NOTE
2 - GOING CONCERN AND MANAGEMENTS’ PLAN
As
of September 30, 2018, the Company had cash of $1,835,912 and has reported a net loss of $10,127,090 and has used cash in operations
of $6,485,151 for the nine months ended September 30, 2018. In addition, as of September 30, 2018 the Company has working capital
of $2,629,420 and an accumulated deficit of $74,709,958. These conditions indicate that there is substantial doubt about the Company’s
ability to continue as a going concern within one year from the issuance date of the financial statements.
The
ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and
generate sufficient revenue and its ability to raise additional funds by way of public or private offerings.
Historically,
the Company has financed its operations through equity and debt financing transactions and expects to continue incurring operating
losses for the foreseeable future. The Company’s plans and expectations for the next 12 months include raising additional
capital to help fund commercial operations and product development. The Company utilizes cash in its operations of approximately
$705,000 per month. Management believes, but it cannot be certain, its current holdings of cash, along with the cash to
be generated from expected product sales and future financings including those funds received in its October 2018 financings,
will be sufficient to meet its projected operating requirements for the next twelve months from the date of this report.
If
these sources do not provide the capital necessary to fund the Company’s operations during the next twelve months from the
date of this Report, the Company may need to curtail certain aspects of its operations or expansion activities, consider the sale
of its assets, or consider other means of financing. The Company can give no assurance that it will be successful in implementing
its business plan and obtaining financing on terms advantageous to the Company or that any such additional financing would be
available to the Company.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and
regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. In the opinion
of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting
of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended September
30, 2018 and 2017. As this is an interim period financial statement, certain adjustments are not necessary as with a financial
period of a full year. Although management believes that the disclosures in these unaudited condensed consolidated financial statements
are adequate to make the information presented not misleading, certain information and footnote disclosures normally included
in financial statements that have been prepared in accordance U.S. GAAP have been condensed or omitted pursuant to the rules and
regulations of the SEC.
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s financial
statements for the year ended December 31, 2017, which contains the audited financial statements and notes thereto, for the years
ended December 31, 2017 and 2016 included within the Company’s Form 10-K filed with the SEC on April 16, 2018. The interim
results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for
the year ended December 31, 2018 or for any future interim periods.
Use
of Estimates
The
Company prepares its financial statements in conformity with U.S. GAAP. These principles require 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. Management
believes that these estimates are reasonable and have been discussed with the Board of Directors; however, actual results could
differ from those estimates. The consolidated financial statements presented include fair value of derivative financial instruments
along with other equity instruments, recoverability of deferred tax assets, collections of its receivables, and valuation of assets
acquired and liabilities assumed by acquisition.
Principles
of Consolidation
The
condensed consolidated financial statements have been prepared using the accounting records of MagneGas and its wholly owned subsidiaries
and all material intercompany balances and transactions have been eliminated.
Inventory
Inventory
is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Inventory is
comprised of industrial gases, welding supply finished goods and MagneGas2®. The Company carries little to no inventory classified
as work in progress at any time. Estimates of lower of cost or net realizable value are based upon economic conditions, historical
sales quantities and patterns, and in some cases, the specific risk of loss on specifically identified inventories. The Company
evaluates inventories on a regular basis to identify inventory on hand that may be slow moving. Inventory that is in excess of
current and projected use is reduced by an allowance to the level that approximates its estimate of future demand.
Goodwill
and Other Indefinite-lived Assets
The
Company records goodwill and other indefinite-lived assets in connection with business combinations. Goodwill, which represents
the excess of acquisition cost over the fair value of the net tangible and intangible assets of acquired companies, is not amortized.
Indefinite-lived assets are stated at fair value as of the date acquired in a business combination.
The
Company assesses the recoverability of goodwill and certain indefinite-lived intangible assets annually in the fourth quarter
and between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment
testing for goodwill is done at a reporting unit level. Under Financial Accounting Standards Board (“FASB”) guidance
for goodwill and intangible assets, a reporting unit is defined as an operating segment or one level below the operating segment,
called a component. However, two or more components of an operating segment will be aggregated and deemed a single reporting unit
if the components have similar economic characteristics. The Company operates as one reporting unit.
Authoritative
accounting guidance allows the Company to first assess qualitative factors to determine whether it is necessary to perform the
more detailed two-step quantitative goodwill impairment test. The Company performs the quantitative test if its qualitative assessment
determined it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The Company may
elect to bypass the qualitative assessment and proceed directly to the quantitative test for any reporting unit or asset. The
quantitative goodwill impairment test, if necessary, is a two-step process. The first step is to identify the existence of a potential
impairment by comparing the fair value of a reporting unit (the estimated fair value of a reporting unit is calculated using a
discounted cash flow model) with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying
amount, the reporting unit’s goodwill is considered not to be impaired and performance of the second step of the quantitative
goodwill impairment test is unnecessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second
step of the quantitative goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any.
The second step of the quantitative goodwill impairment test compares the implied fair value of the reporting unit’s goodwill
with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair
value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined using
the same approach as employed when determining the amount of goodwill that would be recognized in a business combination. That
is, the fair value of the reporting unit is allocated to all of its assets and liabilities as if the reporting unit had been acquired
in a business combination and the fair value was the purchase price paid to acquire the reporting unit.
In
August 2018, the FASB issued ASU No. 2018-15,
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):
Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
, which
broadens the scope of existing guidance applicable to internal-use software development costs. The update requires costs to be
capitalized or expensed based on the nature of the costs and the project stage in which they are incurred subject to amortization
and impairment guidance consistent with existing internal-use software development cost guidance. This new guidance will be effective
for annual reporting periods beginning December 15, 2019, including interim periods within those periods. The Company is currently
evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.
Revenue
Recognition
In
March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”,
in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance
Obligations and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers
(Topic 606)”, or ASU 2016-12. This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue
From Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for
revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date
of ASU 2014-09 until annual and interim periods beginning on or after December 15, 2017. It has replaced most existing revenue
recognition guidance under U.S. GAAP. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect
adjustment as of the date of adoption. We have adopted Topic 606 using a modified retrospective approach and will be applied prospectively
in our financial statements from January 1, 2018 forward. Revenues under Topic 606 are required to be recognized either at a “point
in time” or “over time”, depending on the facts and circumstances of the arrangement, and will be evaluated
using a five-step model. The adoption of Topic 606 did not have a material impact on the financial statements, either at initial
implementation nor will it have a material impact on an ongoing basis.
Based
on the Company’s analysis the Company did not identify a cumulative effect adjustment for initially applying the new revenue
standards. The Company principally generates revenue through the sales of: (1) MagneGas2®, other industrial gases and welding
supply goods and (2) Plasma Arc Flow Units, either directly or through one or more of its wholly owned welding supply and gas
distribution subsidiaries. The Company’s revenue recognition policy for the year ending December 31, 2018 is as follows:
●
|
Revenue
for metal-working fuel, industrial gases and welding supplies is recognized at the point where the customer obtains control
of the goods and we satisfy our performance obligation. The majority of the Company’s terms of sale have a single performance
obligation to transfer products. Accordingly, the Company recognizes revenue when control has been transferred to the customer,
generally at the time of shipment of products. Under the previous revenue recognition accounting standard, the Company recognized
revenue upon transfer of title and risk of loss, generally upon the delivery of goods.
|
|
|
●
|
Revenue
generated from sales of a Plasma Arc Flow Unit (“Units”) is no longer recognized on a percentage of completion.
