued
interest
|
$ | 1,154,193 | ||
Convertible
debentures
|
6,083,026 | |||
Total
identifiable liabilities
|
$ | 7,237,219 |
In
addition, preferred stock and common stock at par value were recorded against
additional paid-in capital for $921 and $287,931 at the date of acquisition,
respectively.
8
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
|
Basis
of Presentation and Nature of Organization
(Continued)
|
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.
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
|
Principles
of Consolidation
The
financial statements for the periods ended September 30, 2010 and 2009 have been
consolidated to include the accounts of the Company and its
subsidiaries.
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.
Cash
and Cash Equivalents
Cash and
cash equivalents consists principally of currency on hand, demand deposits at
commercial banks, and liquid investment funds having a maturity of three months
or less at the time of purchase.
9
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2.
|
Summary
of Significant Accounting Policies
(Continued)
|
Trading
Securities
The
Company’s trading securities are bought and held principally for the purpose of
selling them in the near term and are classified as trading
securities. Trading securities are recorded at fair value on the
balance sheet in current assets with the change in fair value during the period
included in earnings.
The
Company’s trading securities are comprised of United States Treasury Strips and
Treasury Notes with maturity dates of one year or less and are summarized as
follows:
Unrealized
|
Realized
|
Fair
Value
|
Fair
Value
|
|||||||||||||
Trading
securities
|
Gains
|
Losses
|
September
30, 2010
|
December
31, 2009
|
||||||||||||
United
States Treasury Strips
|
$ | 259 | $ | - | $ | 459,917 | $ | - | ||||||||
United
States Treasury Notes
|
$ | 94 | $ | 28 | $ | 277,109 | $ | 354,972 |
Oil
and Gas Properties
The
Company utilizes the full cost 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, 2010, 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, 2010, all of the Company’s oil and gas properties were
unproved and were excluded from amortization.
The
capitalized costs included in the full cost pool are subject to a “ceiling
test”, which limits such costs to the aggregate of the estimated present value,
using an estimated discount rate, of the future net revenues from proved
reserves, based on current economic and operating conditions and the estimated
value of unproven properties. This ceiling test is performed by the Company on
an annual basis. Based on the status of the Company’s exploration
activities, as of September 30, 2010, none of the remaining Company’s unproved
oil and gas properties were considered impaired.
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.
An
impairment charge of approximately $1,330,000 was recognized during the nine
months ended September 30, 2010, see note 3 for more
information.
10
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2.
|
Summary
of Significant Accounting Policies
(Continued)
|
Income
Taxes
The
Company accounts for income taxes using the assets and liability
method. Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in the tax rate is recognized in income or expense in the period that the
change is effective. Tax benefits are recognized when it is probable
that the deduction will be sustained. A valuation allowance is
established when it is more likely than not that all or a portion of a deferred
tax asset will not be realized.
Fair
Value of Financial Instruments
GAAP
requires disclosing the fair value of financial instruments to the extent
practicable for financial instruments which are recognized or unrecognized in
the balance sheet. The fair value of the financial instruments
disclosed herein is not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider the tax
consequences of realization or settlement.
In
assessing the fair value of financial instruments, the Company uses a variety of
methods and assumptions, which are based on estimates of market conditions and
risks existing at the time. For certain instruments, including cash
and cash equivalents, accounts payable, and accrued expenses, it was estimated
that the carrying amounts approximated fair value because of the short
maturities of these instruments. All debt is based on current rates
at which the Company could borrow funds with similar remaining maturities and
approximates fair value.
Derivative
Financial Instruments
We review
the terms of convertible debt and equity instruments we issued to determine
whether there are embedded derivative instruments, including the embedded
conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. In circumstances where the
embedded conversion option in a convertible instrument is required to be
bifurcated and there are also other embedded derivative instruments in the
convertible instrument that are required to be bifurcated, the bifurcated
derivative instruments are accounted for as a single, compound derivative
instrument.
In
connection with the sale of convertible debt and equity instruments, we may also
issue freestanding options or warrants. If freestanding options or warrants were
issued and will be accounted for as derivative instrument liabilities (rather
than as equity), the proceeds are first allocated to the fair value of those
instruments. When the embedded derivative instrument is to be bifurcated and
accounted for as a liability, the remaining proceeds received are then allocated
to the fair value of the bifurcated derivative instrument. The remaining
proceeds, if any, are then allocated to the convertible instrument, usually
resulting in that instrument being recorded at a discount from its face amount.
