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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
(Amendment No. 1)
-------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED MARCH 31, 2009
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)
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant as 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 whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files.) Yes __ No__
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 as of May 19, 2009 was
148,689,737.
Amendment No. 1
This Amendment No.1 on Form 10-Q/A, which amends and restates items identified
below with respect to the Form 10- Q, filed by Carbonics Corporation ("we" or
"the Company") with the Securities and Exchange Commission (the "SEC") on May
19, 2009 (the "Original Filing"), is being filed in order to :
o Include restated financial statements as described in Note 8 to the
financial statements;
o Amend Item 2, Management's Discussion and Analysis, to reflect the
amended financial statements;
o Amend Item 4, 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 the following notes under Item 1, Financial Statements and
Supplementary Schedules, to reflect the amended financial statements:
o Note 3, Going Concern, was updated to restate the Company's
working capital deficit;
o Note 4, Significant Accounting Policies, to modify the Fair Value
of Financial Instruments and Deferred Financing and Debt Discount
sections;
o Note 5, Financing Arrangements, was updated to restate the
convertible debenture disclosures;
o Note 6, Derivatives, was deleted;
o Note 8, Restatements, was updated 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 Carbonics Corporation, please refer to the more recent
filings made with the SEC.
2
CARBONICS CAPITAL CORPORATION
QUARTERLY REPORT ON FORM 10Q
FOR THE FISCAL QUARTER ENDED MARCH 31, 2009
TABLE OF CONTENTS
Page No
Part I Financial Information
Item 1. Financial Statements ..........................................................................3
Condensed Consolidated Balance Sheet - March 31, 2009 (unaudited)
and December 31, 2008 (audited)..............................................................4
Condensed Consolidated Statements of Operations - for the Three Months
Ended March 31, 2009 (unaudited) and 2008 (unaudited).......................................5
Statement of Stockholders' Equity - December 31, 2008 and Three Months
Ended March 31, 2009.........................................................................6
Condensed Consolidated Statements of Cash Flows - for the Three Months
Ended March 31, 2009 (unaudited) and 2008 (unaudited)........................................7
Notes to Condensed Consolidated Financial Statements...........................................8
Item 2. Management's Discussion and Analysis .........................................................12
Item 3 Quantitative and Qualitative Disclosures about Market Risk....................................14
Item 4. Controls and Procedures.......................................................................14
Part II Other Information
Item 1. Legal Proceedings.............................................................................15
Items 1A. Risk Factors..................................................................................15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................15
Item 3. Defaults upon Senior Securities...............................................................15
Item 4. Submission of Matters to a Vote of Security Holders...........................................15
Item 5. Other Information ............................................................................15
Item 6. Exhibits .....................................................................................15
Signatures 16
3
PART I
ITEM 1 FINANCIAL STATEMENTS
4
CARBONICS CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2009 (UNAUDITED) AND DECEMBER 31, 2008
RESTATED RESTATED
3/31/2009 12/31/2008
------------------------------
ASSETS
Current Assets:
Cash $ 62,247 $ --
Note receivable - related party 320,691 386,132
------------- -------------
Total current assets 382,938 386,132
TOTAL ASSETS $ 382,938 $ 386,132
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses $ 672,698 $ 591,511
Accrued interest 477,948 439,870
Convertible debentures, net of discount 6,348,055 9,235,713
------------- -------------
Total current liabilities 7,498,701 10,267,094
TOTAL LIABILITIES 7,498,701 10,267,094
------------- -------------
Preferred stock
Series C, par $0.001, 1,000,000 shares authorized, 805, 767 issued
and outstanding 806 806
Common stock, par $0.001, 500,000,000 authorized
133,179,405 and 127,279,405 issued and outstanding, respectively 133,179 127,279
Additional paid-in capital 125,030,653 125,027,231
Accumulated deficit (132,280,402) (135,036,278)
------------- -------------
Total stockholders' deficiency (7,115,763) (9,880,962)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 382,938 $ 386,132
============= =============
The notes to the financial statement are an integral
part of these statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
Three Months Ended Three Months Ended
(Restated) (Restated)
3/31/09 3/31/08
--------------------------------------
Revenue $ -- $ --
----------------- -----------------
Operating expenses:
General and administrative expenses 21,882 96,846
Stock based compensation -- 90,000
----------------- -----------------
Total operating expenses 21,882 186,846
----------------- -----------------
Operating loss (21,882) (186,846)
----------------- -----------------
Other income (expense):
Change in fair value of conversion features 2,878,336 1,189,051
Costs related to conversion features -- (493)
Settlement expense (62,500) --
Interest expense (38,077) (37,429)
----------------- -----------------
Total other income (expense) 2,777,759 1,151,622
Net income before provision for income taxes 2,755,877 964,776
----------------- -----------------
Provision for income taxes -- --
Net Income $ 2,755,877 $ 964,776
================= =================
Common share, basic and diluted
income per share from continuing operations $ 0.02 $ 0.10
Common share, basic and diluted
income per share $ 0.02 $ 0.10
================= =================
Weighted average share of common stock
outstanding, basic and diluted 127,607,259 9,937,290
================= =================
The notes to the Consolidated Financial Statement are an
integral part of these statements.