Even though our Units are cost intensive and generally require a 6 to 9 month production cycle, revenue will now be recognized
upon shipment of the completed machine. We require purchasers of our Units to make significant payments before we proceed
with production and at 75% completion; these payments are now classified as customer deposits instead of revenue.
|
Leases
In
February 2016, the FASB issued authoritative guidance under ASU 2016-02, Leases (Topic 842). ASU 2016-02 provides new comprehensive
lease accounting guidance that supersedes existing lease guidance. Upon adoption of ASU 2016-02, the Company will be required
to recognize most leases on its balance sheet at the beginning of the earliest comparative period presented with a corresponding
adjustment to stockholders’ equity. ASU 2016-02 requires the Company to capitalize most current operating lease obligations
as right-of-use assets with a corresponding liability based on the present value of future operating lease obligations. Criteria
for distinguishing leases between finance and operating are substantially similar to criteria for distinguishing between capital
leases and operating leases in existing lease guidance. Lease agreements that are 12 months or less are permitted to be excluded
from the balance sheet. Topic 842 includes a number of optional practical expedients that the Company may elect to apply. Expanded
disclosures with additional qualitative and quantitative information will also be required. The adoption will include updates
as provided under ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 and ASU 2018-10,
Codification Improvements to Topic 842, Leases. The Company is required to adopt this new guidance in the first quarter of fiscal
2020. The Company is currently evaluating the potential impact of adoption of this standard on its condensed consolidated financial
statements and the additional transition method under ASU 2018-11, which allows the Company to recognize Topic 842’s cumulative
effect within retained earnings in the period of adoption.
Fair
Value Measurements
In
August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2018-13, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing,
modifying, or adding certain disclosures. The amendments in ASU 2018-13 will be effective for fiscal years beginning after
December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures
upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company has
not yet evaluated the impact of adoption of this ASU on its condensed consolidated financial statements disclosures.
The
following table summarizes our revenue recognized in the condensed consolidated financial statements of operations:
|
|
For
the three months ended September 30,
|
|
|
For
the nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Metal-working fuel, industrial
gases and welding supplies
|
|
|
2,598,820
|
|
|
|
879,511
|
|
|
|
6,678,285
|
|
|
|
2,717,503
|
|
Plasma Arc Flow Unit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total revenues
|
|
|
2,598,820
|
|
|
|
879,511
|
|
|
|
6,678,285
|
|
|
|
2,717,503
|
|
Information
on Remaining Performance Obligations and Revenue Recognized from Past Performance
We
do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration
of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations
with an original expected duration exceeding one year was not material at September 30, 2018.
Contract
Balances
The
timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when revenue
is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision
of the related services, we record deferred revenue until the performance obligations are satisfied.
Contract
Costs
Contract
costs include labor and other costs to fulfill contracts associated with our Plasma Arc Flow are capitalized where the revenue
is recognized at a point in time and the costs are determined to be recoverable.
Preferred
Stock
The
Company applies the accounting standards for distinguishing liabilities from equity under U.S. GAAP when determining the classification
and measurement of its Preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments
and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption
rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely
within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as
permanent equity.
Stock-Based
Compensation
The
Company accounts for stock-based compensation costs under the provisions of ASC 718, “Compensation—Stock Compensation”,
which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards
that are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock-based
payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions
of ASC 718. ASC 718 is also applied to awards modified, repurchased, or canceled during the periods reported.
The
Company incurred stock-based compensation charges, net of estimated forfeitures of $18,979 and $110,393 for the three months ended
September 30, 2018 and 2017, respectively, and $142,653 and $353,538 for the nine months ended September 30, 2018 and 2017, respectively,
and has included such amounts in selling, general and administrative expenses in the consolidated statements of operations.
Stock-Based
Compensation for Non-Employees
The
Company accounts for warrants and options issued to non-employees under ASC 505-50, Equity Based Payments to Non-Employees, using
the Black-Scholes option-pricing model. The value of such non-employee awards unvested are re-measured over the vesting terms
at each reporting date.
The
Company incurred stock-based compensation charges, net of estimated forfeitures of $79,995 and $406,486 for the three months ended
September 30, 2018 and 2017, respectively, and $222,594 and $2,288,741 for the nine months ended September 30, 2018 and 2017,
respectively, and has included such amounts in selling, general and administrative expenses in the condensed consolidated statements
of operations.
Basic
and Diluted Net Loss per Common Share
Basic
loss per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding
for each period. Diluted loss per share is computed by dividing the net loss by the weighted average number of shares of common
stock outstanding plus the dilutive effect of shares issuable through the common stock equivalents.
As
of September 30, 2018, and 2017 the Company’s common stock equivalents outstanding are described as follows:
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Options
|
|
|
231,084
|
|
|
|
230,100
|
|
Warrants
|
|
|
4,647,223
|
|
|
|
11,561,667
|
|
Convertible secured debentures
|
|
|
-
|
|
|
|
82,857
|
|
Convertible preferred
stock
|
|
|
444,448
|
|
|
|
-
|
|
Total common
stock equivalents outstanding
|
|
|
5,322,755
|
|
|
|
11,874,624
|
|
The
common stock equivalents have not been included in our weighted average shares outstanding calculation in the condensed consolidated
statement of operations for the three and nine months ended September 30, 2018 and 2017 as the inclusion would be antidilutive.
Subsequent
Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based
upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required
adjustment or disclosure in the consolidated financial statements, except as disclosed in Note 14.
NOTE
4 – ACQUISITIONS
January
2018 Asset Purchase:
On
January 19, 2018, the Company entered into an Amended and Restated Asset Purchase Agreement (“Amended Asset Purchase Agreement”)
with GGNG Enterprises Inc. (formerly known as NG Enterprises, Inc.) and Guillermo Gallardo (collectively, the “Seller”)
and closed the purchase of certain assets related to the Seller’s welding supply and gas distribution business in San Diego,
California. The total purchase price for the Purchased Assets was $767,500. $22,500 was paid as a business broker commission and
is included in goodwill. Upon consummation of the closing, on January 19, 2018, the Company commenced business operations in San
Diego, California through its wholly owned subsidiary NG Enterprises Acquisition, LLC and is doing business as “Complete
Welding San Diego”.
The
preliminary allocation of the consideration transferred is as follows:
Cash
|
|
$
|
767,500
|
|
Total purchase
price
|
|
$
|
767,500
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
55,000
|
|
Inventory
|
|
|
150,000
|
|
Cylinders
|
|
|
325,000
|
|
Trucks
|
|
|
10,000
|
|
Accounts payable
assumed
|
|
|
(148,719
|
)
|
Total
purchase price allocation
|
|
$
|
391,281
|
|
|
|
|
|
|
Goodwill
|
|
$
|
376,219
|
|
February
2018 Asset Purchase:
On
February 16, 2018, the Company entered into an Asset Purchase Agreement (“Asset Purchase Agreement”) with Green Arc
Supply, L.L.C. (the “Seller”) and closed the purchase of certain assets related to the Seller’s welding supply
and gas distribution business located in Louisiana and Texas. The total purchase price for the purchased assets and assumed liabilities
was $2,259,616, which was comprised of a $1,000,000 cash payment and the issuance of 961,539 shares of restricted common stock
having a fair value of $1,259,616. The Asset Purchase Agreement also included certain conditional and bonus payments to the Seller,
subject to certain performance criteria being met, as well as other terms and conditions which are typical in asset purchase agreements.
Further,
in conjunction with the Asset Purchase Agreement, the Company entered into four (4) Assignment, Assumption and Amendment to Lease
Agreements (each a “Lease Assumption Agreement”) with the Seller and the landlords of certain real property leased
by the Seller for the operation of the Seller’s business locations in Louisiana and Texas. Upon consummation of the closing,
the Company commenced operations in Texas and Louisiana through its wholly owned subsidiary MWS Green Arc Acquisition, LLC and
is doing business as “Green Arc Supply”.
