4M Carbon Fiber Corp. and Subsidiary
Notes to the Unaudited Condensed Consolidated Financial Statements
For the six months ended June 30, 2019 and 2018
1.Organization and Nature of Operations
The Company was incorporated in the state of Delaware, on January 21, 2009 as a wholly owned subsidiary of CornerWorld Corporation (“CWC”), a Nevada corporation publicly traded on the OTCQB exchange.
The Company was setup as a holding company for three telecommunications services subsidiaries. It disposed of these operations when it simultaneously entered into a Stock Purchase Agreement, dated March 31, 2017 (the “Stock Purchase Agreement”), with 4M Industrial Oxidation, LLC, a Tennessee limited liability company (“4MIO”), pursuant to which 4MIO purchased from the Selling Stockholders an aggregate of 3,664,641 shares of common stock, par value $0.0001 per share (the “Common Stock”), of the Company, representing approximately 78.7% of the issued and outstanding shares of Common Stock of the Company. The foregoing sale of Common Stock by the Selling Shareholders to 4MIO resulted in a change in control of the Company.
Subsequently, on April 6, 2017, Woodland acquired one hundred percent (100%) of the outstanding membership interests of 4MIO which became a wholly owned subsidiary. The acquisition had an effective date of April 1, 2017.
In early 2018, Woodland changed its name to 4M Carbon Fiber Corp (“4M”) and while fully reporting to the Securities Exchange Commission (SEC), expects to complete the process whereby it can begin trading on a public stock exchange in late 2019.
2.Basis of Presentation
Interim Unaudited Consolidated Financial Statements
The unaudited interim consolidated financial statements of 4M Carbon Fiber Corporation (the “Company,” “4MCF,” “we,” “our” or “us”) for the six-month periods ended June 30, 2019 and 2018 contained in this Quarterly Report (collectively, the “Unaudited Interim Consolidated Financial Statements”) were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for all periods presented. The results of operations for the six-month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the entire fiscal year.
The accompanying Unaudited Interim Consolidated Financial Statements have been prepared in accordance with the regulations for interim financial information of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited accompanying statements of financial condition and related interim statements of operations, cash flows, and stockholders’ deficit include all adjustments (which consist only of normal and recurring adjustments) considered necessary for a fair presentation in conformity with U.S. GAAP. These Unaudited Interim Consolidated Financial Statements should be read in conjunction with the 4M Carbon Fiber Corp. consolidated financial statements as of and for the year ended December 31, 2018, as filed with the SEC on Form 10-K.
3.Summary of Significant Accounting Policies
a) Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may
differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary 4M Industrial Oxidation, LLC. All significant inter-company transactions are eliminated.
c) Cash and Cash Equivalents
For purposes of the statement of cash flows, cash includes demand deposits, saving accounts and money market accounts. The Company considers all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents.
At June 30, 2019 and December 31, 2018, the Company had one bank account that exceeded the $250,000 FDIC limit. The Company plans on opening additional accounts to mitigate the risk of loss and provide additional benefits and bank flexibility.
d) Accounts receivable and concentration of credit risk
The Company currently offers specialized testing services to various carbon fiber manufacturers and companies utilizing carbon fiber to evaluate the efficacy of the technology on their particular products and product lines. The Company typically requires an upfront fee prior to setup and operation of the test runs. At times, some accounts utilize more than the anticipated resources and additional services are invoiced after the fact. This has minimized the risk of default in the collection of accounts receivable.
e) Allowance for doubtful accounts
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts and the aging of the accounts receivable. The Company regularly reviews the adequacy of the Company’s allowance for doubtful accounts through identification of specific receivables where it is expected that payments will not be received. The Company also establishes an unallocated reserve that is applied to all amounts that are not specifically identified. In determining specific receivables where collections may not have been received, the Company reviews past due receivables and gives consideration to prior collection history and changes in the customer’s overall business condition. The allowance for doubtful accounts reflects the Company’s best estimate as of the reporting dates.