6
]CARBONICS CAPITAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2008 AND THREE MONTHS ENDED MARCH 31, 2009
Series C Preferred Stock Common Stock
Shares Amount Shares Amount
-------------------------------------------------------
Balance, December 31, 2007 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
Beneficial conversion features -- -- -- --
Forgiveness of affiliate debt -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 2008 805,767 $ 806 127,279,406 $ 127,279
=========== =========== =========== ===========
Issuance of common stock upon conversion of debt -- -- 5,900,000 5,900
Beneficial conversion features -- -- -- --
Net income -- -- -- --
----------- ----------- ----------- -----------
Balance, March 31, 2009 805,767 $ 806 133,179,406 $ 133,179
=========== =========== =========== ===========
Total
Additional Cumulative Stockholders'
Paid-In-Capital Deficit Equity
Balance, December 31, 2007 $ 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) -- --
Beneficial conversion features 63,733 -- 63,733
Forgiveness of affiliate debt (1,796,320) -- (1,796,320)
Net (loss) -- (6,383,036) (6,383,036)
------------- ------------- -------------
Balance, December 31, 2008 $ 125,027,231 $(135,036,278) $ (9,880,962)
============= ============= =============
Issuance of common stock upon conversion of debt (1,239) -- (1,239)
Beneficial conversion features 4,661 -- 4,661
Net income -- 2,755,877 5,489,641
------------- ------------- -------------
Balance, March 31, 2009 $ 125,030,653 $(132,280,402) $ (7,115,763)
============= ============= =============
The notes to the financial statement are an integral
part of these statements.
7
CARBONICS CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
(RESTATED) (RESTATED)
Three Months Ended Three Months Ended
3/31/09 3/31/08
--------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income from continuing operations $ 2,755,877 $ 964,775
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation -- 5,588
Stock based compensation -- 90,000
Changes in beneficial conversion features (2,878,336) (1,189,051)
Changes in Assets and Liabilities
Deposits -- 32,152
Accounts payable 13,233 (254,808)
Accrued expenses 67,955 (83,334)
Deferred financing fees -- (43,946)
Liabilities to be settled in stock -- (407,333)
Interest payable - related party -- 196,832
Interest payable 38,077 37,429
----------- -----------
Net cash provided used in operating activities (3,194) (651,696)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances (Repayments) of short-term borrowings 65,441 --
Proceeds from notes receivable - related party -- 854,168
Issuance of note receivable -- --
Repayment of notes payable - related party -- (200,000)
----------- -----------
Net cash provided by financing activities 65,441 654,168
----------- -----------
Net (decrease) increase in cash 62,247 2,472
Cash at beginning of period -- --
----------- -----------
Cash at end of period $ 62,247 $ 2,472
=========== ===========
Supplemental statement of non-cash investing and financing activities:
Conversion of debentures $ 4,661 30,300
Transfer of net assets to related party $ -- 2,203,653
The notes to the financial statement are an integral
part of these statements.
8
1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10Q of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all normal recurring adjustments considered necessary for a fair
statement of the results of operations have been included. The results of
operations for the three months ended March 31, 2009 are not necessarily
indicative of the results of operations for the full year. When reading the
financial information contained in this Quarterly Report, reference should be
made to the financial statements and notes contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2008.
2 NATURE OF OPERATIONS
We develop renewable energy projects that facilitate the more efficient use of
carbon in energy supply chains. Our development activities during 2009 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.
3 GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company had an accumulated deficit
of ($132,280,402) at March 31, 2009. As of March 31, 2009 the Company's current
liabilities exceeded current assets by $7,115,763. 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.
4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet as of March 31, 2009 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
9
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.
Fair value estimates are made at a specific point in time, based on the terms of
the financial instrument. 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
these estimates.