The
preliminary allocation of the consideration transferred is as follows:
Cash
|
|
$
|
1,000,000
|
|
Shares issued
in connection with acquisition
|
|
|
1,259,616
|
|
Total purchase
price
|
|
$
|
2,259,616
|
|
Cash
|
|
$
|
15,000
|
|
Accounts
receivable
|
|
|
277,000
|
|
Inventory
|
|
|
707,000
|
|
Other
current assets
|
|
|
18,000
|
|
Cylinders
|
|
|
750,000
|
|
Trucks
|
|
|
250,000
|
|
Fixed
assets
|
|
|
321,625
|
|
Other
assets
|
|
|
75,000
|
|
Accounts
payable assumed
|
|
|
(154,009
|
)
|
Total
purchase price allocation
|
|
$
|
2,259,616
|
|
|
|
|
|
|
Goodwill
|
|
$
|
0
|
|
April
2018 Stock Purchase:
On
April 3, 2018, MagneGas Corporation (the “Company”) entered into a Securities Purchase Agreement (“SPA”)
with Robert Baker, Joseph Knieriem (collectively, the “Sellers”) and Trico Welding Supplies, Inc., a California corporation
(“Trico”) for the purchase of all of the issued and outstanding capital stock of Trico by the Company. Under the terms
of the SPA, the Company purchased one hundred percent (100%) of Trico’s issued and outstanding capital stock for the gross
purchase price of $2,000,000 (“Trico Stock”). The SPA included certain other terms and conditions which are typical
in securities purchase agreements. On March 21, 2018, the Company made an initial non-refundable deposit for the purchase of the
Trico Stock. Upon execution of the SPA the Company funded the remaining $1,000,000 balance due. Effective at closing, the Company
commenced business operations in northern California through its new wholly owned subsidiary Trico Welding Supplies, Inc.
The
preliminary allocation of the consideration transferred is as follows:
Cash
|
|
$
|
2,000,000
|
|
Total purchase
price
|
|
$
|
2,000,000
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
714,000
|
|
Cash
|
|
|
54,000
|
|
Inventory
|
|
|
502,000
|
|
Refundable deposits
|
|
|
8,000
|
|
Prepaid
|
|
|
9,000
|
|
Customer relationships
|
|
|
449,000
|
|
Cylinders and trucks
|
|
|
493,000
|
|
Accounts payable assumed
|
|
|
(536,000
|
)
|
Accrued liabilities
|
|
|
(74,000
|
)
|
Capital leases
|
|
|
(384,000
|
)
|
Deferred tax
liability
|
|
|
(112,000
|
)
|
Total
purchase price allocation
|
|
$
|
1,123,000
|
|
|
|
|
|
|
Goodwill
|
|
$
|
877,000
|
|
All
goodwill recorded as part of the purchase price allocations is currently anticipated to be tax deductible.
The
following unaudited proforma financial information presents the consolidated results of operations of the Company with MWS Green
Arc Acquisition, LLC, NG Enterprises Acquisition, LLC and Trico Welding Supplies, Inc. for the three and nine months ended September
30, 2018 and 2017, as if the above discussed acquisitions had occurred on January 1, 2017 instead of January 19, 2018, February
16, 2018 and April 3, 2018, respectively. The proforma information does not necessarily reflect the results of operations that
would have occurred had the entities been a single company during those periods.
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
2,599,045
|
|
|
|
2,642,598
|
|
|
|
8,263,608
|
|
|
|
8,263,821
|
|
Gross Profit
|
|
|
1,035,366
|
|
|
|
993,397
|
|
|
|
2,891,486
|
|
|
|
2,973,482
|
|
Operating Loss
|
|
|
(3,511,088
|
)
|
|
|
(2,845,710
|
)
|
|
|
(10,335,737
|
)
|
|
|
(9,628,855
|
)
|
Net Loss
|
|
|
(3,575,665
|
)
|
|
|
(3,680,085
|
)
|
|
|
(10,607,756
|
)
|
|
|
(8,907,692
|
)
|
Weighted Average Common Stock Outstanding
|
|
|
39,366,633
|
|
|
|
10,786,551
|
|
|
|
20,684,102
|
|
|
|
7,763,782
|
|
Loss per Common Share – Basic and Diluted
|
|
|
(0.09
|
)
|
|
|
(0.34
|
)
|
|
|
(0.51
|
)
|
|
|
(1.15
|
)
|
NOTE
5 - INVENTORY
Inventory,
consisting primarily of production materials consumables, spare parts and accessories was $1,543,817 and $738,950 at September
30, 2018 and December 31, 2017, respectively.
NOTE
6 – INTANGIBLE ASSETS
The
Company’s recorded intangible assets consist of intellectual property, customer relationships and non-compete agreements.
Applicable long–lived assets are amortized or depreciated over the shorter of their estimated useful lives, the estimated
period that the assets will generate revenue, or the statutory or contractual term. Estimates of useful lives and periods of expected
revenue generation are reviewed periodically for appropriateness and are based upon management’s judgment. Intellectual
property is amortized on the straight-line method over its useful lives of 15 years. Customer relationships are amortized on the
straight-line method over their useful lives of 10 years. Non-compete agreements are amortized on the straight-line method over
the length of each agreement.
The
Company’s intangible assets consisted of the following:
|
|
Estimated
useful life
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Intellectual property
|
|
15 years
|
|
$
|
891,042
|
|
|
$
|
869,502
|
|
Customer relationships
|
|
10 years
|
|
|
449,000
|
|
|
|
-
|
|
Non-compete agreements
|
|
1-10 years
|
|
|
1,600,000
|
|
|
|
-
|
|
Total intangible assets, gross
|
|
|
|
|
2,940,042
|
|
|
|
869,502
|
|
Less: Accumulated amortization
|
|
|
|
|
(707,533
|
)
|
|
|
(457,171
|
)
|
Intangible
assets, net
|
|
|
|
$
|
2,232,509
|
|
|
$
|
412,331
|
|
The
Company recorded amortization expense of $109,290 and $13,991 for the three months ended September 30, 2018 and 2017, respectively,
and $250,362 and $27,965 for the nine months ended September 30, 2018 and 2017, respectively.
The
following table outlines estimated future annual amortization expense for the next five years and thereafter:
December 31,
|
|
|
|
2018
|
|
$
|
100,972
|
|
2019
|
|
|
312,223
|
|
2020
|
|
|
303,890
|
|
2021
|
|
|
303,890
|
|
2022
|
|
|
303,890
|
|
2023
|
|
|
216,552
|
|
Thereafter
|
|
|
691,092
|
|
Total
|
|
$
|
2,232,509
|
|
NOTE
7 – NOTES PAYABLE
Point
Financial Promissory Note Payable
The
Company entered into a short-term note agreement with a financing company on November 15, 2017. The new note has an implicit interest
rate of 25% and the Company received net proceeds of $500,000. The short-term note agreement has a term of twelve (12) months
and requires the Company to make monthly payments in the amount of $10,417 with a $625,000 balloon payment at end of term, which
includes a $125,000 buy back premium. The Company has the right to prepay the amounts owed under the note at any time without
penalty. The short-term note agreement has a blanket lien on the Company’s assets.
The
Company recorded $250,000 in commitment fees, buy back premiums and interest as an original issue discount and recorded a face
amount of $750,000. The $250,000 in discount is being accreted over the 12-month life of the agreement using the straight-line
method, which approximates the interest rate method.
During
the three and nine months ended September 30, 2018 the Company has made discretionary principal prepayments in the amount of $133,125
and $496,375, respectively, which included the minimum payments under the terms of the agreement. The Company accretion of the
debt discount for the three and nine months ended September 30, 2018 was $52,965 and $170,301, respectively.
NOTE
8 - STOCKHOLDERS’ EQUITY
Reverse
Stock Splits
On
January 16, 2018, the Company filed an amendment to the Certificate of Incorporation to effect a one-for-fifteen reverse split
of the Company’s issued and outstanding common stock which was effectuated on January 16, 2018.
