PART
I
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form 10-K contains 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 fact. 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
cautionary 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 a guarantee 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 as
forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements, which reflect
management’s reasonable view only as of the date of this report.
Item
1. Business.
Taronis
Technologies, Inc. was originally organized as 4307 INC. under the laws of the State of Delaware on December 9, 2005. The name
of the Company was later changed to MagneGas Corporation and thereafter to MagneGas Applied Technology Solutions, Inc. On January
31, 2019, the name of the Company was changed to Taronis Technologies, Inc.
Unless
otherwise provided in this report, all references in this report to “we,” “us,” “Taronis,”
“our Company,” “our,” or the “Company” refer to Taronis Technologies, Inc. and our subsidiaries.
Overview
We
are a technology-based company that is focused on addressing the global constraints on natural resources, including fuel and water.
Our two core technology applications – renewable fuel gasification and water decontamination/sterilization - are derived
from our patented and proprietary Plasma Arc Flow System. The Plasma Arc Flow System works by generating a combination of electric
current, heat, ultraviolet light and ozone, that affects the feedstock run through the system to create a chosen outcome, depending
on whether the system is in “gasification mode” or “sterilization mode”.
Gasification
Mode
When
the Plasma Arc Flow System is in “gasification mode” and the appropriate feedstock is passed through the system in
a closed loop with constant recirculation (to achieve the maximum possible gasification rates), it creates a renewable, hydrogen-based
synthetic fuel we call “MagneGas”. We sell MagneGas as a metal cutting fuel as an alternative product to acetylene,
which is the most commonly used metal fuel globally, but also happens to be a non-renewable fossil fuel-based metal cutting fuel.
Alternatively, MagneGas is a cleaner, renewable fuel alternative that creates a flame up to 85% hotter than acetylene and cuts
metal up to 38% faster than acetylene, while maintaining a comparable price.
Sterilization
Mode
When
the Plasma Arc Flow System is in “sterilization mode”, the system may process any number of liquified waste
streams. In most cases we pass the selected waste stream through the system a limited number of times to achieve the maximum sterilization/decontamination
effect on the waste stream. Sterilization mode also produces modest amounts of gas as a byproduct. Our proprietary combination
of electric current, heat, ultraviolet light and ozone has shown an ability to eliminate up to 99.9% of EPA and USDA regulated
pathogens such as e-coli and fecal coliform. We also believe our technology has the capability to eliminate cyanobacteria commonly
referred to as “blue-green algae” and are currently conducting tests to verify that capability.
During
2018 and 2017, as part of our retail growth strategy, we acquired a number of businesses with large customer bases
through which we now offer our proprietary MagneGas product in addition to other gases and welding supplies. The majority of our
retail locations are in Texas and California, which we believe are the two top markets for consumption of metal cutting fuels
and related supplies. We also have locations in Florida and Louisiana. We also market, for sale and licensure, our proprietary
plasma arc technology for gasification and the processing of liquid waste and have developed a global network of brokers to sell
the Plasma Arc Flow System.
Core
Technology
Submerged
Plasma Arc Flow System Overview
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Our
patented system enables fluid to efficiently pass through a submerged plasma arc.
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To
create synthetic fuel, the fluid must contain hydrogen and oxygen – carbon supply can be facilitated by the electrodes.
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As
the fluid passes through the arc, hydrogen, carbon and oxygen molecules are liberated and gasified.
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A
wide range of feedstocks can produce different gases, with differing flame and heating properties
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Typically,
our fuels are 40-60% ionized hydrogen and 30-40% other synthetic hydrocarbon and carbon compounds.
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To
decontaminate or sterilize waste streams, such as contaminated water or biomass waste, the “feed stock” must be
in liquid form.
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Our
Products
We
have two proprietary products that we market and sell, which are derived from our core technology. The first is our clean, renewable
alternative cutting fuel called “MagneGas”, which is sold at our various locations to retail end users as an alternative
product to acetylene. The second is our Plasma Arc Flow System, which is marketed for sale and licensure to commercial operators
who desire to utilize our technology for gas production (under strict license) or water decontamination and sterilization.
MagneGas
Cutting Fuel
We
currently produce MagneGas, which is comprised primarily of hydrogen and created through a patented protected process. The fuel
can be used as an alternative to acetylene and other natural gas derived fuels for metal cutting and other commercial uses. After
production, the fuel is stored in hydrogen cylinders which are then sold to market on a rotating basis. Independent analyses performed
by the City College of New York and Edison Welding Institute have verified that MagneGas cuts metal at a significantly higher
temperature and faster than acetylene, which is the most commonly used fuel in metal cutting. The use of MagneGas is nearly identical
to acetylene (it merely requires a different welding tip and a regulator) making it easy for end-users to adopt our product with
limited training.
Over
the last several years we have acquired and maintain a retail distribution network, which allows us to sell and transport MagneGas
to customers in various metalworking industries. Since 2017, we have doubled the range we are able to distribute MagneGas and
are now able to more efficiently address markets within a 500-mile radius of our production hubs in Florida and Texas. Within
the next two years, we plan to create two production hubs in California to serve the western United States. Finally, we
have and intend to continue to acquire complementary gas and welding supply distribution businesses in order to expand the distribution
and use of MagneGas, other industrial gases and related equipment. We have sold to over 30,000 customers in the public and private
sectors.
Plasma
Arc Flow System
We
use our Plasma Arc Flow System to make MagneGas, but it has the ability to gasify many forms of liquids and liquid waste such
as used vegetable, soybean or motor oils, certain types of liquified biomass, ethylene glycol and can be used to sterilize bio-contaminants
in waste and decontaminate water.
The
Plasma Arc Flow System forces a high-volume flow of liquid waste through a submerged plasma arc existing between carbon electrodes,
a process which sterilizes the bio-contaminants within the waste without requiring any chemical disinfecting agents. The Plasma
Arc Flow System also releases a clean burning fuel as a byproduct of the decontamination and sterilization process, which can
be used to offset some energy consumption. Because our Plasma Arc Flow Systems are available in various sizes from 50kW to 500kW,
they are applicable to a broad array of end-users, including: (i) large consumers of cutting fuels (construction companies, shipbuilders,
heavy industry) who desire a safer, renewable, and efficient alternative to acetylene and propane, (ii) producers
of contaminated waste streams (commercial manufacturers, farming operations, chemical producers, etc.) who either desire to or
are mandated by law to treat agricultural, pharmaceutical, industrial or manufacturing waste streams prior to release into the
ecosystem and (iii) local, state or federal governments, desirous of decontaminating water sources or reclaiming waste water that
is otherwise unusable.
Our
Strategy
We
strive to be a leading clean technology company. We seek to accomplish this goal through commercialization of our existing proprietary
products, and research and development to improve upon these products and discover new products or applications. To help commercialize
the use of MagneGas, over the last several years we have acquired a number of independent welding supply and gas distribution
businesses, which now offer MagneGas as an alternative to acetylene in 22 retail locations across the United States. We will continue
to evaluate potential strategic acquisition targets to enhance our organic based growth model. To further the commercialization
of our Plasma Arc Flow Systems for decontamination and sterilization, we have applied for and have been awarded two grants from
the United States Department of Agriculture and have successfully completed a number of pilot studies and plan to open a commercial
sterilization and decontamination facility in the United States within the next year.
Our
research and development activities are focused on:
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the
potential ability to use the Plasma Arc Flow System for the processing of agricultural waste and for the elimination of cyanobacteria,
commonly referred to as “blue-green algae”;
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proving
and scaling the utility of our Plasma Arc Flow System on a large-scale industrial basis;
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increased
system efficiency for higher fuel production.
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For
the fiscal year ending December 31, 2018, we experienced the following significant developments:
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We
formed NG Enterprises Acquisition, LLC, a wholly owned subsidiary we used to acquire all of the assets of GGNG Enterprises,
LLC, a San Diego, California based welding supply and gas distribution business, and commenced business operations in Southern
California doing business under the name “Complete Welding of San Diego”;
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We
formed MWS Green Arc Acquisition, LLC, a wholly owned subsidiary we used to acquire all of the assets of Green Arc Supply,
L.L.C, an industrial gas and welding supply distributor and commenced business operations in Texas and Louisiana doing business
under the name “Green Arc Supply”;
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We
acquired all of the capital stock of Trico Welding Supplies, Inc., an industrial gas and welding supply distributor with two
locations in Sacramento, California, and commenced business operations in Northern California doing business under the name
“Trico Welding Supplies”;
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We
formed MagneGas Limited, a United Kingdom-based subsidiary, for the purpose of applying for grants and government financing
in the United Kingdom; no grants have been obtained as of December 31, 2018
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We
formed MagneGas Ireland Ltd., an Ireland-based subsidiary for the purpose of applying for grants and government financing
and expanding business development efforts in the European Union and greater Middle East; no grants have been obtained as
of December 31, 2018
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Our
joint venture partner, Infinite Fuels, was awarded a $6.87 million
grant from the Executive Agency for Small and Medium-sized Enterprises, a department
within the European Commission;
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We
acquired all of the capital stock of Paris Oxygen, Inc., a welding supply and gas distribution business located in Paris,
Texas and commenced business operations in that location;
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We
acquired all of the capital stock of Latex Welding Supply, Inc. a welding supply and gas distribution business located in
Shreveport, Louisiana and commenced business operations in that location; and,
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We
acquired all of the capital stock of United Welding Specialties of Longview, Inc., a welding supply and gas distribution business
located in Longview, Texas and commenced business operations in that location.
