UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2006
Commission file number 27339
ICARBON CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 88-0426887
------------------------------ --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
106 Lakeside Avenue
P.O. Box 210
Delano, PA 18220
(Address of principal executive offices)
(570) 467-2222
(Issuer's telephone number)
Check whether the issuer (1) filed all documents and reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
As of August 10, 2006, 32,567,603 shares of our common stock, par value, $.001,
were outstanding.
Transitional Small Business Disclosure Format: Yes No X
ICARBON CORPORATION
FORM 10-QSB - INDEX
PART I. FINANCIAL INFORMATION:
Pages
- -------
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis or Plan of Operation 18
Item 3. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ICARBON CORPORATION.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
2006 2006
---------------- ----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 218,619 $ 129,845
Cash restricted by loan agreement 15,000 15,000
Trade accounts receivable 216,753 163,666
Other receivable 17,000 17,000
Inventories 1,383,600 1,472,002
Prepaid expenses 49,475 75,910
----------- -----------
TOTAL CURRENT ASSETS 1,900,447 1,873,423
PROPERTY, PLANT AND EQUIPMENT, NET 9,626,891 6,851,042
GOODWILL 800,240 800,240
LICENSE AGREEMENT 2,105,186 1,977,186
DEPOSIT ON INVESTMENT IN COMPANY 1,200,000 300,000
----------- -----------
TOTAL ASSETS $15,632,764
$11,801,891
=========== ===========
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
2
JUNE 30, MARCH 31,
2006 2006
--------- ----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
- -------------------------------------------------------------------------------------------------------------------
Current maturities of long-term debt:
Related parties $ 457,972 $ 817,972
Other 614,316 543,296
Current maturity of capital lease obligation 3,669 3,607
Notes payable, demand:
Related parties 2,635,117 2,775,117
Other 750,000 2,608,000
Accounts payable 482,053 586,883
Accrued expenses 442,204 244,861
Due to related parties 72,142 53,221
----------- -----------
TOTAL CURRENT LIABILITIES 5,457,473 7,632,957
LONG-TERM DEBT, LESS CURRENT MATURITIES
Related parties 225,000 225,000
Other 3,681,345 1,111,944
----------- -----------
TOTAL LONG-TERM DEBT 3,906,345 1,336,944
----------- -----------
CAPITAL LEASE OBLIGATION, LESS CURRENT MATURITY 1,602 2,543
----------- -----------
TOTAL LIABILITIES 9,365,420 8,972,444
----------- -----------
STOCKHOLDERS' EQUITY
Class B preferred stock; $0.001 par value; authorized 100,000,000 830 -
shares; 829,755 shares issued and outstanding - June 30, 2006
Class C preferred stock; $0.001 par value; authorized 100,000,000
shares; 326,057 shares issued and outstanding - June 30, 2006 326 -
Class D preferred stock; $0.001 par value; issued and outstanding
585,000 shares - June 30, 2006;
583,318 shares - March 31, 2006 585 585
Class E preferred stock; $0.001 par value; issued and outstanding
14,546 shares (involuntary liquidation value - $1,454,618) 15 15
Common stock, $0.001 par value; authorized 100,000,000 shares;
issued and outstanding 15,964,986 - June 30, 2006; 6,647,540
shares - March 31, 2006 15,967 40,000
Paid-in capital 12,453,196 6,755,137
Accumulated deficit (6,203,575) (3,966,290)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 6,267,344 2,829,447
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,632,764 $11,801,891
==+======== ===========
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3
ICARBON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
2006 2005
----------- ----------
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
NET SALES $ 374,255 $ 306,590
COST OF SALES 208,677 170,911
--------------- --------------
GROSS PROFIT 165,578 135,678
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,103,291 627,041
--------------- --------------
OPERATING LOSS (937,713) (491,363)
--------------- --------------
OTHER EXPENSES
Interest expense (72,078) (73,621)
--------------- --------------
TOTAL OTHER EXPENSES, NET (72,078) (73,621)
--------------- --------------
NET LOSS ($1,009,791) ($ 564,984)
=============== ==============
Net loss per common share - basic and diluted ($1.16) ($.11)
=============== ===============
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
4
ICARBON CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months 583,318 $583 14,546 $15 6,647,540 $6,648 $6,788,491 ($3,966,290) $2,829,447
Ended June 30, 2006
BALANCE - MARCH 31,
2006
Issuances of shares of
stock in exchange for
extending loan terms
(unaudited) - - - - 1,681 2 - - 19,127 20 63,628 - 63,650
Capital contributed in
connection with the
Company's merger with
BPK Resources, Inc.