The
reverse stock splits did not modify the rights or preferences of the common stock. Proportional adjustments have been made to
the conversion and exercise prices of the Company’s outstanding common stock warrants, convertible notes, common stock options,
and to the number of common stock shares issued and issuable under the Company’s equity compensation plan. The Company did
not issue any fractional shares in connection with the reverse stock splits or change the par value per share. Fractional shares
issuable entitle shareholders, to receive a cash payment in lieu of the fractional shares without interest. All share and per
share amounts for the common stock have been retroactively restated to give effect to the reverse splits.
Common
Shares Issued for Cash
On
August 27, 2018, we entered into a Securities Purchase Agreement (“SPA”), in which we sold up to 25,000,000 shares
of common stock at any time during the offering period and from time to time until the expiration or termination of the offering.
The purchase price for the common stock was $0.15 per share. Total gross proceeds to the Company upon completion of the offering
(assuming full subscription) was approximately $3,750,000. The offering was made pursuant to a prospectus supplement and accompanying
base prospectus relating to the Company’s effective shelf registration statement on Form S-3 (File No. 333-207928).
Additionally,
under the terms of the SPA, the Company agreed to grant the investor(s) one common stock purchase warrant for every share of common
stock purchased under the SPA at an exercise price of $0.30 per share (“Exercise Price”) (the “Warrants”).
The Warrants may only be exercised for cash and expire on September 31, 2019. Total gross proceeds to the Company, assuming full
exercise of the Warrants, will be approximately $7,500,000. The offering of the Warrants was exempt from registration under Section
4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the safe harbor provided
by Rule 506(b) of Regulation D (“August 2018 Warrant Offering”).
During
the nine months ended September 30, 2018, the Company received total proceeds of $663,750 and issued common shares of 4,425,001.
Common
Shares Issued for Accounts Payable Settlement
During
the nine months ended September 30, 2018, the Company issued 721,455 shares of common stock to its directors, officers and consultants
to settle the outstanding payables and accrued compensation. The total fair value of these issuances was $564,873.
Common
Shares Issued for Services
During
the three and nine months ended September 30, 2018, the Company issued 2,096,857 and 3,883,684 shares of common stock to consultants,
respectively. The total fair value of these issuances during the three and nine months ended September 30, 2018 were $456,560
and $2,706,767, respectively. These shares vest over the service term from the date of issuance. $853,399 and $1,914,639 were
recognized as stock-based compensation during three and nine months ended September 30, 2018, respectively. As of September 30,
2018, $792,128 remains unvested.
Common
Stock Issued for Exercise of Warrants
During
the first quarter of 2018, the Company issued 75,000 shares of common stock for the exercise of warrants, cash proceeds were $750.
NOTE
9 – PREFERRED STOCK
Series
C Convertible Preferred Stock
During
the nine months ended September 30, 2018, investors converted 16,717 shares of Preferred Series C which had a stated value
of $16,717,000 into 44,799,677 shares of the Company’s Common Stock.
Series
E Convertible Preferred Stock
During
the nine months ended September 30, 2018, investors converted 280,110 shares of Preferred Series E which had a stated value of
$380,950 into 135,754 shares of the Company’s Common Stock.
Series
F Convertible Preferred Stock
On
June 27, 2018, the Company entered into a Securities Settlement Agreement (“SSA”) with Maxim Group, LLC (“Maxim”).
Maxim was entitled to certain placement agent fees from the Company in the aggregate amount of $556,016 arising from the convertible
preferred transaction dated as of June 12, 2017, pursuant to the engagement letter, dated March 7, 2017, between the Company and
Maxim. Under the terms of the SSA, the Company issued to Maxim 817,670 shares of Series F Convertible Preferred Stock with an
initial total value of $556,016 (“Series F Convertible Preferred Stock”). The Series F Convertible Preferred Stock
has an initial conversion price of $0.68 per share and will be initially convertible into an aggregate of 817,670 shares of Common
Stock.
Upon
execution of the SAA, the Company reduced its outstanding obligations by $556,016.
During
the nine months ended September 30, 2018, investors converted 817,670 shares of Series F Convertible Preferred Stock which had
a stated value of $556,016 into 3,132,106 shares of the Company’s Common Stock for settlement of payable to the placement
agents.
NOTE
10 – COMMON STOCK OPTIONS
Options
outstanding as of September 30, 2018 consisted of the following:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
in Years
|
|
|
Value
|
|
December 31, 2017
|
|
|
15,342
|
|
|
$
|
159.34
|
|
|
|
1.58
|
|
|
|
-
|
|
Granted
|
|
|
225,000
|
|
|
$
|
0.93
|
|
|
|
10
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(9,258
|
)
|
|
$
|
169.52
|
|
|
|
-
|
|
|
|
-
|
|
September 30, 2018
|
|
|
231,084
|
|
|
$
|
4.69
|
|
|
|
9.09
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2018
|
|
|
159,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2018, the fair value of non-vested options totaled $65,647 which will be amortized to expense over the weighted
average remaining term of 9.09 years.
During
the nine months ended September 30, 2018, the Company granted options for the purchase of 225,000 shares of common stock to employees
and directors of the Company. These options vest pro-rata over 24 months and have a life of ten years and an exercise price of
$0.86-0.94 per share. The Company valued the stock options using the Black-Scholes option valuation model and the fair value of
the awards was determined to be $208,300. The fair value of the common stock as of the grant date was determined to be $0.86-0.93
per share.
The
fair value of each employee option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. Key
weighted-average assumptions used to apply this pricing model during the three months ended 2018 were as follows:
Risk
free interest rate
|
|
|
2.79-2.84
%
|
|
Expected
term
|
|
|
10
years
|
|
Volatility
|
|
|
183
|
%
|
Dividends
|
|
$
|
-
|
|
NOTE
11 – COMMON STOCK WARRANTS
Common
Stock Warrants outstanding as of September 30, 2018 consisted of the following:
|
|
|
|
|
Weighted
Average
|
|
|
|
Outstanding
|
|
|
Exercise
Price
|
|
|
Remaining
Life
|
|
Balance-
December 31, 2017
|
|
|
222,222
|
|
|
|
456
|
|
|
|
4.45
|
|
Granted
|
|
|
4,500,001
|
|
|
|
0.30
|
|
|
|
0.98
|
|
Exercised
|
|
|
(75,000
|
)
|
|
|
0.01
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance-
September 30, 2018
|
|
|
4,647,223
|
|
|
|
2.58
|
|
|
|
0.93
|
|
On
January 17, 2018, the Company issued 75,000 common stock warrants in consideration for the services rendered by a consultant.
The warrants were exercisable immediately and had an exercise price of $0.01. The warrants would have expired on February 17,
2018 had they not been exercised.
During
the first quarter of 2018, the Company issued 75,000 shares of common stock for the exercise of warrants, cash proceeds were $750.
The fair value of the common stock warrants is $316,501, of which $79,995 and $222,594 was recognized as stock-based compensation
for three and nine months ended September 30, 2018, respectively.
On
August 28, 2018, MagneGas Corporation (the “Company”) entered into a Securities Purchase Agreement (“SPA”)
with the investor(s) listed on the signature page thereto (“Investor”). Under the terms of the SPA, the Company offered
and agreed to sell up to 25,000,000 shares of common stock (“Common Stock”) at any time during the offering period
until the expiration or termination of the offering. The purchase price for the Common Stock is $0.15 per share. Total gross proceeds
to the Company upon completion of the offering (assuming full subscription) would be $3,750,000. Additionally, at each closing
and upon receipt of the consideration for such shares of Common Stock, the Company will grant the Investor that number of warrants
equal to the number of shares of Common Stock purchased at each closing (“Warrants”), up to a total of 25,000,000
Warrants at an exercise price of $0.30 per share (“Exercise Price”). On September 11, 2018 the Company entered into
an Assignment and Acceptance Agreement between First Choice and Alto Opportunity Master Fund SPC – Segregated Master Portfolio
B. As of September 30, 2018, the Company issued 4,425,001 shares of Common Stock and granted 4,425,001 Common Stock Warrants pursuant
to the SPA.
