UNITED
STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



| | R | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
| | - | ---------------------------------------------------------------------------------



For the quarterly period ended March 31, 2012.



| |  ̈ | Transition report under Section 13 or 15(d) of the Exchange Act
| | - | ---------------------------------------------------------------



For the transition period from
________________ to________________ .



Commission file number 000-28887



CARBONICS CAPITAL CORPORATION

(Exact name of registrant as specified in
its Charter)



|Delaware                        |  | 22-3328734         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)



100 Overlook Center, 2nd Floor

Princeton, NJ 08540

(Address of Principal Executive Offices)



(609) 498-7029

(Registrant’s Telephone Number, Including
Area Code)



Indicate by check mark whether the Issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter
period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days.

Yes RNo£



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated
filer”, “accelerated filer and “smaller reporting company” in Rule 12b-2 or the Exchange Act. (Check one):



|Large Accelerated filer |  ̈ | Accelerated Filer         |  ̈
|----------------------- | - | ------------------------- | -
|                        |   |                           |  
|Non-Accelerated Filer   |  ̈ | Smaller Reporting Company | R

(Do not check if a smaller reporting company)



Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act)

Yes ̈NoR



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).

Yes   ̈No R



As of May 21, 2012 the Registrant
had the following number of shares of its capital stock outstanding:2,879,307,140 shares of
Common Stock, par value $0.0001 and 921,890 shares of Series C Preferred Stock, par value $0.001, which are convertible, in accordance
with their terms, into a number of shares of Common Stock equal to 73.75% of the fully-diluted outstanding shares of Common Stock.











Table of Contents



|                                                                                                                                                        |     
|------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                                                        | Page
|Part I. Financial Information                                                                                                                           | 2   
|                                                                                                                                                        |     
|Item 1: Financial Statements (Unaudited)                                                                                                                | 2   
|                                                                                                                                                        |     
|Condensed Consolidated Balance Sheets at March 31, 2012 (unaudited) and December 31, 2011                                                               | 2   
|                                                                                                                                                        |     
|Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2012 and 2011 (with cumulative totals since inception) (Unaudited) | 3   
|                                                                                                                                                        |     
|Condensed Consolidated Statement of Changes in Stockholders’ Equity for the period December 28, 2008 (Inception) through March 31, 2012 (Unaudited)     | 4   
|                                                                                                                                                        |     
|Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2012 and 2011 (with cumulative totals since inception) (Unaudited) | 5   
|                                                                                                                                                        |     
|Notes to Condensed
Consolidated Financial Statements                                                                                                    | 6   
|                                                                                                                                                        |     
|Item 2: Management’s Discussion and Analysis                                                                                                            | 11  
|                                                                                                                                                        |     
|Item 3: Quantitative and Qualitative Disclosures About Market Risk                                                                                      | 14  
|                                                                                                                                                        |     
|Item 4: Controls and Procedures                                                                                                                         | 14  
|                                                                                                                                                        |     
|Part II. Other Information                                                                                                                              | 15  
|                                                                                                                                                        |     
|Item 1: Legal Proceedings                                                                                                                               | 15  
|                                                                                                                                                        |     
|Item 1A: Risk Factors                                                                                                                                   | 15  
|                                                                                                                                                        |     
|Item 2: Unregistered Sales of Equity Securities and Use of Proceeds                                                                                     | 15  
|                                                                                                                                                        |     
|Item 3: Defaults Upon Senior Securities                                                                                                                 | 15  
|                                                                                                                                                        |     
|Item 4: Removed and Reserved                                                                                                                            | 15  
|                                                                                                                                                        |     
|Item 5: Other Information                                                                                                                               | 15  
|                                                                                                                                                        |     
|Item 6: Exhibits                                                                                                                                        | 15  
|                                                                                                                                                        |     
|Signatures                                                                                                                                              | 16  
|                                                                                                                                                        |     
|EX-31.1: CERTIFICATION                                                                                                                                  |     
|EX-31.2: CERTIFICATION                                                                                                                                  |     
|EX-32.1: CERTIFICATIONS                                                                                                                                 |     











