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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Amendment No. 1)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
COMMISSION FILE NO.: 0-28887
CARBONICS CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-3328734
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(State of other jurisdiction of IRS Employer
incorporation or organization) Identification No.)
One Penn Plaza, Suite 1612, New York, New York 10119
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(Address of principal executive offices) (Zip Code)
(212) 994-5374
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(Registrant's telephone number including area code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 406 of the Securities Act. Yes No X
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
--- ---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer Accelerated filer
--- ---
Non-accelerated filer Small reporting company X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of outstanding shares of common stock and value of the voting stock
held by non-affiliates of the Registrant as of April 14, 2009 was 133,179,491.
Amendment No. 1
This Amendment No.1 on Form 10-K/A, which amends and restates items identified
below with respect to the Form 10- K, filed by Carbonics Capital Corporation
("we" or "the Company") with the Securities and Exchange Commission (the "SEC")
on April 14, 2009 (the "Original Filing"), is being filed to in order to:
o Include restated financial statements as described in Note 12 to the
financial statements;
o Amend Item 8A, Controls and Procedures, to reflect the modification to
management's assessment of its disclosure controls and procedures
caused by the restatement and to provide further disclosures;
o Amend Item 7, Management's Discussion and Analysis, to reflect the
amended financial statements and otherwise as follows:
o the paragraph titled Expenses Associated with Change in
Convertible Liabilities was added;
o the paragraph titled Gain Associated with Derivative Instruments
was deleted;
o the breakdown of working capital deficit was updated
o Amend the following notes under Item 8, Financial Statements and
Supplementary Schedules, to reflect the amended financial statements:
o The report of Independent Registered Public Accounting Firm was
updated to reflect restatement;
o Note 1, Acquisition, was updated with respect to the terms of the
Stock Purchase Agreement between the Company and GS AgriFuels;
o Note 3, Going Concern, was updated to restate the Company's
working capital deficit;
o Note 4, Significant Accounting Policies, the Financial
Instruments section was modified as well as the New Accounting
Pronouncements section
o Note 5, Financing Arrangements, was updated to restate the
schedule of financial obligations;
o Note 6, Embedded Derivatives, was deleted; and,
o Note 12, Restatement, was added to outline the changes that were
made to the financial statements.
None of the other disclosures in this Report have been amended or updated. For
updated information about the Company, please refer to the more recent filings
made with the SEC.
2
CARBONICS CAPITAL CORPORATION
ANNUAL REPORT ON FORM 10K
FOR THE FISCALYEAR ENDED DECEMBER 31, 2008
TABLE OF CONTENTS
Page
Part I
Item 1 Business ........................................................................................4
Item 1A Risk Factors.....................................................................................5
Item 2 Description of Properties........................................................................7
Item 3 Legal Proceedings................................................................................7
Item 4 Submission of Matters to a Vote of Security Holders .............................................7
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchase of Equity Securities ......................................................8
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis.............................................................9
Item 8 Financial Statements and Supplementary Data.....................................................11
Item 9 Changes and Disagreements with Accountants on Accounting and Financial Disclosure ..............23
Item 9A Controls and Procedures ........................................................................23
Item 9B Other Information...............................................................................25
Part III
Item 10 Directors, Executive Officers and Corporate Governance ........................................25
Item 11 Executive Compensation .........................................................................25
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ....................................................................26
Item 13 Certain Relationships and Related Transactions and Director Independence .......................26
Item 14 Principal Accountant Fees and Services .........................................................28
Part IV
Item 15 Exhibits and Financial Statement Schedules .....................................................28
Signatures..................................................................................................34
3
PART I
Basis of Presentation
In this Annual Report on Form 10-K, the terms "we," "our," "us," "Carbonics,"
"Carbonics Corporation" or the "Company" refer to Carbonics Capital Corporation,
and its subsidiaries on a consolidated basis. The term "Carbonics Capital
Corporation" refers to Carbonics Capital Corporation on a stand alone basis
only, and not its subsidiaries.
Forward Looking Statements
We make certain forward-looking statements in this Annual Report on Form 10-K
and in the documents that are incorporated herein by reference. These
forward-looking statements relate to our outlook or expectations for earnings,
revenues, expenses, asset quality or other future financial or business
performance, strategies or expectations, or the impact of legal, regulatory or
supervisory matters on our business, results of operations or financial
condition. Specifically, forward-looking statements may include statements
preceded by, followed by or that include the words "estimate," "plan,"
"project," "forecast," "intend," "expect," "anticipate," "believe," "seek,"
"target" or similar expressions. These statements reflect our management's
judgment based on currently available information and involve a number of risks
and uncertainties that could cause actual results to differ materially from
those in the forward-looking statements. Future performance cannot be ensured.
Actual results may differ materially from those in the forward-looking
statements. Some factors that could cause our actual results to differ include:
>> the volatility and uncertainty of commodity prices;
>> the costs and business risks associated with developing new products
and entering new markets;
>> our ability to locate and integrate future acquisitions;
>> the impact of new, emerging and competing technologies on our
business;
>> the possibility of one or more of the markets in which we compete
being impacted by political, legal and regulatory changes or other
external factors over which they have no control;
>> changes in or elimination of governmental laws, tariffs, trade or
other controls or enforcement practices;
>> our reliance on key management personnel;
>> limitations and restrictions contained in the instruments and
agreements governing our indebtedness;
>> our ability to raise additional capital and secure additional
financing;
>> our ability to implement additional financial and management controls,
reporting systems and procedures and comply with Section 404 of the
Sarbanes-Oxley Act, as amended; and
>> other risks referenced from time to time in our filings with the SEC
and those factors listed in this Form 10K under Item 1A, Risks
Factors, beginning on page 24.
You are cautioned not to place undue reliance on any forward-looking statements,
which speak only as of the date of this Form 10-K, or in the case of a document
incorporated by reference, as of the date of that document. Except as required
by law, we undertake no obligation to publicly update or release any revisions
to these forward-looking statements to reflect any events or circumstances after
the date of this Form 10-K or to reflect the occurrence of unanticipated events.
4
ITEM 1 BUSINESS
OVERVIEW
We develop renewable energy projects that facilitate the more efficient use of
carbon in energy supply chains. Our development activities during 2008 primarily
involved evaluation of a number of different chemical and other technologies
designed to separate carbon dioxide from exhaust for conversion into value-added
carbonaceous products.
We are party to a technology commercialization agreement with GreenShift
Corporation, which company is majority owned by our majority shareholder,
Viridis Capital, LLC, pursuant to which GreenShift has agreed to provide
commercialization support services and access to GreenShift's rights to sell and
use a proprietary biomass gasification technology in fields of use outside of
the corn ethanol industry. Carbonics will pay GreenShift a royalty equal to 10%
of the pre-tax net income generated by Carbonics through use of this technology.
Our strategic plan also involves the acquisition of accretive assets and cash
flows that are strategic to our technology development efforts. We are currently
evaluating a number of qualified opportunities that produce the raw materials
needed for our technologies, or that have the infrastructure we need to scale
our technologies, or that have the ability to refine the products we produce
with our technologies into finished goods. Our plan in this respect is to
leverage the targeted assets and cash flows to defray our technology and
financing risk as we commercialize our technologies.
INTELLECTUAL PROPERTIES
Carbonics, Carbonics Capital Corporation, and the "Carbonics Logo" are the
registered trademarks of Carbonics Capital Corporation.
Carbonics is party to a technology commercialization agreement with GreenShift,
pursuant to which GreenShift has agreed to provide commercialization support
services and access to GreenShift's rights to sell and use a proprietary biomass
gasification technology in fields of use outside of the corn ethanol industry.
This technology was developed by ZeroPoint Clean Tech, Inc., a renewable energy
technology and project development company. ZeroPoint believes that it has
developed a highly efficient biomass gasification process capable of converting
biomass into renewable synthesis gas to create carbon-neutral energy. Additional
information is available online at www.zeropointcleantech.com.
EMPLOYEES
As of December 31, 2008, Carbonics Capital employed 2 at will employees. There
is no union representation for any of our employees.
ITEM 1A RISK FACTORS
There are many important factors that have affected, and in the future could
affect, Carbonics' business, including, but not limited to the factors discussed
below, which should be reviewed carefully together with other information
contained in this report. Some of the factors are beyond our control and future
trends are difficult to predict.
There is substantial doubt concerning our ability to continue as a going
concern.
Carbonics had a loss from continuing operations of $6,383,036 during the twelve
months ended December 31, 2008, and had $0 in cash at December 31, 2008. These
matters raise substantial doubt about our ability to continue as a going
concern. Management's plans include raising additional proceeds from debt and
equity transactions and completing strategic acquisitions.
We are implementing new business plans which make the results of our business
uncertain.
Our limited operating history makes it difficult for potential investors to
evaluate our business. Therefore, our proposed operations are subject to all of
the risks inherent in the initial expenses, challenges, complications and delays
frequently encountered in connection with the formation of any new business, as
well as those risks that are specific to the biodiesel, ethanol and culinary
oils industry in general. Investors should evaluate an investment in our company
in light of the problems and uncertainties frequently encountered by companies
attempting to develop markets for new products, services and technologies.
Despite best efforts, we may never overcome these obstacles to achieve financial
success. Our business is speculative and dependent upon the implementation of
our business plan, as well as our ability to enter into agreements with third
parties for necessary financing, the provision of necessary feedstock sources,
engineering, procurement and construction services and the sale and distribution
of our biodiesel fuel on terms that will be commercially viable for us. There
can be no assurance that our efforts will be successful or result in revenue or
profit. There is no assurance that we will earn significant revenues or that our
investors will not lose their entire investment.
5
The fiscal efficiencies of highly capitalized competitors in biotechnology could
defeat our efforts to capture a viable market share.