At
September 30, 2018 the total intrinsic value of warrants outstanding and exercisable was $0.
NOTE
12 – PREFERRED STOCK WARRANTS
Preferred
Stock Warrants outstanding to purchase Series C Preferred Stock as of September 30, 2018 consisted of the following:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
in Years
|
|
Balance
-December 31, 2017
|
|
|
21,397
|
|
|
$
|
900
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,602
|
)
|
|
$
|
900
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-
September 30, 2018
|
|
|
4,795
|
|
|
$
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2018
|
|
|
4,795
|
|
|
|
|
|
|
|
|
|
During
the three and nine months ended September 30, 2018, the warrant holders exercised 4,158 and 16,602 Preferred Warrants into 4,158
and 16,602 Series C Convertible Preferred Shares, respectively. The investors simultaneously converted 4,510 and 16,717
shares, respectively during the three and nine months ended September 30, 2018, which had a stated value of $4,510,000 and $16,717,000,
respectively. These Series C Convertible Preferred Shares converted into 27,378,302 and 44,799,677 shares of the Company’s
Common Stock during the three and nine months ended September 30, 2018, respectively. Management analyzed the conversion features
of the Series C Preferred stock underlying the Series C Preferred Warrants and recorded a beneficial conversion feature in the
amount of $415,800 and $1,660,200, which was recognized as a deemed dividend for the three and nine months ended September 30,
2018, respectively.
At
September 30, 2018 and December 31, 2017, the total intrinsic value of preferred stock warrants outstanding and exercisable was
$0 and $0, respectively.
NOTE
13 - RELATED PARTY TRANSACTIONS
Operating
Leases – Related Party
The
Company previously occupied 5,000 square feet of a building owned by a related party. Rent was payable at $4,000 on a month-to-month
basis. The facility allowed for expansion needs. The lease was held by EcoPlus, Inc., a company that is effectively controlled
by Dr. Ruggero Santilli, a former officer and director of the Company and one of the people who currently has voting and investment
control over 1,000,000 shares of Series A Preferred Stock which, in turn, has 100,000 votes per share on any matters brought to
a vote of the common stock shareholders. The lease was terminated on May 27, 2017. Rent expense for the three months ended September
30, 2017 under this lease was approximately $12,000 and for the nine months ended September 30, 2017 was approximately $32,000.
Notes
Payable – Related Parties
As
of December 31, 2017, the Company had a $50,000 promissory note with a member of the Board of Directors. The note bore interest
of 15% per annum and was due on July 3, 2017. During the nine months ended September 30, 2018 the Company repaid $50,000 in principal
and $9,500 in interest. As of September 30, 2018, the balance payable was $0 including interest of $0.
As
of December 31, 2017, the Company had a $50,000 promissory note with the Company’s Chief Executive Officer (“CEO”).
The note bears interest of 15% and was due on July 11, 2017. During the nine months ended September 30, 2018 the Company repaid
$50,000 in principal and $9,500 in interest. As of September 30, 2018, the balance payable was $0 including interest of $0.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Litigation
Certain
conditions may exist as of the date the consolidated financial statements are issued which may result in a loss to the Company,
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the
assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable
but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would
be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business,
financial position, and results of operations or cash flows.
On
April 16, 2015, there was an accident at the Company’s facilities which occurred during the gas filling process. As a result
of the accident, one employee was killed and one was injured but has recovered and has returned to work. Although the Company
has Workers Compensation Insurance and General Liability Insurance, the financial impact of the accident is unknown at this time.
No customers have terminated their relationship with the Company as a result of the accident. On October 14, 2015 the Company
received their final report from the Occupational and Safety Hazard Administration (“OSHA”) related to the accident.
The OSHA report included findings, many of which were already resolved and a proposed citation. The Company was not cited for
any willful misconduct and no final determination was made as to the cause of the accident. The Company received citations related
to various operational issues and received an initial fine of $52,000. The Company has also been informed by the U.S. Department
of Transportation that it has closed its preliminary investigation with no findings or citations to the Company. The U.S. Department
of Transportation has the right to re-open the investigation should new information become available. The Company is still investigating
the cause of the accident and there have been no conclusive findings as of this time. It is unknown whether the final cause of
the accident will be determined and whether those findings will negatively impact Company operations or sales. The Company continues
to be fully operational and transparent with all regulatory agencies. As of September 30, 2018, the Company has not accrued for
any contingency.
On
November 18, 2016 a lawsuit was filed in District Court in Pinellas County, Florida by the Estate of Michael Sheppard seeking
unspecified damages. The lawsuit alleges that the Company was negligent and grossly negligent in various aspects of its safety,
training and overall work environment that led to the accident. The Company was not cited by OSHA for any willful misconduct nor
did it receive any citations from the Department of Transportation. As of September 30, 2018, the Company has not accrued for
any contingency.
NOTE
15 – SUBSEQUENT EVENTS
Acquisitions
On
October 17, 2018, MagneGas Applied Technology Solutions, Inc. (the “Company”) entered into a Securities Purchase Agreement
(“SPA”) with Ronald Ruyle, Charlotte Ruyle, Jered Ruyle and Jansen Ruyle (collectively, the “Sellers”)
and Paris Oxygen Company, a Texas corporation (“Paris”) for the purchase of all of the issued and outstanding capital
stock of Paris by the Company. Under the terms of the SPA, the Company purchased one hundred percent (100%) of Paris’s issued
and outstanding capital stock for the gross purchase price of $1,250,000 (“Paris Stock”). The SPA includes certain
other terms and conditions which are typical in securities purchase agreements. Effective at closing, the Company commenced business
operations at its new location in Texas.
On
October 22, 2018, MagneGas Applied Technology Solutions, Inc. (the “Company”) entered into a Securities Purchase Agreement
(“SPA”) with Melvin Ruyle (the “Seller”) and Latex Welding Supply, Inc., a Louisiana corporation (“Latex”)
for the purchase of all of the issued and outstanding capital stock of Latex by the Company. Under the terms of the SPA, the Company
purchased one hundred percent (100%) of Latex’s issued and outstanding capital stock for the gross purchase price of $1,500,000
(“Latex Stock”). The SPA includes certain other terms and conditions which are typical in securities purchase agreements.
Effective at closing, the Company commenced business operations at its new location in Louisiana.
On
October 26, 2018, MagneGas Applied Technology Solutions, Inc. (the “Company”) entered into a Securities Purchase Agreement
(“SPA”) with Tyler Welder’s Supply, Inc., a Texas corporation (the “Seller”) and United Welding
Specialties of Longview, Inc., a Texas corporation (“UWS”) for the purchase of all of the issued and outstanding capital
stock of UWS by the Company (“Transaction”). Under the terms of the SPA, the Company purchased one hundred percent
(100%) of UWS’s issued and outstanding capital stock for the gross purchase price of $750,000 (“UWS Stock”).
The SPA includes certain other terms and conditions which are typical in securities purchase agreements. Effective at closing,
the Company commenced business operations at its new location in Texas.
October
2018 Registered Direct Offering and Private Placement
On
October 11, 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with one or more investors identified
on the signature pages thereto (“Investors”). Under the terms of the SPA, the Company agreed to sell to each Investor,
and each Investor severally, but not jointly, agreed to purchase from the Company 21,800,000 shares of the Company’s common
stock, par value $0.001 per share (the “Common Stock”) and warrants to purchase up to 21,800,000 shares of Common
Stock (“Warrants”), for a total gross purchase price of approximately $5,014,000 (exclusive of the exercise of the
Warrants) (the “Offering”). The Company received aggregate net proceeds of approximately $4,588,160. The Offering
closed on October 15, 2018.