In circumstances where a freestanding derivative instrument is to be accounted
for as an equity instrument, the proceeds are allocated between the convertible
instrument and the derivative equity instrument, based on their relative fair
values.
Derivative
financial instruments are initially measured at their fair value. For derivative
financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported as charges or credits to
income. For option-based derivative financial instruments, we use the
Black-Scholes option pricing model to value the derivative
instruments.
The
discount from the face value of the convertible debt instrument resulting from
the allocation of part of the proceeds to embedded derivative instruments and/or
freestanding options or warrants is amortized over the life of the instrument
through periodic charges to income, using the effective interest
method.
11
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
GAAP
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. ASC 820 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three levels as follows:
• Level 1
— quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access as of the measurement
date. Financial assets and liabilities utilizing Level 1 inputs include active
exchange-traded securities and exchange-based derivatives.
• Level 2
— inputs other than quoted prices included within Level 1 that are directly
observable for the asset or liability or indirectly observable through
corroboration with observable market data. Financial assets and liabilities
utilizing Level 2 inputs include fixed income securities, non-exchange based
derivatives, mutual funds, and fair-value hedges.
• Level 3
— unobservable inputs for the asset or liability only used when there is little,
if any, market activity for the asset or liability at the measurement date.
Financial assets and liabilities utilizing Level 3 inputs include
infrequently-traded, non-exchange-based derivatives and commingled investment
funds, and are measured using present value pricing models.
The
Company’s derivative liabilities and trading securities are marked to market
every reporting period using level 3 and level 1 input’s,
respectively.
The
following table reconciles, for the nine months ended September 30, 2010, the
beginning and ending balances for financial instruments that are recognized at
fair value using level 3 inputs in the consolidated financial
statements:
Balance
of derivative liability as of December 31, 2009
|
$ | - | ||
Value
of derivative liabilities upon adoption, August 17, 2010
|
9,475,000 | |||
Change
in fair value during period
|
- | |||
Balance
at September 30, 2010
|
$ | 9,475,000 |
Net
Loss per Share of Common Stock
Basic
loss per common share is computed by dividing net loss by the weighted average
number of common stock outstanding during each period. Anti-dilutive
securities not included in net loss per share calculation for the period
include:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Potentially
dilutive securities:
|
||||||||||||||||
Convertible
notes
|
94,736,500,000 | - | 94,736,500,000 | - | ||||||||||||
Warrants
|
2,250,000 | - | 2,250,000 | - |
3.
|
Oil
and Gas Properties, Unproven
|
On
November 26, 2008, the United States Bankruptcy Court for the District of Oregon
approved the entry of an Asset Purchase Agreement between YA Global, as the
Buyer, and Torrent Energy, Inc., Methane Energy Corp., and Cascadia Energy Corp.
(collectively the Seller). The Purchase Agreement consisted of YA
Global acquiring 100% ownership of the Coos Bay Basin Property in exchange for
forgiveness of debentures outstanding with Seller, as well as stock issued by
the Seller which was held by the Buyer. On the same date in which the Purchase
Agreement took place, YA Global contributed all property received into their
wholly owned subsidiary’s subsidiary, Westport Energy, LLC.
12
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3.
|
Oil
and Gas Properties, Unproven
(Continued)
|
On August
17, 2010, Westport Acquisition, Inc., a subsidiary of Carbonics, entered into a
LLC Purchase Agreement (the “Agreement”) with New Earthshell Corporation (“NEC”)
to acquire 100% of the membership interest in Westport Energy in accordance with
the terms of the LLC Purchase Agreement. Westport Energy is 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 oil and gas properties are currently unproven and ongoing exploration
activities are planned and will require the additional significant expenditures
for the year ending December 31, 2010, which funding must be raised from
external sources. These exploration activities include formation
stimulation and production testing of existing wells drilled in our Coos Bay
project. Assuming that additional funding from external sources is
obtained, management estimates that it will take approximately six to twelve
months to complete the first phase of exploration activities on certain of its
unproved properties and at that time an assessment will be made for
reclassification of a portion of the unproved reserves to proved
reserves. Once properties have been classified as proven, then
certain of the costs incurred would be included in the amortization
computation.