At June 30, 2019 and December 31, 2018, the Company had an allowance for bad debts in the amount of $0 and $0, respectively.
f) Basic and Diluted Net Loss per Share
The Company computes net loss per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. There were dilutive potential securities as of June 30, 2019 in the form of convertible debt (see Note 5), however, due to the Company’s loss their effect on EPS was anti-dilutive and therefor did not affect the EPS calculation.
g) Financial Instruments
Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company did not have any Level 2 or Level 3 assets or liabilities as of June 30, 2019, with the exception of its notes payable. The carrying amounts of these liabilities at June 30, 2019 approximate their respective fair value based on the Company’s incremental borrowing rate.
Cash is considered to be highly liquid and easily tradable as of June 30, 2019 and therefore classified as Level 1 within our fair value hierarchy.
In addition, FASB ASC 825-10-25 Fair Value Option, or ASC 825-10-25, was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments
h) Income Taxes
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted ASC 740 “Accounting for Income Taxes” as of its inception. Pursuant to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in this financial statement because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
i) Revenue Recognition
The Company recognizes revenue in accordance with ASC-605, “Revenue Recognition,” which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or title has passed; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts.
Revenues are recognized (a) for larger construction type projects based on the percentage of completion method; or (b) for direct sales of products, upon shipment, provided that a signed purchase order has been received, the price is fixed, title has transferred, collection of resulting receivables is reasonably assured, and there are no remaining significant obligations. Reserves for sales returns and allowances, based on historical levels of returns and discounts, current economic trends and changes in customer demand.
Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
j) Reclassification
Certain reclassifications have been made to conform the prior period data to the current presentation. These reclassifications had no effect on reported net loss.
4.Notes Payable
Notes Payable, others:
The Company owed $200,584 and $200,584 at June 30, 2019 and December 31, 2018, respectively, to a formerly related party. The relationship ceased to exist when 4MIO was merged into 4M Carbon Fiber.
During the year ended December 31, 2015, the Company had through its 4MIO subsidiary borrowed $150,000 in 2-year notes issued to an accredited investor. The notes due dates have been extended to July 1, 2019.
During the six months ended June 30, 2019 and the year ended December 31, 2018 the Company made no repayments of notes, and paid accrued interest of $4,603 and $79,928, respectively.
At June 30, 2019 and December 31, 2018, the Company has accrued interest of $31,572 and $40,665, respectively.
5.Convertible debt
In September 2017, the Company entered into four, two-year convertible debentures, totaling $90,000 with four accredited investors. The debentures are convertible at the higher of (a) 80% of the market price on the date of conversion or (b) $2.00 per share. The notes carry interest at eight percent (8%) per annum. In 2018, three of the notes were fully converted into common shares. The convertible debenture balances are listed below:
Date | June 30, 2019 | | December 31, 2018 |
September 7, 2017 | $20,000 | | $20,000 |
| | | |
Total | $20,000 | | $20,000 |
The Company computed the Beneficial Conversion Feature to determine any debt discount. The computations indicated that no discount adjustment was required.
At June 30, 2019 and December 31, 2018 convertible notes and debentures consisted of the following:
| June 30, 2019 | | December 31, 2018 |
Convertible notes payable | $20,000 | | $20,000 |
Unamortized debt discount | (-) | | (-) |
Carrying amount | $20,000 | | $20,000 |
Less: current portion | (-) | | (-) |
Long-term convertible notes, net | $20,000 | | $20,000 |
6.Related Party Transactions
Prior to the reverse merger of 4MIO with Woodland Holdings Corp. on April 6, 2017, approximately 95% of outstanding membership interests of 4MIO were owned by Remaxco Technologies, Inc. (“RMX”). As a result, there are certain transactions between the companies which are disclosed below as well as other places in these footnotes (see Footnote 4).
In January 2016, the Company reclassified a Note Receivable of $150,000 due from RMX to Prepaid Licensing Fees. This reclassification reflects a portion of the expected royalties that are to be paid to RMX and ORNL once the Plasma Oxidation ovens equipped with the technology begin to ship. Since the strategic pivot away from selling hardware to one of carbon fiber production, these prepaid amounts will be applied against future license fees payable.