The
sale of the Common Stock at a price of $0.23 per share was made pursuant to a prospectus supplement, which was filed with the
Securities and Exchange Commission (the “SEC”) on October 11, 2018, and accompanying base prospectus relating to the
Company’s shelf registration statement on Form S-3 (File No. 333-207928), which was declared effective by the SEC on June
15, 2016. Additionally, the grant of the Warrants with an exercise price of $0.3654 per Warrant was made pursuant to an exemption
from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). Pursuant
to the SPA, holders of Warrants have piggy-back registration rights beginning 45 days after the closing date until one year following
the closing date to have their Warrant Shares (defined below) registered on certain of our registration statements at the Company’s
expense.
Equity
Issuances and Warrant Grants
During
the period October 1, 2018 through November 9, 2018, the warrant holders exercised 3,120 Preferred Warrants into
3,120 Series C Preferred Shares. The investors converted 3,120 Series C Preferred Shares into 31,866,667
shares of the Company’s Common Stock.
During
the period October 1, 2018 through November 9, 2018, the Company issued 125,314 shares of Common Stock to employees
as payment due pursuant non-compete agreements. The Company issued 63,911 shares of Common Stock to employees as
bonus compensation due under employment agreements.
On
August 28, 2018, MagneGas Corporation (the “Company”) entered into a Securities Purchase Agreement (“SPA”)
with the investor(s) listed on the signature page thereto (“Investor”). Under the terms of the SPA, the Company offered
and agreed to sell up to 25,000,000 shares of common stock (“Common Stock”) at any time during the offering period
until the expiration or termination of the offering. The purchase price for the Common Stock is $0.15 per share. Total gross proceeds
to the Company upon completion of the offering (assuming full subscription) would be $3,750,000. Additionally, at each closing
and upon receipt of the consideration for such shares of Common Stock, the Company will grant the Investor that number of warrants
equal to the number of shares of Common Stock purchased at each closing (“Warrants”), up to a total of 25,000,000
Warrants at an exercise price of $0.30 per share (“Exercise Price”).
During
the period October 1, 2018 through November 9, 2018, the Company issued 20,283,333 shares of Common Stock and 20,283,333
Common Stock Warrants pursuant to the SPA.
Subsidiary
Formation
On
October 30, 2018, the Company formed a wholly owned subsidiary under the laws of Ireland called “MagneGas Ireland Limited”.
The Company commenced business operations in Ireland effective as of the date the certificate of incorporation was filed and accepted
by The Register of Companies.
Repurchase
of Series A Convertible Preferred Stock
On
November 2, 2018, the Company repurchased all of the outstanding shares of its Series A Preferred Stock (“Series A Preferred”)
for total consideration of $1 million cash and 5 million shares of the company’s common stock on November 2, 2018. The Series
A Preferred was a super-majority voting class of stock that gave complete voting control to its holders. Upon completion of the
repurchase, the Company terminated the Series A Preferred class of stock and returned voting control of the Company to its common
stock shareholders. Negotiations for the repurchase began in October 2018.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary
Notice Regarding Forward Looking Statements
The
following is a “safe harbor” statement under the Private Securities Litigation Reform Act of 1995. Statements contained
in this document that are not based on historical facts are “forward-looking statements.” This Management’s
Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward-looking
statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions that are not statements of historical facts. This document and any other written or oral statements
made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events
and financial performance. We may, in some cases, use words such as “project,” “believe,” “anticipate,”
“plan,” “expect,” “estimate,” “intend,” “continue,” “should,”
“would,” “could,” “potentially,” “will,” “may” or similar words and
expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements.
The
forward-looking statements in this document are based upon various assumptions, many of which are based on management’s
discussion and analysis or plan of operations and elsewhere in this Report. Although we believe that these assumptions were reasonable
when made, these statements are not guarantees of future performance and are subject to certain risks and uncertainties, some
of which are beyond our control, and are difficult to predict. Actual results could differ materially from those expressed in
forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements, which reflect
management’s view only as of the date of this Report.
Certain
Terms Used in this Report
When
this report uses the words “we,” “us,” “our,” and the “Company,” they refer to
MagneGas Corporation and our wholly-owned subsidiaries. “SEC” refers to the Securities and Exchange Commission.
Overview
MagneGas
Applied Technology Solutions, Inc., f/k/a “MagneGas Corporation” (the “Company”) was organized in the
State of Delaware on December 9, 2005. On September 25, 2018, the Company changed its name from “MagneGas Corporation”
to “MagneGas Applied Technology Solutions, Inc.” as part of the Company’s corporate rebranding strategy.
The
Company is an alternative energy company that has developed a proprietary plasma arc system (“Plasma Arc Flow Units”
or “Plasma Arc Flow System”) which generates hydrogen based synthetic gases through the gasification of various types
of liquid feedstocks. The Company’s synthetic gas – MagneGas2® - is bottled in cylinders and is distributed to
the metalworking market as an alternative cutting fuel to acetylene and propane. Through the course of its business development,
the Company has established a retail and wholesale platform and a network of brokers to sell its MagneGas2® for use in the
metalworking and manufacturing industries throughout the world. Additionally, the Company is in the process of developing ancillary
uses of MagneGas2® for additional end-user applications. The Company’s Plasma Arc Flow Units include various commercial
applications, most notably the sterilization of liquid waste, which has resulted in the Company’s marketing and sale of
Plasma Arc Flow Units for third-party commercial use.
Between
February and March of 2017, the Company formed five wholly owned subsidiaries in the State of Delaware respectively called MagneGas
Energy Solutions, LLC, MagneGas Welding Supply, LLC, MagneGas Real Estate Holdings, LLC, MagneGas IP, LLC and MagneGas Production,
LLC. The Company formed these entities to hold the various types of Company assets their names indicate.
On
June 29, 2018, the Company organized MagneGas Limited under the laws of the United Kingdom and commenced business operations in
greater Europe. Each time the Company acquires the assets of an acquisition target in lieu of purchasing the issued and outstanding
capital stock of such acquisition target, it forms a new wholly owned subsidiary to hold the relevant assets.
During
2018, the Company formed NG Enterprises Acquisition, LLC to hold the tangible and intangible assets of GGNG Enterprises, Inc.
and formed MWS Green Arc Acquisition, LLC to hold the tangible and intangible assets of Green Arc Supply, L.L.C.
2014
Acquisition
In
the second quarter of 2014 the Company began implementing an acquisition-focused growth strategy that was highlighted by the October
2014 purchase of Equipment Sales and Services, Inc. (“ESSI”). ESSI is a full line seller of industrial gases and equipment
for the welding and metal cutting industries. Since acquiring ESSI, the Company has opened several retail locations and distributes
MagneGas2® as a metal cutting fuel as well as other gases and welding supplies. Additional acquisitions of independent gas
and welding supply businesses has allowed the Company to augment its acquisition growth model with significant organic growth.
2018
Acquisitions
|
●
|
In
January 2018, the Company acquired all of the assets of GGNG Enterprises, Inc. and began doing business in southern California
under the name “Complete Welding San Diego”.
|
|
●
|
In
February 2018, the Company acquired all of the assets of Green Arc Supply, L.L.C. and began doing business in Texas and Louisiana
under the name “Green Arc Supply”.
|
|
●
|
On
April 3, 2018, the Company acquired all of the capital stock of Trico Welding Supplies, Inc. and began doing business in Northern
California under the name “Trico Welding Supplies”.
|
|
●
|
In
October 2018, the Company acquired Paris Oxygen Company, Latex Welding Supplies and United Welding Specialties of Longview,
Inc. and expanded its footprint in Texas and Louisiana.
|
Results
of Operations
Comparison
for the three and nine months ended September 30, 2018 and 2017
Revenues
For
the three months ended September 30, 2018 and 2017 we generated revenues of $2,598,820 and $879,511, respectively. The 195% increase
in revenue was due primarily to our acquisition of Trico Welding Supplies, Inc. in Northern California which generated $1,263,570.