The business of developing new biotechnologies is a capital-intense business,
requiring substantial capital resources. The costs that we may incur in
obtaining capital are substantially greater per dollar than the cost incurred by
large scale enterprises in the industry. This situation could cause us to be
unable to compete effectively.
The exercise of our outstanding warrants and options and Carbonics Capital
Corporation's various anti-dilution and price-protection agreements could cause
the market price of our common stock to fall, and may have dilutive and other
effects on our existing stockholders.
The exercise of our outstanding warrants and options could result in the
issuance of up to 1,438,516 shares of common stock, assuming all outstanding
warrants and options are currently exercisable. Such issuances would reduce the
percentage of ownership of our existing common stockholders and could, among
other things, depress the price of our common stock. This result could
detrimentally affect our ability to raise additional equity capital. In
addition, the sale of these additional shares of common stock may cause the
market price of our stock to decrease.
We lack capital to fund our operations.
During the twelve months ended December 31, 2008 our operations used $607,566 in
cash, but our debt service obligations required cash in excess of that amount.
Loans from some of our shareholders and the issuance of convertible debentures
funded our debt service. Those individuals may not be able to continue to fund
our operations or our debt service.
Our failure to attract qualified engineers and management personnel could hinder
our success.
Our ability to attract and retain qualified engineers and other professional
personnel when we need them will be a major factor in determining our future
success. There is a very competitive market for individuals with advanced
engineering training, and we are not assured of being able to retain the
personnel we will need.
Key personnel are critical to our business and our future success depends on our
ability to retain them.
Our success depends on the contributions of our key management, and engineering
personnel. The loss of these officers could result in lost sales opportunities,
lost business, difficulties operating our assets, difficulties raising
additional funds and could therefore significantly impair our financial
condition. Our future success depends on our ability to retain and expand our
staff of qualified personnel, including environmental technicians, sales
personnel and engineers. Without qualified personnel, we may incur delays in
rendering our
Viridis Capital can exert control over us and may not make decisions that
further the best interests of all stockholders.
Viridis Capital, LLC controls 100% of our outstanding Series C preferred stock.
The preferred shares are convertible into 80% of our Common Stock. As a result,
Viridis exerts a significant degree of influence over our management and affairs
and over matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. In addition, this
concentration of ownership may delay or prevent a change in control of us and
might affect the market price of our common stock, even when a change in control
may be in the best interest of all stockholders. Furthermore, the interests of
this concentration of ownership may not always coincide with our interests or
the interests of other stockholders and accordingly, they could cause us to
enter into transactions or agreements which we would not otherwise consider.
Investing in our stock is highly speculative and you could lose some or all of
your investment.
The value of our common stock may decline and may be affected by numerous market
conditions, which could result in the loss of some or the entire amount invested
in our stock. The securities markets frequently experience extreme price and
volume fluctuations that affect market prices for securities of companies
generally and very small capitalization companies such as us in particular.
The volatility of the market for Carbonics Capital Corporation common stock may
prevent a shareholder from obtaining a fair price for his shares.
The common stock of Carbonics Corporation is quoted on the OTC Bulletin Board.
It is impossible to say that the market price on any given day reflects the fair
value of Carbonics Corporation, since the price sometimes moves up or down by
6
50% or more in a week's time. A shareholder in Carbonics Corporation who wants
to sell his shares, therefore, runs the risk that at the time he wants to sell,
the market price may be much less than the price he would consider to be fair.
Our common stock qualifies as a "penny stock" under SEC rules which may make it
more difficult for our stockholders to resell their shares of our common stock.
Our common stock trades on the OTC Bulletin Board. As a result, the holders of
our common stock may find it more difficult to obtain accurate quotations
concerning the market value of the stock. Stockholders also may experience
greater difficulties in attempting to sell the stock than if it were listed on a
stock exchange or quoted on the NASDAQ Global Market or the NASDAQ Capital
Market. Because our common stock does not trade on a stock exchange or on the
NASDAQ Global Market or the NASDAQ Capital Market, and the market price of the
common stock is less than $5.00 per share, the common stock qualifies as a
"penny stock." SEC Rule 15g-9 under the Securities Exchange Act of 1934 imposes
additional sales practice requirements on broker-dealers that recommend the
purchase or sale of penny stocks to persons other than those who qualify as an
"established customer" or an "accredited investor." This includes the
requirement that a broker-dealer must make a determination on the
appropriateness of investments in penny stocks for the customer and must make
special disclosures to the customer concerning the risks of penny stocks.
Application of the penny stock rules to our common stock affects the market
liquidity of the shares, which in turn may affect the ability of holders of our
common stock to resell the stock.
Only a small portion of the investment community will purchase "penny stocks"
such as our common stock.
Carbonics Corporation common stock is defined by the SEC as a "penny stock"
because it trades at a price less than $5.00 per share. Carbonics Corporation
common stock also meets most common definitions of a "penny stock," since it
trades for less than $1.00 per share. Many brokerage firms will discourage their
customers from purchasing penny stocks, and even more brokerage firms will not
recommend a penny stock to their customers. Most institutional investors will
not invest in penny stocks. In addition, many individual investors will not
consider a purchase of a penny stock due, among other things, to the negative
reputation that attends the penny stock market. As a result of this widespread
disdain for penny stocks, there will be a limited market for Carbonics
Corporation common stock as long as it remains a "penny stock." This situation
may limit the liquidity of your shares.
ITEM 2 DESCRIPTION OF PROPERTIES
Carbonics Capital Corporation currently maintains office at One Penn Plaza,
Suite 1612, New York, NY. The lease for this space expires in May of 2011. We
paid $0 in rent during 2008. During 2008 we are being permitted to use the
premises for no charge by GreenShift Corporation, the primary tenant. We believe
these offices will be sufficient for our needs for the foreseeable future.
ITEM 3 LEGAL PROCEEDINGS
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Carbonics Capital Corporation's Common Stock trades on the OTC Bulletin Board
under the symbol "CICS." The following table sets forth, for the periods
indicated, the range of high and low closing bid prices for the Company's Common
Stock during the past two years as reported by the National Association of
Securities Dealers composite feed or other qualified inter-dealer quotation
medium. The reported bid quotations reflect inter-dealer prices without retail
markup, markdown or commissions, and may not necessarily represent actual
transactions.
Period High Low
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2007 First Quarter 2.61 1.70
2007 Second Quarter 1.76 0.50
2007 Third Quarter 1.08 0.58
2007 Fourth Quarter 0.76 0.24
2008 First Quarter 0.030 0.0200
2008 Second Quarter 0.004 0.0040
2008 Third Quarter 0.004 0.0040
2008 Fourth Quarter 0.002 0.0012
Title of Class Approximate Number of Holders of Record as of April 14, 2008
Common Stock, 0.001 par 145
The number of holders does not give effect to beneficial ownership of shares
held in the street name of stock brokerage houses or clearing agents and does
not necessarily reflect the actual ownership of the shares.
REVERSE SPLIT
On February 11, 2008, the Company completed a 1 for 20 reverse stock-split. All
stock prices, share amounts, per share information, stock options and stock
warrants in this Report reflect the reverse stock split.
DIVIDENDS
We have no present intention of paying dividends in the foreseeable future. Our
policy for the time being is to retain earnings and utilize the funds for
operations and growth. Future dividend policies will be determined by the Board
of Directors based on our earnings, financial condition, capital requirements
and other existing conditions.
SALE OF UNREGISTERED SECURITIES
Carbonics Capital Corporation did not sell any unregistered equity securities
during the 4th quarter of 2008.
REPURCHASE OF EQUITY SECURITIES
Carbonics Capital Corporation did not repurchase any of its equity securities
that were registered under Section 12 of the Securities Act during the 4th
quarter of 2008.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
8
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
We develop renewable energy projects that facilitate the more efficient use of
carbon in energy supply chains. Our development activities during 2008 primarily
involved evaluation of a number of different chemical and other technologies
designed to separate carbon dioxide from exhaust for conversion into value-added
carbonaceous products.
We are party to a technology commercialization agreement with GreenShift
Corporation, which company is majority owned by our majority shareholder,
Viridis Capital, LLC, pursuant to which GreenShift has agreed to provide
commercialization support services and access to GreenShift's rights to sell and
use a proprietary biomass gasification technology in fields of use outside of
the corn ethanol industry. Carbonics will pay GreenShift a royalty equal to 10%
of the pre-tax net income generated by Carbonics through use of this technology.
Our strategic plan also involves the acquisition of accretive assets and cash
flows that are strategic to our technology development efforts. We are currently
evaluating a number of qualified opportunities that produce the raw materials
needed for our technologies, or that have the infrastructure we need to scale
our technologies, or that have the ability to refine the products we produce
with our technologies into finished goods. Our plan in this respect is to
leverage the targeted assets and cash flows to defray our technology and
financing risk as we commercialize our technologies.
RESULTS OF OPERATIONS
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues
There were no revenues from continuing operations for the year ended December
31, 2008 or for the twelve months ended December 31, 2007.
All revenues realized in discontinued operations during the year ended December
31, 2007 were due to the operating activities of our former subsidiaries,
GreenShift Corporation, GS EnviroServices, Inc., GS AgriFuels Corporation and
EcoSystem Corporation.
Cost of Revenues
There was no cost of revenues for the year ended December 31, 2008 or for the
year ended December 31, 2007.
All cost of revenues realized in discontinued operations during the year ended
December 31, 2007 were due to the operating activities of our former
subsidiaries, GreenShift Corporation, GS EnviroServices, Inc., GS AgriFuels
Corporation and EcoSystem Corporation.