(unaudited) 829,755 830 188,410 188 - - - - 9,126,584 9,127 2,027,814 - 2,037,959
SG Note Converted
(unaudited) 171,735 172 149,828 - 150,000
Series C Raise - RAB
Capital (unaudited) 117,647 118 1,999,882 2,000,000
Series C Raise - Paragon
Capital (unaudited) 20,000 20 339,980 340,000
Capital Raise Cost
(unaudited) - - - - - - - - - - (82,600) - (82,600)
Beneficial conversion
Preferred Series C
(unaudited) - - - - - - - - - - 1,227,494 (1,227,494) -
Merger costs (unaudited) - - - - - - - - - - (61,321) - (61,321)
Net loss (unaudited) - - - - - - - - - - - (1,009,791) (1,009,791)
------- ---- ------- ---- -------- ---- ------ --- ---------- ------- ------------ ------------ -----------
BALANCE - JUNE 30, 2006
(UNAUDITED) 829,755 $830 326,057 $326 585,000 $585 14,546 $15 15,964,986 $15,967 $12,453,196 ($6,203,575) $6,267,344
======= ==== ======= ==== ======== ==== ====== === ========== ======= ============ ============ ===========
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
2006 2005
-------------- --------------
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,009,791) ($ 564,984)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 112,263 75,114
Interest capitalized on notes payable - 15,256
Stock issued for loan extension 63,650 -
Stock issued in lieu of compensation - 60,000
(Increase) decrease in assets:
Trade accounts receivable and other receivable (53,087) (48,628)
Inventories 88,402 (522,496)
Prepaid expenses 26,435 78,940
Increase (decrease) in liabilities:
Accounts payable (104,829) -
Accrued expenses 219,548 -
Due to related parties (579) -
-------------- -------------
NET CASH USED IN OPERATING ACTIVITIES 657,988) (744,457)
-------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Subscription/merger costs (61,321) -
Purchase of licensing agreement (128,000) -
Increase in deposit on investment in company (900,000) -
Purchase of property, plant, and equipment (416,175) (460,785)
============== =============
NET CASH USED IN INVESTING ACTIVITIES (1,505,496) (460,785)
============== =============
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
2006 2005
-------------- --------------
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital lease obligation (879) (823)
Proceeds from demand notes payable:
Related Parties 3,249,999 150,000
Other - -
Repayments on demand notes payable, related parties (450,000) -
Proceeds from the issuance of long-term debt:
Related parties - 400,000
Other - 625,000
Repayments on long-term debt:
Related parties (360,000) -
Other (40,169) (117,947)
-------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,398,951 1,056,230
-------------- -------------
NET INCREASE IN CASH 88,774 (83,629)
CASH - BEGINNING 144,845 103,260
-------------- -------------
CASH - ENDING $ 233,619 $ 19,631
============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $77,140 $26,715
============== =============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
$
Debt converted to common stock $ 200,000 $ 1,035,412
============== =============
Debt converted to preferred stock $ - $ 1,454,618
============== =============
Equipment acquired by issuance of common stock $1,650,000 $ -
============== =============
Building acquired by direct financing $ 2,650,000 $ 438,100
============== =============
Inventory acquired by direct financing $ $ -
============== =============
Deposit on investment via direct financing $ $ -
============== =============
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
2006 2005
-------------- -------------
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES (CONTINUED)
Investment in license agreement by issuance of common $
stock $ 128,000 -
============== =============
Accrued interest converted to common stock $ - $ -
============== =============
Long-term debt, related party reclassified to demand note
Payable, related party $ - $ -
============== =============
Asset repossessed and related debt relieved $ $ -
============== =============
Other property released and related accrued expense relieved $ $ -
============== =============
Other non cash equity and demand notes payable transaction $ $ -
============== =============
Mining claims and leases acquired via direct financing $ $ -
============== =============
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America. Certain information and footnote
disclosures normally included in financial statements under accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the Securities and Exchange Commission
rules and regulations. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and
notes thereto included in Form 8K-A for the fiscal year ended March 31,
2006, filed on July 14, 2006. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of the consolidated financial statements have
been included. The results of operations for the three month periods
ended June 30, 2006 and 2005 are not necessarily indicative of the
results which may be expected for the entire fiscal year.
On April 19, 2006, BPK Resources, Inc. a Nevada corporation publicly
traded through the facilities of the NASDAQ OTC (BPK) closed upon an
Agreement and Plan of Merger (the Merger Agreement) among BPK, BPK
Resources Acquisition Corp., a Delaware corporation and wholly owned
subsidiary of BPK (Merger Sub), Graphite Technology Group, Inc.
(Graphite), and Derek Hirsch and James E. Olive, the principal
shareholders of Graphite (the Merger). In accordance with the Merger
Agreement, Merger Sub merged with and into Graphite with
Graphitesurviving as a wholly owned subsidiary of BPK.
The Merger resulted in the owners and management of the Company having
effective operating control of the combined entity after the Merger,
with the existing BPK investors continuing as only passive investors.
In connection with the Merger, all directors and officers of BPK
resigned and new directors and officers were appointed by Graphite.
Under accounting principles generally accepted in the United States of
America, the Merger is considered to be a capital transaction in
substance, rather than a business combination. That is the Merger is
equivalent to the issuance of stock by Graphite for the net monetary
assets of BPK, accompanied by a recapitalization, and is accounted for
as a change in capital structure. Accordingly, the accounting for the
Merger is identical to that resulting from a reverse acquisition,
except that no goodwill intangible asset is recorded. Under reverse
takeover accounting, the post reverse-acquisition comparative financial
statements of the "legal acquirer" (BPK), are those of the "legal
acquiree" (Graphite) (i.e., the accounting acquirer).