Trico has significant exposure to the agricultural industry of northern California, as well as the rapidly emerging cannabis market
in the region. As the growth of cannabis operations has entered the market, Trico has been well positioned to provide a wide range
of hard goods and industrial gases to support the installation and maintenance of some of the larger growers in the region.
Organic
sales growth in the area of preexisting operations generated $1,329,455 for the three months ended September 30, 2018, as compared
to $879,511 for the three months ended September 30, 2017. The $449,944 (51%) increase in sales outside of Trico was largely due
to the expansion of the Company into the East Texas, Louisiana, and San Diego, California markets via two acquisitions made during
the first quarter of 2018. The East Texas and Louisiana markets have benefitted from the strong regional economy overall. Green
Arc has experienced steady growth with clients in oil and gas exploration and production, rail car and transportation, and light
to medium manufacturing industries in the local market.
Revenues
generated by ESSI, LLC, the Company’s Florida industrial gas and welding supply subsidiary, were $829,938, which were largely
unchanged as compared to the same period in the prior year. The Company has focused on increased staffing and growth efforts in
East Texas and California during the traditionally slower summer months in Florida. The Florida market typically sees some seasonality
during the hottest summer months, when some of ESSI’s larger clients defer maintenance work until the cooler months. For
example the local utility providers typically try to maximize the infrastructure maintenance outside the summer months, when demand
for their electrical power is greatest.
For
the nine months ended September 30, 2018 and 2017 we generated revenues of $6,678,285 and $2,717,503, respectively. The 146% increase
in revenue was due primarily to the three acquisitions completed during the nine months ended September 30, 2018. These acquisitions
contributed $3,981,497 in revenue during the period. The Company’s Florida operations generated $2,685,403 during the first
nine months of 2018, largely unchanged from the same period in the prior year. The Company dedicated virtually all spare financial
and operational resources during the first nine months of 2018 to completing, integrating, and implementing growth plans at the
three newly acquired businesses in California, Texas and Louisiana. All integration of these three acquisitions was completed
by end of third quarter, 2018.
Cost
of Revenues
For
the three months ended September 30, 2018 and 2017 cost of revenues were $1,600,602 compared to $552,374, respectively. For the
three months ended September 30, 2018 and 2017, we generated a gross profit of $998,218 compared to $327,137. Gross margins for
the three months ended September 30, 2018 and 2017 were 38% and 37%, respectively. The Company recorded $201,809 in additional
cost of goods sold during the period due to acquisition accounting. If this amount were excluded, gross margins would have otherwise
been 46%.
The
Company anticipates that margins will improve as all acquired inventory is sold and our cost basis for replacement inventory is
reflected in our future cost of goods sold. Partially offsetting this increase in cost of goods sold, the Company has achieved
better pricing and terms on select products as we achieve economies of scale and greater buying power. The Company has also implemented
a series of cost adjustments related to recent tariff-driven price increases on products sold. This enabled the Company to improve
gross margins by 194 basis points when the impact from acquisition accounting is excluded. The Company anticipates that gross
margins will continue to improve in the coming quarters. The Company is currently in the process of installing a bulk industrial
gas fill plant at its Clearwater facilities. These facilities are estimated to further improve combined gross margins by 3 to
5 percentage points as the Company expects to improve its gas margins in the Florida market in early 2019.
For
the nine months ended September 30, 2018 and 2017 cost of revenues were $4,331,064 compared to $1,588,419, respectively. For the
nine months ended September 30, 2018 and 2017, we generated a gross profit of $2,347,221 compared to $1,129,084. Gross margins
for the nine months ended September 30, 2018 and 2017 were 35% and 42%, respectively. The decline in gross margins was due to
acquisition accounting treatment of the acquired inventory values. The company recorded $534,870 in additional cost of goods sold
during the period due to acquisition accounting. If this amount were excluded, gross margins would have been 43%. The Company
anticipates that margins will improve as all acquired inventory is sold and our cost basis for replacement inventory is reflected
in our future cost of goods sold. Partially offsetting this increase in cost of goods sold, the Company has achieved better pricing
and terms on select products as we achieve economies of scale and greater buying power.
Operating
Expenses
Operating
costs for the three months ended September 30, 2018 and 2017 were $4,546,454 and $2,620,664, respectively. Our operating expenses
as a percentage of sales were 175.1% and 298% for the three months ended September 30, 2018 and 2017, respectively. This is the
direct result of increasing our revenues at an accelerated rate relative to our operating expenses. In addition, the Company has
experienced a number of expenses that we view as non-recurring and directly related to our acquisition and capital raising activities
during 2018.
The
increase in our operating costs in 2018 was primarily attributable to the completion of our acquisition in April 2018 and significant
capital markets activity during the period. The Company spent $90,000 on consulting related to the April 2018 acquisition. The
Company also recognized significant non-recurring charges related to integration of these acquisitions. The Company incurred approximately
$60,000 in computer and IT integration activities. Travel expenses were also significantly higher due to ongoing personnel training,
integration and other non-recurring activities. During the three months ended September 30, 2018 we recognized a non-cash charge
of $18,979 in stock-based compensation for employees, compared to $110,393 in the comparable three months ended September 30,
2017 and common stock issued for services of $853,399 for the three months ended September 30, 2018, compared to $1,914,639 in
the comparable three months ended September 30, 2017. Other non-cash operating expenses were due to depreciation and amortization
charges of $408,881 for the three-month period ended September 30, 2018, compared to $166,034 for the three months ended September
30, 2017.
Operating
costs for the nine months ended September 30, 2018 and 2017 were $12,216,775 and $9,018,931, respectively. Our operating expenses
as a percentage of sales were 182.9% and 331.9% for the nine months ended September 30, 2018 and 2017, respectively. The increase
in our operating costs in 2018 was primarily attributable to the completion of our acquisition in April 2018 and significant capital
markets activity during the period. The Company spent $547,810 on consulting related to the April 2018 acquisition. The Company
also recognized significant non-recurring charges related to integration of these acquisitions. The Company incurred $63,579 in
computer and IT integration activities. Travel expenses were also significantly higher due to ongoing personnel training, integration
and other non-recurring activities. During the nine months ended September 30, 2018 we recognized a non-cash charge of $142,653
in stock-based compensation for employees, compared to $353,537 in the comparable nine months ended September 30, 2017 and common
stock and warrants issued for services of $2,137,233 for the nine months ended September 30, 2018, compared to $2,288,741 in the
comparable nine months ended September 30, 2017. Other non-cash operating expenses were due to depreciation and amortization charges
of $988,354 for the nine-month period ended September 30, 2018, compared to $526,602 for the nine months ended September 30, 2017.
In
the current quarter, as in prior quarters, we selectively used common stock as a method of payment for certain services, primarily
the advertising and promotion of the technology to increase investor and customer awareness and as incentive to its key employees
and consultants. We expect to continue these arrangements, though due to a stronger operating position, this method of payment
may become limited to employees.
Net
Loss
Our
operating results for the three months ended September 30, 2018 have recognized losses in the amount of $3,612,588 compared to
$3,125,055 for the three months ended September 30, 2017. The increase in our loss was primarily attributable to acquisition and
integration expenses.
Our
operating results for the nine months ended September 30, 2018 have recognized losses in the amount of $10,127,090 compared to
$7,147,991 for the nine months ended September 30, 2017. The increase in our loss was primarily attributable to acquisition and
integration expenses.
Liquidity
and Capital Resources
As
of September 30, 2018, the Company had cash of $1,835,912 and has reported a net loss of $10,127,090 and has used cash in operations
of $6,344,071 for the nine months ended September 30, 2018. Partly offsetting our negative cash flows, as of September
30, 2018 the Company had a positive working capital position of $2,629,420, and a stockholder’s equity balance of $16,566,524.
As a result of the Company’s negative cash flow generation, there is reasonable doubt about the Company’s ability
to continue as a going concern within one year from the issuance date of the financial statements.
The
ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and
generate sufficient revenue and its ability to raise additional funds by way of public or private offerings or through the use
of indebtedness.