Notes Payable to Related Parties:
On the following dates, the Company entered into individual eighteen-month promissory note agreements for an aggregate principal amount of $278,000 with a company of which our COO is a member. Pursuant to the agreement, the loans bear interest at 10% per annum.
During the six months ended June 30, 2019 the Company repaid the $278,000 of notes and accrued interest of $12,186.
7.Stockholders’ Equity
a) Authorized
Authorized capital stock consists of:
· 250,000,000 shares of common stock with a par value of $0.0001 per share; and
· 25,000 preferred shares with a par value of $0.0001 per share;
b) Share Issuances
On February 1, 2019, the Company issued 250,000 shares of common stock at a price of $1.50 per share to a consultant for services to be rendered throughout the course of the year. The Company recorded $187,500 as prepaid consulting expense and $37,500 as consulting expense. The Company is amortizing the prepaid amount over the course of the current calendar year.
On February 4, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On February 11, 2019, the Company issued 30,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $45,000.
On March 12, 2019, the Company issued 30,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $45,000.
On April 1, 2019, the Company issued 39,996 shares of common stock at a price of $0.60 per share to our chief financial officer under the terms of an agreement to defer a portion of his compensation in the previous year (2018) which was expensed in the prior year and recorded as “stock to be issued” in the amount of $23,998.
On April 1, 2019, the Company issued 13,332 shares of common stock at a price of $0.90 per share to our chief financial officer under the terms of an agreement to defer a portion of his compensation in the current year and was expensed and recorded as “stock to be issued” in the amount of $11,999.
On April 2, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On April 3, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000.
On April 3, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $40,000.
On April 3, 2019, the Company issued 8,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $12,000.
On April 3, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000.
On April 4, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $40,000.
On April 4, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On April 4, 2019, the Company issued 16,667 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $25,000.
On April 8, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On April 8, 2019, the Company issued 26,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $39,000.
On April 8, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000.
On April 18, 2019, the Company issued 33,333 shares of common stock at a price of $1.50 per share to an officer and director in consideration of a cash investment of $50,000.
On April 29, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On April 30, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000.
On May 7, 2019, the Company issued 160,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $200,000.
On May 8, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On May 16, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000.
On June 5, 2019, the Company issued 1,125,000 shares of common stock at a price of $0.90 per share to an officer in consideration of $1,012,500 of stock grants previously issued but not exercised during the year 2018. The grants were expensed in 2018 and recorded as “stock to be issued”.
On June 5, 2019, the Company issued 375,000 shares of common stock at a price of $1.25 per share to an officer in consideration of $468,750 of stock grants issued during the current year but not exercised until June 2019. The grants were expensed during the current fiscal year and recorded as “stock to be issued”.
On June 20, 2019, the Company issued 12,000 shares of common stock at a price of $0.90 per share to a consultant in consideration of services rendered of $10,800.
On June 20, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On June 20, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On June 20, 2019, the Company issued 60,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $75,000.
As of June 30, 2019, and December 31, 2018, there were 80,792,916 and 78,273,588 shares of common stock issued and outstanding, respectively.
8.Income Taxes
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted ASC 740 “Accounting for Income Taxes” as of its inception. Pursuant to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in this financial statement because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
Deferred income tax assets as of June 30, 2019 and December 31, 2018 of $1,603,645 and $1,217,545, respectively, resulting from net operating losses and future amortization deductions, have been fully offset by valuation allowances. The valuation allowances have been established equal to the full amounts of the deferred tax assets, as the Company is not assured that it is more likely than not that these benefits will be realized.
