NOTE
2 - GOING CONCERN AND MANAGEMENTS’ PLAN
As of June 30, 2018, the Company had cash
of $1,147,522 and has reported a net loss of $6,514,500 and has used cash in operations of $3,974,246 for the six
months ended June 30, 2018. In addition, as of June 30, 2018 the Company has working capital of $1,235,578 and an accumulated
deficit of $71,097,370. 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 $660,000 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, 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 June
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 six months
ended June 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 inventory reserves, 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.
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.
|
The
following table summarizes our revenue recognized in the condensed consolidated financial statements of operations:
|
|
For
the three months ended June 30,
|
|
|
For
the six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Metal-working fuel, industrial
gases and welding supplies
|
|
|
2,907,712
|
|
|
|
966,204
|
|
|
|
4,079,464
|
|
|
|
1,837,992
|
|
Plasma Arc Flow Unit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total revenues
|
|
|
2,907,712
|
|
|
|
966,204
|
|
|
|
4,079,464
|
|
|
|
1,837,992
|
|
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 June 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 $105,075 and $0 for the three months ended June 30,2018 and 2017, respectively,
and $123,674 and $0 for the six months ended June 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 $79,125 and $102,905 for the three months ended
June 30, 2018 and 2017, respectively, and $142,599 and $243,145 for the six months ended June 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 June 30, 2018, and 2017 the Company’s common stock equivalents outstanding are described as follows:
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
Options
|
|
|
231,084
|
|
|
|
238,100
|
|
Warrants
|
|
|
222,222
|
|
|
|
11,641,668
|
|
Convertible secured debentures
|
|
|
-
|
|
|
|
276,334
|
|
Convertible preferred
stock
|
|
|
2,990,618
|
|
|
|
225,000
|
|
Total common
stock equivalents outstanding
|
|
|
3,443,924
|
|
|
|
12,381,102
|
|
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 six months ended June 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 months ended June 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 June 30,
|
|
|
For
the six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
2,907,712
|
|
|
|
2,918,269
|
|
|
|
5,720,278
|
|
|
|
5,697,216
|
|
Gross Profit
|
|
|
935,126
|
|
|
|
993,449
|
|
|
|
2,040,303
|
|
|
|
2,184,543
|
|
Operating Loss
|
|
|
(3,379,142
|
)
|
|
|
(3,529,096
|
)
|
|
|
(6,403,894
|
)
|
|
|
(6,252,073
|
)
|
Net Loss
|
|
|
(3,495,060
|
)
|
|
|
(2,752,275
|
)
|
|
|
(6,683,989
|
)
|
|
|
(4,831,863
|
)
|
Weighted Average Common Stock Outstanding
|
|
|
15,972,166
|
|
|
|
7,026,075
|
|
|
|
11,188,009
|
|
|
|
6,475,082
|
|
Loss per Common Share – Basic
and Diluted
|
|
|
(0.22
|
)
|
|
|
(0.39
|
)
|
|
|
(0.60
|
)
|
|
|
(0.75
|
)
|
NOTE
5 - INVENTORY
Inventory, consisting primarily of production
materials consumables, spare parts and accessories was $2,134,777 and $738,950 at June 30, 2018 and December 31, 2017,
respectively.
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Production materials consumables,
spare parts, and accessories
|
|
$
|
2,134,777
|
|
|
$
|
738,950
|
|
Work in process
|
|
|
-
|
|
|
|
-
|
|
Total at cost
|
|
|
2,134,777
|
|
|
|
738,950
|
|
Slow moving inventory
allowance
|
|
|
(170,445
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
$
|
1,964,332
|
|
|
$
|
738,950
|
|
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
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Intellectual property
|
|
15 years
|
|
$
|
877,781
|
|
|
$
|
869,502
|
|
Customer relationships
|
|
10 years
|
|
|
449,000
|
|
|
|
-
|
|
Non-compete agreements
|
|
1-10 years
|
|
|
1,650,000
|
|
|
|
-
|
|
Total intangible assets, gross
|
|
|
|
|
2,976,781
|
|
|
|
869,502
|
|
Less: Accumulated amortization
|
|
|
|
|
(705,963
|
)
|
|
|
(457,171
|
)
|
Intangible assets, net
|
|
|
|
$
|
2,270,818
|
|
|
$
|
412,331
|
|
The Company recorded
amortization expense of $215,853 and $13,991 for the three months ended June 30, 2018 and 2017, respectively, and $248,792 and
$27,965 for the six months ended June 30, 2018 and 2017, respectively.