Disclosure Regarding Forward-Looking
Statements



Certain statements in the Quarterly Report
on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”), Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”),
the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange
Commission, all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or achievements of Carbonics Capital Corporation (the “Company”)
or industry results, to be materially different from any future results, performance or achievements expressed or implied by such
forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements
can be identified by, among other things, the use of forward-looking language, such as the words, “plan”, “believe”,
“expect”, “anticipate”, “intend”, “estimate”, “project”, “may”,
“will”, “would”, “could”, “should”, “seeks”, or “scheduled to”,
or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion
of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the
PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. The Company cautions
investors that any forward-looking statements made by the Company are not guarantees or indicative of future performance. Important
assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements
with respect to the Company, include, but are not limited to, the risks and uncertainties affecting its businesses described in
Items 1 and 1A of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2011 and in registration
statements and other securities filings by the Company. Although the Company believes that its plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection
or assumption in any of the forward-looking statements and are subject to change due inherent risks and uncertainties. The forward-looking
statements contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or
undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent
events or otherwise, unless otherwise required by law.











PART I. FINANCIAL INFORMATION



Item 1. Unaudited Financial Statements



CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



|                                                                                                               |  | March 31, |             |   | December 31, |  
|-------------------------------------------------------------------------------------------------------------- |  | --------- | ----------- | - | ------------ | -
|                                                                                                               |  | 2012      |             |   | 2011         |  
|ASSETS                                                                                                         |  |           |             |   |              |  
|                                                                                                               |  |           |             |   |              |  
|Assets                                                                                                         |  |           |             |   |              |  
|Cash and cash equivalents                                                                                      |  | $         | 357,661     |   |              | $
|Restricted cash                                                                                                |  |           | 690,474     |   |              |  
|Trading securities - Restricted                                                                                |  |           | 107,952     |   |              |  
|Prepaid and other current assets                                                                               |  |           | 42,683      |   |              |  
|Total current assets                                                                                           |  |           | 1,198,770   |   |              |  
|                                                                                                               |  |           |             |   |              |  
|Oil and gas properties, unproven                                                                               |  |           | 10,475,000  |   |              |  
|                                                                                                               |  |           |             |   |              |  
|Total assets                                                                                                   |  | $         | 11,673,770  |   |              | $
|                                                                                                               |  |           |             |   |              |  
|LIABILITIES AND STOCKHOLDERS' DEFICIENCY                                                                       |  |           |             |   |              |  
|                                                                                                               |  |           |             |   |              |  
|Current Liabilities:                                                                                           |  |           |             |   |              |  
|Senior secured convertible debenture, net of discount                                                          |  | $         | 28,569,007  |   |              | $
|Account payable and accrued expenses                                                                           |  |           | 225,250     |   |              |  
|Line of credit                                                                                                 |  |           | 593         |   |              |  
|Convertible debentures                                                                                         |  |           | 6,083,026   |   |              |  
|Accrued interest                                                                                               |  |           | 6,422,764   |   |              |  
|Derivative liability                                                                                           |  |           | 3,127,000   |   |              |  
|Total current liabilities                                                                                      |  |           | 44,427,640  |   |              |  
|                                                                                                               |  |           |             |   |              |  
|Stockholders' Deficiency:                                                                                      |  |           |             |   |              |  
|Preferred stock, $0.001 par value, 1,000,000 shares authorized                                                 |  |           |             |   |              |  
|Series C Voting Convertible, 921,890 shares issued and outstanding                                             |  |           | 921         |   |              |  
|Common stock, $0.0001 par value; 10,000,000,000 shares authorized; 2,879,307,140 shares issued and outstanding |  |           | 287,931     |   |              |  
|Additional paid-in capital                                                                                     |  |           | (9,872,115  | ) |              |  
|Accumulated deficiency during exploration stage                                                                |  |           | (23,170,607 | ) |              |  
|Total stockholders' deficiency                                                                                 |  |           | (32,753,870 | ) |              |  
|Total liabilities and stockholders' deficiency                                                                 |  | $         | 11,673,770  |   |              | $











CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

(UNAUDITED)