Selling, General and Administrative Expenses Operating Expenses
Selling, general and administrative expenses during the year ended December 31,
2008 totaled $448,531, including $203,531 in selling, general and administrative
expenses and $245,000 in stock based compensation. In the comparable period of
the prior year, selling, general and administrative expenses totaled $4,777,553,
including $2,189,158 in selling, general and administrative expenses and
$2,588,396 in stock based compensation attributable to selling, general and
administrative expenses. Selling, general and administrative expenses during
2008 primarily consisted of accounting and legal fees, office related expenses
as well as costs associated with payroll. Due to the divestment of our
operations at the end of 2007, selling, general and administrative expenses in
2008 consisted of development costs associated with our planned future projects.
Selling, general and administrative expenses are expected to remain high as a
percentage of sales until such time that the Company can achieve enough revenue
growth and obtain the economies of scale necessary to support these expenses.
Interest Expense
Interest expense for the twelve months ended December 31, 2008 was $177,425,
representing an increase of $56,037 from $121,388 for the same period in 2007.
Expenses Associated with Change in Convertible Liabilities
As of December 31, 2008, the Company had several convertible debentures due to
YA Global Investments, LP. The Company accounted for the convertible debentures
in accordance with SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS 150), as the
9
conversion feature embedded in the convertible debentures could result in the
note principal and related accrued interest being converted to a variable number
of the Company's common shares. We calculate the fair value of the conversion
feature at the time of issuance and record a conversion liability for the
calculated value. We recognize interest expense for the conversion liability
which is added to the principal of the debenture. We also recognize interest
expense for accretion of the conversion liability over the term of the note. The
additional value for the conversion features of $5,757,079 for the year ended
December 31, 2008 have been recognized within Other Income (Expense) as Changes
in conversion liabilities in the accompanying financial statements.
Net Income or Loss
Net loss from continuing operations for the twelve months ended December 31,
2008, was $6,383,036 as compared to a loss from continuing operations of
$13,144,286 from the same period in 2007. The Company transferred its interest
in all of its subsidiaries to GreenShift Corporation during the twelve months
ended December 31, 2007 resulting in a loss on disposal of discontinued
operations of $28,741,853 for the twelve months ended December 31, 2007 which
was excluded from the above figures. Net loss of $6,383,036 for the twelve
months ended December 31, 2008 as compared to a net loss of $41,886,139 for the
same period in 2007 was due primarily to the loss on the disposal of its
subsidiaries as well as increased operating expenses, interest and amortization
charges associated with financing, and issuance of stock based compensation.
Liquidity and Capital Resources
The Company had $10,267,094 in liabilities at the end of the twelve months ended
December 31, 2008, and may need to obtain additional financing to satisfy these
obligations.
Our primary sources of liquidity are cash provided by investing and financing
activities. For the twelve months ended December 31, 2008, net cash used in our
operating activities was $607,566. The Company's capital requirements consist of
general working capital needs, scheduled principal and interest payments on
debt, obligations and capital leases and planned capital expenditures. The
Company's capital resources consist primarily of proceeds from issuance of debt
and common stock. The Company plans to fund ongoing operations during 2008 with
a combination of proceeds from the issuance of debt and equity as well as the
repayment to the Company of loans receivable and other amounts due.
Cash Flows
Our operating activities during the twelve months ended December 31, 2008 used
$607,566 in cash. At December 31, 2008, accounts payable and accrued expenses
totaled $591,511. At December 31, 2008 the Company had $0 cash. For the twelve
months ended December 31, 2008, investing activities provided $0 in cash, and
cash from financing activities of provided $607,566. The Company had a working
capital deficit of $9,880,962 at December 31, 2008, which includes convertible
debentures of $9,235,713.
At the present time, Carbonics Capital has no source of committed capital. We
are currently investigating the availability of both equity and debt financing
necessary to complete the Company's current projects. We do not know at this
time if the necessary funds can be obtained nor on what terms they may be
available.
Off Balance Sheet Arrangements
None.
10
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
Page No
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm...................................................11
Consolidated Balance Sheet ...............................................................................12
Consolidated Statements of Operations ....................................................................13
Consolidated Statements of Stockholders' Equity...........................................................14
Consolidated Statements of Cash Flows.....................................................................15
Notes to Consolidated Financial Statements ...............................................................16
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Carbonics Corporation
We have audited the accompanying balance sheets of Carbonics Corporation as of
December 31, 2008 and 2007, and the related statements of income, stockholders'
equity and cash flows for each of the years in the two-year period then ended.
Carbonics Corporation's management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Carbonics Corporation as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the years in the two-year period then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully discussed in Note 3 to
the financial statements, the Company has suffered losses from operations and
has a working capital deficiency as of December 31, 2008. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 12, the financial statements as of and for the year ended
December 31, 2008 have been restated.
/s/ Rosenberg Rich Baker Berman & Company
Somerset, New Jersey
April 15, 2009, except for Note 12 as to which the date is January 14, 2010
12
CARBONICS CAPITAL CORPORATION
BALANCE SHEET
DECEMBER 31, 2008
RESTATED RESTATED
12/31/2008 12/31/2007
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ASSETS
Current Assets:
Cash $ -- $ --
Note receivable - related party 386,132 2,948,831
Interest receivable - related party -- 196,832
------------- -------------
Total current assets 386,132 3,145,663
Furniture and equipment - net -- 69,628
Deposits -- 32,515
------------- -------------
TOTAL ASSETS $ 386,132 $ 3,247,806
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $ 591,511 $ 1,064,672
Liabilities to be settled in stock -- 407,333
Accrued interest 439,870 262,445
Convertible debentures 9,235,713 3,605,467
Current maturities of long term debt -- 26,329
------------- -------------
Total current liabilities 10,267,094 5,366,246
------------- -------------
TOTAL LIABILITIES 10,267,094 5,366,246
------------- -------------
Preferred stock
Series C, par $0.001, 1,000,000 shares authorized,
805,767 and 974,140 issued and outstanding 806 974
Common stock, par $0.001, 500,000,000 authorized
127,279,406 and 9,549,649 issued and outstanding, respectively 127,279 9,549
Additional paid-in capital 125,027,231 126,524,280
Accumulated deficit (135,036,278) (128,653,242)
------------- -------------
Total stockholders' deficiency (9,880,962) (2,118,439)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 386,132 $ 3,247,806
============= =============
The notes to the financial statement are an integral
part of these statements.
13
CARBONICS CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
RESTATED RESTATED
2008 2007
------------------------------
Revenue $ -- $ --
Cost of revenues -- --
------------- -------------
Gross profit -- --
------------- -------------
Operating expenses:
General and administrative expenses 203,532 2,189,157
Stock based compensation 245,000 2,588,396
------------- -------------
Total operating expenses 448,531 4,777,553
------------- -------------
Operating loss (448,531) (4,777,553)
------------- -------------
Other income (expense):
Amortization of deferred financing costs and
debt discount -- (330,519)
Loss on impairment of assets -- (6,395,879)
Loss on extinguishment of debt -- --
Settlement expense -- (267,056)
Change In fair value of conversion features (5,757,079) (1,251,891)
Interest expense (177,425) (121,388)
------------- -------------
Total other income (expense) (5,934,504) (8,366,733)
Loss before provision for income taxes (6,383,036) (13,144,286)
Provision for income taxes -- --
Net loss from continuing operations (6,383,036) (13,144,286)
------------- -------------
Discontinued operations:
Loss from discontinued operations -- (32,171,517)
Gain on disposal of discontinued operations -- 3,429,664
------------- -------------
Total discontinued operations -- (28,741,853)
------------- -------------
Net Loss $ (6,383,036) $ (41,886,139)
============= =============
Common share, basic and diluted
income (loss) per share from continuing operations $ (0.06) $ (1.47)
Common share, basic and diluted
income (loss) per share from discontinued operations $ -- $ (3.22)
------------- -------------
Common share, basic and diluted
income (loss) per share $ (0.06) $ (4.70)
============= =============
Weighted average share of common stock
outstanding, basic and diluted 100,532,324 8,919,229
============= =============
The notes to the Consolidated Financial Statement are an
integral part of these statements.
14
CARBONICS CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Series C Preferred Stock Common Stock
Shares Amount Shares Amount
Balance, December 31, 2006 1,000,000 $ 1,000 5,911,292 $ 5,911
============ ============ ============ ============
Issuance of common stock upon conversion of debt -- -- 274,414 274
Stock issued for compensation -- -- 1,412,500 1,413
Liabilities to be settled in stock -- -- -- --
Stock compensation included in discontinued operations -- -- 698,191 698
Conversion of Series C Preferred into common stock (25,860) (26) 2,006,202 2,006
Warrants issued for deferred financing fees -- -- -- --
Stock issued in consideration of cancellation of debt -- -- 513,250 513
Forgiveness of affiliate debt -- -- -- --
Issuance of note payable in consideration of
cancellation of shares -- -- (1,263,250) (1,263)
Cancellation of shares by related party -- -- (3,333) (3)
Distribution of subsidiaries to GreenShift -- -- --
------------ ------------ ------------ ------------
Property distribution to shareholders -- -- -- --
Net loss -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2007 (restated) 974,140 $ 974 9,549,266 $ 9,549
============ ============ ============ ============
Issuance of common stock upon conversion of debt -- -- 9,730,140 9,730
Stock issued for services -- -- 3,000,000 3,000
Stock issued for compensation -- -- 10,000,000 10,000
Conversion of Series C Preferred into common stock (168,373) (168) 95,000,000 95,000
Forgiveness of affiliate debt -- -- -- --
Net loss -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2008 (restated) 805,767 $ 806 127,279,406 $ 127,279
============ ============ ============ ============
The notes to the financial statement are an integral
part of these statements.