The following table outlines estimated
future annual amortization expense for the next five years and thereafter:
December 31,
|
|
|
|
2018
|
|
$
|
180,739
|
|
2019
|
|
|
303,465
|
|
2020
|
|
|
303,465
|
|
2021
|
|
|
303,465
|
|
2022
|
|
|
303,465
|
|
Thereafter
|
|
|
876,219
|
|
Total
|
|
$
|
2,270,818
|
|
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 six months ended June 30, 2018 the Company has made discretionary principal prepayments in the amount of $83,125
and $363,250, respectively, which included the minimum payments under the terms of the agreement. The Company accretion of the
debt discount for the three and six months ended June 30, 2018 was $71,378 and $117,376, 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 Accounts Payable Settlement
During the six months ended June 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 of which $41,696 was recorded as current period
expense as stock compensation.
Common
Shares Issued for Services
During
the three and six months ended June 30, 2018, the Company issued 1,155,160 and 1,786,935 shares of common stock to consultants,
respectively. The total fair value of these issuances during the three and six months ended June 30, 2018 were $519,457 and $2,250,207,
respectively. These shares vest over the service term from the date of issuance. $712,014 and $1,061,240 were recognized as stock-based
compensation during three and six months ended June 30, 2018, respectively. As of June 30, 2018, $1,188,967 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 six months ended June 30, 2018, investors converted 12,207 shares of Preferred Series C which had a stated value of $12,207,000
into 17,421,375 shares of the Company’s Common Stock.
Series
E Convertible Preferred Stock
During
the six months ended June 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 three months ended June 30, 2018, investors converted 201,550 shares of Series F Convertible Preferred Stock which had a stated
value of $137,054 into 725,000 shares of the Company’s Common Stock for settlement of payable to the placement agents.
NOTE
10 – COMMON STOCK OPTIONS
Options
outstanding as of June 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
|
|
|
|
-
|
|
|
|
-
|
|
June 30, 2018
|
|
|
231,084
|
|
|
$
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018
|
|
|
139,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2018, the fair value of non-vested options totaled $84,594 which will be amortized to expense over the weighted average
remaining term of 9.34 years.
During
the six months ended June 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 June 30, 2018 consisted of the following:
|
|
|
|
|
Weighted
Average
|
|
|
|
Outstanding
|
|
|
Exercise
Price
|
|
|
Remaining
Life
|
|
Balance- December 31, 2017
|
|
|
22,222
|
|
|
|
456
|
|
|
|
4.45
|
|
Granted
|
|
|
75,000
|
|
|
|
0.01
|
|
|
|
0.08
|
|
Exercised
|
|
|
(75,000
|
)
|
|
|
0.01
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance- June 30, 2018
|
|
|
22,222
|
|
|
|
455.63
|
|
|
|
4.20
|
|
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 $79,125 and $142,599 was recognized as stock-based compensation
for three and six months ended June 30, 2018, respectively.
At June 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 June 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
|
|
|
(12,444
|
)
|
|
$
|
900
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance- June 30, 2018
|
|
|
8,953
|
|
|
$
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018
|
|
|
8,953
|
|
|
|
|
|
|
|
|
|
During
the three and six months ended June 30, 2018, the warrant holders exercised 3,141 and 12,444 Preferred Warrants into 3,141 and
12,444 Series C Convertible Preferred Shares, respectively. The investors simultaneously converted 2,789 and 12,207 shares, respectively
during the three and six months ended June 30, 2018, which had a stated value of 2,789,000 and $12,207,000, respectively. These
Series C Convertible Preferred Shares converted into 7,743,544 and 17,421,275 shares of the Company’s Common Stock during
the three and six months ended June 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 $314,100 and $1,244,400,
which was recognized as a deemed dividend for the three and six months ended June 30, 2018, respectively.