|                                                                        |  | Three Months Ended March 31, |               |   | Cumulative Period |  
|----------------------------------------------------------------------- |  | ---------------------------- | ------------- | - | ----------------- | -
|                                                                        |  |                              |               |   |                   |  
|                                                                        |  |                              |               |   |                   |  
|                                                                        |  | 2012                         |               |   | 2011              |  
|                                                                        |  |                              |               |   |                   |  
|Net sales                                                               |  | $                            | -             |   |                   | $
|Cost of sales                                                           |  |                              | -             |   |                   |  
|                                                                        |  |                              | -             |   |                   |  
|                                                                        |  |                              |               |   |                   |  
|Operating expenses                                                      |  |                              |               |   |                   |  
|Impairment loss                                                         |  |                              | -             |   |                   |  
|General and administrative expenses                                     |  |                              | 206,886       |   |                   |  
|                                                                        |  |                              |               |   |                   |  
|Total operating expenses                                                |  |                              | 206,886       |   |                   |  
|                                                                        |  |                              |               |   |                   |  
|Loss from operations                                                    |  |                              | (206,886      | ) |                   |  
|                                                                        |  |                              |               |   |                   |  
|Interest expense                                                        |  |                              | (1,236,025    | ) |                   |  
|Change in fair value of derivative liability                            |  |                              | 882,000       |   |                   |  
|Losses from trading securities                                          |  |                              | (1,440        | ) |                   |  
|                                                                        |  |                              |               |   |                   |  
|Income (loss) before income tax provision                               |  |                              | (562,351      | ) |                   |  
|                                                                        |  |                              |               |   |                   |  
|Income tax provision                                                    |  |                              | -             |   |                   |  
|                                                                        |  |                              |               |   |                   |  
|Net income (loss)                                                       |  | $                            | (562,351      | ) |                   | $
|                                                                        |  |                              |               |   |                   |  
|Basic and diluted loss per common share                                 |  | $                            | 0.00          |   |                   | $
|                                                                        |  |                              |               |   |                   |  
|Weighted average number of common shares outstanding, basic and diluted |  |                              | 2,879,307,000 |   |                   |  











CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’
DEFICIENCY

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

(UNAUDITED)



|                                                      |  | Series C Voting Convertible
    preferred stock issued |         |   | Common Stock Issued |   |     |        |  |  | Deficit Accumulated |  |  |                                |        
|----------------------------------------------------- |  | ------------------------------------------------------ | ------- | - | ------------------- | - | --- | ------ |  |  | ------------------- |  |  | ------------------------------ | -------
|                                                      |  | Shares                                                 |         |   | Amount              |   |     | Shares |  |  | Amount              |  |  | Additional
    Paid-in Capital |        
|December 23, 2008 contribution of
    assets          |  |                                                        | -       |   |                     | $ | -   |        |  |  | -                   |  |  | $                              | -      
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Reverse merger recapitalization                       |  |                                                        | 805,767 |   |                     |   | 806 |        |  |  | 127,279,406         |  |  |                                | 12,728 
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Balance, December 31, 2008                            |  |                                                        | 805,767 |   |                     |   | 806 |        |  |  | 127,279,406         |  |  |                                | 12,728 
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Shares issued prior to reverse
    merger by acquiree |  |                                                        | 166,275 |   |                     |   |     |        |  |  | 355,562,697         |  |  |                                | -      
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Capital contribution                                  |  |                                                        | -       |   |                     |   | -   |        |  |  | -                   |  |  |                                | -      
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Reverse merger recapitalization                       |  |                                                        | -       |   |                     |   | 166 |        |  |  | -                   |  |  |                                | 35,556 
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Net loss                                              |  |                                                        | -       |   |                     |   | -   |        |  |  | -                   |  |  |                                | -      
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Balance, December 31, 2009                            |  |                                                        | 972,042 |   |                     |   | 972 |        |  |  | 482,842,103         |  |  |                                | 48,284 
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Shares issued prior to reverse
    merger by acquiree |  |                                                        | (50,152 | ) |                     |   | -   |        |  |  | 2,396,465,037       |  |  |                                | -      
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Capital contribution                                  |  |                                                        | -       |   |                     |   | -   |        |  |  | -                   |  |  |                                | -      
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Reverse merger recapitalization                       |  |                                                        | -       |   |                     |   | (51 | )      |  |  | -                   |  |  |                                | 239,647
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Net loss                                              |  |                                                        | -       |   |                     |   | -   |        |  |  | -                   |  |  |                                | -      
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Balance, December 31, 2010                            |  |                                                        | 921,890 |   |                     | $ | 921 |        |  |  | 2,879,307,140       |  |  | $                              | 287,931
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Net loss                                              |  |                                                        | -       |   |                     |   | -   |        |  |  | -                   |  |  |                                | -      
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Balance, December 31, 2011                            |  |                                                        | 921,890 |   |                     | $ | 921 |        |  |  | 2,879,307,140       |  |  | $                              | 287,931
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Net loss                                              |  |                                                        | -       |   |                     |   | -   |        |  |  | -                   |  |  |                                | -      
|                                                      |  |                                                        |         |   |                     |   |     |        |  |  |                     |  |  |                                |        
|Balance, March 31, 2012                               |  |                                                        | 921,890 |   |                     | $ | 921 |        |  |  | 2,879,307,140       |  |  | $                              | 287,931











CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS

(UNAUDITED)



|                                                                                        |  | Three Months Ended |          |   | Cumulative Period from |  
|--------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ---------------------- | -
|                                                                                        |  | March 31,          |          |   | December 23, 2008      |  
|                                                                                        |  | 2012               |          |   | 2011                   |  
|Operating activities:                                                                   |  |                    |          |   |                        |  
|Net Income (loss)                                                                       |  | $                  | (562,351 | ) |                        | $
|Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:             |  |                    |          |   |                        |  
|Impairment of long-lived assets                                                         |  |                    | -        |   |                        |  
|Change in fair value of derivative liability                                            |  |                    | (882,000 | ) |                        |  
|Unrealized (gains) losses on marketable securities                                      |  |                    | 18       |   |                        |  
|Amortization of debt discount                                                           |  |                    | 418,500  |   |                        |  
|Changes in Assets and Liabilities                                                       |  |                    |          |   |                        |  
|Prepaid and other current assets                                                        |  |                    | 28,138   |   |                        |  
|Decrease in accounts payable and accrued expenses                                       |  |                    | (247,175 | ) |                        |  
|Increase in accrued interest                                                            |  |                    | 817,363  |   |                        |  
|Net cash used in operating activities                                                   |  |                    | (427,507 | ) |                        |  
|                                                                                        |  |                    |          |   |                        |  
|Investing activities:                                                                   |  |                    |          |   |                        |  
|Restricted cash                                                                         |  |                    | (512,453 | ) |                        |  
|Proceeds from sale of trading securities                                                |  |                    | 567,159  |   |                        |  
|Purchases of trading securities                                                         |  |                    | (107,954 | ) |                        |  
|Net cash used in investing activities                                                   |  |                    | (53,248  | ) |                        |  
|                                                                                        |  |                    |          |   |                        |  
|Financing activities                                                                    |  |                    |          |   |                        |  
|Line of credit                                                                          |  |                    | (17,645  | ) |                        |  
|Proceeds from advances                                                                  |  |                    | -        |   |                        |  
|Proceeds from issuance of senior secured convertible debenture                          |  |                    | -        |   |                        |  
|Proceeds from issuance of promissory notes                                              |  |                    | -        |   |                        |  
|Retirement of promissory notes in exchange for convertible debenture                    |  |                    | -        |   |                        |  
|Capital contribution                                                                    |  |                    | -        |   |                        |  
|Net cash used in financing activities                                                   |  |                    | (17,645  | ) |                        |  
|                                                                                        |  |                    |          |   |                        |  
|(Decrease) increase in cash                                                             |  |                    | (498,400 | ) |                        |  
|                                                                                        |  |                    |          |   |                        |  
|Cash and cash equivalents, beginning of period                                          |  |                    | 856,061  |   |                        |  
|Cash and cash equivalents, end of period                                                |  | $                  | 357,661  |   |                        | $
|                                                                                        |  |                    |          |   |                        |  
|NONCASH INVESTING AND FINANCING ACTIVITIES                                              |  |                    |          |   |                        |  
|Oil and gas properties, unproven                                                        |  | $                  | -        |   |                        | $
|Debt discount derived from derivative liability - Convertible debentures                |  |                    | -        |   |                        |  
|Debt discount derived from derivative liability - Senior Secured convertible debentures |  |                    | -        |   |                        |  
|                                                                                        |  |                    |          |   |                        |  
|Reverse merger liabilities and equity adjustments                                       |  |                    |          |   |                        |  
|Accrued interest                                                                        |  |                    | -        |   |                        |  
|Senior secured convertible debenture                                                    |  |                    | -        |   |                        |  
|Convertible debentures                                                                  |  |                    | -        |   |                        |  
|                                                                                        |  |                    |          |   |                        |  
|                                                                                        |  | $                  | -        |   |                        | $

















CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)



1.  Basis of Presentation and Nature
of Organization



Nature of Operations



Carbonics Capital Corporation’s
wholly owned subsidiary, Westport Acquisition LLC and its wholly owned subsidiary, Westport Energy, LLC (the Company), was formed
in December 2008, in the State of Delaware, as a limited liability company. Westport Energy is an exploration stage company engaged
in the exploration for coalbed methane in the Coos Bay region of Oregon. Westport Energy holds leases to approximately 104,000
acres of prospective coalbed methane lands in the Coos Bay Basin.