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Our
Distribution & Sales Network
We
distribute and sell our MagneGas fuel, other gases and welding supplies at our retail locations in Florida, Louisiana, Texas and
California through a select network of independent welding supply distributors. We use our retail industrial gas and welding supply
subsidiaries as a platform to accelerate MagneGas fuel sales into regional markets. Our Plasma Arc Flow System is distributed
directly by the Company and marketed and/or sold via a network of international brokers.
Competitive
Business Conditions
The
competitive landscape in which our welding supply and gas distribution business operates is comprised of several major international
conglomerates, such as Airgas, Linde, Air Products and Praxair and a number of smaller independent distributors which compete
for market share in certain geographical areas. We believe that the superior qualities of MagneGas are a market differentiator
which allow us to compete with both large conglomerates and smaller distributors.
The
competitive landscape in which the Plasma Arc Flow System may be utilized for waste water decontamination and sterilization is
relatively undeveloped and we are not aware of any direct competitors at this time.
Patents
and Trademarks
The
technology related to the Plasma Arc Flow System is patented in the United States and to the extent we have not done so already,
we are exploring filing patents under the Patent Cooperation Treaty in other areas of the world. The patents related to “Plasma
Arcs” are the Company’s key patents. In addition to the issued United States patents listed below, we have numerous
patents pending. We own the following U.S. patents:
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U.S.
Patent No. 6,183,604 - DURABLE AND EFFICIENT EQUIPMENT FOR THE PRODUCTION OF A COMBUSTIBLE AND NON-POLLUTANT GAS FROM UNDERWATER
ARCS AND METHOD THEREFOR. Filing Date: August 11, 1999 – Issue Date: February 6, 2001.
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2.
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U.S.
Patent No. 6,673,322 - APPARATUS FOR MAKING A NOVEL, HIGHLY EFFICIENT, NONPOLLUTANT, OXYGEN RICH AND COST COMPETITIVE COMBUSTIBLE
GAS AND ASSOCIATED METHOD. Filing Date: June 29, 2001 – Issue Date: January 6, 2004.
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3.
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U.S.
Patent No. 6,663,752 – BURNING LIQUID FUEL PRODUCED VIA A SELF-SUSTAINING PROCESSING OF LIQUID FEEDSTOCK. Filing Date:
October 3, 2001 – Issue Date: December 16, 2003.
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4.
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U.S.
Patent No. 6,926,872
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APPARATUS AND METHOD FOR PRODUCING A CLEAN BURNING COMBUSTIBLE GAS WITH LONG LIFE ELECTRODES
AND MULTIPLE PLASMA-ARC-FLOWS. Filing Date: December 7, 2001 – Grant Date: August 9, 2005.
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5.
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U.S.
Patent No. 6,972,118 – APPARATUS AND METHOD FOR PROCESSING HYDROGEN, OXYGEN AND OTHER GASES. Filing Date: December 14,
2001 – Issue Date: December 6, 2005.
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6.
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U.S.
Patent No. 7,780,924 – PLASMA-ARC-FLOW APPARATUS FOR SUBMERGED LONG LASTING ELECTRIC ARCS OPERATING UNDER HIGH POWER,
PRESSURE AND TEMPERATURE CONDITIONS TO PRODUCE A COMBUSTIBLE GAS. Filing Date: June 26, 2006 – Issue Date: August 24,
2010.
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7.
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U.S.
Patent No. 8,236,150 – PLASMA-ARC-THROUGH APPARATUS AND PROCESS FOR SUBMERGED ELECTRIC ARCS. Filing Date: July 1, 2010
– Issue Date: August 7, 2012.
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8.
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U.S.
Patent No. 9,433,916 - PLASMA-ARC-THROUGH APPARATUS AND PROCESS FOR SUBMERGED ELECTRIC ARCS WITH VENTING. Filing Date: May
28, 2014 – Issue Date: September 6, 2016.
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9.
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U.S.
Patent No. 9,700,870 - METHOD AND APPARATUS FOR THE INDUSTRIAL PRODUCTION OF NEW HYDROGEN-RICH FUELS. Filing Date: April 3,
2014 – Issue Date: July 11, 2017.
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10.
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U.S.
Patent No. 10,100,416 - PLASMA-ARC-THROUGH APPARATUS AND PROCESS FOR SUBMERGED ELECTRIC ARCS WITH VENTING. Filing Date: August
8, 2016 – Issue Date: October 16, 2018.
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11.
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U.S.
Patent No. 10,100,262 - METHOD AND APPARATUS FOR THE INDUSTRIAL PRODUCTION OF NEW HYDROGEN-RICH FUELS. Filing Date: June 2,
2017 – Issue Date: October 16, 2018.
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12.
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U.S.
Patent No. 10,189,002 - APPARATUS FOR FLOW-THROUGH OF ELECTRIC ARCS. Filing Date: October 31, 2014 – Issue Date: January
29, 2019.
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We
are also the owner of record for the registered trademarks “MAGNEGAS”, “VENTURI”, “MAGNEGAS2”,
“MAGNETOTE” in the United States; “MAGNEGAS” and “MAGNEHYDROGEN” in Mexico; “MAGNEGAS”
in Australia and New Zealand.
Governmental
Approval
Most
of our welding supply products and the applications for which they are used are not subject to governmental approval, although
we are subject to state and local licensing requirements. We continue to seek approval from the United Stated Department of Agriculture
(“USDA”) for the use of our Plasma Arc Flow System to treat agricultural waste streams. As part of this testing and
the eventual commercialization of our Plasma Arc Flow System, we must meet and maintain compliance with guidelines set
by the Environmental Protection Agency (“EPA”) for the release of any decontaminated or sterilized waste streams.
Governmental
Regulations
We
are regulated by the United States Department of Transportation (“DOT”) and state transportation agencies in the method
of storage and transportation of our fuels and by the EPA and state environmental regulatory agencies with regards to the processing
of waste. We believe that our current operations are fully compliant with applicable local, state and federal regulations.
We
are also regulated by the Occupational Safety & Health Administration (“OSHA”) and comparable state statutes that
regulate the protection of the health and safety of workers. OSHA requires that we maintain information about hazardous materials
used or produced in our operations and that we provide this information to employees, state and local governmental authorities,
and local residents. We believe that our current operations are fully compliant with OSHA and comparable state statutes.
Research
and Development
Plasma
Arc Flow System for Agricultural Sterilization and Decontamination
Through
years of research and development, we have determined our Plasma Arc Flow System can be modified to process a number of feedstocks,
including animal biosolid waste and other liquified waste streams. We have conducted several successful tests of the Plasma Arc
Flow System at a large hog farm in Indiana and dairy farm in Florida for the processing, sterilization and decontamination of
agricultural waste streams. These tests, which achieved full sterilization of the manures processed through the Plasma Arc Flow
System, were conducted with variable flow and efficiency rates, demonstrating the versatility of the Plasma Arc Flow System.
Notably,
on June 13, 2017, we were awarded a $431,874 grant from the USDA, which is being used to accelerate the commercialization of the
Plasma Arc Flow System for the treatment of pathogens and nutrients found in animal bio-solid wastes. The Company successfully
launched its first grant-funded operations at a dairy farm in Bowling Green, Florida in December 2017, and held its first
successful demonstration to the USDA in May 2018.
In
September 2018, the Company initiated the second phase of its 18-month, USDA grant-funded sterilization project. The second phase
of the sterilization project will expand the scope of pathogens and living organisms tested for sterilization efficacy. The project
will also expand the study of efficacy in breaking down pharmaceutical wastes trapped in associated waste water. Lastly, the second
phase of the project will significantly expand the study of the waste solids processed using the Company’s Plasma Arc Flow
System. The second phase of testing on site in Bowling Green, Florida is expected to run through early October 2019.
Increased
System Efficiency for Greater Fuel Output
We
continue to conduct ongoing research to discover methods to increase efficiency and reduce the cost of the production of our fuels.
Since 2012, we have reduced our production costs by 88% and are working diligently to reduce costs by another 50% in the next
12 months, which we believe will enable us to out-price acetylene producers. Additionally, we are also exploring other power systems
and filtration systems as well as the potential ability to convert certain byproducts into electricity
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During
the last two fiscal years, we typically had 3 to 6 full-time employees working on research and development projects.
Employees
As
of December 31, 2018, we employed 87 full-time employees. We have occasionally used temporary employees and independent contractors
to perform production and other duties. We consider our relationship with our employees to be excellent.
Properties
O
ur
corporate headquarters and primary MagneGas production facility is located at 11855 44
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Street North,
Clearwater, Florida. This facility is 18,000 square feet and has the capacity to run three Plasma Arc Flow Systems simultaneously
for multiple shifts if needed.
All
of our retail locations are subject to lease arrangements, some of which provide us the option to purchase the subject real estate
in the future.
Corporate
Information
Taronis
Technologies, Inc. was originally organized as 4307 INC. under the laws of the State of Delaware on December 9, 2005. The
name of the Company was later changed to MagneGas Corporation and thereafter to MagneGas Applied Technology Solutions, Inc. On
January 31, 2019, the name of the Company was changed to Taronis Technologies, Inc.. Our corporate headquarters are located
at 11885 44
th
Street North, Clearwater, Florida 33762 and our telephone number is (727) 934-3448.