At
June 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 June 30, 2017 under this lease was approximately
$12,000 and for the six months ended June 30, 2017 was approximately $20,000.
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 six months ended June 30, 2018 the Company repaid $40,000 in principal
and $6,313 in interest. As of June 30, 2018, the balance payable was $13,125 including interest of $1,896.
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 six months ended June 30, 2018 the Company repaid $20,000
in principal and $6,146 in interest. As of June 30, 2018, the balance payable was $33,125 including interest of $1,896.
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 June 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 June 30, 2018, the Company has not accrued for any contingency.
NOTE
15 – SUBSEQUENT EVENTS
Notes
Payable – Related Parties
On
July 3, 2018, the Company repaid the remaining balance of that certain $50,000 promissory note held by a member of the Board of
Directors. The note bore interest of 15% per annum and was originally due on July 3, 2017.
On
July 11, 2018, the Company repaid the remaining balance of a $50,000 promissory note with the Company’s Chief Executive
Officer (“CEO”). The note bore interest of 15% and was originally due on July 11, 2017.
Equity:
During the period July 1, 2018 through
August 8, 2018, the warrant holders exercised 2,522 Preferred Warrants into 2,522 Series C Preferred Shares. The investors converted
2,522 Series C Preferred Shares into 10,843,865 shares of the Company’s Common Stock.
During the period July 1, 2018 through
August 8, 2018, the warrant holders exercised 616,120 Preferred Warrants into 616,120 Series F Preferred Shares. The investors
converted 616,120 Series F Preferred Shares into 2,407,106 shares of the Company’s Common Stock.
During the period July 1, 2018 through August 8, 2018, the Company issued 301,725
shares of Common Stock to Joseph Knieriem as payment for non-compete and compensation agreements. The Company issued 64,103 shares
of Common Stock to Christopher Huntington as payment for Board of Directors compensation.
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
Corporation (the “Company”) was organized in the State of Delaware on December 9, 2005.
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.
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 four retail locations and distributes
MagneGas2® as a metal cutting fuel as well as other gases and welding supplies. Additional acquisitions and the success of
ESSI has allowed the Company to augment its acquisition growth model with significant organic growth. 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”.
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.
Results
of Operations
Comparison
for the three and six months ended June 30, 2018 and 2017
Revenues
For the three months
ended June 30, 2018 and 2017 we generated revenues of $2,907,712 and $966,204, respectively. The 201% increase in revenue
was due primarily to our acquisition of Trico Welding Supplies, Inc. in Northern California which generated $1,392,757. Organic
sales growth in the area of preexisting operations generated $1,534,574, as compared to $966,204 for the three months ended June
30, 2018. The $568,369 (58.5%) 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. Revenues generated
by ESSI, LLC, the Company’s Florida industrial gas and welding supply subsidiary, were $969,140, 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,
where the Company sees significant growth potential and higher profit margin opportunities.
For the six months
ended June 30, 2018 and 2017 we generated revenues of $4,079,464 and $1,837,992, respectively. The 122% increase in revenue
was due primarily to the three acquisitions completed year-to-date and organic sales growth in the area of preexisting operations.
These acquisitions contributed $2,218,411 in revenue during the period. The Company’s Florida operations generated $1,855,465
during the first six 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 six months of 2018 to completing, integrating, and implementing
growth plans at three newly acquired business in California, Texas and Louisiana.