The Company’s common stock
is traded on the Over-the-Counter Pink Sheets under the symbol CICS.



Basis of Presentation of
Interim Financial Statements



The accompanying unaudited condensed
consolidated financial statements were prepared by the Company pursuant to the rules and regulations of the SEC and, in the opinion
of management, include all adjustments (consisting of normal recurring accruals and adjustments necessary for adoption of new accounting
standards) necessary to present fairly the results of the interim periods shown.  Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”)
have been condensed or omitted pursuant to such SEC rules and regulations.  Management believes that the disclosures
made are adequate to make the information presented not misleading.  The results for the interim periods are not necessarily
indicative of results for the full year.



The accompanying unaudited condensed
consolidated financial statements include the accounts of Carbonics Capital Corporation and its wholly-owned subsidiaries.  All
significant intercompany balances and transactions have been eliminated in consolidation.



Liquidity and Going Concern



The accompanying condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles, which contemplate continuation
of the Company as a going concern. The Company has recurring deficits, a large accumulated deficit and is in the exploration stage
of development, and has no revenues. These items raise substantial doubt about the Company’s ability to continue as a going
concern. In view of these matters, realization of the assets of the Company is dependent upon the Company’s ability to meet
its financial requirements and the success of future operations.



In addition, as of March 31,
2012, the Company is not compliant with the repayment terms of the convertible notes and is in technical default. The senior secured
convertible debentures have cross-default provisions within the agreement, which necessitated their classification as a current
liability. All convertible debentures are currently due and the Company continues to work with the note holders to remediate the
default.



The Company’s future success
is dependent upon its ability to achieve profitable operations and raise the appropriate funds needed. There is no guarantee whether
the Company will be able to generate enough revenue and or raise capital to support these operations.



The Company cannot predict how
long it will continue to incur further losses or whether it will ever become profitable, or if its business will improve.  The
financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.



Recent Accounting Pronouncements



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











CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)



2.  Summary of Significant Accounting
Policies



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



Fair Value Framework



The following table reconciles,
for the three months ended March 31, 2012, the beginning and ending balances for financial instruments that are recognized at fair
value using level 3 inputs in the condensed consolidated financial statements:



|Balance of derivative liability as of December 31, 2011 |  | $ | 4,009,000 |  
|------------------------------------------------------- |  | - | --------- | -
|                                                        |  |   |           |  
|Change in fair value during period                      |  |   | (882,000  | )
|                                                        |  |   |           |  
|Balance at March 31, 2012                               |  | $ | 3,127,000 |  



Level 3 financial instruments
consist of certain embedded conversion features in the Company’s convertible debentures and senior secured convertible debentures.
The fair value of these embedded conversion features are measured using the Black-Scholes model. The Company computes valuations
each quarter using Black-Scholes model calculations.  The unobservable
input used by the Company was the estimation of the volatility of the Company’s stock price over the remaining term of the
convertible debentures, which were measured at 63% at March 31, 2012.



Changes in unobservable input
values would likely cause material changes in fair value of the Company’s Level 3 financial instruments. The significant
unobservable input used in the fair value measurement is the estimation of the volatility of the Company’s common stock.
A significant increase (decrease) in the volatility would result in a higher (lower) fair value measurement.



Net Loss per Share of Common
Stock



The Company’s basic loss per common share is
based on net loss for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted
income per common share is based on net income, divided by the weighted average number of common shares outstanding during the
period, including common share equivalents, such as outstanding stock options and beneficial conversion of related party accounts.
Diluted loss per share does not include common stock equivalents, as these shares would have no effect. The computation of diluted
loss per share also does not assume conversion, exercise or contingent exercise of securities due to the beneficial conversion
of related party accounts, as this would be anti-dilutive.



The computation of basic and
diluted net loss attributable to common stockholders is as follows:



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











CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)



2.  Summary of Significant Accounting
Policies (Continued)



Potentially Dilutive Securities



The following table summarizes the potentially dilutive
securities which were excluded from the above computation of basic and diluted net loss per share of common stock due to their
anti-dilutive effect:



|                                      |  | March 31, 2012 |                 |   | March 31, 2011 | 
|------------------------------------- |  | -------------- | --------------- | - | -------------- | 
|                                      |  |                |                 |   |                | 
|Warrants                              |  |                | 2,750,000       |   |                | 
|                                      |  |                |                 |   |                | 
|Senior secured convertible debentures |  |                | 233,203,000,000 | * |                | 
|                                      |  |                |                 |   |                | 
|Convertible debentures                |  |                | 65,908,000,000  | * |                | 



*The convertible debentures exceeded the number of authorized
common shares and as a result weighted average shares outstanding, fully diluted, is the maximum authorized number of common shares,
10,000,000,000.