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
In consideration for the Merger, (i) the holders of issued and
outstanding shares of the Graphite's common stock received an aggregate
of (A) 40 million shares of BPK's common stock and (B) 585,000 shares
of BPK Series D Convertible Preferred Stock convertible into an
aggregate of 58,500,000 shares of BPK common stock; and (ii) holders of
issued and outstanding shares of Graphites's preferred stock received
an aggregate of 14,456 shares of Series E Convertible Preferred Stock,
convertible into an aggregate of 3,500,000 shares of BPK common stock.
The capital transaction has been given retroactive effect as if the
transaction had occurred on March 31, 2006.
On the date of the merger BPK's balance sheet consisted of current
assets of $3,747,929, current liabilities of $1,709,970 and
stockholders' equity of $2,037,959. Accordingly, the results of
operations for the three month period ended June 30, 2006 include
activity for BPK from April 19, 200 to June 30, 2006.
On July 21, 2006, the BPK Resources, Inc. changed its name to iCarbon
Corporation (the Company). The Company is traded through the facilities
of the NASDAQ OTC (ICRB). On August 4, 2006, the Company was also
granted listing status on the Frankfurt Stock Exchange. The Company's
common shares will trade on the Deutsche Borse Unofficial Regulated
Market (Segment Freiverkehr) FWB (R) Frankfurter Wertpapierborse (the
Frankfurt Stock Exchange), also referred to as the "Open Market".
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement No. 123(R), "Share-Based Payment." Statement No.
123(R) revised Statement No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related implementation guidance.
Statement No. 123(R) will require compensation costs related to
share-based payment transactions to be recognized in the financial
statements (with limited exceptions). The amount of compensation costs
will be measured based on the grant-date fair value of the equity or
liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service in exchange for the
award. This statement became effective for the Company during the
current annual reporting.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB
No. 107"), "Share-Based Payment", providing guidance on option
valuation methods, the accounting for income tax effects of
share-based payment arrangements upon adoption of SFAS No. 123 (R),
and the disclosures subsequent to adoption. The Company has adopted
SFAS No. 123(R) and began providing SAB No. 107 required disclosures
during the current reporting period., using the modified prospective
method with no restatement. The impact of future option or stock
grants is dependent upon the quantity and nature of future stock-based
compensation grants.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In May 2005, FASB issued SFAS 154, "Accounting Changes and Error
Corrections". The Statement requires retroactive application of a
voluntary change in accounting principle to prior period financial
statements unless it is impracticable. SFAS 154 also requires that a
change in method of depreciation, amortization, or depletion for
long-lived, non-financial assets be accounted for as a change in
accounting estimate that is affected by a change in accounting
principle. SFAS 154 replaces APB Opinion 20, "Accounting Changes", and
SFAS 3, "Reporting Accounting Changes in Interim Financial Statements".
SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Adoption of
this statement did not have an impact on our Consolidated Financial
Statements.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes." The interpretation clarifies the
accounting for uncertainty in income taxes recognized in a company's
financial statements in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Specifically, the pronouncement prescribes a recognition threshold and
a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. The interpretation also provides guidance on the related
derecognition, classification, interest and penalties, accounting for
interim periods, disclosure and transition of uncertain tax positions.
The interpretation is effective for fiscal years beginning after
December 15, 2006. The Company is evaluating the impact of this new
pronouncement on its consolidated financial statements.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
NOTE 3 - DEPOSIT ON INVESTMENT IN COMPANY, INVESTMENT IN LICENSE AGREEMENT AND
OTHER ASSETS ACQUIRED
AGREEMENT BETWEEN THE COMPANY, M. BERTIL AKESSON, SOCIETE MINIERE
DE LA GRANDE ILE, AND SOMAGRA
On July 27, 2005, the Company entered into an agreement with Bertil
Akesson ("Akesson"), Le President Directeur General of Societe Miniere
de la Grande Ile and Societe Malagese du Graphit (SOMAGRA) by which the
Company will purchase 50% ownership of all SOMAGRA's owned right and
interest in mining claims and leases comprising the Ambatomitamba
Graphite Mine and four contiguous graphite mines located in Madagascar
as well as all equipment on site. Ownership will be unencumbered. The
Company will operate under the name SOMAGRA.
By terms of the agreement, the Company will finance, manage, operate
and develop the graphite mines.
The purchase agreement calls for the Company to purchase this 50%
ownership by payment of $3.0 million. The payment of the purchase price
is to be paid by $1.2 million in cash, of which $1,200,000 has been
paid and reflected as a deposit at June 30, 2006. The additional $1.8
million is due at the earliest date after all governmental approvals,
mining permits and licenses are secured through the issue of 1,669,067
shares of the Company's common stock.
In addition, the Company entered into an agreement by which the Company
will have the option to purchase the remaining 50% ownership of all
SOMAGRA's owned right and interest in mining claims and leases
comprising the Ambatomitamba Graphite Mine and four contiguous graphite
mines located in Madagascar as well as all equipment on site.
The option agreement calls for the Company to purchase this 50%
ownership by payment of $3.0 million. The payment of the purchase price
is to be paid by $1.2 million in cash and $1.8 million in equity. The
$1.8 million in stock will be based on the then current market price of
the Company's stock. The $1.2 million in cash will be paid in 4 equal
installments of $300,000 due July 1 of each year beginning in 2006. A
lump sum interest payment of $75,000 was paid with the first
installment of $300,000 in July 1, 2006.