Reports
to Security Holders
We
file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, registration statements and other
items pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with the Securities and Exchange
Commission (“SEC”). The SEC maintains an internet site (
www.sec.gov
) that contains reports, proxy and information
statements regarding issuers that file electronically with the SEC.
Item
1A. Risk Factors.
There
can be no assurance that we can achieve or maintain profitability.
As
a small business, we encounter problems, expenses, difficulties, complications and delays that may affect our ability to become
profitable. As a result, we may not be able to generate sufficient revenue to operate and grow in the manner desired.
Our
ability to achieve and maintain profitability and positive cash flow will be dependent upon, among other things:
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our ability to raise capital on favorable terms in order to operate and grow our business;
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management’s ability to maintain the technology and skills necessary to operate our business;
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our ability to maintain awareness of regulatory updates by government agencies and changes in the law, particularly in the areas
of product transportation, handling and compliance and environmental regulation;
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our ability to attract customers who require the products and services we offer;
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our ability to generate revenues through the sale of our products and services to potential clients; and
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our ability to manage the logistics and operations of our Company and the distribution of our products and services.
We
have had operating losses since formation and expect to incur net losses for the near term.
We
reported a net loss of $15,036,843 for the fiscal year ended December 31, 2018 as compared to a net loss of $11,024,388
for the fiscal year ended December 31, 2017. We currently spend approximately $785,000 per month to fund our operations.
We anticipate that we will continue to lose money in the near term and we may not be able to achieve profitable operations. In
order to achieve profitable operations, we may need to raise additional capital in the near term to maintain current operations.
Our
financial statements for December 31, 2018 include a disclosure that there is substantial doubt about our ability to continue
as a going concern.
We
have a history of losses since inception. For the year ended December 31, 2018, we incurred a net loss of $15,036,843,
and had an accumulated deficit of $79,619,711. We expect to continue to incur operating and net losses for the foreseeable
future as we operate our business; expand our sales and marketing efforts; expand our retail distribution network; invest in product
development and establish the necessary administrative functions to support our growing operations and being a public company.
Our losses in future periods may be greater than the losses we would incur if we developed the business more slowly. In addition,
we may find that these efforts are more expensive than we currently anticipate or that these efforts may not result in increases
in our revenues, which would further increase our losses. Therefore, there is substantial doubt about our ability to continue
operations in the future as a going concern, as disclosed in the notes to the financial statements for the year ended December
31, 2018. Although our financial statements raise substantial doubt about our ability to continue as a going concern, they do
not reflect any adjustments that might result if we are unable to continue our business. If we cannot continue as a viable entity,
our stockholders may lose some or all of their investment in our company.
We
will likely need to secure additional funding to continue operations in order to continue as a going concern, which may not be
available to us on favorable terms or at all.
To
date, we have not achieved positive cash flows or profitability, and therefore we will likely need raise additional capital or
incur debt to fund our operations in order to continue as a going concern. We expect to continue to incur operating losses for
the foreseeable future as we incur costs associated with business operations, the pursuit of potential acquisitions, continuation
of our research and development programs, expansion of our sales and marketing capabilities, increased manufacturing of
our products, and compliance with the requirements related to being a U.S. public company listed on the Nasdaq Capital Market.
As a result, additional funding will likely be needed and it may not be available on terms favorable to us, or at all. However,
if we are unable to improve our liquidity position, we may not be able to continue as a going concern. If we secure additional
funding through the issuance of equity securities, our stockholders may suffer dilution and our ability to use our net operating
losses to offset future income may be limited. If we obtain funding through the issuance of debt secured by the Company’s
assets, stockholders may not receive any liquidation value related to the Company’s assets if a lender forecloses on the
assets as a result of a non-cured event of default. We may also be required to accept terms that include investor rights that
may be restrictive to our business. Unfavorable terms may also include features that may create further dilution, such as warrants,
anti-dilution features, price resets and other similar toxic features. These types of features may make equity financing more
dilutive, but may also create additional, compound dilution in connection with future financings as well. If we raise additional
funding through debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness,
require us to use our cash to make payments under such indebtedness, force us to maintain specified liquidity or other ratios
or restrict our ability to pay dividends or make acquisitions. If we are unable to secure additional funding, our commercialization
efforts would be delayed, reduced or eliminated, our relationships with our suppliers and customers may be harmed, and we may
not be able to continue our operations. The accompanying consolidated financial statements do not include any adjustments that
might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge our
liabilities other than in the normal course of business which could cause investors to suffer the loss of all or a substantial
portion of their investment.
The
growth of our business depends upon the development and successful commercial acceptance of our products.
Successful
commercialization of MagneGas and our commercialization of the Plasma Arc Flow System for sterilization and decontamination depends
on timely and efficient implementation of manufacturing processes and effective sales, marketing and customer service. Because
of the complexity of our products, significant delays may occur between development, introduction to the market and volume production
phases.
Widescale
commercialization of the MagneGas fuel and the commercial launch of the Plasma Arc Flow System for sterilization and decontamination,
may involve many difficulties, including but not limited to:
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retention
and hiring of appropriate operational, research and development personnel;
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determination
of the products’ technical specifications;
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successful
completion of the development process;
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successful
marketing of MagneGas, resulting in customer acceptance;
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successful
implementation of our Plasma Arc Flow System for commercial decontamination and sterilization;
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regulatory
approvals;
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managing
inventory levels, logistics and operations; and
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additional
customer service and warranty costs associated with supporting product modifications and/or subsequent potential field upgrades.
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We
must expend significant financial and management resources to develop and market MagneGas and our Plasma Arc Flow System. We cannot
assure that we will receive meaningful revenue from these investments. If we are unable to continue to successfully develop or
modify our products in response to customer requirements or technological changes, or our products are not commercially successful,
our business may be harmed.
Acquisitions
constitute a key aspect of our growth strategy and failure to successfully integrate newly acquired companies or businesses could
adversely affect our financial results.
We
invested significant capital into acquisitions and these acquisitions comprised a substantial component of our growth in the year
ending December 31, 2018. We will likely continue to pursue acquisitions of other companies or their business assets in the future.
There can be no assurance that these transactions will be consummated or that, if consummated, will be successful from an integration
or financial perspective. Further, if we complete acquisitions, we face many associated risks, including:
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incurring
significantly higher than anticipated capital expenditures and operating expenses;
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failing
to assimilate the operations, customers and personnel of the acquired company or business;
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disrupting
our ongoing business;
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dissipating
our management resources;
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dilution
to existing stockholders and stock price decline from the issuance of equity securities;
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liabilities
or other problems associated with the acquired business;
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incurring
debt on terms unfavorable to us or that we are unable to repay;
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becoming
subject to adverse tax consequences, substantial depreciation or deferred compensation charges;
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improper
compliance with laws of foreign jurisdictions;
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failing
to maintain uniform standards, controls and policies; and
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impairing
relationships with employees and customers as a result of changes in management.
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Fully
integrating an acquired company or business assets into our operations may take a significant amount of time. We cannot guarantee
that we will be successful in overcoming these risks or any other problems encountered with acquisitions. To the extent we do
not successfully avoid or overcome the risks or problems related to any acquisition, our results of operations and financial condition
could be adversely affected. Future acquisitions also could impact our financial position and capital needs and could cause substantial
fluctuations in our quarterly and yearly results of operations. Acquisitions could include significant goodwill and intangible
assets, which may result in future impairment charges that would reduce our stated earnings.
Escalating
trade tensions and the adoption or expansion of tariffs and trade restrictions could negatively impact us.
The
U.S. government has recently announced tariffs on steel and aluminum products and materials imported into the United States and
has signaled a willingness to impose tariffs on other products. Various countries and economic regions have announced plans or
intentions to impose retaliatory tariffs on a wide range of products they import from the United States. These newly imposed or
threatened U.S. tariffs and retaliatory tariffs could have the effect of increasing the cost of materials for our products, which
could result in our products becoming less competitive or generating lower margins. The tariffs could also result in disruptions
to our supply chain, as suppliers struggle to fill orders from companies trying to purchase goods in bulk ahead of announced tariffs.
Finally, many of our customers also operate in industries that are vulnerable to harm from imposition of tariffs and these customers
may be unable to stay solvent as a result of the tariffs, which would negatively impact our sales.
Economic
conditions and regulatory changes following the United Kingdom’s exit from the European Union could have a material adverse
effect on our business and results of operations.
We
recently formed a wholly owned subsidiary, MagneGas Limited, which is based in London, England, for the purpose of directly applying
for grants and government-backed financing as a European entity. The United Kingdom invoked Article 50 of the Treaty on European
Union on March 29, 2017, initiating the process to leave the European Union (“Brexit”), which is currently scheduled
to occur on April 12, 2019. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations
as the United Kingdom determines which European Union laws to replace or replicate. Given the ongoing political uncertainty surrounding
the form of Brexit (including a potential “hard Brexit” in which the United Kingdom would also give up full access
to the European Union single market and customs union), we cannot predict how the Brexit process will finally be implemented and
are continuing to assess the potential impact, if any, on our ability to seek grants and government-backed financing as a European
entity.