Reconciliation between the statutory United States corporate income tax rate (21%) and the effective income tax rates based on continuing operations is as follows:
| June 30, 2019 | | December 31, 2018 |
Income tax benefit at Federal statutory rate of 21% | $(595,572) | | $(558,600) |
State Income tax benefit, net of Federal effect | (141,803) | | (133,000) |
Permanent and other differences | 351,109 | | 309,277 |
Change in valuation allowance | 386,267 | | 382,323 |
Total | $- | | $- |
Components of deferred tax assets were approximately as follows:
| June 30, 2019 | | December 31, 2018 |
Net operating loss | $1,603,645 | | $1,217,545 |
Asset impairment | - | | - |
Valuation allowance | (1,603,645) | | (1,217,545) |
Total | $- | | $- |
At December 31, 2018, the Company has available net operating losses of approximately $4,682,864 which may be carried forward to apply against future taxable income. These losses will begin to expire in 2032. Deferred tax assets related to these losses have not been recorded due to uncertainty regarding their utilization.
The provisions of ASC 740 require companies to recognize in their financial statements the impact of a tax position if that position is more likely than not to be sustained upon audit, based upon the technical merits of the position. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
Management does not believe that the Company has any material uncertain tax positions requiring recognition or measurement in accordance with the provisions of ASC 740. Accordingly, the adoption of these provisions of ASC 740 did not have a material effect on the Company’s financial statements. The Company’s policy is to record interest and penalties on uncertain tax positions, if any, as income tax expense.
The Company has filed its applicable extensions for the Federal and State tax returns for the year ended December 31, 2018 giving it until October 15, 2019 to complete their filing. The Company has filed returns for 2017.
The Company entered into a share exchange agreement during fiscal year 2017, as a result, pursuant to Internal Revenue Code Section 382, the amount of future taxable income that can be offset by pre-share exchange agreement net operating losses may be limited. The deferred tax asset derived from these tax loss carryforwards have been included in consolidated deferred tax assets - net operating loss carryforwards, and a full valuation allowance has been established since it is not more likely than not that such benefits will be recovered.
9.Commitments and Contingencies
Litigation
The Company may, from time to time, become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company is currently not aware of any such legal proceedings that it believes will have, individually or in the aggregate, a material adverse effect on its business.
10.Acquisition of 4M Industrial Oxidation, LLC.
On April 6, 2017, the Company entered into an Agreement and Plan of Merger, dated April 6, 2017 (the “Merger Agreement”) with an effective date of April 1, 2017, with 4MIO Merger Sub, LLC, a Tennessee limited liability company and wholly-owned subsidiary of the Company (the “Merger Sub”), and 4MIO, for the purposes of consummating a reverse merger (the “Merger”).
Pursuant to the Merger Agreement, Merger Sub merged with and into 4MIO, with 4MIO being the surviving company and resulting in 4MIO becoming a wholly owned subsidiary of the Company. The Merger was intended to constitute a tax-free reorganization within the meaning of Section 368 of the United States Internal Revenue Code of 1986, as amended.
In the Merger, the members of 4MIO exchanged their membership interests of 4MIO, representing 100% of the outstanding membership interests of 4MIO, for an aggregate of 55 million (55,000,000) shares of Common Stock of the Company which represented approximately 78.46% of the shares of Common Stock of the Company based on an aggregate of 70,096,470 shares of Common Stock outstanding upon consummation of the Merger.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
ASSETS: | |
Current assets | $319,983 |
Property & equipment | 603,949 |
Furniture & fixtures | 11,854 |
Leasehold improvements | 73,127 |
Total | $1,008,913 |
| |
LIABILITIES: | |
Current liabilities | $388,086 |
Net purchase price | $620,827 |
11. Subsequent Events
We have evaluated subsequent events through the date of issuance of the unaudited condensed consolidated financial statements, and below are the material recognizable subsequent events.
Issuance of Shares
oOn July 11, 2019, the Company issued 22,806 shares of common stock at a price of $1.00 per share to an accredited investor upon conversion of $20,000 in convertible debt and accrued interest of $2,805.
oOn August 13, 2019, the Company issued 27,777 shares of common stock at a price of $0.90 per share to an accredited investor in consideration of a cash investment of $25,000.
Changes in Management – As reported on Form 8-K on August 1, 2019
On July 26, 2019, Mr. Robert Klawonn left his position as Chief Executive Officer of the Company
On July 31, 2019, Mr. Rodney Grubb retired from his role as Chief Operating Officer and Co-Chairman of the Board of Directors of Company. Mr. Grubb will continue to serve as a member of the Company’s Board of Directors.