Reclassifications



Certain reclassifications have been made in prior
years’ consolidated financial statements to conform to the current year’s presentation.



3.  Oil and Gas Properties, Unproven



Summary



As of March 31, 2012 the remaining
capitalized costs of Oil and Gas Properties, unproved are summarized as follows:



|                                 |  | Acquisition Costs |            |  | Impairment |   |             | Total | 
|-------------------------------- |  | ----------------- | ---------- |  | ---------- | - | ----------- | ----- | 
|Coos Bay Basin Property          |  |                   |            |  |            |   |             |       | 
|Year ended 2008                  |  | $                 | 24,141,000 |  |            | $ | -           |       | 
|Year ended 2009                  |  |                   | -          |  |            |   | -           |       | 
|Year ended 2010                  |  |                   | -          |  |            |   | (3,041,000  | )     | 
|Year ended 2011                  |  |                   | -          |  |            |   | (10,625,000 | )     | 
|3 months ended March 31, 2012    |  |                   | -          |  |            |   | -           |       | 
|Inception through March 31, 2012 |  | $                 | 24,141,000 |  |            | $ | (13,666,000 | )     | 



Impairment – Chehalis
Basin Property



In January 2010, the Company
determined that the cost to continue exploration of the Chehalis Basin Property outweighed the benefit in which they projected.
Therefore, lease agreements were not renewed with the owners and the asset balance was fully impaired. This resulted in an impairment
of approximately $1,331,000 during the first quarter of 2010.



On May 13, 2010, the Company
received formal notice from Washington State Department of Natural Resources that these leases had been cancelled and forfeited
effective May 7, 2010.



Impairment



During the fourth quarter of
2011 and 2010, the Company determined that the carrying cost of the Coos Bay property exceeded the fair value of the property by
approximately $10,625,000 and $1,710,000, respectively. The fair value of the property was independently valued based upon a discounted
cash flow using management’s estimates, which are considered level 3 inputs. The differences were recorded as impairment
charges in the statement of operations.











CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)



4.  Environmental Matters



The Company has established
procedures for a continuing evaluation of its operations to identify potential environmental exposures and to assure compliance
with regulatory policies and procedures. Management monitors these laws and regulations and periodically assesses the propriety
of its operational and accounting policies related to environmental issues. The nature of the Company’s business requires
routine day-to-day compliance with environmental laws and regulations. The Company incurred no material environmental investigation,
compliance and remediation costs for the three months ended March 31, 2012 and 2011. The Company is unable to predict whether its
future operations will be materially affected by these laws and regulations. It is believed that legislation and regulations relating
to environmental protection will not materially affect the results of operations of the Company.



5.  Convertible Debentures, Derivative Liability, and Debt
Discount



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



Convertible debentures:



|                             |  | Conversion
Price |         |  | March 31,  2012 |   |           | December 31,  2011 | 
|---------------------------- |  | ---------------- | ------- |  | --------------- | - | --------- | ------------------ | 
|Due December 2010 – 5%       |  |                  | 0.00010 |  |                 | $ | 592,000   |                    | 
|Due December 2010 – 12%      |  |                  | 0.00009 |  |                 |   | 570,000   |                    | 
|Due December 2010 – 5%       |  |                  | 0.00010 |  |                 |   | 921,000   |                    | 
|Due December 2011– 12%       |  |                  | 0.00009 |  |                 |   | 4,000,000 |                    | 
|Debt discount                |  |                  | -       |  |                 |   | -         |                    | 
|Total convertible debentures |  |                  |         |  |                 | $ | 6,083,000 |                    | 



The convertible debentures (“debentures”),
plus accrued interest are convertible into common stock of the Company at a conversion rate generally based on the lower of $.10
or 90% of the average of the three lowest closing market prices of the Company's stock for the thirty days preceding conversion,
subject to adjustment and beneficial ownership limitations.



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



Senior secured convertible debentures:



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



The senior secured convertible
debentures (“senior debentures”), plus accrued interest are convertible into common stock at various conversion rates
which are subject to adjustment and beneficial ownership limitations. The conversion rates are subject to reduction based on the
volume weighted average price (“VWAP”) for the period preceding the conversion date or other date of determination,
based upon the contractual provisions included in the debenture agreements.