There is currently no mining activity. The Company is developing a mine
operations plan with current activities limited to establishing
pre-production mine processes.
AGREEMENT BETWEEN THE COMPANY AND CHENZHOU GLOBAL GRAPHITE INC.
On October 13, 2005, the Company purchased a 37.125% interest in
Chenzhou Global Graphite Inc. (a company incorporated in Hunan
Province, China) ("Chenzhou") which was established during 2005 and
continues to develop its business. Chenzhou has successfully developed
patented purification technology which increases carbon levels of
amorphous graphite. High level fixed carbon amorphous graphite (99.2+%
fixed carbon) represents the potential for better and lower cost
material solutions for numerous industrial applications. The Company
and Chenzhou will collaborate to commercialize the product potential of
the patented technology. In addition, Chenzhou has an agreement to
become the majority owner and the licensed operator of a graphite mine
in Jiangxi Province, China. Chenzhou will also have mining rights and
licenses for mining amorphous graphite in Hunan Province. The
transaction entailed a share exchange of 270,815 common shares issued
by the Company for 3,712,500 common shares representing 37.125%
ownership of Chenzhou (value of $1,652,186). The Company was
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
NOTE 3 - DEPOSIT ON INVESTMENT IN COMPANY, INVESTMENT IN LICENSE AGREEMENT AND
OTHER ASSETS ACQUIRED (CONTINUED)
AGREEMENT BETWEEN THE COMPANY AND CHENZHOU GLOBAL GRAPHITE INC.
(CONTINUED)
also required to purchase an additional 787,500 shares, 7.875%
ownership, for $350,000 cash.
On June 25, 2006, this agreement was modified to the extent that the
Company released its ownership interest in Chenzhou in exchange for a
license agreement.
The license agreement establishes the Company as the exclusive
perpetual licensee, a collaborative developer of the technology and as
the sole party to commercialize the business potential of the
technology. The Company negotiated the license in favor of surrendering
its common equity interest and other financial commitments to Chenzhou.
The license encompasses the exploitation of all of the assets of
Chenzhou, which includes mine licenses as and when granted and mine
properties controlled by Chenzhou. Payment of the license was
accomplished by credit of 270,815 common shares issued previously by
Graphite Technology Group, Inc., and $350,000 cash advances, resulting
in 270,815 common equity shares in the capital stock of the Company and
23,764 Series D Preferred stock of the Company The Company has no
continuing financial commitments to Chenzhou Global, however expects to
continue financial assistance to further the development and
commercialization of Chenzhou's technology and mine development.
Chenzhou has the option to acquire a 55% economic interest in the Jin
Chuan graphite mine, Jiangxi Province. The Company has the option,
granted by Chenzhou, to purchase directly a 27.5% ownership of the Jin
Chuan Graphite Mine. Chenzhou would purchase the remaining 27.5%, which
purchase would comprise part of the license.
NOTE 4 - NOTES PAYABLE, DEMAND
Notes payable, demand, decreased $150,000 during the period ended June
30, 2006 due to a repayment to a related party. During the period ended
June 30, 2005, there were $150,000 in new borrowings from related
parties and an additional increase of $135,986 due to long-term debt
that was reclassified to demand debt.
Note 5 - Long-Term Debt
DURING THE PERIOD ENDED JUNE 30, 2006, THE COMPANY BORROWED THE
FOLLOWING:
The Company's subsidiary, GTG Carbons, LLC, borrowed $2,650,000 to
acquire a warehouse in Aliquippa, Pennsylvania. The total purchase
price was $2, 900,000, the Company paid $250,000 and the seller,
Mechanical Service Company, Inc., held a mortgage for $2,650,000. The
terms of the mortgage call monthly payments of $19,445 through December
2007, thereafter the monthly payments are $25,325 through May 2011 with
a ballon payment on June 1, 2011. Interest is charged at 8% and the
mortgage is secured by the building and is guaranteed by the Company.
The Company borrowed $30,029 from Keystone Nazareth Bank & Trust to
purchase a vehicle. The terms of the note are payments of $726 through
May 2010 with interest charged at 6.5%. The loan is collateralized by a
vehicle.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
DURING THE PERIOD ENDED JUNE 30, 2005, THE COMPANY BORROWED THE
FOLLOWING:
The Company borrowed $425,000 from Keystone Nazareth Bank & Trust. The
terms of the note are payments of interest with a principal payment of
$425,000 due on April 1, 2006. Interest is charged at the Bank's Prime
Rate plus one percent.