The Company adopted SFAS 157 on January 1, 2008. 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 three months ended March 31, 2009:
Fair Value
As of March 31, 2009 Level 1 Level 2 Level 3 Total
-------- -------- ------- ------
Embedded conversion liabilities $ -- $ -- $4,062,240 $ 4,062,240
The following table reconciles, for the three months ended March 31, 2009, the
beginning and ending balances for financial instruments that are recognized at
fair value in the consolidated financial statements:
Balance of Embedded Conversion Liabilities at December 31, 2007 $ 1,251,891
Reductions in fair value due to principal conversions (63,733)
Gain on fair value adjustments to embedded derivatives 5,757,079
-----------
Balance of Embedded Conversion Liabilities at December 31, 2008 6,945,237
Accretion adjustments to fair value - beneficial conversion features (4,661)
Gain on fair value adjustments to embedded conversion liabilities (2,878,336)
-----------
Balance of Embedded Conversion Liabilities at March 31, 2009 $ 4,062,240
===========
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 Note 6 for more information
on the valuation methods used.
DEFERRED FINANCING COSTS AND DEBT DISCOUNTS
Deferred finance costs represent costs which may include direct costs paid 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.
10
5 FINANCING ARRANGEMENTS
The following is a summary of the Company's financing arrangements as of March
31:
Current portion of convertible debentures:
Convertible debenture payable from CICS to YAGI issued October 2005 $ 2,009,690
Convertible debenture payable from CICS to YAGI issued June 2007 633,333
Convertible debenture payable from CICS to YAGI issued February 2006 3,705,032
----------------
Total current convertible debentures $ 6,348,055
================
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. During the three months ended March 31, 2009
and 2008, interest expense from accretion of the debt discount was $47,348 and
$152,720, respectively.
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 March 31, 2009, the
outstanding principal and accrued interest of the debt was $48,406,629.
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 certain Secured Convertible Debenture No. CCP-2 dated
October 12, 2005 in the original principal amount of $1,475,000; a certain
Secured Convertible Debenture No. CCP-4 dated February 8, 2006 in the original
principal amount of $3,050,369; a certain Secured Convertible Debenture No.
GSHF-3-1 dated June 26, 2007 in the original principal amount of $570,000.
11
The Company accounted for the YAGI Debenture dated October 12, 2005 in
accordance 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 10
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. As of March 31, 2009, income of $1,004,845 has been recorded
from a reduction in the fair value of the conversion feature on the convertible
note payable, thereby, decreasing the carrying value of the YAGI Debenture to
$2,009,690 at June 30, 2009.
The Company accounted for the YAGI Debenture dated February 8, 2006 in
accordance 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 10
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. The Company recognized a reduction in the conversion
liability at present value of $4,661 for the conversions that occurred during
the three months ended March 31, 2009. As of March 31, 2009, income of
$1,873,491 has been recorded from a reduction in the fair value of the
conversion feature on the convertible note payable as well as s a reduction in
the conversion liability at present value of $4,661 for the conversions that
occurred during the quarter, thereby, decreasing the carrying value of the YAGI
Debenture to $3,705,032 at March 31, 2009.
The Company accounted for the YAGI Debenture dated October 12, 2005 in
accordance 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 10
Restatement of Prior Years Financials, below). The Company determined the value
of the YAGI Debenture at December 31, 2008 to be $632,840 which represented the
face value of the debenture plus the present value of the $62,840 conversion
feature. As of March 31, 2009, the carrying value of the YAGI Debenture to was
$633,333 at March 31, 2009.
6 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.
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 March 31, 2009, the
outstanding principal and accrued interest of the debt was $48,406,629.
7 SUBSEQUENT EVENTS
On May 4, 2009, the Superior Court of the State of California entered a default
against the Company in the amount of $62,500. Golden State Equity Investors,
Inc. alleged claims against the Company in which they asserted a cause of action
for breach of contract regarding a Settlement Agreement dated July 9, 2008. The
Company has recorded this default amount effective January 1, 2009.
8 RESTATEMENTS
The Company has restated its financial statements for the years ended December
31, 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 be revised to conform with recent
12
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 through retrospective
application of this accounting interpretation to prior periods in accordance
with this standard.