Chehalis Basin
Property
On
November 26, 2008, the United States Bankruptcy Court for the District of Oregon
approved the entry of an Asset Purchase Agreement between YA Global, as the
Buyer, and Torrent Energy, Inc., Methane Energy Corp., and Cascadia Energy Corp.
(collectively the Seller). The Purchase Agreement consisted of YA
Global acquiring 100% ownership of the Coos Bay Basin Property in exchange for
forgiveness of debentures outstanding with Seller, as well as stock issued by
the Seller which was held by the Buyer. On the same date in which the Purchase
Agreement took place, YA Global contributed all property received into their
wholly owned subsidiary’s subsidiary, Westport Energy, LLC.
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 $1,330,000 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.
As of
September 30, 2010 the remaining capitalized costs of Oil and Gas Properties,
unproven relate to the Coos Bay Basin Property and are summarized as
follows:
|
Exploration
Costs
|
|
||||||||||||||||||||||
Acquisition
Costs
|
Seismic
and
Land
|
Drilling
and
Gathering
|
Geological
and
Geophysical
|
Development
Costs
|
Total
|
|||||||||||||||||||
Coos
Bay Basin Property
|
||||||||||||||||||||||||
Year
ended 2008
|
$ | 23,887,325 | $ | - | $ | - | $ | - | $ | - | $ | 23,887,325 | ||||||||||||
Year
ended 2009
|
- | - | - | - | - | |||||||||||||||||||
Year
ended 2010
|
- | - | - | - | - | |||||||||||||||||||
Inception
through September 30, 2010
|
- | - | - | - | - | |||||||||||||||||||
Total
|
$ | 23,887,325 | $ | - | $ | - | $ | - | $ | - | $ | 23,887,325 |
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 period ended September
30, 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.
13
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5.
|
Convertible
Debentures, Derivative Liability and Debt
Discount
|
Senior
Secured Convertible Debenture
In
contemplation of the reverse merger and as a condition to, the Company issued to
NEC a note in principal amount of $27,640,000 dated August 17,
2010. The note bears interest at the rate of 9% per annum, payable at
maturity. The maturity date for the note is August 13,
2012. The note, plus accrued interest is convertible into common
stock of the Company at a conversion rate equal to $0.0003 per share, subject to
adjustment and beneficial ownership limitations. The Company recorded debt
discount of $9,214,000 related to the fair value of the conversion option on the
date of issuance.
Immediately
following the closing of the reverse merger, the Company issued YA Global a
secured convertible debenture in the principal amount of
$650,000. The note bears interest at the rate of 9% interest per
annum, payable at maturity. The note is due on August 31,
2012. The note is convertible into common stock of the Company at a
conversion rate per share initially equal to the lower of $0.0003 or 90% of the
lowest volume weighted average price (“VWAP”) of the common shares for the 20
trading days immediately prior to conversion, subject to adjustment and
beneficial ownership limitations. The proceeds from the note will be
used to fund various short-term administrative and operating
expenses.
The
senior secured convertible debenture is 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.
Convertible
Debenture
In
connection with the reverse merger, the Company assumed the Convertible
debentures of $6,083,026 and accrued interest of approximately $1,154,193 of the
legal entity.
The
following is a summary of the Company’s convertible debenture arrangements as of
September 30, 2010:
Current
portion of convertible debentures:
|
||||
Convertible
debenture payable to YA Global Investments issued October 2005 –
5%
|
$ | 592,360 | ||
Convertible
debenture payable to YA Global Investments issued July 2007 –
12%
|
570,000 | |||
Convertible
debenture payable to YA Global Investments issued February 2006 –
5%
|
920,666 | |||
Convertible
debenture payable to YA Global Investments issued June 2009 –
12%
|
4,000,000 | |||
Debt
discount
|
(24,630 | ) | ||
Total
current convertible debentures
|
$ | 6,058,396 |
The
convertible debentures are due December 31, 2010 and are convertible into common
stock with exercises prices ranging from $0.01 to $0.10.
Derivative
Liability –Conversion Option
Features
of the convertible debentures, including such provisions as price protection
required the Company to treat the conversion option as a derivative
liability. The Company used the Black-Scholes option pricing model to
calculate the fair value of the conversion option. As of August 17,
2010 (date of issuance and assumption) and September 30, 2010 the derivative
liability was approximately $9,475,000.