Certain
purchasers of common stock from certain institutional investors may have claims against us and/or the institutional investors
under Section 12(a)(1) of the Securities Act.
In
June 2017 we sold to investors warrants to purchase our Series C Convertible Preferred Stock (the “Preferred Stock”)
in a private placement. The warrants were exercisable into Preferred Stock which was, itself, convertible into our common stock.
In connection with the private placement, we granted certain registration rights to the investors. Pursuant to these rights, we
filed a registration statement on Form S-3 (the “Resale S-3”). In the Resale S-3, we registered for resale all of
the securities issued in the June 2017 private placement, including the relevant warrants, Preferred Stock and common stock issuable
on conversion of the Preferred Stock. We paid the registration fee in full for such resales. Pursuant to SEC staff guidance, we
registered for resale by investors 3,560,714 shares of common stock, which was the maximum number of shares issuable at such time
pursuant to the conversion of the Preferred Stock. The Resale S-3 was declared effective on September 14, 2017.
On
January 16, 2018, we effected a 1-for-15 reverse stock split of our common stock, which did not affect our Preferred Stock or
the conversion rate of our Preferred Stock. According to SEC staff guidance, by operation of Rule 416 under the Securities Act
of 1933, as amended (the “Securities Act”), the number of common stock shares available for resale under the Resale
S-3 was automatically reduced in proportion to the reverse stock split. Pursuant to such guidance, in order to register for resale
all of the shares of common stock issuable on conversion of the Preferred Stock, we were required to file an additional registration
statement. We were not aware of the SEC staff guidance and inadvertently did not file a new resale registration statement covering
the additional shares issuable upon conversion of the Preferred Stock.
After
we became aware of the SEC staff guidance, we filed a resale registration statement on Form S-3 on October 29, 2018, which covered
the resale of the remaining shares issuable upon conversion of the Preferred Stock, which was declared effective on November 6,
2018. Between March 2018, when the investors sold the maximum number of shares registered in the Resale S-3, as adjusted by the
reverse stock split, and November 6, 2018, approximately 3,150,000 shares were sold in unregistered transactions by two institutional
investors without an exemption from registration. Consequently, certain purchasers of common stock from these two institutional
investors may have claims against us or the institutional investors under Section 12(a)(1) of the Securities Act, which, upon
appropriate proof, may entitle them to recover the consideration paid for such shares with interest thereon, less the amount of
any income received thereon, upon the tender of the shares, or damages if they no longer own the shares. Section 13 of the Securities
Act requires that any such claim be brought within one year of the violation. While we have not received notice of any such claim
to-date and have not qualified any potential liability, we will still be subject to such claims until the end of the one-year
period following the applicable violation, which may have occurred as late as November 6, 2018.
Our
business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail
to grow or fail to manage our growth effectively.
Over
the course of our business development as a clean technology company, we have established a retail and wholesale platform and
network of brokers to sell our synthetic gas for use in the metalworking and manufacturing industries. Our business strategy includes
continued expansion of this network by way of acquisitions and organic growth. Recently, to further our strategy, we made changes
to our executive management team, including a new chief executive officer and interim financial officer. Our ability to successfully
grow will depend on a variety of factors, including the ability of these executive officers to execute our business strategy.
Growth
opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively,
our financial condition and operating results could be negatively affected. Furthermore, there are considerable costs involved
in acquiring companies and expanding retail capacity, and generally a period of time is required to generate the necessary revenues
to offset these costs, especially in areas in which we do not have an established presence. Accordingly, any such business expansion
can be expected to negatively impact our earnings until certain economies of scale are reached.
We
are currently not in compliance with Nasdaq listing requirements. If we do not regain compliance and continue to meet Nasdaq listing
requirements, our Common Stock may be delisted from Nasdaq, which could affect the market price and liquidity of our common stock
and reduce our ability to raise additional capital.
On
May 7, 2018, we received a notice from Nasdaq indicating that the Common Stock was subject to potential delisting from Nasdaq
because for a period of 30 consecutive business days, the bid price of the Common Stock had closed below the minimum $1.00 per
share requirement for continued inclusion under Nasdaq Marketplace Rule 5550(a)(2) (the “Bid Price Rule”). The notification
had no immediate effect on the listing or trading of the Common Stock on Nasdaq. Nasdaq stated in its letter that in accordance
with the Nasdaq listing requirements, the Company was being provided with an initial period of 180 calendar days, or until November
5, 2018, to regain compliance. On November 6, 2018, the Company was informed by Nasdaq Listing Qualifications Staff that the Company’s
request for an additional 180-day period to regain compliance, or until May 6, 2019, was granted. To regain compliance with the
Bid Price Rule, the bid price of the Common Stock must close at $1.00 per share or more for a minimum of ten consecutive business
days and the Company must meet all other initial listing standards for the Nasdaq Capital Market. Although the Company effected
the Reverse Stock Split as of January 30, 2019 at 5 p.m. Eastern Time, the price of our Common Stock subsequently fell
below $1.00 due to uncontrollable market conditions prior to having traded above $1.00 for the minimum ten consecutive business
days required to regain compliance. We may need to seek another reverse stock split in order to increase our stock price, however
there is no guarantee that Nasdaq will continue to allow us to regain compliance in this manner. If the Company fails to regain
compliance during the second 180-day period, or by May 6, 2019, then Nasdaq will notify the Company of its determination
to delist the Company’s Common Stock, at which point the Company would have an opportunity to appeal the delisting determination
to a Hearings Panel.
In
addition, on December 13, 2018, the Company convened and thereafter adjourned its annual meeting of stockholders due to an inability
to achieve a quorum as specified in the Company’s bylaws. While we have not received a notice from Nasdaq, it is likely
that our inability to achieve a quorum may be seen as a failure to hold an annual meeting within 12 months of the end of our last
fiscal year (the “Annual Meeting Requirement”). In order to maintain our Nasdaq listing, we may need to create a plan
of compliance to submit to Nasdaq for review and hold another annual meeting. However, there can be no assurance that Nasdaq will
accept our plan or that we will be able to regain compliance with the Annual Meeting Requirement or maintain compliance with any
other Nasdaq requirement in the future.
If
we are unable to meet these requirements, our Common Stock could be delisted from Nasdaq. If our Common Stock were to be delisted
from Nasdaq, our Common Stock could continue to trade on the OTCQB or similar marketplace. Any such delisting of our Common Stock
could have an adverse effect on the market price of, and the efficiency of the trading market for, our Common Stock, not only
in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions
and less coverage of us by securities analysts, if any. Also, if in the future we were to determine that we need to seek additional
equity capital, it could have an adverse effect on our ability to raise capital in the public or private equity markets. Any of
these changes could cause investors to suffer the loss of all or a substantial portion of their investment.
Pending
and future litigation and government investigations may have a material adverse impact on our financial condition and results
of operations.
From
time to time, we have been subject to litigation. It is possible that we may be subject to litigation or claims for indemnification
in connection with the sale of our Common Stock in inadvertent unregistered transactions that occurred in 2018. The SEC may determine
to investigate the unregistered transactions in our Common Stock, which could subject us to potential enforcement actions by the
SEC under Section 5 of the Securities Act of 1933, as amended (the “Securities Act”) and may result in injunctive
relief or the imposition of fines. In addition, it is possible that we had other unregistered offers or sales of our Common Stock,
other than the aforementioned inadvertent unregistered transactions that occurred in 2018, and we may be subject to litigation
or claims for indemnification in connection with any such offers or sales. If any such claims were to succeed, we might not have
sufficient funds to pay the resulting damages. There can be no assurance that the insurance coverage we maintain would cover any
such expenses or be sufficient to cover any claims against us. In addition to the monetary value of any claim, any litigation,
regulatory action or governmental proceeding to which we are a party could adversely affect us by harming our reputation, diverting
the time and attention of management, and causing the Company to incur significant litigation expenses, which would all materially
and adversely affect our business.
In
addition, we may be a party to litigation matters involving our business, which operates within a highly regulated industry. On
September 4, 2018, we received notice that a law firm representing the estate of an individual who sustained life-ending injuries
while working for an end user of our products had made a claim to our insurance carrier. The matter is under investigation by
the U.S. Department of Transportation and the Occupational Health and Safety Administration. 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.
We
may be required to record a significant charge to earnings as we are required to reassess our goodwill or other intangible assets
arising from acquisitions.
We
are required under U.S. GAAP to review our intangible assets, including goodwill, for impairment when events or changes in circumstances
indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment annually or more frequently
if facts and circumstances warrant a review. Factors that may be considered a change in circumstances, indicating that
the carrying value of our amortizable intangible assets may not be recoverable, include a decline in stock price and market
capitalization and slower or declining growth rates in our industry. We may be required to record a significant charge to earnings
in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined.
Management
has identified material weaknesses in our internal controls over financial reporting and as a result we may not prevent or detect
misstatements in our financial reporting.
As
a result of material weaknesses in internal control over financial reporting, the Company’s management has concluded that,
as of December 31, 2018, the Company’s internal controls over financial reporting was not effective based on the criteria
in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Management has not maintained adequate segregation of duties within the Company due
to its reliance on a few individuals to fill multiple roles and responsibilities. Furthermore, the Company has limited accounting
personnel to prepare its financial statements and handle complex accounting transactions. Our failure to segregate duties and
the insufficiency of our accounting resources has been a material weakness for the period covering this report.