For the three months
ended June 30, 2018 and 2017 cost of revenues were $1,972,586 compared to $532,657, respectively. For the three months ended June
30, 2018 and 2017, we generated a gross profit of $935,126 compared to $433,547. Gross margins for the three months ended June
30, 2018 and 2017 were 32% and 45%, respectively. The decline in gross margins was due to acquisition accounting treatment of
the acquired inventory values. The company recorded $331,061 in additional cost of goods sold during the period due to acquisition
accounting. If this amount were excluded, gross margins would have been 44%. 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. In addition, 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.
For
the six months ended June 30, 2018 and 2017 cost of revenues were $2,730,459 compared to $1,036,045, respectively. For the six
months ended June 30, 2018 and 2017, we generated a gross profit of $1,349,005 compared to $801,947. Gross margins for the six
months ended June 30, 2018 and 2017 were 33% and 44%, respectively. The decline in gross margins was due to acquisition accounting
treatment of the acquired inventory values. 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 June 30, 2018 and 2017 were $4,355,964 and $3,524,922, 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 $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 June 30, 2018 we recognized a non-cash charge of $18,599 in
stock-based compensation for employees, compared to $1,779,350 in the comparable three months ended June 30, 2017, common stock
issued for services of $790,389 for the three months ended June 30, 2018, compared to $1,312,721 in the comparable three months
ended June 30, 2017. Other non-cash operating expenses were due to depreciation and amortization charges of $401,929 for
the three-month period ended June 30, 2018, compared to $193,230 for the three months ended June 30, 2017.
Operating costs for
the six months ended June 30, 2018 and 2017 were $7,670,321 and $6,398,267, 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 six months ended June 30, 2018 we recognized a non-cash charge of $123,674 in stock-based
compensation for employees, compared to $1,882,255 in the comparable six months ended June 30, 2017, common stock issued for services
of $1,203,839 for the six months ended June 30, 2018, compared to $1,639,110 in the comparable three months ended June 30, 2017.
Other non-cash operating expenses were due to depreciation and amortization charges of $579,474 for the six-month period
ended June 30, 2018, compared to $360,568 for the six months ended June 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 June 30, 2018 have recognized losses in the amount of $3,495,060 compared to $2,241,777
for the three months ended June 30, 2017. The increase in our loss was primarily attributable to acquisition and integration expenses.
Our
operating results for the six months ended June 30, 2018 have recognized losses in the amount of $6,514,500 compared to $4,022,936
for the six months ended June 30, 2017. The increase in our loss was primarily attributable to acquisition and integration expenses.
Liquidity
and Capital Resources
As of June 30, 2018, the Company had cash
of $1,147,522 and has reported a net loss of $6,514,500 and has used cash in operations of $3,974,246 for the six
months ended June 30, 2018. Partly offsetting our negative cash flows, as of June 30, 2018 the Company had a positive working
capital position of $1,235,578, and a stockholder’s equity balance of $14,426,449. 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
$660,000 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 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 six months ended June 30, 2018 and
2017 are summarized in the following table:
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Operating activities
|
|
$
|
(3,974,246
|
)
|
|
$
|
(2,377,367
|
)
|
Investing activities
|
|
|
(5,516,975
|
)
|
|
|
(129,750
|
)
|
Financing activities
|
|
|
10,051,919
|
|
|
|
972,273
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash from continuing operations
|
|
$
|
560,698
|
|
|
$
|
(1,534,844
|
)
|
For the three months ended June 30, 2018,
we used cash of $3,974,246 in operations in 2018 and used cash of $2,377,367 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 six months ended June 30, 2018, cash used by investing activities consisted of $5,516,975
primarily due to the acquisition of all of the capital stock of Trico Welding Supplies, Inc. During the three months ended
June 30, 2017, cash used by investing activities consisted of $129,750. Cash provided by financing activities for the six months
ended June 30, 2018 was $10,051,919 as compared to cash provided by financing activities for the six months ended June
30, 2017 of $972,273. The net increase in cash during the six months ended June 30, 2018 was $560,698 as compared to a
net decrease in cash of $1,534,844 for the six months ended June 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.
Off
Balance Sheet Arrangements
The
Company has no off-balance sheet arrangements.