14
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5.
|
Convertible
Debentures, Derivative Liability and Debt Discount
(Continued)
|
Derivative
Liability –Conversion Option (Continued)
Additionally,
if the Company were required to settle its outstanding warrants and convertible
debt as of September 30, 2010, we would be required to issue 94,738,750,000
common shares. The Company determined that the settlement of these outstanding
financial instruments would exceed our authorized shares by 87,618,000,000. The
Company would be required to reclassify these contracts from equity to
liabilities, if not already re-classed for price protection noted
above.
Assumptions
utilized to calculate the fair value of the derivative liability were as
follows:
Issuance
|
September,
30
|
|||||||
Date
|
2010
|
|||||||
Exercise
Price
|
Range
$0.0003 to $0.10
|
Range
$0.0003 to $0.10
|
||||||
Risk
Free Interest Rate
|
2.5 | % | 2.5 | % | ||||
Volatility
|
80 - 120 | % | 80 - 120 | % | ||||
Term
|
2
years
|
1.92
years
|
||||||
Dividend
Rate
|
0 | % | 0 | % | ||||
Closing
Price of Common Stock
|
$ | 0.0001 | $ | 0.0001 |
Debt
Discount
The
Company recorded debt discount of $9,475,000 related to the fair value of the
conversion options of the note on the date of issuance based. Fair
value was computed using the trading price of the Company on the date of
issuance. The debt discount will be accreted over 2
years. During the period the Company recorded accretion expense of
$672,000.
Accrued
Interest
During
the period the Company accrued interest of $382,163.
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.
7.
|
Stockholders’
Deficiency
|
Series
C Preferred Stock
Shares of
the Company’s Series C Preferred Stock (the “Series C Shares”) may be converted
by the holder into Company common stock. The conversion ratio is such that the
full 1,000,000 Series C Shares originally issued convert into Company common
shares representing 80% of the fully diluted outstanding common shares
outstanding after the conversion (which includes all common shares outstanding
plus all common shares potentially issuable upon the conversion of all
derivative securities not held by the holder). The holder of Series C Shares may
cast the number of votes at a shareholders meeting or by written consent that
equals the number of common shares into which the Series C Shares are
convertible on the record date for the shareholder action. In the event the
Board of Directors declares a dividend payable to Company common shareholders,
the holders of Series C Shares will receive the dividend that would be payable
if the Series C Shares were converted into Company common shares prior to the
dividend. In the event of a liquidation of the Company, the holders of Series C
Shares will receive a preferential distribution of $0.001 per share, and will
share in the distribution as if the Series C Shares had been converted into
common shares.
15
CARBONICS
CAPITAL CORPORATION AND SUBSIDIARY
(AN
EXPLORATION COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7.
|
Stockholders’
Deficiency (Continued)
|
Common
Stock
During
the nine months period ended September 30, 2010 and prior to the reverse merger,
the Company issued approximately 2.4 billion common shares. These
shares were recapitalized in accordance with the par value of the respective
equity instruments upon consummation of the agreement.
Warrants
As of
September 30, 2010 the Company had 2,250,000 warrants outstanding with an
aggregate exercise price of $0.15 per share and expires on December 31,
2012. The warrants have certain price protection provisions that
require it to be recorded as a derivative liability. The Company used
the Black-Scholes option pricing model to calculate the fair value of the
derivative liability. As of September 30, 2010 the derivative
liability was $0.
8.
|
Income
Taxes
|
The
Company recognizes deferred tax assets, net of applicable valuation allowances,
related to net operating loss carry-forwards and certain temporary differences
and deferred tax liabilities related to certain temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax reporting. The Company recognizes a future
tax benefit to the extent that realization of such benefit is considered to be
more likely than not. This determination is based on projected taxable income
and tax planning strategies. Otherwise, a valuation allowance is
applied.
Realization
of the Company’s deferred tax temporary differences is contingent on future
taxable earnings. The Company’s deferred tax asset was reviewed for expected
utilization using a “more likely than not” approach by assessing the available
positive and negative evidence surrounding its recoverability. Accordingly, a
valuation allowance has been recorded against the Company’s deferred tax asset,
as it was determined based upon past and present losses that it was “more likely
than not” that the Company’s deferred tax assets would not be
realized.
In future
years, if the deferred tax assets are determined by management to be “more
likely than not” to be realized, the recognized tax benefits relating to the
reversal of the valuation allowance will be recorded. The Company will continue
to assess and evaluate strategies that will enable the deferred tax asset, or
portion thereof, to be utilized, and will reduce the valuation allowance
appropriately as such time when it is determined that the “more likely than not”
criteria is satisfied.