NOTE 6 - STOCKHOLDERS' EQUITY
Series B preferred stock consists of 100,000,000 authorized, nonvoting
shares with a $0.001 par value. All Series B Shares were issued at .55
per share and are immediately convertible at the option of the holder
into one share of common stock. In the event of a liquidation or
dissolution of the Company, the Series B Shares automatically convert
into shares of common stock at an effective conversion price of $.55
per share. We can redeem the Series B Shares at any time at our option
at a redemption price of $.01 per share so long as (i) the average of
the closing bid prices of our common stock during the twenty trading
days preceding the redemption notice date equals or exceeds $1.00 per
share; and (ii) the shares of common stock issuable upon conversion
are either subject to an effective registration statement under the
Securities Act of 1933, or transferable pursuant to Rule 144(k)
promulgated thereunder. Series C Preferred stock consists of
100,000,000 authorized, nonvoting shares with a $0.001 par value. Each
share of Preferred Stock shall be converted into that number of shares
of Common Stock equal to the original issue price of the Preferred
Stock ($17.00) divided by $0.17 (as same may be adjusted, the
"Conversion Price") upon the earlier of: (i) the filing of an
amendment to the Articles of Incorporation of the Company increasing
the number of shares of Common Stock the Company is authorized to
issue such that a sufficient number of shares of Common Stock is
authorized and unissued so that each share of Series C Preferred Stock
can be converted into Common Stock; or (ii) the first business day
after the effective date of a reverse stock split of the outstanding
shares of Common Stock such that a sufficient number of shares of
Common Stock is authorized and unissued so that each share of Series C
Preferred Stock can be converted into Common Stock. Each Warrant is
initially exercisable into 50 shares of Common Stock at an initial
exercise price of $0.34 per share. The Preferred Stock, the Warrants
and the shares of Common Stock issuable upon conversion of the
Preferred Stock or exercise of the Warrants are hereinafter referred
to collectively as the "Securities."
Series D convertible preferred stock consists of 585,000 authorized,
nonvoting shares with a $0.001 par value. Each share of Series D
Preferred Stock will automatically convert into 100 shares of Common
Stock upon the earlier of: (i) the filing of an amendment to the
Company's Articles of Incorporation increasing the number of
authorized shares of Common Stock such that a sufficient number of
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
shares of Common Stock is authorized and unissued so that each share
of Series D Preferred Stock may be converted into Common Stock or (ii)
the first business day after the effective date of a reverse stock
split of the outstanding shares of Common Stock such that a sufficient
number of shares of Common Stock is authorized and unissued so that
each share of Series D Preferred Stock may be converted into Common
Stock. The holders of Series D Preferred Stock will have no
liquidation preference, voting rights or rights to receive dividends.
These shares were granted to all holders of outstanding shares of the
Company's common stock as of the date of the Merger. As noted in Note
1, these shares have been given retroactive effect as if the
transaction had occurred on March 31, 2006.
Series E convertible preferred stock consists of 14,546 authorized,
nonvoting shares with a $0.001 par value. These shares will be
convertible into an aggregate of 3,500,000 shares of Common Stock.
Each share of Series E Preferred Stock will be Convertible into shares
of Common Stock at the option of the holder commencing upon the
earlier of: (i) the filing of an amendment to the Company's Articles
of Incorporation increasing the number of authorized shares of Common
Stock such that a sufficient number of shares of Common Stock is
authorized and unissued so that each share of Series E Preferred Stock
may be converted into Common Stock or (ii) the first business day
after the effective date of a reverse stock split of the outstanding
shares of Common Stock such that a sufficient number of shares of
Common Stock is authorized and unissued so that each share of Series E
Preferred Stock may be converted into Common Stock. Subject to the
rights of holders of any series of preferred stock which by its terms
is senior to the Series E Preferred Stock , in the event of any
liquidation, dissolution winding up of the Company, holders of the
Series E Preferred Stock will be entitled to receive in preference to
the holders of Common Stock an aggregate amount of approximately
$1,500,000. The holders of the Series E preferred stock shall be
entitled to receive, out of any assets legally available therefore,
cumulative dividends at the rate of five percent (5%) per annum,
accrued daily and payable in preference and priority to any payment of
any dividend on the common stock. These shares of Series E preferred
stock shall be convertible, at the option of the holders, into an
aggregate of 3,500,000 shares of the Company's common stock. As noted
in Note 1, these shares have been given retroactive effect as if the
transaction had occurred on March 31, 2006.
During the period ended June 30, 2006, the Company issued 19,127
shares of common stock to various individuals and entities in
consideration for extending loan provisions. These transactions were
valued at $63,650.
The Company effected a reverse stock split on July 25, 2006. Please
see Note 9 for further discussion.
NOTE 7 - INCOME TAXES
The Company has fully reserved for all state and federal net operating
loss carryforwards, thus there is no income tax benefit recorded due
to the uncertainty as to the company's ability to realize net
operating loss carry-forwards that are available to offset taxable
income in future periods.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
NOTE 8 - EARNINGS PER SHARE
The Company's calculation of earnings per share is as follows:
JUNE 30, 2006 JUNE 30, 2005
-------------------------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ($1,009,791) ($564,984)
================ ================
AVERAGE BASIC AND DILUTED SHARES OUTSTANDING 13,933,826 5,024,485
================ ================
NET LOSS PER COMMON SHARE
Basic and Diluted ($0.07) ($0.11)
================ ================
For the period ended June 30, 2006, the following shares have been
excluded from the computation of diluted earnings per share as they
would be antidilutive: 829,775 shares of Series B convertible preferred
shares that are convertible into 138,296 shares of common stock;
326,057 shares of Series C convertible preferred shares that are
convertible into 319,664 shares of common stock; 585,000 shares of
Series D convertible preferred shares that are convertible into
9,750,000 shares of common stock; 14,546 shares of Series E convertible
preferred shares that are convertible into 583,333 shares of common
stock; stock warrants convertible into 4,689,837 shares of common
stock; and stock options convertible into 366,667 share of common
stock.