15
CARBONICS CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Total
Additional Cumulative Stockholders'
Paid-In-Capital Deficit Equity
-------------------------------------------------
Balance, December 31, 2006 $ 58,695,961 $ (72,561,616) $ (13,858,744)
============= ============= =============
Issuance of common stock upon conversion of debt 209,814 -- 210,088
Stock issued for compensation 2,560,146 -- 2,561,559
Liabilities to be settled in stock (407,333) -- (407,333)
Stock compensation included in discontinued operations 794,489 -- 795,187
Conversion of Series B Preferred into common stock (40,098) -- (38,118)
Warrants issued for deferred financing fees 266,361 -- 266,361
Stock issued in consideration of cancellation of debt 2,126,068 -- 2,126,581
Forgiveness of affiliate debt 108,763 -- 108,763
Issuance of note payable in consideration of
cancellation of share (732,587) -- (733,850)
Cancellation of shares by related party 67 -- 64
Distribution of subsidiaries to GreenShift 62,942,629 (12,601,487) 50,341,142
Property distribution to shareholders -- (1,604,000) (1,604,000)
Net loss -- (41,886,139) (43,372,453)
------------- ------------- -------------
Balance, December 31, 2007 (restated) $ 126,524,280 $(128,653,242) $ (2,118,439)
============= ============= =============
Issuance of common stock upon conversion of debt 53,370 -- 63,100
Stock issued for services 87,000 -- 90,000
Stock issued for compensation 190,000 -- 200,000
Conversion of Series B Preferred into common stock (94,832) -- --
Change in conversion feature due to conversion liabilities 63,733 -- 63,733
Forgiveness of affiliate debt (1,796,320) -- (1,796,320)
Net income (loss) -- (6,383,036) (6,383,036)
------------- ------------- -------------
Balance, December 31, 2008 (restated) $ 125,027,231 $(135,036,278) $ (9,880,962
============= ============= =============
The notes to the financial statement are an integral
part of these statements.
16
CARBONICS CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
RESTATED RESTATED
2008 2007
------------- -------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (6,383,035) $(13,144,286)
Net loss from discontinued operations -- (28,741,853)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 59,235 33,527
Amortization of debt discount and deferred financing fees -- 330,519
Stock based compensation 245,000 2,588,396
Impairment of investments -- 6,395,879
Stock for services 60,000 --
Changes in conversion features 5,757,079 1,251,891
Changes in Assets and Liabilities
Assets of discontinued operations -- 46,913,175
Prepaid expenses and other current assets -- 25,811
Accounts payable (122,925) 168,740
Accrued expenses (432,850) 306,945
Interest payable - affiliates 177,415 229,047
Deposits 32,515 --
Liabilities of discontinued operations -- (17,358,201)
------------ ------------
Net cash (used in) operating activities (607,566) (1,000,410)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances (Repayments) of short-term borrowings (66,628) (61,042)
Repayment of convertible debentures (10,547) (1,060,542)
Proceeds from convertible debentures - related parties 684,741 1,500,231
Proceeds from convertible debentures -- 493,000
------------ ------------
Net cash provided by financing activities 607,566 871,647
------------ ------------
Net increase (decrease) in cash -- (128,763)
Cash at beginning of period -- 128,763
------------ ------------
Cash at end of period $ -- $ --
============ ============
The notes to the financial statement are an integral
part of these statements.
17
CARBONICS CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1 BASIS OF PRESENTATION
OVERVIEW
We develop renewable energy projects that facilitate the more efficient use of
carbon in energy supply chains. Our development activities during 2008 primarily
involved evaluation of a number of different chemical and other technologies
designed to separate carbon dioxide from exhaust for conversion into value-added
carbonaceous products.
We are party to a technology commercialization agreement with GreenShift
Corporation, which company is majority owned by our majority shareholder,
Viridis Capital, LLC, pursuant to which GreenShift has agreed to provide
commercialization support services and access to GreenShift's rights to sell and
use a proprietary biomass gasification technology in fields of use outside of
the corn ethanol industry. Carbonics will pay GreenShift a royalty equal to 10%
of the pre-tax net income generated by Carbonics through use of this technology.
Our strategic plan also involves the acquisition of accretive assets and cash
flows that are strategic to our technology development efforts. We are currently
evaluating a number of qualified opportunities that produce the raw materials
needed for our technologies, or that have the infrastructure we need to scale
our technologies, or that have the ability to refine the products we produce
with our technologies into finished goods. Our plan in this respect is to
leverage the targeted assets and cash flows to defray our technology and
financing risk as we commercialize our technologies.
2 NATURE OF OPERATIONS
COMPLETION OF NAME CHANGE AND REVERSE STOCK SPLIT
Effective February 11, 2008, the Company changed its name from GreenShift
Corporation to Carbonics Capital Corporation (f/k/a GreenShift Corporation) and
completed a 1 for 20 reverse stock split. All stock prices, share amounts, per
share information, stock options and stock warrants in this Report reflect the
reverse split.
RESTRUCTURING
On November 9, 2007, the Company completed a series of transactions, including
the transfer to GreenShift Corporation of Carbonics' stakes in GS AgriFuels
Corporation and EcoSystem Corporation. GreenShift assumed all of Carbonics'
intercompany, affiliate related party notes payable and receivable, all trade
payables, and all receivables, but did not assume Carbonics debt to YA Global
Investments, LP. In exchange, GreenShift issued to Carbonics a promissory note
in the aggregate net amount of $2,948,831 (the "Carbonics Note"). On December
12, 2007, Carbonics distributed 1,000,000 shares of GS EnviroServices, Inc.
common stock, 2,000,000 shares of EcoSystem Corporation common stock, and all of
what was then Carbonics' 80% stake in GreenShift on a pro-rated basis to all of
Carbonics' shareholders. To accomplish the distribution, Carbonics converted
200,000 shares of GreenShift Series D Preferred Stock into 20,800,000 shares of
GreenShift common stock, which it distributed to the minority shareholders of
GreenShift, and distributed 800,000 shares of GreenShift Series D Preferred
Stock to Viridis Capital, LLC, Carbonics' majority shareholder. Kevin Kreisler,
the sole member of Viridis Capital, is the Chairman and Chief Executive Officer
of the Company.
FORGIVENESS OF RELATED PARTY DEBT
During the year ended December 31, 2008, the company waived $2,000,000 of the
debenture receivable from GreenShift Corporation. Additionally, the company
waived interest receivable from GreenShift in the amount of $196,832, as well as
other related company notes receivable of $6,821 in the first quarter of 2008.
3 GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company had a net loss of
$6,383,036 for the twelve months ended December 31, 2008 and had an accumulated
deficit and negative cash flow from operations. As of December 31, 2008 the
Company's current liabilities exceeded current assets by $9,880,962. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans include raising additional proceeds from debt
and equity transactions and completing strategic acquisitions.
18
4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
For the year ended December 31, 2008, the company had no consolidated
subsidiaries. For the year ended December 31, 2007, the operations of all
consolidated companies are reflected in the discontinued operations. During the
fourth quarter 2007, the Company divested 100% of its interest in EcoSystem
Corporation, GS AgriFuels Corporation, GS EnviroServices, Inc., and GreenShift
Corporation (See note 10).
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 reported amounts of assets,
liabilities, revenues, expenses, and disclosures of contingencies during the
reporting period. Actual results could differ from management's estimates.
STOCK BASED COMPENSATION
The Company accounts for stock and stock options issued for services and
compensation to employees under SFAS 123(r). For non-employees, the fair market
value of the Company's stock on the date of stock issuance or option/grant is
used. The Company determines the fair market value of options issued under the
Black-Scholes Pricing Model. Under the provisions of SFAS 123(r), share-based
compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized as an expense over the employee's requisite service
period (generally the vesting period of the equity grant).
BASIC AND DILUTED EARNINGS PER SHARE ("EPS")
Basic (loss) earnings per share is computed by dividing net income by the
weighted average common shares outstanding during a period. Diluted (loss)
earnings per share is based on the treasury stock method and includes the effect
from potential issuance of common stock such as shares issuable pursuant to the
exercise of stock options, assuming the exercise of all in-the-money stock
options. Common share equivalents have been excluded where their inclusion would
be anti-dilutive.
FURNITURE AND EQUIPMENT
Furniture and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. Gains and losses on depreciable assets
retired or sold are recognized in statement of operations in the year of
disposal, and repair and maintenance expenditures are expensed as incurred.
Property, plant and equipment are stated at cost.
LOAN AND DEBT SECURITIES
For loans and debt securities, fair value generally approximates cost unless the
borrower's enterprise value, overall financial condition or other factors lead
to a determination of fair value at a different amount.
When the Company issues nominal cost warrants or free equity securities
("nominal cost equity"), the Company allocates its cost basis in its investment
between its debt securities and its nominal cost equity at the time of
origination. At that time, the original issue discount basis of the nominal cost
equity is recorded by increasing the cost basis in the equity and decreasing the
cost basis in the related debt securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 141 (revised 2007) Business
Combinations. This Statement replaces FASB Statement No. 141, Business
Combinations. This Statement requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the Statement.
SFAS No. 141 (revised) is effective for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Management does not expect the
implementation of this new standard to have a material impact on the Company's
financial position, results of operations and cash flows.
19
In February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities" including an amendment of
FASB Statement No. 115 with respect to improvement of financial reporting of
certain investments in debt and equity securities. This Statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is expected to expand the
use of fair value measurement, which is consistent with the Board's long-term
measurement objectives for accounting for financial instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet as of December 31, 2008 for
cash equivalents, accounts receivable, other receivables, accounts payable, and
accrued expenses approximate fair value because of the immediate or short-term
maturity of these financial instruments. The fair value of notes payable and
long-term debt approximates their carrying value as the stated or discounted
rates of the debt reflect recent market conditions. It was not practical to
estimate the fair value of the convertible debt due to the nature of these
items. These estimates would be based on the carrying amounts, maturities,
effective interest rates and volatility of the Company's stock. The Company does
not believe it is practical due to the significant volatility of the Company's
stock.
Effective January 1, 2008, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements. This Statement defines fair
value for certain financial and nonfinancial assets and liabilities that are
recorded at fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This guidance applies to
other accounting pronouncements that require or permit fair value measurements.