There
were no significant uncertain tax positions taken, or expected to be taken, in a
tax return that would be determined to be an unrecognized tax benefit taken or
expected to be taken in a tax return that should have been recorded on the
Company’s consolidated financial statements for the year ended June 30,
2010. Additionally, there were no interest or penalties outstanding
as of or for each of the fiscal years ended June 30, 2010 and
2009.
Federal
and state tax returns for the years ended December 31, 2008 and 2009 are subject
to examination by taxing authorities.
16
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operation
Certain
statements set forth under this caption constitute “forward-looking statements.”
See “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.
Company
Overview
Carbonics
Capital Corporation’s wholly owned subsidiary, Westport Energy, LLC, was formed
in December of 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.
Coos
Bay Basin Exploration Prospect
The Coos
Bay Basin is basically a structural basin formed by folding and faulting and
contains a thick section of coal-bearing sediments. Coal-bearing
rocks contained within the Coos Bay Basin form the Coos Bay Coal
field. Coal mining from the Coos Bay field began in 1854 and
continued through the mid 1950’s. Much of the coal was shipped to San
Francisco. Since mining activity ended several companies such as
Sumitomo, Shell and American Coal Company have done exploratory work and
feasibility studies on the Coos Bay Coal Field but no mining operations were
conducted. In addition, approximately 20 exploratory oil and/or gas
wells have been drilled in the Coos Bay basin during the years
1914-1993. Many of these wells encountered gas in the coal seams that
were penetrated during drilling.
Coalbeds
are contained in both the Lower and Upper Member of the Middle Eocene Coaledo
Formation. The coal-bearing sandstones and siltstones of the Middle
Eocene Coaledo formation are estimated to form a section up to 6,400 feet
thick. Total net coal thickness for the Lower Coaledo Member can
range up to 70 feet and over 30 feet for the Upper Coaledo
Member. Coos Bay coal rank ranges from sub bituminous to
high-volatile bituminous, with a heating value of 8,300 to 14,000 British
Thermal Units per pound (“BTU/LB.”), low sulfur content, and a moderate
percentage of ash.
On
October 6, 2004, a multi-hole coring program was commenced by the prior
leaseholders of the Coos Bay property. Coring was needed to collect
coal samples so that accurate gas content data could be
measured. Cores were collected, desorption work was done on the coals
and evaluation completed by mid 2005. This data, as well as other
geologic information, was provided to Sproule Associates, Inc., an international
reservoir engineering firm, for an independent evaluation. To date,
natural gas analyses performed on samples from Coos Bay coal samples and wells
indicate that the gas is pipeline quality and that the coals are fully saturated
with gas. However, technically recoverable gas volumes do not
necessarily qualify as proved reserves, and we have not recorded any proven
reserves.
Natural
Gas Market
Until
2005, the Port of Coos Bay was one of the largest population centers on the west
coast not served by natural gas. A project to bring natural gas into
the region via a 52-mile, 12-inch pipeline was approved, funded by Coos County
and the State of Oregon, and completed in late 2004 with gas sales beginning in
early 2005. While the line is owned by Coos County, the local gas
distribution company, Northwest Natural Gas, operates the line. Northwest
Natural Gas serves Coos County and most of western Oregon. The
pipeline and its associated distribution system represent the most likely market
option for delivery of gas, if produced by us in the
future. Estimates of current local Coos County market requirements
are less than 1 million cubic feet of gas per day initially, which represents
less than 1% of ultimate pipeline capacity. Excess capacity is
available for additional gas input.
Coos
County is also likely to benefit from new industrial, commercial and residential
development as natural gas is now available. Expansion of the market is likely
to bring greater demand for and value to natural gas. Because of its west coast
location, Coos Bay market prices would be subject to pricing standards of the
New York Mercantile Exchange for most of the year. Regional gas pricing hubs are
located at Malin and Stanfield, Oregon. The closest pricing point,
however, would be the Coos Bay City Gate, where Northwest Natural Gas’s retail
rates are set and regulated by Oregon’s Public Utilities Commission. Seasonal or
critical gas demand fluctuations could cause prices to exceed or fall below
posted prices on a regular basis.