Failure
to comply with applicable government regulations could materially limit our sales opportunities and future revenue.
Failure
to obtain operating permits, or otherwise to comply with applicable federal, state and local regulatory and environmental requirements
could affect our abilities to market and sell MagneGas and Plasma Arc Flow Systems and could have a material adverse effect on
our business and operations. We and our customers may be required to comply with a number of federal, state and local laws and
regulations in the areas of safety, health and environmental controls. To the extent we intend to market the Plasma Arc Flow System
internationally, we will be required to comply with laws and regulations of various foreign jurisdictions and, when applicable,
obtain permits in those other jurisdictions. We cannot be certain that we will be able to obtain or maintain required permits
and approvals or that new or more stringent environmental regulations will not be enacted or that if they are, we will be able
to meet the stricter standards.
The
preparation of our financial statements involves the use of estimates, judgments and assumptions, and our financial statements
may be materially affected if our estimates prove to be inaccurate.
Financial
statements prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”)
require the use of estimates, judgments, and assumptions that affect the reported amounts. Different estimates, judgments, and
assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates,
judgments, and assumptions are likely to occur from period to period in the future. These estimates, judgments, and assumptions
are inherently uncertain, and, if they prove to be wrong, then we face the risk that charges to income will be required.
Our
Plasma Arc Flow System is unproven on a large-scale industrial basis for decontamination and sterilization and could fail to perform
in an industrial production environment.
Our
Plasma Arc Flow System has never been utilized on a large-scale industrial basis, i.e. scaled commercial production for decontamination
and sterilization of waste streams. All of the tests that we have conducted to date with respect to our technology have been performed
on limited quantities of liquid waste, and we cannot assure you that the same or similar results could be obtained on a large-scale
industrial basis. We cannot predict all of the difficulties that may arise when the technology is utilized on a large-scale industrial
basis. In addition, our technology has never operated at a volume level required to be profitable. It is possible that the technology
may require further research, development, design and testing prior to implementation of a larger-scale commercial application.
Accordingly, we cannot guarantee that this technology will perform successfully on a large-scale commercial basis, that it will
be profitable to us or that it will be competitive in the market.
Our
future success is dependent, in part, on the performance and continued service of our Executive Team and other key personnel.
Without their continued service, we may be forced to interrupt our operations.
We
are presently dependent to a great extent upon the experience, abilities and continued services of our Executive Team. The loss
of our Executive Team or other key personnel’s services may affect our business operations substantially.
Our
related party transactions may cause conflicts of interests that may adversely affect our business.
We
have received various small notes and loans from related parties. We believe that these transactions and agreements that we have
entered into with these affiliates are on terms that are at least as favorable as could reasonably have been obtained at such
time from third parties. However, these relationships could create, or appear to create, potential conflicts of interest when
our Board is faced with decisions that could have different implications for us and these affiliates. The appearance of conflicts,
even if such conflicts do not materialize, might adversely affect the public’s perception of us, as well as our relationship
with other companies and our ability to enter into new relationships in the future, which could have a material adverse effect
on our ability to raise capital or to do business.
We
face the potential risk of product liability, which may subject us to litigation and related costs.
Our
Plasma Arc Flow System may be utilized in a variety of industrial and other settings and may be used to handle materials resulting
from the user’s generation of liquid waste and the creation of a compressed hydrogen-based fuel for distribution to end-users.
The equipment, cylinders and gas may breakdown or malfunction. Further, because of the inherent risk in the compression, transportation
and use of MagneGas fuel, it is possible that claims for personal injury and business losses arising out of a breakdown or malfunction
would occur. Our insurance may be insufficient to provide coverage against all claims or may not cover all claims, and claims
may be made against us even if covered by our insurance policy for amounts substantially in excess of applicable policy limits.
Such an event could have a material adverse effect on our business, financial condition and results of operations and could render
us insolvent.
Because
we are small and have fewer financial and other resources than our competitors, we may not be able to successfully compete in
the industry.
There
is significant competition in our industry. Our business faces competition from a number of producers that can produce significantly
greater volumes of fuel than we can or expect to produce, producers that can produce a wider range of fuel products than we can,
and producers that have the financial and other resources that would enable them to expand their production rapidly if they chose
to. These producers may be able to achieve substantial economies of scale and scope, thereby substantially reducing their fixed
production costs and their marginal productions costs. If these producers are able to substantially reduce their marginal production
costs, the market price of fuel may decline and we may be not be able to produce or sell our products at a cost that allows us
to compete economically. Further, since MagneGas is an alternative to acetylene, the unstable price of acetylene will impact our
ability to become profitable and to sell cost competitive fuel. Even if we are able to operate profitably, these other producers
may be substantially more profitable than us, which may make it more difficult for us to raise any financing necessary for us
to achieve our business plan and may have a materially adverse effect on the market price of our common stock.
Costs
of compliance with burdensome or changing environmental and operational safety regulations could cause our focus to be diverted
away from our business and our results of operations may suffer.
Our
business is subject to various federal and state mandated regulatory and safety requirements which are implemented by state and
federal agencies. These regulations are subject to change and such changes may require additional capital expenditures or increased
operating costs. Consequently, considerable resources may be required to comply with future regulations. In addition, our production
facilities could be subject to nuisance or related claims by employees, property owners or residents near the facilities. Environmental
and public nuisance claims, or tort claims, or increased environmental compliance costs resulting therefrom could significantly
increase our operating costs.
We
are subject to the requirements of the Occupational Safety & Health Administration, or OSHA, and comparable state statutes
that regulate the protection of the health and safety of workers. OSHA requires that we maintain information about hazardous materials
used or produced in our operations and that we provide this information to employees, state and local governmental authorities,
and local residents. Failure to comply with OSHA requirements, including general industry standards, process safety standards
and control of occupational exposure to regulated substances, could have a material adverse effect on our results of operations,
financial condition and the cash flows of the business if we are subjected to significant fines or compliance costs.
Because
MagneGas is relatively new to the metalworking market, it may take time for the industry to adopt it.
MagneGas
competes with acetylene and other fossil-fuel based metal cutting fuels in the metalworking market. Because MagneGas is a relatively
new product in the industry, it may take time for end-users to consider using MagneGas which may adversely impact our sales. A
failure by the market to adopt our products quickly, or at all, will have material adverse effect on our results of operations,
financial condition and the cash flows of the business.
Mergers
or other strategic transactions involving our competitors could weaken our competitive position, which could harm our operating
results.
There
is significant competition among existing alternative fuel producers. Some of our competitors may enter into new alliances with
each other or may establish or strengthen cooperative relationships with systems integrators, third-party consulting firms or
other parties. Any such consolidation, acquisition, alliance or cooperative relationship could lead to pricing pressure and our
loss of market share and could result in a competitor with greater financial, technical, marketing, service and other resources,
all of which could have a material adverse effect on our business, operating results and financial condition.
Our
failure to respond to rapid change in the market for alternative fuel products could have an adverse effect on our results of
operations.
Our
future success will depend significantly on our ability to create a product that is clean, effective and competitively priced.
However, as technology develops generally, consumer preferences switch, government regulations and incentives change and industry
standards evolve. A currently competitive product may quickly become uncompetitive. A delay in or inability to develop
or acquire technological improvements, adapt the products we develop to technological changes or provide technology that appeals
to our customers may preclude our ability to compete in the marketplace and could cause us to lose existing customer relationships.
Such failures could lead to our insolvency.
Because
our long-term plan depends, in part, on our ability to expand the sales of our solutions to customers located outside of the United
States, our business will be susceptible to risks associated with international operations.
We
have limited experience operating in foreign jurisdictions. We continue to explore opportunities for joint ventures internationally.
Our inexperience in operating our business outside of the United States increases the risk that our current and future international
expansion efforts will be unsuccessful. Conducting international operations subjects us to new risks that, generally, we have
not faced in the United States, including:
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in currency exchange rates;
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changes in foreign regulatory requirements;
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longer
accounts receivable payment cycles and difficulties in collecting accounts receivable;
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difficulties
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potentially
adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation
of earnings;
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localization
of our solutions, including translation into foreign languages and associated expenses;
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burdens of complying with a wide variety of foreign laws and different legal standards, including laws and regulations related
to privacy;
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increased
burden in compliance with certain United States laws and regulatory schemes, including, but not limited to, the Foreign Corrupt
Practices Act of 1977, as amended, and various trade controls and economic sanctions laws, regulations and policies, such
as the International Traffic in Arms Regulations and the Export Administration Regulations;
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increased
financial accounting and reporting burdens and complexities;
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political,
social and economic instability abroad, terrorist attacks and security concerns in general; and
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reduced
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Risks
Related to Our Intellectual Property
The
success of our business depends, in part, upon proprietary technologies and information that may be difficult to protect and may
infringe or be perceived to infringe on the intellectual property rights of third parties.
We
believe that the identification, acquisition and development of proprietary technologies are key drivers of our business. Our
success depends, in part, on our ability to obtain patents, maintain the secrecy of our proprietary technology and information
and operate without infringing on the proprietary rights of third parties. We cannot guarantee that the patents of others will
not have an adverse effect on our ability to conduct our business, that the patents that provide us with competitive advantages
will not be challenged by third parties, that we will develop additional proprietary technology that is patentable or that any
patents issued to us will provide us with competitive advantages. Further, we cannot assure you that others will not independently
develop similar or superior technologies, duplicate elements of our technology or design around it.