On February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2,
Effective Date of FASB Statement No. 157. This Staff Position delays the
effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal
years beginning after November 15, 2008 and interim periods within those fiscal
years, except for those items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). The adoption
of SFAS No. 157 had no effect on the Company's consolidated financial position
or results of operations.
The Company partially adopted SFAS 157 on January 1, 2008, delaying application
for non-financial assets and non-financial liabilities as permitted. This
statement establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three levels as follows:
o 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.
o 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.
o 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 following table presents the embedded derivative, the Company's only
financial assets measured and recorded at fair value on the Company's
Consolidated Balance Sheets on a recurring basis and their level within the fair
value hierarchy during the year ended December 31, 2008:
Fair Value
As of December 31, 2008 Level 1 Level 2 Level 3 Total
- -----------------------------------------------------------------------------------------------------------------
Embedded conversion liabilities $ -- $ -- $ 6,945,237 $ 6,945,237
20
The following table reconciles, for the year ended December 31, 2008, the
beginning and ending balances for financial instruments that are recognized at
fair value in the consolidated financial statements:
Balance of Embedded Conversion Liability at December 31, 2006 $ --
Present Value of beneficial conversion features of debentures 1,251,891
-----------
Balance of embedded conversion liability at December 31, 2007 1,251,891
Reductions in fair value due to principal conversions (63,733)
Present Value of beneficial conversion features of debentures 5,757,079
-----------
Balance at December 31, 2008 $ 6,945,237
===========
The valuation of the derivatives are calculated using a complex binomial pricing
model that is based on changes in the volatility of our shares, our stock price,
the probability of a reduction in exercise and conversion price, and the time to
conversion of the related financial instruments. See No3e 6 for more information
on the valuation methods used.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows Statement of Financial Accounting Standards ("SFAS") no.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 requires that long-lived assets, including property and equipment, be
reviewed for impairment whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. Assets to be disposed of are
reported at the lower of the carrying amount or fair value, less costs to sell.
Impairment is measured as the difference between carrying value and fair market
value. Fair value is based on appraised values or estimated sales values of
similar assets in recent transactions. SFAS No. 144 also requires companies to
separately report discontinued operations for a component of an entity that has
been disposed of or is classified as held for sale.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial statement. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
DEFERRED FINANCING COSTS AND DEBT DISCOUNTS
Deferred finance costs represent costs which may include direct costs paid to or
warrants issued to third parties in order to obtain long-term financing and have
been reflected as other assets. Costs incurred with parties who are providing
the actual long-term financing, which generally include the value of warrants,
fair value of the derivative conversion feature, or the intrinsic value of
beneficial conversion features associated with the underlying debt, are
reflected as a debt discount. These costs and discounts are generally amortized
over the life of the related debt. On April 2, 2007, YA Global Investment, LP
declared certain debentures to be in default (See Note 5). As a result, deferred
financing fees related to these debentures were deemed to be permanently
impaired and were written off to amortization expense.
Amortization expense related to these costs and discounts was $0 and $330,519
for the years ended December 31, 2008 and 2007, respectively.
5 FINANCING ARRANGEMENTS
The following is a summary of the Company's financing arrangements as of
December 31, 2008:
Current portion of convertible debentures:
YAGI convertible debenture payable from Carbonics Capital issued October 2005 $ 602,907
YAGI convertible debenture payable from Carbonics Capital issued July 2005 570,000
YAGI convertible debenture payable from Carbonics Capital issued April 2006
1,117,569
Convertible debenture conversion liabilities $6,945,237
----------
Total current convertible debentures $9,235,713
==========
21
The following chart is presented to assist the reader in analyzing the Company's
ability to fulfill its fixed debt service requirements (net of note discounts)
of as of December 31, 2008 and the Company's ability to meet such obligations:
Year Amount
- -----------------------------------------------------------------
2009 $ 2,290,476
- -----------
Total minimum payments due under current and $ 2,290,476
===========
long term obligations
CONVERTIBLE DEBENTURES
YA Global Investments, LP
On April 2, 2007 YA Global Investments, LP ("YAGI") declared certain debentures
issued by the Company to YAGI to be in default for the failure by the Company to
maintain an effective registration statement as required by the Investor
Registration Rights Agreement executed contemporaneous with the issuance of the
debentures. The Debentures are unconditionally guaranteed by Viridis Capital,
LLC ("Viridis"), a wholly-owned affiliate of Kevin Kreisler, the Company's
chairman and chief executive officer (the "Guaranty").
In addition, on April 2, 2007 the Company, YAGI and Viridis entered into a
Forbearance Agreement, pursuant to which YAGI agreed to forbear from exercising
the remedies available to it under the Debentures and the related security and
stock pledge agreements, which would have included the liquidation by YAGI of a
portion of the Company's holdings. The terms of the Forbearance Agreement
provided that YAGI shall instead accept, convert and liquidate sufficient shares
of Viridis' Series C Preferred Stock in the Company to facilitate the full
repayment of the Debentures. YAGI shall accept the Series C Preferred Stock in
tranches, and it shall not convert a tranche until it has sold 80% of the shares
of Company common stock issuable upon conversion of the previous tranche. Any
such conversions shall be subject to the ownership limitations specified in the
Debentures (i.e., limitations to ownership of no more than 4.9% of the
outstanding capital stock of the Company. YAGI shall apply the net proceeds,
which are defined in the Forbearance Agreement as 90% of the lowest closing bid
price for the Company's common stock for the five trading days preceding the
conversion date of the Series C shares, to the full satisfaction of the
Company's obligations under the Debentures in the following priorities: (a)
first, to accrued interest on the most recently issued Debenture, (b) then to
principal on the most recently issued Debenture, (c) then to accrued interest on
the next most recently issued Debenture, (d) then to principal on the next most
recently issued Debenture, and so forth until all of the Company's obligations
under the Debentures have been satisfied in full.
On June 26, 2007, Carbonics entered into a Securities Purchase Agreement (this
"Agreement"), with YAGI. In connection with this Agreement, YAGI purchased
secured convertible debentures amounting to $570,000 due on June 26, 2009. The
June 26, 2007 YAGI debentures provide for interest in the amount of 12% per
annum and are convertible at the lesser of $0.60 or 90% of the lowest closing
bid price of Carbonics' common stock during the 30 trading days immediately
preceding the conversion date. YAGI will be entitled to convert the June 26,
2007 debenture on the basis of the conversion price into Carbonics' common
stock, provided that YAGI cannot convert into shares that would cause YAGI to
own more 4.9% of Carbonics Capital's outstanding common stock.
In addition, Carbonics issued to YAGI a warrant to purchase 500,000 shares of
Carbonics Capital's common stock at $1.00 per share. The value of the warrant
was calculated to be $570,000 at the time of the issuance using the guidance
found in APB Opinion 14, "Accounting for Convertible Debt and Debt issued with
Detachable Stock Purchase Warrants" and was recorded as a discount. The discount
is amortized to interest expense over the term of the loan using the effective
interest method of amortization.
The Company accounted for the YAGI Debenture dated October 12, 2005 in
accordance with with SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS 150), as the
conversion feature embedded in the YAGI Debenture could result in the note
principal being converted to a variable number of the Company's common shares.
The carrying amount of the debenture has been restated for the prior year
(please see Note 12, Restatement of Prior Years Financials, below). The Company
determined the value of the YAGI Debenture at December 31, 2008 to be $3,014,535
which represented the face value of the debenture plus the present value of the
$2,411,628 conversion feature less a reduction in the conversion liability at
present value of $10,100 for the conversions that occurred during the year.
The Company accounted for the YAGI Debenture dated February 8, 2006 in
accordance with with SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS 150), as the
conversion feature embedded in the YAGI Debenture could result in the note
principal being converted to a variable number of the Company's common shares.
The carrying amount of the debenture has been restated for the prior year
(please see Note 12 Restatement of Prior Years Financials, below). The Company
determined the value of the YAGI Debenture at December 31, 2008 to be $5,587,845
which represented the face value of the debenture plus the present value of the
$4,470,276 conversion feature less a reduction in the conversion liability at
present value of $53,633 for the conversions that occurred during the year.
The Company accounted for the YAGI Debenture dated October 12, 2005 in
accordance with with SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS 150), as the
conversion feature embedded in the YAGI Debenture could result in the note
principal being converted to a variable number of the Company's common shares.
The carrying amount of the debenture has been restated for the prior year
(please see Note 12 Restatement of Prior Years Financials, below). The Company
determined the value of the YAGI Debenture at December 31, 2008 to be $633,333
22
which represented the face value of the debenture plus the present value of the
$63,333 conversion feature.
On January 25, 2008, a financing was completed that resulted in Carbonics
becoming the guarantor of the debts of several of its former affiliates. The
beneficiary of the guarantees was YA Global Investments, LP ("YAGI"), which
committed to extend credit to those affiliates. As of December 31, 2008, the
outstanding principal and accrued interest of the debt was $44,330,307.
On August 14, 2008, certain Secured Convertible Debentures between Carbonics
Capital Corporation and YA Global Investments, L.P. were amended. The maturity
date of the following Secured Convertible Debentures have been extended until
December 31, 2011: a debenture dated October 12, 2005 in the original principal
amount of $1,475,000; a debenture dated February 8, 2006 in the original
principal amount of $3,050,369; and a debenture dated June 26, 2007 in the
original principal amount of $570,000.
6 INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109,
Accounting for Income Taxes" ("FIN 48"), on January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized no material adjustment in the
liability for unrecognized income tax benefits. At the adoption date of January
1, 2007, and at December 31, 2007, there were no unrecognized tax benefits.
Interest and penalties related to uncertain tax positions will be recognized in
income tax expense. As of December 31, 2008, no interest related to uncertain
tax positions had been accrued.