The following shows the effect of the restatements on the financial statements:
3/31/09 3/31/09 12/31/08 12/31/08
Balance Sheets: As reported As restated As reported As restated
-----------------------------------------------------------------------------
Convertible debentures, current $ 2,049,074 $ 6,348,055 $ 2,006,387 $ 9,235,713
Liability for derivative instruments 4,650,932 -- 10,310,380 --
Accumulated deficit (132,563,958) (132,280,402) (138,053,599) (135,036,278)
3/31/09 3/31/09 3/31/08 3/31/08
Statements of Operations: As reported As restated As reported As restated
------------------------------------------------------------------------------
Loss on fair value-derivatives $ 5,659,448 $ -- $ 1,567,573 $ --
Amortization of debt discount (47,348) -- (152,720) --
Change in conversion liabilities -- 2,878,336 -- 1,189,051
Conversion liability expense -- -- -- (493)
Income (loss) from
continuing operations 5,511,523 2, 755,877 1,190,577 964,776
Net income (loss) 5,489,641 2,755,877 1,190,577 964,776
Earnings (loss) per share:
Continuing operations $ 0.04 $ (0.02) $ 0.12 $ 0.10
Total, basic and diluted $ 0.04 $ (0.02) $ 0.12 $ 0.10
3/31/09 3/31/09 12/31/08 12/31/08
Statements of Stockholders' Equity: As reported As restated As reported As restated
------------------------------------------------------------------------------
Change in conversion feature due
to conversion liabilities -- 4,661 -- 63,733
Net loss $ 5,489,641 $ 2,755,877 $ (9,733,673) $ 964,776
3/31/09 3/31/09 3/31/08 3/31/08
Statements of Cash Flows: As reported As restated As reported As restated
-------------------------------------------------------------------------------
Net loss from continuing operations $ 5,489,641 2,755,877 $ 1,190,577 $ 964,776
Amortization of debt discount
and deferred financing costs 47,348 -- 152,720 330,519
Change in fair value of derivatives (5,659,448) -- (1,567,573) --
Interest from conversion liabilities -- 2,878,336 -- 1,189,051
13
ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS
We develop renewable energy projects that facilitate the more efficient use of
carbon in energy supply chains. Our development activities during 2009 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
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Revenues
There were no revenues from continuing operations for the three months ended
March 31, 2009 and 2008.
Cost of Revenues
There was no cost of revenues for the three months ended March 31, 2009 and
2008.
General and Administrative Expenses Operating Expenses
General and administrative expenses during the three months ended March 31, 2009
totaled $21,882 with $0 related to stock based compensation. In the comparable
period of the prior year, general and administrative expenses totaled $186,846
with $90,000 related to stock based compensation. General and administrative
expenses during the three months ended March 31, 2009 primarily consisted of
legal fees and office related expenses.
Interest Expense
Interest expense for the three months ended March 31, 2009 was $38,077 and
$37,429 for the same period in 2008.
Gain Associated with Change in Convertible Liabilities
As of March 31, 2009, Carbonics Capital 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 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. For
the three months ended March 31, 2009 and 2008, we recognized $0 and $493
interest expense for the accretion of the conversion liability for these
debentures. For the three months ended March 31, 2009and 2008, we recognized a
gain for the change in fair value of the conversion liability of $2,878,336 and
a gain of $1,189,051 for these debentures.
Net Income
Net income for the three months ended March 31, 2009 was $2,755,877 as compared
to a net income of $967,776 from the same period in 2008.
Liquidity and Capital Resources
The Company had $7,498,701 in current liabilities at March 31, 2009, and may
need to obtain additional financing to satisfy these obligations.
14
Our primary sources of liquidity are cash provided by and financing activities.
For the three months ended March 31, 2009, net cash used in our operating
activities was $3,194 as compared to $651,696 used in the three months ended
March 31, 2008. 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 2009 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 three months ended March 31, 2009 used
$3,194 in cash. At March 31, 2009, accounts payable and accrued expenses totaled
$672,699. At March 31, 2009 the Company had $62,247 in cash. For the three
months ended March 31, 2009, investing activities used $0 in cash, and cash from
financing activities provided $65,442. The Company had a working capital deficit
of $7,115,763 at March 31, 2009, which includes convertible debentures of
$6,348,055.
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.
15
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer participated in
and supervised the evaluation of our disclosure controls and procedures (as
defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) that are designed to ensure that
information required to be disclosed by us in the reports that we file is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that the information required to be disclosed by us in the reports that
we file or submit under the Act is accumulated and communicated to our
management, including our principal executive officer or officers and principal
financial officer, to allow timely decisions regarding required disclosure.
Management determined that at March 31, 2009, the Company had a material
weakness because it did not have a sufficient number of personnel with an
appropriate level of knowledge and experience of generally accepted accounting
principles in the United States of America (U.S. GAAP) that are commensurate
with the Company's financial reporting requirements. As a result, Management
concluded that the Company's disclosure controls and procedures were not
effective at March 31, 2009.
There have been no changes in the Company's internal control over financial
reporting during the most recently completed fiscal quarter that have materially
affected or are reasonably likely to materially affect the Company's internal
control over financial reporting.
16
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 1A RISK FACTORS
Not Applicable.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS
INDEX TO EXHIBITS
Exhibit
Number Description
- -------------------------------------------------------------------------------
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.
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
/S/ KEVIN KREISLER
-----------------------
By: KEVIN KREISLER
Chairman and Chief Executive Officer
Date: May 20 , 2009
/S/ JACQUELINE FLYNN
-------------------------
By: JAQUELINE FLYNN
Chief Financial Officer
Date: May 20 , 2009
17