To
commercialize our proprietary technologies successfully, we may need to acquire licenses to use, or to contest the validity of,
issued or pending patents. We cannot guarantee that any license acquired under such patents would be made available to us on acceptable
terms, if at all, or that we would prevail in any such contest. In addition, we could incur substantial costs in defending ourselves
in suits brought against us for alleged infringement of another party’s patents or in defending the validity or enforceability
of our patents, or in bringing patent infringement suits against other parties based on our patents.
In
addition to the protection afforded by patents, we also rely on trade secrets, proprietary know-how and technology that we seek
to protect, in part, by confidentiality agreements with our prospective joint venture partners, employees and consultants. We
cannot guarantee that these agreements will not be breached, that we will have adequate remedies for any such breach, or that
our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.
We
cannot guarantee that we will obtain any patent protection that we seek, that any protection we do obtain will be found valid
and enforceable if challenged or that it will confer any significant commercial advantage. U.S. patents and patent applications
may be subject to interference proceedings, U.S. patents may be subject to re-examination proceedings in the U.S. Patent and Trademark
Office and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices,
which proceedings could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope
of one or more of the claims of, the patent or patent application. In addition, such interference, re-examination and opposition
proceedings may be costly. Moreover, the U.S. patent laws may change, possibly making it easier to challenge patents. Some of
our technology was, and continues to be, developed in conjunction with third parties, and thus there is a risk that such third
parties may claim rights in our intellectual property. Thus, any patents that we own or license from others may provide limited
or no protection against competitors. Our pending patent applications, those we may file in the future, or those we may license
from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary protection or
competitive advantages against competitors with similar technology.
Several
patents in our patent portfolio have imperfect chains of title, which could result in ownership challenges by third parties. The
cost to defend against such ownership challenges or the loss of such patents could have a material adverse effect on our business,
operation or financial results.
Our
patents,
U.S. Patent No’s. 6,183,604
,
6,663,752
, and
6,673,322
, have defects in their original patent
assignments. We have filed several
nunc pro tunc
assignments to correct the assignment defects for each of these patents
(the “Corrective Assignments”). The Corrective Assignments are intended to correct the defects in earlier defective
patent assignments such that each patent is valid and enforceable by us. The Corrective Assignments do not replace the assignments
previously recorded at the U.S. Patent and Trademark Office. Instead, the Corrective Assignments are intended to repair the defects
in the prior patent assignments. Notwithstanding the recordation of the Corrective Assignments, the ownership of each patent may
be subject to ownership challenges and the costs to defend against such ownership challenges or the loss of such patents could
have a material adverse effect on our business, operations or financial results.
Many
of our competitors have significant resources and incentives to apply for and obtain intellectual property rights that could limit
or prevent our ability to commercialize our current or future products in the United States or abroad.
Many
of our potential competitors have significant resources and have made substantial investments in competing technologies and may
seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products
either in the United States or in international markets. Our current or future U.S. or foreign patents may be challenged, circumvented
by competitors or others or may be found to be invalid, unenforceable or insufficient. Since patent applications are confidential
until patents are issued in the United States, or in most cases, until after 18 months from filing of the application, or corresponding
applications are published in other countries, and since publication of discoveries in the scientific or patent literature often
lags behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each of our pending
patent applications, or that we were the first to file patent applications for such inventions.
If
we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products
could be adversely affected.
In
addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how. We generally
seek to protect this information by confidentiality agreements with our employees, consultants, scientific advisors and third
parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets
may otherwise become known or be independently developed by competitors. To the extent that our employees, consultants or contractors
use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how
and inventions.
Risks
Related to Our Securities
Future
issuance of our common stock could dilute the interests of existing stockholders.
We
may issue additional shares of our common stock in the future. The issuance of a substantial amount of common stock could have
the effect of substantially diluting the interests of our current stockholders. We may also be subject to or be required to accept
unfavorable terms in financings, including features that may create further dilution, such as warrants, anti-dilution features,
price resets and other similar features. These types of features will make such equity financings more dilutive, but may also
create additional, compounded dilution in connection with future financings as well. In addition, the sale of a substantial amount
of common stock in the public market, either in the initial issuance or in a subsequent resale by the target company in an acquisition
which received such common stock as consideration or by investors who acquired such common stock in a private placement,
could have an adverse effect on the market price of our common stock. Significant dilution will lower our stock price and could
result in the loss of our Nasdaq listing.
The
market price for our common stock is particularly volatile, which could lead to wide fluctuations in our share price. You may
be unable to sell your common stock at or above your purchase price, which may result in substantial losses to you.
The
market for our common stock is characterized by significant price volatility when compared to the shares of larger, more established
companies that have large public floats and we expect that our share price will continue to be more volatile than the shares of
such larger, more established companies for the indefinite future. The volatility in our share price is attributable to a number
of factors, including the trading volume of our shares, market perception of prior dilutive equity issuances in order to raise
capital, short selling and the fact that we are considered by some to be a speculative or “risky” investment due to
our lack of profits to date and uncertainty surrounding market acceptance of our products. As a consequence, some investors may
be inclined to sell their shares quickly and at greater discounts than would be the case with a larger established company. Many
of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance.
Our
operating results may fluctuate significantly, and these fluctuations may cause the price of our securities to fall.
Our
quarterly operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues
or our expenses in any particular quarter. You should not rely on quarter-to-quarter comparisons of our results of operations
as an indication of future performance. Factors that may affect our quarterly results include:
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our
entry into mergers, acquisitions, joint ventures and other strategic transactions;
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market
acceptance of our products and those of our competitors;
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the
sales and fulfillment cycle associated with our products, which is typically lengthy and subject to a number of significant
risks over which we have little or no control, and the corresponding delay in our receipt of the associated revenue;
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our
ability to complete the technical milestone tests associated with our commercial agreements;
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our
ability to attract and retain key personnel;
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development
of new designs and technologies; and
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our
ability to manage our anticipated growth and expansion.
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We
have a significant number of warrants outstanding, and while these warrants are outstanding, it may be more difficult to raise
additional equity capital. Additionally, certain of these warrants contain price-protection provisions that may result in the
reduction of their exercise prices if certain transactions occur in the future.
As
of April 8, 2019, we had outstanding warrants to purchase approximately 12,819,028 shares of common stock, subject to adjustment,
respectively. We may find it more difficult to raise additional equity capital while these warrants are outstanding. At any time
during which these warrants are likely to be exercised, we may be unable to obtain additional equity capital on more favorable
terms from other sources. Furthermore, the majority of the warrants contain price-protection provisions under which, if we were
to issue securities in conjunction with a merger, tender offer, sale of assets or reclassification of our common stock at a price
lower than the exercise price of such warrants, the exercise price of the warrants would be reduced, with certain exceptions,
to the lower price. Additionally, the exercise of the warrants will cause the increase of our outstanding shares of our common
stock, which could have the effect of substantially diluting the interests of our current stockholders.
We
no longer qualify as an “emerging growth company,” and we will be required to comply with certain provisions of the
Sarbanes Oxley Act and can no longer take advantage of reduced disclosure requirements available to emerging growth companies.
As
of December 31, 2017, we ceased to be an “emerging growth company,” as defined in the Jumpstart Our Business
Startups Act (“JOBS Act”). For as long as we were an emerging growth company, we were permitted to take advantage
of reduced regulatory and reporting requirements that are otherwise generally applicable to public companies. These included,
without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding
advisory votes on executive compensation and golden parachute payments. As we are no longer an emerging growth company, we expect
to incur additional expenses and devote substantial management effort toward ensuring compliance with those requirements applicable
to companies that are not emerging growth companies.
The
price of shares of our common stock may not reflect our value and there can be no assurance that there will be an active market
for our shares of common stock now or in the future.
The
price of our common stock, when traded, may not reflect our true value. We cannot guarantee that there will be an active market
for our shares of common stock either now or in the future. Market liquidity will depend, among other things, on the perception
of our operating business and any steps that our management might take to bring us to the awareness of investors and we cannot
guarantee that there will be any awareness generated. Consequently, investors may not be able to liquidate their investment or
liquidate it at a price that reflects the value of the business. As a result, holders of our securities may have difficulty finding
purchasers for our shares should they attempt to sell shares held by them. Even if a more active market should develop, the price
of our shares of common stock may be highly volatile. Our shares should be purchased only by investors having no need for liquidity
in their investment and who can hold our shares for an indefinite period of time.
We
cannot guarantee that our common stock will remain listed on Nasdaq Capital Market. If we are not able to comply with the Nasdaq’s
listing requirements, our common stock will be delisted from Nasdaq and our common stock would likely be quoted on the OTC Bulletin
Board or on the OTC Pink Sheets. As a consequence of any such delisting, a stockholder would likely find it more difficult to
dispose of, or to obtain accurate quotations as to the prices of our common stock. Also, a delisting of our common stock would
adversely affect our ability to obtain financing for the continuation of our operations and harm our business.
If
and when a larger trading market for our common stock develops, the market price of our common stock is still likely to be highly
volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the price at which you acquired
them.