Historically,
the Company has financed its operations through equity and debt financing transactions and expects to continue incurring operating
losses for the foreseeable future. The Company’s plans and expectations for the next 12 months include raising additional
capital to help fund commercial operations, make select acquisitions, and new product development. The Company utilizes cash in
its operations of approximately $705,000 per month. Management believes, but it cannot be certain, its current holdings
of cash along with the cash to be generated from expected product sales and future financings including those funds received
in its October 2018 financing will be sufficient to meet its projected operating requirements for the next twelve months from
the date of this report.
Cash
Flows from Continuing Operations
Cash
flows from continuing operations for operating, financing and investing activities for the nine months ended September 30, 2018
and 2017 are summarized in the following table:
|
|
Nine
months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Operating
activities
|
|
$
|
(6,344,071
|
)
|
|
$
|
(3,385,026
|
)
|
Investing
activities
|
|
|
(6,294,239
|
)
|
|
|
(85,906
|
)
|
Financing
activities
|
|
|
13,887,397
|
|
|
|
1,948,417
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash from continuing operations
|
|
$
|
1,249,087
|
|
|
$
|
(1,522,515
|
)
|
For
the nine months ended September 30, 2018, we used cash of $6,344,071 in operations in 2018 and used cash of $3,385,026
in operations in 2017. Our cash use for 2018 was primarily attributable to cash used to reduce vendor balances, accrued expenses
and other short-term liabilities. Our cash use for 2017 was primarily attributable to general corporate needs, personnel restructuring,
the overhaul of our capital structure, and organic growth initiatives. During the nine months ended September 30, 2018, cash used
by investing activities consisted of $6,294,239 primarily due to the acquisition of all of the capital stock of Trico Welding
Supplies, Inc. During the nine months ended September 30, 2017, cash used by investing activities consisted of $85,906. Cash provided
by financing activities for the nine months ended September 30, 2018 was $13,887,397 as compared to cash provided by financing
activities for the nine months ended September 30, 2017 of $1,948,417. The net increase in cash during the nine months ended September
30, 2018 was $1,249,087 as compared to a net decrease in cash of $1,522,515 for the nine months ended September 30, 2017.
Insurance
The
Company has insurance to cover Liabilities related to environmental and pollution contingencies of $1,000,000 per loss and $2,000,000
in the aggregate.
Critical
Accounting Policies
Our
significant accounting policies are presented in this Report in our Notes to financial statements, which are contained in this
Quarterly Report. The significant accounting policies that are most critical and aid in fully understanding and evaluating the
reported financial results include the following:
The
Company prepares its financial statements in conformity with U.S. GAAP. These principles require 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. Management
believes that these estimates are reasonable and have been discussed with our Board of Directors (the “Board”); however,
actual results could differ from those estimates.
We
issue restricted stock to consultants for various services. Cost for these transactions are measured at the fair value of the
consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of
the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to
earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete.
Long-lived
assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate
that the carrying value may not be recoverable. When required impairment losses on assets to be held and used are recognized based
on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar
assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable
from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value
of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted
at a rate commensurate with the risk associated with the recovery of the assets.
The
Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which would require a cumulative effect
adjustment for initially applying the new revenue standard as an adjustment to the opening balance of retained earnings and the
comparative information would not require to be restated and continue to be reported under the accounting standards in effect
for those periods.
Based
on the Company’s analysis the Company did not identify a cumulative effect adjustment for initially applying the new revenue
standards. The Company principally generates revenue through the sales of: (1) MagneGas2®, other industrial gases and welding
supply goods and (2) Plasma Arc Flow Units, either directly or through one or more of its wholly owned welding supply and gas
distribution subsidiaries. The Company’s revenue recognition policy for the year ending December 31, 2018 is as follows:
●
|
Revenue
for metal-working fuel, industrial gases and welding supplies is recognized when performance obligations of the sale are satisfied.
The majority of the Company’s terms of sale have a single performance obligation to transfer products. Accordingly,
the Company recognizes revenue when control has been transferred to the customer, generally at the time of shipment of products.
Under the previous revenue recognition accounting standard, the Company recognized revenue upon transfer of title and risk
of loss, generally upon the delivery of goods.
|
|
|
●
|
Revenue
generated from sales of a Plasma Arc Flow Unit (“Units”) is no longer recognized on a percentage of completion.
Even though our Units are cost intensive and generally require a 6 to 9 month production cycle, revenue will now be recognized
upon shipment of the completed machine. We require purchasers of our Units to make significant payments before we proceed
with production and at 75% completion; these payments are now classified as customer deposits instead of revenue.
|
The
fair value of an embedded conversion option that is convertible into a variable amount of shares and warrants that include price
protection reset provision features are deemed to be “down-round protection” and, therefore, do not meet the scope
exception for treatment as a derivative under Accounting Standards Codification (“ASC”) ASC 815 “Derivatives
and Hedging”, since “down-round protection” is not an input into the calculation of the fair value of the conversion
option and warrants and cannot be considered “indexed to the Company’s own stock” which is a requirement for
the scope exception as outlined under ASC 815. The accounting treatment of derivative financial instruments requires that the
Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and
at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income
or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments
at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified
as of the date of the event that caused the reclassification. As a result of entering into a convertible credit facility for which
such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance
with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments
related to share-based compensation issued to employees.
The
Black-Scholes option valuation model was used to estimate the fair value of the warrants and conversion options. The model includes
subjective input assumptions that can materially affect the fair value estimates. The Company determined the fair value of the
Binomial Lattice Model and the Black-Scholes Valuation Model to be materially the same. The expected volatility is estimated based
on the most recent historical period of time equal to the weighted average life of the warrants. Conversion options are recorded
as debt discount and are amortized as interest expense over the life of the underlying debt instrument.
In
February 2016, the FASB issued authoritative guidance under ASU 2016-02, Leases (Topic 842). ASU 2016-02 provides new comprehensive
lease accounting guidance that supersedes existing lease guidance. Upon adoption of ASU 2016-02, the Company will be required
to recognize most leases on its balance sheet at the beginning of the earliest comparative period presented with a corresponding
adjustment to stockholders’ equity. ASU 2016-02 requires the Company to capitalize most current operating lease obligations
as right-of-use assets with a corresponding liability based on the present value of future operating lease obligations. Criteria
for distinguishing leases between finance and operating are substantially similar to criteria for distinguishing between capital
leases and operating leases in existing lease guidance. Lease agreements that are 12 months or less are permitted to be excluded
from the balance sheet. Topic 842 includes a number of optional practical expedients that the Company may elect to apply. Expanded
disclosures with additional qualitative and quantitative information will also be required. The adoption will include updates
as provided under ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 and ASU 2018-10,
Codification Improvements to Topic 842, Leases. The Company is required to adopt this new guidance in the first quarter of fiscal
2020. The Company is currently evaluating the potential impact of adoption of this standard on its condensed consolidated financial
statements and the additional transition method under ASU 2018-11, which allows the Company to recognize Topic 842’s cumulative
effect within retained earnings in the period of adoption.
In
August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2018-13, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing,
modifying, or adding certain disclosures. The amendments in ASU 2018-13 will be effective for fiscal years beginning after
December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures
upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company has
not yet evaluated the impact of adoption of this ASU on its condensed consolidated financial statements disclosures.
In
August 2018, the FASB issued ASU No. 2018-15,
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):
Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
, which
broadens the scope of existing guidance applicable to internal-use software development costs. The update requires costs to be
capitalized or expensed based on the nature of the costs and the project stage in which they are incurred subject to amortization
and impairment guidance consistent with existing internal-use software development cost guidance. This new guidance will be effective
for annual reporting periods beginning December 15, 2019, including interim periods within those periods. The Company is currently
evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.
Off
Balance Sheet Arrangements
The
Company has no off-balance sheet arrangements.