NOTE 9 - SUBSEQUENT EVENTS
PRIVATE PLACEMENT
On July 17, 2006, the Company completed a $4.5 Million institutional private
placement of 9% guaranteed exchangeable notes due January 12, 2010. The notes
were issued by iCarbon Corporation's subsidiary, Graphite Technology Group, Inc.
and are guaranteed by the Company to Millennium Global Special Situations
Americas Fund. The notes are exchangeable for shares of the Company's common
stock at an exchange price of $0.23 per share subject to adjustment.
Under the purchase agreement for the notes, the investor also received warrants
exercisable for five years from the issue date to purchase up to approximately
9.8 million shares of the Company's common stock at an exercise price of $0.34
per share subject to adjustment. The purchase agreement calls for the Company to
register the shares issuable upon the exchange of the notes and the exercise of
the warrants for resale on behalf of the investor.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
NOTE 9 - SUBSEQUENT EVENTS (CONTINUED)
ACQUISITION OF CLASSIFIER MILLING SYSTEMS CORP.
iCarbon Canada Ltd., a wholly owned foreign subsidiary of iCarbon Corporation
acquired Classifier Milling Systems Corp. ("CMS"), a Canadian private company in
the business of designing, engineering and manufacturing milling equipment for
use in separation, reduction, classifying and routing raw materials. The
acquisition was completed July 27, 2006.
The acquisition terms included a cash payment of US $1 million dollars, issue of
$3 million principal amount of Promissory Notes and provisions to pay $1 million
of the Promissory Note by issuance of common equity shares of iCarbon
Corporation.
CMS engineers and manufactures conventional and custom milling process
systems (Hammer Mills, Air Classifier Mills, Cyclones and Cyclone
Classifiers, Dust Collectors, Chill Roll Assemblies, Extruders, Paddle/Ribbon
Mixers). CMS milling systems are used for production of powdered graphite and a
range of industrial minerals as well as plastics, rubber, paints,
petrochemicals, cement, food stocks, pharmaceutical, cosmetic, and refractory
materials. CMS manufactures systems ranging from 1HP to 400HP for small, medium
and large systems users that process up to 15,000 tons per annum rated capacity
from a single system.
REVERSE STOCK SPLIT
On July 25, 2006, the Company effected a reverse stock split of its common stock
outstanding at a ratio of one share for every six shares outstanding. After
giving effect to the reverse split, 15,965,068 shares of the Company's common
stock were outstanding. In addition, the Company also issued 16,398,142 shares
of its common stock pursuant to the terms of certain convertible notes and
Series C and Series D Preferred Stock, after which issuance the Company's issued
and outstanding shares of common stock total 32,363,210.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's consolidated
financial statements and the accompanying notes thereto included herein. This
Quarterly Report on Form 10-QSB includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which could cause the actual results, performance (financial or
operating) or achievements expressed or implied by such forward-looking
statements not to occur or be realized. Such forward-looking statements
generally are based upon the Company's best estimates of future results,
performance or achievement, based upon current conditions, and based upon the
most recent results of operations. Forward-looking statements may be identified
by the use of forward-looking terminology such as "may", "will," "expect,"
"believe," "estimate," "anticipate," "continue" or similar terms, variations of
those terms or the negative of those terms.
Potential risks and uncertainties include, among other things, such factors as:
(i) dependence on foreign suppliers for raw materials; (ii) the price for
graphite and carbon materials is difficult to predict; (iii) reserves and
mineral resources are only estimates and may be inaccurate; (iv) title to our
mines may be challenged; and (v) other factors set forth in our other filings
with the Securities and Exchange Commission.
OVERVIEW
Unless the context otherwise requires, references to the "Company,"
"iCarbon Corporation" "BPK Resources," "we," "us" or "our," mean iCarbon
Corporation (formerly known as: BPK Resources, Inc.) and our consolidated
subsidiaries.
This Management's Discussion and Analysis and other parts of this report
contain forward-looking statements that involve risks and uncertainties. All
forward-looking statements included in this report are based on information
available to us on the date hereof, and as except as required by law, we assume
no obligation to update any such forward-looking statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth in Item
2.01 of our previous filed Form 8-K dated April 19, 2006 under the caption "Risk
Factors". The following should be read in conjunction with our financial
statements and the related notes included elsewhere herein.
18
OVERVIEW OF CURRENT BUSINESS
Prior to April 19, 2006, the Company's business almost entirely related to
its working interests in oil and gas development operations. Following the
merger with Graphite Technology, the business of the Company is conducted
exclusively by its wholly owned subsidiary. Our current business is mining,
manufacturing/processing and selling natural and synthetic graphite, carbon
based materials and industrial minerals and materials for use in numerous
industries and applications. We engineer and process a broad range of graphite
powders and carbon additives, and operate manufacturing facilities in New York
and in two locations in Pennsylvania and we are a co-developer of a processing
plant in Chenzhou City, Hunan Province, China. We own mining rights to operate
graphite mines in Canada and Madagascar and have options to operate mines in
China. Our wholly owned subsidiary, Graphite Technology, is an ISO certified
manufacturer: ISO 9001: 2000.