The
market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number
of factors that are beyond our control, including, but not limited to:
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Variations
in our revenues and operating expenses;
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Actual
or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding
our common stock, other comparable companies or our industry generally;
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Market
conditions in our industry, the industries of our customers and the economy as a whole;
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Actual
or expected changes in our growth rates or our competitors’ growth rates;
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Developments
in the financial markets and worldwide or regional economies;
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Announcements
of innovations or new products or services by us or our competitors;
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Announcements
by the government relating to regulations that govern our industry;
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Sales
of our common stock or other securities by us or in the open market; and
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Changes
in the market valuations of other comparable companies.
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If
securities or industry analysts do not publish research or reports about us, or publish negative reports about our business, our
share price could decline.
Securities
analysts from H.C. Wainwright & Co., LLC, Zacks Investment Research, and Edison Group currently cover our common stock, but
may not do so in the future. Our lack of analyst coverage might depress the price of our common stock and result in limited trading
volume. If we do receive analyst coverage in the future, any negative reports published by such analysts could have similar effects.
The
application of the Securities and Exchange Commission’s “penny stock” rules to our common stock could limit
trading activity in the market, and our stockholders may find it more difficult to sell their stock.
Our
common stock trades at less than $5.00 per share and is therefore subject to the SEC’s so-called “penny stock rules”.
Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver
a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny
stock held in the customer’s account. The broker-dealer must also make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These requirements
may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject
to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers
from effecting transactions in our securities, which could severely limit their market price and liquidity. These requirements
may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.
FINRA
sales practice requirements may also limit a stockholder’s ability to buy and sell our securities.
In
addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”)
has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds
for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial
status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there
is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements
may make it more difficult for broker-dealers to recommend that their customers buy our securities, which may limit a stockholder’s
ability to buy and sell our securities and have an adverse effect on the market for our securities.
We
do not intend to pay dividends for the foreseeable future, and as a result you must rely on increases in the market price of our
common stock for returns on your equity investment.
For
the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not
anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common
stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our Board and will
depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and
other factors our Board deems relevant.
Our
certificate of incorporation, bylaws and the Delaware General Corporation Law (“DGCL”) may delay or deter a change
of control transaction.
Certain
provisions of our certificate of incorporation and bylaws may have the effect of deterring takeovers, such as those provisions
authorizing our Board to issue, from time to time, any series of preferred stock and fix the designation, powers, preferences
and rights of the shares of such series of preferred stock; prohibiting stockholders from acting by written consent in lieu of
a meeting; requiring advance notice of stockholder intention to put forth director nominees or bring up other business at a stockholders’
meeting; prohibiting stockholders from calling a special meeting of stockholders; requiring a 66 2/3% majority stockholder approval
in order for stockholders to amend certain provisions of our certificate of incorporation or bylaws or adopt new bylaws; providing
that, subject to the rights of preferred shares, the directors will be divided into three classes and the number of directors
is to be fixed exclusively by our Board; and providing that none of our directors may be removed without cause. Section 203 of
the DGCL, from which we did not elect to opt out, provides that if a holder acquires 15% or more of our stock without prior approval
of our Board, that holder will be subject to certain restrictions on its ability to acquire us within three years. These provisions
may delay or deter a change of control of us and could limit the price that investors might be willing to pay in the future for
shares of our common stock.
Item
1B. Unresolved Staff Comments.
Not
Applicable.
Item
2. Properties.
O
ur
current headquarters is located at 11855 44
th
Street North, Clearwater, Florida. The facility is approximately
18,000 square feet and includes a MagneGas production area.
Operating
Leases
Beginning
January 1, 2019, the Company adopted the FASB issued authoritative guidance under ASU 2016-02, Leases (Topic 842). For lease agreements
of more than 12 months, the Company will recognize a right-of-use asset and lease liabilities on the balance sheet, measured at
the present value of the lease payments. The Company will recognize interest on the lease liability separately from amortization
of the right-of-use asset in the income statement. The Company will classify repayments of the principal portion of the lease
liability within financing activities and payments of interest on the lease liability and variable lease payments within operating
activities within operating activities in the statement of cash flows.
On
September 1, 2006 we entered into a lease for a new operating facility in Sacramento, CA, through a wholly owned subsidiary. The
lease agreement has a term of 5 years with minimum monthly payments of $4,700 ($56,400 per annum). Upon the expiration of the
initial term of the lease, the lease converted to a month to month tenancy and the Company continues to pay rent and occupy the
premises set forth in the lease.
On
August 1, 2012 we entered into a lease for a new operating facility in Shreveport, LA, through a wholly owned subsidiary. The
lease agreement has a term of 5 years with minimum monthly payments of $4,750 ($57,000 per annum).
Upon
the expiration of the initial term of the lease, the lease converted to a month to month tenancy and the Company continues to
pay rent and occupy the premises set forth in the lease.
On
August 13, 2015 we entered into a lease for a new operating facility in Palestine, TX, through a wholly owned subsidiary. The
lease agreement has a term of 5 years with minimum monthly payments of $1,800 ($21,600 per annum).
On
August 24, 2015 we entered into a lease for a new operating facility in Flint, TX, through a wholly owned subsidiary. The lease
agreement has a term of 5 years with minimum monthly payments of $5,550 ($66,600 per annum).
On
December 1, 2015 we entered into a lease for a new operating facility in Shreveport, LA, through a wholly owned subsidiary. The
lease agreement has a term of 66 months with minimum monthly payments of $2,846 ($34,152 per annum).
On
April 5, 2016 we entered into a lease for a new operating facility in Lakeland, FL, through a wholly owned subsidiary. The lease
agreement has a term of 3 years with minimum monthly payments of $2,200 ($26,400 per annum). The lease was subsequently extended
for an additional one-year term with a minimum month payment of approximately $2,750 ($33,000 per annum).
On
August 1, 2016 we entered into a lease for a new operating facility in Flint, TX, through a wholly owned subsidiary. The lease
agreement has a term of 4 years with minimum monthly payments of $900 ($10,800 per annum).
On
August 4, 2016 we entered into a lease for a new operating facility in Sarasota, FL, through a wholly owned subsidiary. The lease
agreement has a term of 5 years with minimum monthly payments of $1,700 ($20,400 per annum).
On
November 16, 2017 we entered into a lease for a new testing facility in Bowling Green, FL, through a wholly owned subsidiary.
The lease agreement has a term of 1 year with minimum monthly payments of $3,000 ($36,000 per annum).
Upon
the expiration of the initial term of the lease, the lease converted to a month to month tenancy and the Company continues to
pay rent and occupy the premises set forth in the lease.
On
April 4, 2018 we entered into a lease for a new operating facility in Woodland, CA, through a wholly owned subsidiary. The lease
agreement has a term of 1 year with minimum monthly payments of $14,000 ($168,000 per annum). Upon the expiration of the initial
term of the lease, the lease converted to a month to month tenancy and the Company continues to pay rent and occupy the premises
set forth in the lease.
On
May 1, 2018 we entered into a lease for a new operating facility in Spring Hill, FL, through a wholly owned subsidiary. The lease
agreement has a term of 1 year with minimum monthly payments of $1,250 ($15,000 per annum).
Upon
the expiration of the initial term of the lease, the lease converts to a month to month tenancy and the Company will continue
to pay rent and occupy the premises set forth in the lease.
On
September 1, 2018 we entered into a lease for a new operating facility in Clearwater, FL, through a wholly owned subsidiary. The
lease agreement has a term of 10 years with minimum monthly payments of $6,728.40 ($80,740.80 per annum).
On
October 18, 2018 we entered into a lease for a new operating facility in Paris, TX, through a wholly owned subsidiary. The lease
agreement has a term of 2 years with minimum monthly payments of $3,000 ($36,000 per annum).
On
October 27, 2018 we entered into a lease for a new operating facility in Longview, TX, through a wholly owned subsidiary. The
lease agreement has a term of 2 years with minimum monthly payments of $2,000 ($24,000 per annum).
Item
3. Legal Proceedings.
From
time to time, we may be a party to litigation matters or regulatory investigations involving claims against the Company
or its wholly-owned subsidiaries. We are subject to an increased risk of litigation and regulatory investigation due to our operation
in a highly regulated industry.
On
April 16, 2015, an accident occurred at our facility 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 we have 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, we received the final report from the Occupational
Safety and Health Administration (“OSHA”) related to the accident. The OSHA report included findings, many of which
had already been resolved, and a proposed citation. We were not cited for any willful misconduct and no final determination was
made as to the cause of the accident. We received citations related to other various operational issues and received an initial
fine of $52,000 which we paid. We have also been informed by the DOT that it has closed its preliminary investigation into the
accident with no findings or citations to us. However, the DOT has the right to re-open the investigation should new information
become available.
We
are 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 our operations or sales.
We continue to be fully operational and transparent with all regulatory agencies. As of December 31, 2018, we have not accrued
for any contingency.
A
lawsuit was filed on November 18, 2016 in the Circuit Court of the Sixth Judicial Circuit in Pinellas County, Florida by the Estate
of Michael Sheppard seeking unspecified damages (file number 2016CA1294). The lawsuit alleged that we were negligent and grossly
negligent in various aspects of our safety, training and in our overall work environment at the time of the accident. We believed
at all times that the lawsuit was without merit and responded to the lawsuit in 2016. On February 27, 2019, the judge for this
matter issued an order granting summary judgment and dismissed the case with prejudice, in our favor.