The Company has incurred losses, which have generated net operating loss carry
forwards for the Company as of December 31, 2008. These loss carry forwards are
subject to limitation in future years should certain ownership changes occur.
For the years ended December 31, 2008 and 2007, the Company's effective tax rate
differs from the federal statutory rate principally due to net operating losses
and other temporary differences for which no benefit was recorded. The provision
for income taxes for the years ended December 31, 2008 and 2007 consisted of
state income tax provisions. Deferred tax assets are as follows:
12/31/2008 12/31/2007
--------------------------
Deferred Tax Asset:
Net operating loss carry forwards $ 87,956,000 $ 78,223,000
============ ============
Total deferred tax assets 32,300,000 28,700,000
Less: Valuation allowance (32,300,000) (28,700,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
7 STOCK OPTIONS
Summarized information about the Company's stock options outstanding at December
31, 2008 is as follows:
Weighted Average
Number of Shares Exercise Price
-----------------------------------
Outstanding at January 31, 2007 $3,318,748 $ 0.05
Granted at fair value -- --
Forfeited -- --
Exercised -- --
----------- ----------
Outstanding at December 31, 2007 -- --
Granted at fair value -- --
Forfeited -- --
Exercised -- --
----------- ----------
Outstanding at December 31, 2008 $3,318,748 $ 0.05
=========== ==========
All of the above noted options were exercisable as of December 31, 2008.
23
STOCK BASED COMPENSATION
The Company accounts for stock and stock options issued for services and
compensation by employees under the fair value method. For non-employees, the
fair market value of the Company's stock on the date of stock issuance or
option/grant is used. The Company determined the fair market value of the
options issued under the Black-Scholes Pricing Model. The Company adopted the
provisions of Statement of Financial Accounting Standards SFAS 123(R)
SHARE-BASED PAYMENT, which establishes accounting for equity instruments
exchanged for employee services. Under the provisions of SFAS 123(R),
share-based compensation cost is measured at the grant date, based on the fair
value of the award, and is recognized as an expense over the employee's
requisite service period (generally the vesting period of the equity grant). The
Company used the following assumptions in its calculation: Dividend yield $0;
Expected volatility 99.86%; Risk-free interest rate 4.94%; Expected life 1 year.
The Company recorded expenses of $34,884 in 2007 related to the 3,212,354
options that were issued. No options were issued in 2008.
COMMON STOCK
During the twelve months ended December 31, 2008, the Company issued a total of
10,000,000 shares of Common Stock, $0.001 par value, for services provided to
the Company. The Company's directors, David Winsness and Kurt Gordon received
3,000,000 and 2,000,000 of these shares, respectively.
The shares were issued at $0.02, the market price as of the date of issuance on
April 23, 2008 for a total value of $200,000. During the nine months ended
September 30, 2008, Viridis Capital LLC converted 168,373 shares of Series C
Preferred Stock into a total of 95,000,000 shares of Common Stock, $0.001 par
value.
8 RELATED PARTY TRANSACTIONS
REDUCTION OF DEBT PAYABLE TO RELATED PARTIES
Effective March 31, 2008, the Company waived $2,000,000 of note receivable from
GreenShift, which note was issued in connection with the November 9, 2007
transfer of GS AgriFuels Corporation and EcoSystem Corporation to GreenShift
Corporation. This reduction was in part attributable to the fact that the
appraised value of GS AgriFuels, which appraisal was completed during the first
quarter of 2008, was assessed to be less than the total debt payable by GS
AgriFuels, and the fact that GreenShift realized impairment charges of
$11,153,816 relating to the impairment of GS AgriFuels' NextGen Fuel, Inc., and
Sustainable Systems, Inc. subsidiaries.
9 DISCONTINUED OPERATIONS
During the fourth quarter 2007, the Company divested 100% of its interest in
EcoSystem Corporation, GS AgriFuels Corporation, GS EnviroServices, Inc., and
GreenShift Corporation. In exchange GreenShift issued to Carbonics a promissory
note in the aggregate amount of $2,948,831 (the "Carbonics Note"). The principal
and interest on the Carbonics Note, which accrues at the per annum rate of 8%,
are due and payable in full on December 31, 2008. On July 1, 2007, the Company
sold its interest in Seaway Valley Corporation in return for the assumption of
certain legacy liabilities of GS Carbon.
As a result of the above transactions, the Company realized a loss from
discontinued operations of $0 and $32,171,517 for the twelve months ended
December 31, 2008 and 2007, respectively. Additionally, the Company realized a
gain on the disposal of GS Carbon in the amount of $3,429,664. The net effect of
the divesture of EcoSystem Corporation, GS AgriFuels Corporation, GS
EnviroServices, Inc. and GreenShift Corporation was recorded in stockholders'
equity as this was a transfer between entities under common control. The
components of discontinued operations for the twelve months ended December 31,
2008 and 2007 are as follows:
2008 2007
--------------- --------------
Revenues $ -- $ 29,985,351
Cost of revenues -- 24,062,095
--------------- ------------
Gross profit -- 5,923,256
Selling, general and administrative expense -- 15,324,513
Loss from operations -- (9,401,257)
Interest expense -- (5,233,177)
Other income and expenses, net -- (19,958,944)
--------------- ------------
Total other income and expense -- (25,192,121)
Income before provision for income taxes -- (34,593,378)
Total provision for tax -- (46,605)
--------------- ------------
Net income (loss) from continuing operations -- --
--------------- ------------
Income (loss) from discontinued operations -- (13,225)
Gain (loss) on disposal of discontinued operations -- 2,481,691
--------------- ------------
Gain on disposal of discontinued operations -- 2,468,466
--------------- ------------
Net loss $ -- $(32,171,517)
=============== ============
The results presented above for 2008 and 2007 include the operating activity for
the discontinued operations for the twelve month periods of EcoSystem
Corporation, GS AgriFuels Corporation, GS EnviroServices, Inc. and GreenShift
Corporation. The operating activity of GS Carbon is included in the year ended
December 31, 2007.
10 WARRANTS
The Company's February 7, 2006 financing with YA Global Investment, LP provides
that Carbonics will issue to YA Global five year Warrants to purchase 2,250,000
common shares. The warrants will permit YA Global to purchase 750,000 shares at
$3.00 per share, 750,000 shares at $4.00 per share, and 750,000 shares at $5.00
per share. On June 30, 2006, Carbonics issued 2,250,000 warrants to YA Global.
Summarized information about GreenShift's stock warrants outstanding at December
31, 2008 is as follows:
Number of Weighted Average
Shares Exercise Price
----------------------------------------
Outstanding at December 31, 2006 2,500,000 $ 4.00
Granted at fair value 250,000 1.00
Forfeited -- --
Exercised -- --
-------------- -------------
Outstanding at December 31, 2007 2,750,000 $ 4.00
Granted at fair value -- --
Forfeited -- --
Exercised -- --
------------ -------------
Outstanding at December 31, 2008 $ 2,750,000 $ 3.45
============= =============
All of the above noted warrants were exercisable as of December 31, 2008.
11 STOCKHOLDERS EQUITY
COMPLETION OF NAME CHANGE AND REVERSE STOCK SPLIT
Effective February 11, 2008, the Company changed its name from GreenShift
Corporation to Carbonics Capital Corporation (f/k/a GreenShift Corporation) and
completed a 1 for 20 reverse stock split. All stock prices, share amounts, per
share information, stock options and stock warrants in this Report reflect the
reverse split.
RESTRUCTURING
On November 9, 2007, the Company completed a series of transactions, including
the transfer to GreenShift Corporation of Carbonics' stakes in GS AgriFuels
Corporation and EcoSystem Corporation. GreenShift assumed all of Carbonics'
intercompany, affiliate related party notes payable and receivable, all trade
payables, and all receivables, but did not assume Carbonics debt to YA Global
Investments, LP. In exchange, GreenShift issued to Carbonics a promissory note
in the aggregate net amount of $2,948,831 (the "Carbonics Note"). On December
12, 2007, Carbonics distributed 1,000,000 shares of GS EnviroServices, Inc.
common stock, 2,000,000 shares of EcoSystem Corporation common stock, and all of
what was then Carbonics' 80% stake in GreenShift on a pro-rated basis to all of
Carbonics' shareholders. To accomplish the distribution, Carbonics converted
200,000 shares of GreenShift Series D Preferred Stock into 20,800,000 shares of
GreenShift common stock, which it distributed to the minority shareholders of
GreenShift, and distributed 800,000 shares of GreenShift Series D Preferred
Stock to Viridis Capital, LLC, Carbonics' majority shareholder. Kevin Kreisler,
the sole member of Viridis Capital, is the Chairman and Chief Executive Officer
of the Company.
25
FORGIVENESS OF RELATED PARTY DEBT
During the year ended December 31, 2008, the company waived $2,000,000 of the
debenture receivable from GreenShift Corporation. Additionally, the company
waived interest receivable from GreenShift in the amount of $196,832, as well as
other related company notes receivable of $6,821 in the first quarter of 2008.
COMMON STOCK
During the year ended December 31, 2008, the Company issued a total of
10,000,000 shares of Common Stock, $0.001 par value, for services provided to
the Company. The Company's directors, David Winsness and Kurt Gordon received
3,000,000 and 2,000,000 of these shares, respectively.
The shares were issued at $0.02, the market price as of the date of issuance on
April 23, 2008 for a total value of $200,000. During the year ended December 31,
2008, Viridis Capital LLC converted 168,373 shares of Series C Preferred Stock
into a total of 95,000,000 shares of Common Stock, $0.001 par value.