Mr. Paresh Chari has agreed to serve as the Interim Chief Executive Officer of the Company and Chairman of the Board of Directors. Messrs. Grubb and Chari had served as Co-Chairmen of the Board from February 27, 2019 until Mr. Grubb’s retirement as Co-Chairmen of the Board of Directors on July 31, 2019. Mr. Chari recently retired from Duraline Corporation and its parent, Mexichem, in January of this year. He served as Chairman of the Board and CEO of Duraline and as the President of Mexichem’s Fluent Group, a $4 billion global business with over 90 facilities and 15,000 employees worldwide.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Corporate History
The Company was incorporated in the state of Delaware, on January 21, 2009 as a wholly owned subsidiary of CornerWorld Corporation (“CWC”), a Nevada corporation publicly traded on the OTCQB exchange.
The Company was setup as a holding company for three telecommunications services subsidiaries. It recently disposed of these operations when it simultaneously entered into a Stock Purchase Agreement, dated March 31, 2017 (the “Stock Purchase Agreement”), with 4M Industrial Oxidation, LLC, a Tennessee limited liability company (“4MIO”), pursuant to which 4MIO purchased from the Selling Stockholders an aggregate of 3,664,641 shares of common stock, par value $0.0001 per share (the “Common Stock”), of the Company, representing approximately 78.7% of the issued and outstanding shares of Common Stock of the Company. The foregoing sale of Common Stock by the Selling Shareholders to 4MIO resulted in a change in control of the Company.
Subsequently, on April 6, 2017, Woodland acquired one hundred percent (100%) of the outstanding membership interests of 4MIO which became a wholly owned subsidiary. The acquisition had an effective date of April 1, 2017.
In early 2018, Woodland changed its name to 4M Carbon Fiber Corp (“4M”) and while fully reporting to the Securities Exchange Commission (SEC), expects to complete the process whereby it can begin trading on a public stock exchange in late 2019.
Results of Operations for the six months ended June 30, 2019 and 2018.
Operating Revenues
In the six-month periods ended June 30, 2019 and 2018 we generated revenue of $0 and $0, respectively, and for the three-month period ended June 30, 2019 and 2018 we generated revenue of $0 and $0, respectively. The Company has shifted from running test products for customers to development of its own commercial production facilities.
Cost of Goods Sold
In the six-month period ended June 30, 2019 and 2018, we incurred cost of sales of $0 and $0, respectively, and for the three-month period ended June 30, 2019 and 2018, we incurred cost of sales of $0 and $0, respectively. The cost of development on the test production line and refinement of the process of production of carbon fiber are treated as R & D and expensed as incurred as part of the S, G & A expenses.
Gross profit (loss)
For the six-months ended June 30, 2019 and 2018, our gross profit was $0, and $0, respectively, and for the three-months ended June 30, 2019 and 2018, our gross profit was $0, and $0, respectively. There are no gross losses due to no revenue in the six and three-month periods ended June 30, 2019 and 2018 due to the reclassification of operating expenses to S,G & A as R & D expenses.
Operating Expenses
Our operating expenses for the three and six months ended June 30, 2019 and 2018 are outlined in the table below:
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2019 | | 2018 | | 2018 | | 2019 |
Selling expense | $- | | $1,247 | | $549 | | $1,247 |
General and administrative | 1,920,399 | | 688,290 | | 2,801,448 | | 2,016,736 |
Depreciation and amortization | 16,025 | | 17,404 | | 32,051 | | 34,808 |
Total | $1,936,425 | | $706,941 | | $2,834,048 | | $2,052,791 |
Operating expenses for the six-months ended June 30, 2019 and 2018, were $2,834,048 and $2,052,791, respectively, and for the three-months ended June 30, 2019 and 2018, were $1,936,425 and $706,941, respectively. The increase in operating expense during both the six-month and three-month periods is due in part to significant reductions in the R&D costs in 2019 versus 2018, offset by increased compensation of officers and an increase in equity grants in 2019 versus 2018. Other general and administrative costs remained about the same year to year.