17
Exploration
Objectives
The Coos
Bay Basin is the southernmost of a series of sedimentary basins that are present
in western Oregon and Washington west of the Cascade Range. The
region containing this series of basins is generally referred to as the
Puget-Willamette Trough. These basins contain thick sequences of
predominantly non-marine, coal-bearing sedimentary rock sequences that are
correlative in age, closely related in genesis, and very similar in many other
characteristics. We are primarily targeting natural gas from coal
seams of the Coaledo Formation in the Coos Bay Basin. Secondary
objectives are natural gas, and possibly oil, trapped in conventional sandstone
reservoirs.
Indications
of the hydrocarbon potential in the Puget-Willamette Trough are shown by natural
gas production at the Mist Field in northwest Oregon, the presence of excellent
quality sand reservoir development at the Jackson Prairie Gas Storage Field in
southwest Washington, and numerous oil and/or gas shows from historic oil and
gas exploration drilling activity.
Plan
of Operations and Cash Requirements
The
continuation of our business is dependent on additional financing, positive
results from exploratory activities, and achieving a profitable level of
business. The Company’s future exploration activities will
require significant capital expenditures, which funding must be raised from
outside sources. There can be no assurance that financing will be
available in amounts or on terms acceptable to us, if at all. The inability to
obtain additional capital will restrict our ability to grow and inhibit our
ability to continue to conduct business operations. If the Company is
unable to obtain additional financing in the future, we will likely be required
to further curtail our exploration plans and possibly cease our operations. Any
additional equity financing may result in substantial dilution to our then
existing shareholders.
Liquidity
and Capital Resources
Our
liquid assets, consisting of cash on hand and trading securities was $1,166,000
as of September 30, 2010, compared with $521,000 at December 31,
2009. As of September 30, 2010 our working capital deficit was
approximately $16 million.
During
the period the Company raised $650,000 on terms similar to other notes the
Company incurred at the time of the reverse merger. Those funds will
be used to supply funding for the day-to-day activities while we continue to try
and find additional sources of financing to fund the Company’s
activities.
We expect
to incur significant additional professional fees as we begin to precede 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.
Results
of Operations
For
the nine months ended September 30, 2010 compared with the nine months ended
September 30, 2009
18
Net
Loss
The
Company had a net loss of $2,881,000 for the nine months ended September 30,
2010 versus $213,000 for the nine months ended September 30,
2009. The increase in the net loss was impacted by the abandonment of
the Chehalis Basin Property, which resulted in an impairment loss of $1,331,000
and interest expense incurred by the Company from the debt incurred on the date
of reverse merger till the end of the period of $1,062,000. We expect interest
expense to increase in future periods due to the passage of time and as we
obtain additional financing to fund our operations.
Operating
Expenses
Increases
in general and administrative fees and professional fees also increased during
the period by $276,000. During fiscal 2009 the Company did not
perform extensive activities on the properties owned, except for general
maintenance to keep the leases in suitable working order. We expect
to incur significant additional professional fees as we begin to proceed with
our exploration activities.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
As a
smaller reporting company, we are not required to provide the information
required by this item.
Item
4. Controls and Procedures
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 principles. A control
system, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. Because of the inherent
limitations in all control systems, internal controls over financial reporting
may not prevent or detect misstatements. The design and operation of a control
system must also reflect that there are resource constraints and management is
necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls.
Our
management assessed the effectiveness of our internal controls over financial
reporting for the quarter ended September 30, 2010 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.
Changes
in Internal Control over Financial Reporting:
During
the fiscal quarter ended September 30, 2010, 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.
19
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
There
have been no legal proceedings
Item
1A. Risk Factors
There
have been no material change in the risk factors set forth in Item 1A (“Risk
Factors”) in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
INDEX TO
EXHIBITS
(a)
|
Exhibits
|
Exhibit
Number
|
31.1
|
Certification
of pursuant to Section 302 of Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Executive Officer.
|
|
31.2
|
Certification
of pursuant to Section 302 of Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Financial Officer.
|
|
32.1
|
Certification
of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 by Chief Executive
Officer.
|
|
32.2
|
Certification
of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 by Chief Financial
Officer.
|
20
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:
December 23, 2010
|
By:
|
/s/ Stephen J. Schoepfer
|
||
Name: Stephen
J. Schoepfer
|
||||
Title: Chief
Executive Officer
|
||||
Date:
December 23, 2010
|
By:
|
/s/ Stephen J. Schoepfer
|
||
Name: Stephen
J. Schoepfer
|
||||
Title: Chief
Financial Officer
|
21