SERIES C PREFERRED STOCK
On February 15, 2006 Carbonics filed a Certificate of Designation creating a
class of 1,000,000 shares of Series C Preferred Stock. The Certificate of
Designation was corrected by a Certificate of Correction filed on September 11,
2006. The holder of all 1,000,000 shares of Series C Preferred Stock may convert
it into common shares representing 80% of the Carbonics common shares
outstanding after conversion, but only if, at the time of the conversion,
Carbonics is not registered with the SEC as a Business Development Company. The
holder of the Series C Preferred Stock may cast the number of votes at a
shareholders meeting or by written consent that equals the number of common
shares into which the Preferred Stock is convertible on the record date for the
shareholder action. In the event that the Board of Directors declares a
dividend, the holder of each share of Series C Preferred Stock will receive a
dividend equal to the dividend that would be payable if the Series C Preferred
Stock were converted into common stock. In the event of a liquidation of
Carbonics, the holder of a share of Series C Preferred Stock will receive $.001
and have no further participation in the liquidation.
CONVERSIONS
During the year ended December 31, 2008, Viridis Capital LLC converted 168,373
shares of Series C Preferred Stock into a total of 95,000,000 shares of Common
Stock, $0.001 par value.
During the year ended December 31, 2008, holders of the certain convertible
securities converted amounts totaling $63,100 into 9,730,140 shares of common
stock.
12 RESTATEMENTS
The Company has restated its financial statements for the years ended December
31, 2007 and 2008. Subsequent to the filing of the original financial statements
for the years then ended, Management determined that the Company's prior
policies relating to accounting for the impact of conversion features embedded
in the Company's various derivative securities should have been changed to
conform with recent guidance under EITF 08-04, Transition Guidance for
Conforming Changes to Issue No. 98-5, involving application of conforming
changes from the issuance of SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150). Due
to the variable number of the Company's common shares issuable upon conversion
of certain of the company's derivative securities, such instruments should have
been accounted for as liabilities under SFAS 150 during 2008 based on
interpretive guidance in EITF 08-04. During 2008, the Company had accounted for
such instruments as derivative instruments under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, by bifurcating the conversion
features from the related host contracts and recognizing them at fair value,
amortizing the related debt discounts, and recognizing gain or loss for changes
in fair value of the conversion features. Management believes that accounting
for these conversion features as liabilities under SFAS 150 is the preferable
accounting treatment. In accordance with SFAS No. 154, Accounting Changes and
Error Corrections, the Company has restated the financial statements for the
year ended December 31, 2008 to reflect the adoption of this change in
accounting, and has restated the financial statements for the year ended
December 31, 2007 through retrospective application of this accounting
interpretation to prior periods in accordance with this standard.
26
The following shows the effect of the restatements on the financial statements:
12/31/08 12/31/08 12/31/07 12/31/07
Balance Sheets: As reported As restated As reported As restated
----------------------------------------------------------------------------------------------
Convertible debentures, current $ 2,006,387 $ 9,235,713 $ 1,490,247 $ 3,605,467
Liability for derivative instruments 10,310,380 -- 1,781,903 --
Accumulated deficit (138,053,599) (135,036,278) (128,319,925) (128,653,242)
12/31/08 12/31/08 12/31/07 12/31/07
Statements of Operations: As reported As restated As reported As restated
----------------------------------------------------------------------------------------------
Loss on fair value-derivatives $ (8,528,477) $ -- $ (637,817) $ --
Amortization of debt discount (579,240) -- (2,130,031) (330,519)
Change in conversion liabilities -- (5,757,079) -- (1,251,891)
Loss from continuing operations (9,733,673) (6,383,035) (14,329,724) (13,144,286)
Net income (loss) (9,733,673) (6,383,035) (43,071,577) (41,886,139)
Earnings (loss) per share:
Continuing operations $ (0.00) $ (0.06) $ (1.61) $ (1.47)
Discontinued operations $ (0.00) $ (0.00) $ (3.22) $ (3.22)
Total, basic and diluted $ (0.00) $ (0.06) $ (4.83) $ (4.70)
12/31/08 12/31/08 12/31/07 12/31/07
Statements of Stockholders' Equity: As reported As restated As reported As restated
------------------------------------------------------------------------------------------
Change in conversion feature due
to conversion liabilities -- 63,733 -- --
Net loss $ (9,733,673) $ (6,383,035) $ (43,071,577) $ (41,886,139)
12/31/08 12/31/08 12/31/07 12/31/07
Statements of Cash Flows: As reported As restated As reported As restated
---------------------------------------------------------------------------------------------
Net loss from continuing operations $ (9,733,673) $ (6,383,035) $ (14,329,724) $ (13,144,286)
Amortization of debt discount
and deferred financing costs 579,240 -- 2,130,031 330,519
Change in fair value of derivatives 8,528,477 -- 637,817 --
Interest from conversion liabilities -- 5,757,079 -- 1,251,891
27
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" (defined in SEC Rule 13a-15(e))
refers to the controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports
that it files under the Securities Exchange Act of 1934 (the "Exchange Act") is
recorded, processed, summarized and reported, within time periods specified in
the rules and forms of the Securities and Exchange Commission. "Disclosure
controls and procedures" include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
The Company's management, with the participation of the Chief Executive Officer
and the Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this annual report (the "Evaluation Date"). Management determined that, at
the Evaluation Date, the Company had a material weakness because it did not have
a sufficient number of personnel with an appropriate level of knowledge of and
experience in generally accepted accounting principles in the United States of
America (U.S. GAAP) that are appropriate to the Company's financial reporting
requirements. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded that, as of the Evaluation Date, such
controls and procedures were ineffective.
(b) Changes in internal controls
The term "internal control over financial reporting" (defined in SEC Rule
13a-15(f)) refers to the process of a company that is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Company's management, with the
participation of the Chief Executive Officer and Chief Financial Officer, has
evaluated any changes in the Company's internal control over financial reporting
that occurred during the fourth quarter of the year covered by this annual
report, and they have concluded that there was no change to the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
(c) Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934. We have assessed the effectiveness of
those internal controls as of December 31, 2008, using the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") Internal Control -
Integrated Framework as a basis for our assessment.
Because of inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate. All internal control systems,
no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
A material weakness in internal controls is a deficiency in internal control, or
combination of control deficiencies, that adversely affects the Company's
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with accounting principles generally accepted in the
United States of America such that there is more than a remote likelihood that a
material misstatement of the Company's annual or interim financial statements
28
that is more than inconsequential will not be prevented or detected. In the
course of making our assessment of the effectiveness of internal controls over
financial reporting, we identified one material weakness related to the
Company's control environment, in that the Company did not have a sufficient
number of personnel with an appropriate level of U.S. GAAP knowledge and
experience appropriate to its financial reporting requirements. Accordingly,
management's assessment is that the Company's internal controls over financial
reporting were ineffective as of December 31, 2008.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
Subsequent to filing the Annual Report, management determined to change its
policies for accounting of the derivative securities that the Company has
issued. While the Company has restated the financial statements in this amended
Report to conform with this new policy, the use of the Company's long-standing
prior policy for accounting of the Company's derivative securities was not
itself due to any inadequacy in the Company's controls. However, and as
discussed in greater detail in this amended Report, the Company's controls and
procedures were ineffective as of December 31, 2008.
ITEM 9B OTHER INFORMATION
None.
29
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Name Age Position
- --------------------------
Kevin Kreisler 36 Chairman, Chief Executive Officer
Jacqueline Flynn 43 Chief Financial Officer
Kevin Kreisler is the chairman and acting chief executive officer of the
Company. Mr. Kreisler is the founder, chairman and chief executive officer of
GreenShift Corporation. Mr. Kreisler served as GreenShift's vice president from
1998 to 2000, president from 2000 to 2002, chief executive officer from 2002 to
2005 and has served as GreenShift's chairman from 2005 to the present. Mr.
Kreisler is a graduate of Rutgers University College of Engineering (B.S., Civil
and Environmental Engineering, 1994), Rutgers University Graduate School of
Management (M.B.A., 1995), and Rutgers University School of Law (J.D., 1997).
Mr. Kreisler is admitted to practice law in New Jersey and the United States
District Court for the District of New Jersey.
Jacqueline Flynn has twenty years experience in financial accounting for both
public and private companies. Ms. Flynn has been employed since 2006 as
Controller of GreenShift Corporation, an affiliate of Carbonics Capital. From
2002 to 2005, Ms. Flynn was employed as Chief Financial Officer by Accent
Mortgage Company of Alpharetta, Georgia. During the three years prior to 2002
Ms. Flynn was employed by Lahaina Acquisitions, Inc., a public company that
owned Accent Mortgage Company during that period. She was employed by Lahaina
Acquisitions first as Controller and then as Chief Financial Officer. Ms. Flynn
was awarded an M.B.A. in 1994 by Brenau University.
NOMINATING, COMPENSATION AND AUDIT COMMITTEE
The Board of Directors does not have an audit committee or a nominating or
compensation committee due to the fact that there is only one member of the
Board of Directors.
CODE OF ETHICS
The Company does not have a written code of ethics applicable to its executive
officers. The Board of Directors has not adopted a written code of ethics
because there are only two members of management.
SHAREHOLDER COMMUNICATIONS
The Board of Directors will not adopt a procedure for shareholders to send
communications to the Board of Directors until it has reviewed the merits of
several alternative procedures.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
None of the officers, directors or beneficial owners of more than 10% of the
Company's common stock failed to file on a timely basis the reports required by
Section 16(a) of the Exchange Act during the year ended December 31, 2008.
30
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth compensation information for Carbonics Capital
Corporation's executive officers during the years indicated as relevant. As of
December 31, 2008, no executive officer held options for Carbonics Capital
Corporation's Common Stock.
All Other
Name and Principal Position Annual Compensation Long-term Compensation Compensation
- ----------------------------------------------------------------------------------------------------------------------
Year Salary Bonus Other Shares Granted
- ----------------------------------------------------------------------------------------------------------------------
Kevin Kreisler 2008 $ -- $ -- -- -- $ --
Chairman and Chief Executive Officer 2007 -- -- -- -- --
2006 -- 10,914 -- 56,812 --
EMPLOYMENT AGREEMENTS
Carbonics Capital's relationships with its officers are on an at-will basis.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the voting stock
beneficially owned by any person who, to our knowledge, owned beneficially more
than 5% of any class of voting stock as well as by the members of our Board of
Directors and by all officers and directors as a group.