Other Expenses
In addition to operating expenses, we incurred interest expenses of $7,697 and $17,661 during the six months ended June 30, 2019 and 2018, respectively and $1,925 and $9,347 during the three months June 30, 2019, respectively. The decrease in interest expense during the period ended June 30, 2019 is primarily attributable to the conversion of several convertible debentures and the repayment of a note at the beginning of the period.
Net Loss
We incurred a net loss of $2,836,059 and $2,070,451 for the six-months ended June 30, 2019, respectively and $1,935,159 and $716,288 for the three-months ended June 30, 2019 and 2018, respectively.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
To date we have financed our operations through sales of common stock and the issuance of debt.
The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to identify future investment opportunities and obtain the necessary debt or equity financing and generating profitable operations from the Company’s future operations. The Company has, with over $1,100,000 of cash, sufficient funds to cover its overhead and operating expenses for the coming months.
Working Capital
| | | | | Percentage |
| June 30, | | December 31, | | Increase |
| 2019 | | 2018 | | (Decrease) |
Current Assets | $1,392,208 | | $1,621,392 | | (14.1)% |
Current Liabilities | $1,383,301 | | $1,555,390 | | (11.1)% |
Working Capital Surplus | $ 8,907 | | $66,002 | | (86.5)% |
At June 30, 2019, our cash balance was $1,122,407 compared to $1,457,761 at December 31, 2018. The decrease in cash is attributed to proceeds of $1,082,200 from the private sale of shares of common stock, all of which were used to pay operating expenses, and payments of accounts payable and accrued but unpaid interest, and a related party note of $278,000.
At June 30, 2019, we had total current liabilities of $1,383,301, compared with total current liabilities of $1,555,390 at December 31, 2018. The decrease in total liabilities is attributed to a decrease in accounts payable and accrued liabilities of $56,063, and repayment of a note totaling $278,000, offset by an increase in accrued officers and director’s compensation of $206,146.
At June 30, 2019, we had a working capital surplus of $8,907 compared with a working capital surplus of $66,002 at December 31, 2018. The decrease in working capital is primarily due to an increase in our selling, general, and administrative expenses, an increase in prepaid expenses and decreases in accrued interest, accounts payable and accrued expenses, and notes payable offset with cash obtained from proceeds of common stock sales.
Cash Flows
| For the six Months Ended | | Percentage |
| June 30, | | June 30, | | Increase |
| 2019 | | 2018 | | (Decrease) |
Cash Used in Operating Activities | $(1,191,754) | | $(934,248) | | (26.4)% |
Cash Used in Investing Activities | - | | - | | -% |
Cash Provided by Financing Activities | 856,400 | | 1,095,972 | | (141.1)% |
Net Increase (Decrease) in Cash | $(335,354) | | $161,724 | | (764.7)% |
Cash flow from Operating Activities
During the six-months ended June 30, 2019, we used $1,191,754 of cash in operating activities compared to the use of $934,248 of cash for operating activities during the period ended June 30, 2018. The increase in the use of cash for operating activities was mainly attributed to our net loss of $2,836,059 offset mainly by common stock issued for services of $235,800, common stock issued for compensation of $1,116,633, accrued officer and directors compensation of $206,146, and prepaid expenses of $118,830 and decreases in accounts payable of $56,063..
Cash flow from Investing Activities
During the six-months ended June 30, 2019 and 2018, we used $0 in investing activities.
Cash flow from Financing Activities
During the six-months ended June 30, 2019 and 2018, we received net proceeds of $856,400 and $1,095,972, respectively from financing activities. The proceeds from financing activities for the period ended June 30, 2019 are attributed to $1,082,200 from the issuance of unregistered shares of common stock, receipt of payment on a subscription receivable, offset by the payment of a note of $278,000. For the period ended June 30, 2018, the proceeds from financing activities are attributed to $1,095,972 from the issuance of unregistered shares of common stock.
Going Concern
As of June 30, 2019, the Company had cash on hand of $1,122,407 which management believes is sufficient to support the next twelve (12) months of operations with additional cash to be raised from investors. Therefore, the accompanying unaudited consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Future Financings
We intend to continue to rely on private sales of our shares of common stock in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund our operations and other activities.
Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
Our significant accounting policies are more fully described in Note 3 to our unaudited consolidated financial statements included in this Quarterly Report.
Recently Issued Accounting Pronouncements
Our significant accounting policies are more fully described in Note 3 to our unaudited consolidated financial statements included in this Quarterly Report.
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of June 30, 2019 and December 31, 2018.
Inflation
We do not believe that inflation has had a material effect on our Company’s results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 4. Controls and Procedures.
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was conducted under the supervision and with the participation of our management of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019. Based on that evaluation, our management concluded that our disclosure controls and procedures were not effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Changes in Internal Control Over Financial Reporting
During the quarter ended June 30, 2019 the Company continued to strengthen and improve its internal control over financial reporting. Additional personnel have been added with backgrounds in accounting and administration. No other changes in our internal control over financial reporting occurred during the six-months ended June 30, 2019 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.
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 1, 2019, the Company issued 250,000 shares of common stock at a price of $1.50 per share to a consultant for services to be rendered throughout the course of the year. The Company recorded $187,500 as prepaid consulting expense and $37,500 as consulting expense.
On February 4, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On February 11, 2019, the Company issued 30,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $45,000.
On March 12, 2019, the Company issued 30,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $45,000.
On April 1, 2019, the Company issued 39,996 shares of common stock at a price of $0.60 per share to a consultant for services completed in 2018 and recorded as stock to be issued in the amount of $23,998.
On April 1, 2019, the Company issued 13,332 shares of common stock at a price of $0.90 per share to a consultant for services totaling $11,999.
On April 2, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On April 3, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000
On April 3, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000
On April 3, 2019, the Company issued 8,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $12,000.
On April 3, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000
On April 4, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000
On April 4, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On April 4, 2019, the Company issued 16,667 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $25,000.
On April 8, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On April 8, 2019, the Company issued 26,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $39,000.
On April 8, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000.
On April 18, 2019, the Company issued 33,333 shares of common stock at a price of $1.50 per share to an officer and director on conversion of accrued compensation in the amount of $50,000.
On April 29, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On April 30, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000.
On May 7, 2019, the Company issued 160,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $200,000.
On May 8, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On May 16, 2019, the Company issued 40,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $50,000.
On June 5, 2019, the Company issued 1,125,000 shares of common stock at a price of $0.90 per share to an officer in consideration of $1,012,500 of stock grants previously issued but not exercised during the year 2018. The grants were expensed in 2018 and recorded as “stock to be issued”.
On June 5, 2019, the Company issued 375,000 shares of common stock at a price of $1.25 per share to an officer in consideration of $468,750 of stock grants issued during the current year but not exercised until June 2019. The grants were expensed during the current fiscal year and recorded as “stock to be issued”.
On June 20, 2019, the Company issued 12,000 shares of common stock at a price of $0.90 per share to a consultant in consideration of services rendered of $10,800.
On June 20, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On June 20, 2019, the Company issued 20,000 shares of common stock at a price of $1.50 per share to an accredited investor in consideration of a cash investment of $30,000.
On June 20, 2019, the Company issued 60,000 shares of common stock at a price of $1.25 per share to an accredited investor in consideration of a cash investment of $75,000.
The foregoing unregistered shares of common stock of the Company were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, available under Section 4(a)(2) and/or Rule 504(b) of Regulation D promulgated thereunder due to the fact that there were no solicitation or advertisement and that such issuances did not involve a public offering of securities.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibit No. | Description of Exhibit |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 Certifications under Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Chief Financial Officer and Accounting pursuant to Section 906 Certifications under Sarbanes-Oxley Act of 2002 |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements 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.
4M CARBON FIBER CORP.
By: /s/ Erwin Vahlsing, Jr.
Name: Erwin Vahlsing, Jr.
Title: Chief Financial Officer
(Principal Financial and Accounting Officer and officer authorized to sign on behalf of registrant)
Date: October 23, 2019