Scalable processing and mining technology, proprietary formulae and viable
sources of raw material supply owned and controlled by us comprises the
essential business infrastructure for it to compete effectively as a major
supplier of graphite and carbon based materials to diverse industries. Our
long-term business strategy is to build value by developing a fully integrated
mining, manufacturing, processing and sales operations for graphite, carbon
materials (such as activated carbon, metallurgical coke and anthracite) and bulk
industrial minerals and materials and related manufactured products conducive to
our business infrastructure. We believe that the proprietary processing
technology, proprietary formulae, experienced operators and control of important
mine supply sources in Canada, Madagascar and China will accelerate our business
development in an industry that otherwise poses substantial barriers to entry.
Our business strategy was adopted to position the Company as one of few global
integrated suppliers of graphite and carbon products and a number of industrial
minerals and materials.
During the period of this report, management of the Company focused
substantially on the integration and transition of business operations resulting
from the merger and planning the integration of the businesses of the Company's
operating subsidiaries. Management views the Company's worldwide business
infrastructure as critical to the Company's future performance. Business
planning and integration of our subsidiaries is ongoing and remains a continuing
priority.
RECENT DEVELOPMENTS.
On May 31, 2006, GTG Carbons LLC, a wholly owned subsidiary of Graphite
Technology, acquired the former LTV Steel plant in Aliquippa, Pennsylvania on
the Ohio River for $2.9 million from Mechanical Services Inc. The facility is
compromised of approximately 250,000 square foot commercial warehousing with
proximity to barge and crane loading and related materials handling equipment
and 15 acres of commercial zoned land. We plan to utilize the river port and
warehousing facility for receiving and warehousing and processing bulk raw
materials and finished goods. During the period from closing until present, we
began and currently have an ongoing building improvements program to establish
the facility for anticipated commercial operations.
On June 25, 2006, we amended and agreed to rescind the effect of the
Purchase and Sale Agreement of October 13, 2005 between Graphite Technology and
Chenzhou Global Graphite Inc., by which we acquired 45% common equity interest
in Chenzhou Global Graphite. On June 26, 2006 the 45% equity interest we
previously acquired was exchanged for a license agreement providing Graphite
Technology with the exclusive perpetual right to use and further develop the
carbon purification technology owned by Chenzhou Global Graphite and to receive
any and all associated benefits therefrom to the extent of a 45% participation
in any earnings or distribution of assets by Chenzhou Global Graphite.
On July 27, 2006, we purchased Classifier Milling Systems Corp., a Canada
private company in the business of designing, engineering, and manufacturing
milling equipment for use in separation, reduction, classifying and routing raw
materials.
OUTLOOK
The graphite and carbon materials markets that we serve are significant in
scale and diversity and allow for significant growth. We have industry
experienced operators, control of sources of long-term graphite supply, have
established trade secret proprietary technology and product formulas, which
together comprise an infrastructure that we believe will result in the Company's
products being accepted by customers on an accelerated basis. We believe that
our business infrastructure will support rapid growth in all business lines in
which we compete.
19
The business of the Company is partly dependent upon overall prevailing
worldwide economic conditions over time, and particularly the prevailing
economic conditions in the United States and the effect of that on periodic
growth or decline in basic industries such as steel and metals, refractory,
automotive and aerospace and electronics manufacturing industries. In addition,
the business of the Company could be significantly affected by the
commercialization of fuel cell technology and carbon based composite materials
as well as the rate of development of applications utilizing carbon based
materials solutions. The Company is an integrated resource and manufacturing
concern and our business results will also be affected by our actual production
costs of mining, production yield, and the then prevailing prices for mined
materials as well as production levels of worldwide mining competitors. The
Company's primary mining activities are currently being established in China and
Madagascar and are planned to be established in Canada at a later date. Mined
natural graphite prices for volume grade materials are fully negotiated and
there is no commodities exchange or futures market where graphite is traded.
Historically, Chinese graphite mine suppliers have supplied greater than 50% of
the graphite materials sold to world markets. In recent years, the price for
graphite has increased, partly due to the increased use of graphite due to
economic growth and modernization of China's domestic economy and regional
growth in Asia and India, and partly due to depletion of mined graphite from
current operating mines, primarily in China.
REVENUES
Revenues were $374,255 for our fiscal quarter ended June 30, 2006 as
compared to $306,590 for our fiscal quarter ended June 30, 2005.
General and Administrative Expenses
General and administrative expenses consist of consulting and engineering
fees, professional fees, employee compensation, office rents, travel and
utilities, and other miscellaneous general and administrative costs. General and
administrative expenses were $1,103,291 for the fiscal quarter ended June 30,
2006 compared to $627,041 for our fiscal quarter ended June 30, 2005. The
increase was due primarily due to an increase in professional fees incurred in
connection with our financing transactions, acquisition of Graphite Technology,
and compliance with our reporting obligations under federal securities laws. As
a result of the acquisition and the business development of subsidiaries and new
acquired businesses and addition of key personnel, we expect general and
administrative expenses to increase substantially in future periods.