Amount and Nature of Beneficial Ownership
--------------------------------------------------------------------------------------------
Name and Address(1) Series B Series C Percentage of
Of Beneficial Owner Common % of Class Preferred % of Class Preferred % of Class Voting Power
---------- ----------- ------------ ----------- ----------- ----------- -------------
Kevin Kreisler(2) -- -- -- -- 973,054 100% 77.84%
<FN>
(1) The address of each shareholder is c/o GreenShift Corporation, One Penn
Plaza, Suite 1612, New York, NY 10119.
(2) All shares listed for Mr. Kreisler are owned of record by Viridis Capital,
LLC, of which Mr. Kreisler is the sole member.
</FN>
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
RELATED PARTY TRANSACTIONS
On November 9, 2007, the Company and GreenShift Corporation completed a series
of transactions, including the transfer to GreenShift of Carbonics' stakes in GS
AgriFuels Corporation and EcoSystem Corporation. GreenShift assumed all of
Carbonics' intercompany, affiliate related party notes payable and receivable,
all trade payables, and all receivables, but did not assume Carbonics' debt to
YA Global Investments, LP. In exchange GreenShift issued to Carbonics a
promissory note in the aggregate amount of $2,948,831 (the "Carbonics Note").
The principal and interest on the Carbonics Note, which accrues at the per annum
rate of 8%, are due and payable in full on December 31, 2009. The Carbonics Note
was reduced by $2,000,000 in the first quarter 2008. This reduction was in part
attributable to the fact that the appraised value of GS AgriFuels, which
appraisal was completed during the first quarter of 2008, was assessed to be
less than the total debt payable by GS AgriFuels, and the fact that GreenShift
realized impairment charges of $11,153,816 relating to the impairment of GS
AgriFuels' NextGen Fuel, Inc., and Sustainable Systems, Inc. subsidiaries.
During the year ended December 31, 2008, the note increased a net of $12,234 due
to expenses paid on behalf of GreenShift and the note also increased $443,674
due to the reclassification of amounts that were owed by various subsidiaries to
Carbonics. These amounts were reclassed so that the subsidiary owed Greenshift
rather than Carbonics and GreenShift in turn owed the amounts to Carbonics.
Additionally the company waived the interest receivable from GreenShift as well
as other related party notes in the amount of $196,832.
On November 9, 2007, in connection with the transfer to GreenShift of Carbonics'
stakes in GS AgriFuels and EcoSystem, GreenShift assumed liability for a term
note issued by Carbonics to Viridis Capital, LLC with a face amount of
$1,339,704 (the "Viridis Note"), which amount is due upon demand and bears
interest at the rate of 8%. As of December 31, 2007, the balance due from
Carbonics to Viridis was $0.
On December 12, 2007, Carbonics distributed 2,000,000 and 1,000,000 common
shares of EcoSystem Corporation and GS EnviroServices, Inc., respectively, to
all shareholders of Carbonics except for Viridis Capital, LLC, the Company's
majority shareholder. On December 12, 2007, Carbonics distributed all of what
31
was then Carbonics' 80% stake in GreenShift on a pro-rated basis to all of
Carbonics' shareholders. This was accomplished by Carbonics' conversion of
200,000 shares of GreenShift Series D Preferred Stock into 20,800,000 shares of
GreenShift common stock, which were distributed to the minority shareholders of
Carbonics, and the distribution by Carbonics of 800,000 shares of GreenShift
Series D Preferred Stock to Viridis Capital, LLC, the Company's majority
shareholder. Kevin Kreisler, the sole member of Viridis Capital, is the Chairman
and Chief Executive Officer of the Company.
On January 25, 2008, a financing was completed that resulted in Carbonics
becoming the guarantor of the debts of several of its former affiliates. The
beneficiary of the guarantees was YA Global Investments, LP ("YAGI"), which
committed to extend credit to those affiliates. As of September 30, 2008, the
outstanding principal and accrued interest of the debt was $44,758,833.
DIRECTOR INDEPENDENCE
None of the members of our Board of Directors is independent, as "independent"
is defined in the rules of the NASDAQ Stock Market.
32
PART IV
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
INDEPENDENT AUDITOR FEES
Audit Fees
Rosenberg Rich Baker Berman & Company, P.A. billed $8,250 for professional
services rendered for the audit of our 2008 financial statements and review of
the financial statements included in our 2008 10-K filings. For the year ended
2007, $35,875 was billed for services rendered.
Audit-Related Fees
Rosenberg Rich Baker Berman & Company, P.A. billed $ to the Company in 2008 and
$34,620 in 2007 for services that are reasonably related to the performance of
the audit or review of the yearly financial statements.
Tax Fees
Rosenberg Rich Baker Berman & Company, P.A. billed $ in 2008 and $10,000 to the
Company in 2007 for professional services rendered for tax compliance, tax
advice and tax planning.
All Other Fees
Rosenberg Rich Baker Berman & Company, P.A. billed $ to the Company in 2008 and
$10,000 to the Company in 2007 for services not described above.
It is the policy of the Company's Board of Directors that all services other
than audit, review or attest services must be pre-approved by the Board of
Directors. All of the services described above were approved by the Audit
Committee.
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Index to Exhibits
Exhibit Number Description
3-a Certificate of Incorporation, as amended through January 2000 - filed as an
exhibit to the Registration Statement on Form 10-SB and incorporated herein
by reference.
3-a(1) Certificate of Amendment of Certificate of Incorporation dated January 8,
2003 - filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 2003 and incorporated herein by reference.
3-a(2) Certificate of Amendment of Certificate of Incorporation dated December
2004 - filed as an exhibit to the Current Report on Form 8-K dated December
27, 2004 and incorporated herein by reference.
3-a(3) Certificate of Amendment of Certificate of Incorporation - filed as an
exhibit to the Current Report on Form 8-K filed on May 19, 2005, and
incorporated herein by reference.
3-a(4) Certificate of Amendment of Certificate of Incorporation - filed as an
exhibit to the Current Report on Form 8-K filed on February 13, 2008, and
incorporated herein by reference.
3-a(5) Certificate of Designation, Preferences and Rights of Series C Preferred
Stock of Carbonics Capital Corporation - filed as an exhibit to the Current
Report on Form 8-K dated February 15, 2006 and incorporated herein by
reference.
3-a(6) Certificate of Correction of Certificate of Designation, Preferences and
Rights of Series C Preferred Stock of Carbonics Capital Corporation - filed
as an exhibit to the Current Report on Form 8-K/A (Amendment No. 1) dated
February 15, 2006 and incorporated herein by reference.
3-b Bylaws - filed as an exhibit to the Registration Statement on Form 10-SB
and incorporated herein by reference.
33
10-a Guaranty Agreement dated October 25, 2006 among Stillwater Asset-Based
Fund, LP and Carbonics Capital Corporation, GS AgriFuels Corporation,
EcoSystem Corporation and GreenShift Corporation - filed as an exhibit to
the Current Report on Form 8-K dated October 31, 2006 and incorporated
herein by reference.
10-b Security Agreement dated October 25, 2006 between Stillwater Asset-Based
Fund, LP and Carbonics Capital Corporation - filed as an exhibit to the
Current Report on Form 8-K dated October 31, 2006 and incorporated herein
by reference.
10-c Security Agreement dated October 25, 2006 among GS AgriFuels Corporation,
Carbonics Capital Corporation, EcoSystem Corporation and GreenShift
Corporation and YA Global Investments, LP - filed as an exhibit to the
Current Report on Form 8-K dated October 31, 2006 and incorporated herein
by reference.
10-d Form of Secured Convertible Debenture due February 8, 2009 - filed as an
exhibit to the Company's Current Report on Form 8-K dated February 2, 2006
and incorporated herein by reference.
10-e Second Amended and Restated Security Agreement dated February 2, 2006
between Carbonics Capital Corporation and YA Global Investments, LP - filed
as an exhibit to the Company's Current Report on Form 8-K dated February 2,
2006 and incorporated herein by reference.
10-f Credit Agreement dated January 11, 2008 between GS COES (Yorkville I) LLC
and YA Global Investments, LP - filed as an exhibit to the Current Report
on Form 8-K filed on January 31, 2008, and incorporated herein by
reference.
10-g Amended and Restated Forbearance Agreement dated as of January 11, 2008
among Carbonics Capital Corporation, GreenShift Corporation, Viridis
Capital, LLC and YA Global Investments, LP - filed as an exhibit to the
Current Report on Form 8-K filed on January 31, 2008, and incorporated
herein by reference.
10-h Global Guaranty Agreement dated January 11, 2008 among Viridis Capital LLC,
Kevin Kreisler, Carbonics Capital Corporation, GreenShift Corporation, GS
AgriFuels Corporation, each of their subsidiaries, and YA Global
Investments, LP - filed as an exhibit to the Current Report on Form 8-K
filed on January 31, 2008, and incorporated herein by reference.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the
Sarbanes-Oxley Act of 2002.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the date indicated.
CARBONICS CAPITAL CORPORATION
By: /S/ KEVIN KREISLER
-----------------------
KEVIN KREISLER
Chairman and Chief Executive Officer
Date: April 15, 2009
In accordance with the Exchange Act, this Report has been signed below on March
31, 2008 by the following persons, on behalf of the Registrant and in the
capacities and on the dates indicated.
/S/ KEVIN KREISLER
-----------------------
KEVIN KREISLER
Director, Chief Executive Officer
Date: April 15, 2009
/S/ JACQUELINE FLYNN
-------------------------
JACQUELINE FLYNN
Chief Financial Officer
Date: April 15, 2009