The senior debentures are secured
by a Guaranty and Security agreement dated August 17, 2010 provided by Westport Energy and Westport Acquisition provided to NEC
and YA Global pursuant to which the guarantors unconditionally and irrevocably guarantee the full payment and performance of obligations
the Company owes to NEC. In addition, the grantors of the security agreement grant to NEC security interest in all the assets and
personal property of each grantor in order to secure the obligations under the NEC note.











CARBONICS CAPITAL CORPORATION AND SUBSIDIARY

(AN EXPLORATION COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(UNAUDITED)



Technical default



As of March 31, 2012 the Company
is not compliant with the repayment terms of the convertible notes and is in technical default. The senior secured convertible
debentures have cross-default provisions within the agreement, which necessitated their classification as a current liability.
All convertible debentures are currently due and the Company continues to work with the note holders to remediate the default.



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



Derivative Liability –Conversion
Option



Price protection features of
the convertible debentures required the Company to treat the conversion options in the Company’s senior secured convertible
debentures and convertible debentures as a derivative liability. The Company used the Black-Scholes option pricing model to calculate
the fair value of the conversion options.



Assumptions utilized to calculate
the fair value of the derivative liability were as follows:



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



6.  Line of Credit



The Company has a $740,000 line
of credit from a bank, which includes stand-by letters of credit totaling $675,000 related to the Company’s oil and gas properties.
Advances under the line bear interest at approximately 4.2%. Borrowings are collateralized by treasury bonds held as trading securities
and certificates of deposit and a money market account presented in restricted cash. The cash is restricted for the cleanup and
restoration expenses that could be incurred upon the completion of the project or expiration of the leases.











Item 2. Management’s Discussion and Analysis



Certain statements set forth under this caption constitute
“forward-looking statements.” See “Disclosure Regarding Forward-Looking Statements” on page 1 of this Report
for additional factors relating to such statements. The following discussion should also be read in conjunction with the condensed
consolidated financial statements of the Company and Notes thereto included elsewhere herein and the Company’s Annual Report
on Form 10-K.



The financial statements contained
herein include the results of Carbonics Capital Corporation and its subsidiaries, which are collectively referred to as the “Company.”



Results of Operations – three months ended
March 31, 2012 compared to three months ended March 31, 2011



Revenues



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



Cost of Revenues



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



Net Income (Loss)



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



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



Operating Expenses:



General and administrative
expenses



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



Variance in individual expenses
included in general and administrative fees and professional fees that constituted greater than 5% of total operating expenses
during the three months ended March 31, 2012 and 2011 are as follows. Mineral right lease expense decreased approximately $17,000
from approximately $31,000 in the three months ended March 31, 2011 compared to $14,000 in the three months ended March 31, 2012.
Insurance expense increased approximately $17,000 from approximately $5,000 in the three months ended March 31, 2011 to approximately
$22,000 in the three months ended March 31, 2012. Investment and bank service charges increased approximately $15,000 from approximately
$0 in the three months ended March 31, 2011 to approximately $15,000 in the three months ended March 31, 2012.



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



We expect to incur significant
additional professional fees as we continue to proceed with our exploration activities.











Liquidity and Capital Resources



Our liquid assets, consisting
of cash on hand, restricted cash and trading securities were approximately $1,156,000 as of March 31, 2012. As of March 31, 2012
our working capital deficit was approximately $43 million.



We expect to incur significant
additional professional fees as we begin to proceed with our exploration activities, which will require additional financing. In
addition, the Company will need to re-negotiate terms with the holders of our debentures as they become due. Currently, we do not
have sufficient capital to meet the needs of our note holders and cannot predict when operations will commence, and if so, will
provide enough capital resources to meet those needs.



During the three months ended
March 31, 2012, the Company had a net decrease in cash of approximately $498,000. Our principal sources and uses of funds were
as follows:



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



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



Cash provided by financing
activities. For the three months ended March 31, 2012, the Company used approximately $18,000 in cash from financing activities
as compared to approximately $0 for the three months ended March 31, 2010. This increase of approximately $18,000 was due primarily
to the proceeds from the drawings on the line of credit during the period.



Critical Accounting Policies



The discussion and analysis
of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates. We base our estimates
on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of certain assets and liabilities. Actual results may differ
from these estimates under different assumptions or conditions.