Interest Expense
Interest expense consists of certain cash and noncash charges and interest
accrued on our various debt obligations. Interest expense was $72,078 for our
fiscal quarter ended June 30, 2006 compared to $73,621 for our fiscal quarter
ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations primarily through
private sales of equity securities and the use of short and long-term debt. As
of June 30, 2006, we had a cash balance of $233,619.
20
At June 30, 2006, we had a working capital deficit of $3,557,026 as
compared to a deficit of $5,759,534 at June 30, 2005.
Our principal sources of financing over the past three months are described
below.
During the period of the current report we obtained gross proceeds of
$2,339,999 through the issuance of 137,647 units consisting of shares of Series
C Convertible Preferred stock and warrants to purchase an aggregate of 6,882,350
shares of common stock. Each share of Series C Preferred Stock has an original
issue price of $17.00 and will automatically convert into shares of common stock
at a conversion price of $0.17 per share upon the earlier of: (i) the filing of
an amendment to our Articles of Incorporation increasing the number of shares of
common stock we are authorized to issue so that each share of Series C Preferred
Stock may be converted into common stock; or (ii) the first business day after
the effective date of a reverse stock split of our outstanding shares of common
stock such that we have sufficient number of authorized and unissued shares so
that each share of Series C Preferred Stock may be converted into common stock.
Each warrant comprising part of the unit of Series C Preferred Stock is
exercisable at an exercise price of $0.34 per share. The exercise period for the
Warrants commences on the date which is the earlier of: (i) the filing of an
amendment to our Articles of Incorporation increasing the number of shares of
common stock we are authorized to issue so that each warrant may be exercised in
full; or (ii) the first business day after the effective date of a reverse stock
split of our outstanding shares of common stock such that we have sufficient
number of authorized and unissued shares so that each warrant may be exercised
in full.
The foregoing constitutes our principal sources of financing during the
past 3 months. We do not currently maintain a line of credit or term loan with
any commercial bank or other financial institution.
Based on our available cash resources, securities subscribed for, and
expected revenues from operations, we will have sufficient funds to continue to
operate at current levels for the next 12 months. We intend to obtain additional
funds through sales of debt or equity securities in order to fully implement our
business. The sale of additional equity or convertible debt securities would
result in additional dilution to our shareholders. The issuance of additional
debt would result in increased expenses and could subject us to covenants that
may have the effect of restricting our operations. We have not made arrangements
to obtain additional financing and we can provide no assurance that additional
financing will be available in an amount or on terms acceptable to us, if at
all. If we are unable to obtain additional funds when they are needed or if such
funds cannot be obtained on terms favorable to us, we may be unable to execute
upon our business plan or pay our costs and expenses as they are incurred, which
could have a material, adverse effect on our business, financial condition and
results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2006, we did not have any relationships with
unconsolidated entities or financial partners, such as entities often referred
to as structured finance or special purpose entities that had been established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.
21
ITEM 3. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of our "disclosure controls and
procedures" (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out by us under the supervision and with the participation of our Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based upon that
evaluation, our CEO and CFO concluded that, as of the end of the period covered
by this quarterly report, our disclosure controls and procedures were not
effective to provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms. Specifically, our CEO and
CFO concluded that, in light of the fact that we have had to file for extensions
of the due date for a number of the periodic reports we are required to file
with the Securities and Exchange Commission, our controls and procedures were
not effective to provide reasonable assurance that such reports are filed or
submitted timely with the Securities and Exchange Commission. There has been no
change in our internal control over financial reporting identified in connection
with that evaluation that occurred during the period covered by this report that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
22
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings involving the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
At the close of business on July 24, 2006, the Company issued a total of
16,398,142 shares of common stock upon the automatic conversion of certain
convertible promissory notes and the Company's Series C and Series D preferred
stock. The Company relied on the exemption from registration provided by Section
4(2) of the Securities Act of 1933.
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 AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification by President and Chief Executive Officer, James E. Olive,
pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer David Laudeman, pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification by President and Chief Executive Officer, James E. Olive,
pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer David Laudeman, pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
On May 10, 2006, the Company filed a current report on Form 8-K to report a
change in accountants.
On July 14, 2006, the Company filed a current report on Form 8-K/A to provide
the financial statements of Graphite Technology Group, Inc. for its fiscal years
ended March 31, 2006 and 2005 and to report a change in the Company's fiscal
year.
On July 17, 2006, the Company filed a current report on Form 8-K to report that
the Company entered into a Note and Warrant Purchase Agreement.
On July 25, 2006 the Company filed a current report on Form 8-K to report a one
for six reverse stock split and a name change to iCarbon Corporation.
On August 1, 2006, the Company filed a current report on Form 8-K to report the
acquisition of Classifier Milling Systems Corp.
23
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed by the undersigned, thereunto duly authorized.
Date: August 21, 2006 ICARBON CORPORATION
By :/s/ James E. Olive
-----------------------------------
James E. Olive
President and Chief
Executive Officer
By: /s/ David Laudeman
-----------------------------------
David Laudeman
Chief Financial Officer
24