We have identified below the
accounting policies related to what we believe are most critical to our business operations and are discussed throughout Management’s
Discussion and Analysis of Financial Condition or Plan of Operation where such policies affect our reported and expected financial
results.



Oil and Gas Properties



The Company utilizes the successful
efforts method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration
and development of oil and gas reserves, including such costs as leasehold acquisition costs, interest costs relating to unproved
properties, geological expenditures and direct internal costs are capitalized into the full cost pool. As of March 31, 2012, the
Company has no properties with proven reserves. When the Company obtains proven oil and gas reserves, capitalized costs, including
estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production
method using estimates of proved reserves. Investments in unproved properties and major development projects including capitalized
interest, if any, are not amortized until proved reserves associated with the projects can be determined. If the future exploration
of unproved properties is determined uneconomical, the amount of such properties will be added to the capitalized cost to be amortized.
As of March 31, 2012, all of the Company’s oil and gas properties were unproved and were excluded from amortization.











Use of Estimates



The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.



Impairment of Long—Lived Assets



Long-lived
assets, including oil and gas properties, are reviewed for impairment when circumstances indicate that the carrying value may not
be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets with
the future undiscounted net cash flows estimated by the Company to be generated by such assets. If the carrying amount exceeds
the net undiscounted cash flows, the fair value of the assets are determined using appropriate valuation techniques. The impairment
loss is the extent to which the carrying value of the assets exceeds the fair value of the assets.



Off Balance Sheet Arrangements



None.



Item 3. Quantative and Qualitative Disclosure
About Market Risk



N/A



Item 4. Controls and Procedures



(a) Evaluation of Disclosure Controls and Procedures:



Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide
reasonable assurance regarding the reliability of our financial reporting and preparation of financial statement for external purposes
in accordance with U.S. generally accepted accounting principals. A control system, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives. Because of the inherent limitations in all control
systems, internal controls over financial reporting may not prevent or detect misstatements. The design and operation of a control
system must also reflect that there are resource constraints and management is necessarily required to apply its judgment in evaluating
the cost-benefit relationship of possible controls.



Our management assessed the effectiveness of our
internal controls over financial reporting for the quarter ended March 31, 2012 based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, our management
concluded that during the period covered by this report, our internal controls over financial reporting were not effective. Management
has identified the following material weaknesses in our internal controls over financial reporting:



| | • | lack of documented policies and procedures; and
| | - | -----------------------------------------------



| | • | there is no effective separation of duties, which includes monitoring controls, between the members of management.
| | - | ------------------------------------------------------------------------------------------------------------------



| | • | lack of resources to account for complex and unusual transactions
| | - | -----------------------------------------------------------------



Management is currently evaluating what steps can
be taken in order to address these material weaknesses.



(b) Changes in Internal Control over Financial Reporting:



During the fiscal quarter ended March 31, 2012, there
were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.











PART II. OTHER INFORMATION



Item 1. Legal Proceedings



None.



Item 1A. Risk Factors



N/A



Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds



None.



Item 3. Defaults Upon Senior Securities



None.



Item 4. (Removed and Reserved)



Item 5. Other Information



None.



Item 6. Exhibits



|31.1 |  | Section 302 Certification of Chief Executive Officer.                            
|---- |  | ---------------------------------------------------------------------------------
|     |  |                                                                                  
|31.2 |  | Section 302 Certification of Chief Financial Officer.                            
|     |  |                                                                                  
|32.1 |  | Section 906 Certification of Chief Executive Officer and Chief Financial Officer.











SIGNATURES



In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                   | CARBONICS CAPITAL CORPORATION   | 
|------------------ | ------------------------------- | 
|                   |                                 | 
|Date: May 21, 2012 | By:  /s/ Stephen J. Schoepfer   | 
|                   | Name:  Stephen J. Schoepfer     | 
|                   | Title:  Chief Executive Officer | 
|                   |                                 | 
|Date: May 21, 2012 | By:  /s/ Stephen J. Schoepfer   | 
|                   | Name:  Stephen J. Schoepfer     | 
|                   | Title:  Chief Financial Officer | 













EXHIBIT INDEX



|31.1 |  | Section 302 Certification of Chief Executive Officer                            
|---- |  | --------------------------------------------------------------------------------
|     |  |                                                                                 
|31.2 |  | Section 302 Certification of Chief Financial Officer                            
|     |  |                                                                                 
|32.1 |  | Section 906 Certification of Chief Executive Officer and Chief Financial Officer