We
are not currently involved in any other litigation that we believe could have a materially adverse effect on our financial condition
or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries,
threatened against or affecting the Company, our common stock, any of our subsidiaries or of our subsidiaries’ officers
or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item
4. Mine Safety Disclosures.
Not
Applicable.
Notes
to the Consolidated Financial Statements
December
31, 2018
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Taronis
Technologies, Inc. (the “Company”) was organized in the State of Delaware on December 9, 2005.
On
January 31, 2019, with the filing of a Certificate of Amendment to the Certificate of Incorporation with the Deleware Secretary
of State to effect a name change to “Taronis Technologies, Inc.” The Company is
a technology-based company that is focused on addressing the global constraints on natural resources, including fuel and water.
The Company has two core technology applications – renewable fuel gasification and water decontamination/sterilization
which are derived from the Company’s Plasma Arc Flow System technology. The Company has operating
facilities in the following states: Florida, Louisiana, Texas and California.
On May 18, 2017, the Company filed an amendment
to the Certificate of Incorporation to effect a one-for-ten reverse split of the Company’s issued and outstanding common
stock which was effectuated on May 19, 2017.
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.
On January 30, 2019, the Company filed
a Certificate of Amendment to the Certificate of Incorporation with the Delaware Secretary of State to effect a one-for-twenty
reverse split of the issued and outstanding common stock. The consolidated financial statements and accompanying notes give effect
to the reverse stock split as if they occurred at the first period presented.
These 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 our outstanding common stock warrants, convertible notes, and common stock options. The number of common stock shares issuable
under our equity compensation plan was not affected by the 2019 Reverse Stock Split.
All share and per share amounts for the common stock have been retroactively restated to give effect to
the reverse splits.
NOTE
2 - GOING CONCERN AND MANAGEMENTS’ PLAN
As
of December 31, 2018, the Company had cash of $1,598,737 and has reported a net loss of $15,036,843 and has used cash in
operations of $9,393,643 for the year ended December 31, 2018. In addition, as of December 31, 2018 the Company has a working
capital surplus of $2,706,268 and an accumulated deficit of $79,619,711. The Company utilizes cash in its operations
of approximately $785,000 per month. 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 a public or private offering.
Historically,
the Company has financed its operations through equity and debt financing transactions and believes it will 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 expansion of its commercial operations, including product development. The consolidated financial
statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
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. These consolidated financial statements do not include any adjustments from this uncertainty.
The
Company’s management has determined the above factors regarding its liquidity raise substantial doubt about the Company’s
ability to continue as a going concern.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries.
All material intercompany balances and transactions have been eliminated in consolidation.
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; however, actual results could differ from those estimates. The consolidated
financial statements presented include intangible assets, goodwill, fair value of assets and liabilities related to acquisitions,
recoverability of deferred tax assets, collections of its receivables and the useful life of property, plant and equipment.
Business
Combinations
The
Company accounts for business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 805 “Business Combinations” using the acquisition method of accounting, and accordingly,
the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of
the purchase price over the estimated fair value is recorded as goodwill. All acquisition costs are expensed as incurred. Upon
acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date.
Concentrations
of Credit Risk
Financial
instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash. The Company performs
certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk. The Company
believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and, based
upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, consequently,
believes that its accounts receivable credit risk exposure beyond such allowances is limited.
The
Company maintains cash deposits with financial institutions which are insured by the Federal Deposit Insurance Corporation
(“FDIC”), which, from time to time, may exceed federally insured limits. Cash is also maintained at foreign
financial institutions. Cash in foreign financial institutions as of December 31, 2018 was $806,466. The Company has not experienced
any losses and believes it is not exposed to significant credit risk from cash.
Cash,
Cash Equivalents and Restricted Cash
Cash
and cash equivalents consist of cash, checking accounts, money market accounts and temporary investments with original maturities
of three months or less when purchased. As of December 31, 2018, and 2017 the Company had no cash equivalents.
Restricted
cash consists of cash deposited with a financial institution for $806,466.
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheets
that sum to the total of the same amounts show in the statement of cash flows.
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December
31,
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2018
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2017
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Cash
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1,598,737
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|
|
586,824
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Restricted
deposits
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806,466
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-
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Total
cash, cash equivalents and restricted cash in the balance sheet
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2,405,203
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586,824
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Accounts
Receivable
Accounts
receivable consist of amounts due for the delivery of MagneGas sales to customers with payment terms of generally 30 days. An
allowance for doubtful accounts is established for any amounts that may not be recoverable, which is based on an analysis of the
Company’s customer credit worthiness, historical estimates, and current economic trends. Receivables are determined to be
past due, based on payment terms of original invoices. The Company does not typically charge interest on past due receivables.
The allowance for doubtful accounts was $418,997 and $101,063 as of December 31, 2018 and 2017, respectively.
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 hard goods and gases; consumables used in the production of gas, regulators and tips and work in process.
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.
Property
and equipment, net
Property
and equipment are stated at cost net of accumulated depreciation using the straight–line method at rates sufficient to charge
the cost of depreciable assets to operations over their estimated useful lives, which range from three to thirty-nine and a half
years. Leasehold improvements are amortized over the lesser of (a) the useful life of the asset; or (b) the remaining lease term.
Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations
as incurred, and expenditures which extend the economic life are capitalized. When assets are retired, or otherwise disposed of,
the costs and related accumulated depreciation or amortization are removed from the accounts and any gain or loss on disposal
is recognized.
Impairment
of Long-Lived Assets
The
Company assesses the recoverability of its long-lived assets, including property and equipment, when there are indications that
the assets might be impaired. When evaluating assets for potential impairment, the Company compares the carrying value of the
asset to its estimated undiscounted future cash flows. If an asset’s carrying value exceeds such estimated undiscounted
cash flows, the Company records an impairment charge for the difference between the carrying amount of the asset and its fair
value.
Based
on its assessments, the Company did not record any impairment charges for the year ended December 31, 2018 and 2017.
Intangible
assets, net
The
Company’s recorded intangible assets consist of intellectual property, non-compete agreements and customer relationships.
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 their useful lives of 15 years, customer relationships are amortized on
the straight-line method over their useful lives of 10 years and non-compete agreements are amortized on the straight-line method
over the length of the agreements which can range from 1 year to 10 years.
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.
For
the year ended December 31, 2018, annual goodwill and certain indefinite-lived intangible assets impairment tests,
the Company elected to bypass the qualitative assessment and proceeded directly to the quantitative analysis using the market
price of the stock and determined that no impairment was deemed to exist as of December 31, 2018.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"). The new
revenue recognition guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. The guidance requires an entity to follow a five-step model to (a) identify the contract(s) with a customer, (b)
identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price
to the performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a performance obligation.
In determining the transaction price, an entity may include variable consideration only to the extent that it is probable that
a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the
variable consideration is resolved.
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.
The
Company principally generates revenue through three operating streams: (1) the sale of MagneGas fuel for metal cutting
and through the sales of other industrial and specialty gases and related products through the Company’s wholly owned
subsidiaries, (2) by providing consulting services and (3) through the sales of the Plasma Arc Flow Systems. The Company’s
revenue recognition policy for the year ended 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.
|
|
|
●
|
Consulting
Services are earned through various arrangements.
The Company applies the five-step process outlined in ASC 606 when recognizing revenue with regards to the consulting
services:
|
|
○
|
The
Company enters into a written consulting agreement with a customer to provide professional services and has an enforceable
right to payment for its performance completed to date;
|
|
|
|
|
○
|
All
of the promised services are identified to determine whether those services represent performance obligations;
|
|
|
|
|
○
|
In
consideration for the services to be rendered, the Company expects to receive incremental payments during the term of the
agreement;
|
|
|
|
|
○
|
Payments
are estimated for each performance obligation and allocated in accordance with payment terms; and
|
|
|
|
|
○
|
The
nature of the consulting services is such that the customer will receive benefits of the Company’s performance only
when the customer receives the professional services. Consequently, the entity recognizes revenue over time by measuring the
progress toward complete satisfaction of the performance obligation.
|
●
|
Plasma
Arc Flow Units
Revenue
generated from sales of each unit is recognized upon delivery and completion of the performance obiligation.
Significant deposits are required before production commences. These deposits are classified as customer deposits.
|
Contract
Balances
The
timing of revenue recognition may differ from the timing of payment by customers. The Company records a receivable when revenue
is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the provision
of the related services, the Company records deferred revenue until the performance obligations are satisfied. The Company had
deferred revenue of approximately $0 as of December 31, 2018. The Company expects to satisfy its remaining performance obligations
for these services and recognize the deferred revenue and related contract costs over the next twelve months.
The
following table represents external net sales disaggregated by product category for the year ended December 31,:
|
|
2018
|
|
|
2017
|
|
Gas sold
|
|
$
|
5,979,409
|
|
|
$
|
3,123,033
|
|
Equipment rentals
|
|
|
1,491,220
|
|
|
|
504,096
|
|
Equipment sales
|
|
|
1,992,120
|
|
|
|
-
|
|
Other
|
|
|
250,434
|
|
|
|
92,323
|
|
Total Revenues from Customers
|
|
|
9,713,183
|
|
|
|
3,719,452
|
|
The
Company also enters into sales transactions whereby customer orders contain multiple deliverables and reports its multiple deliverable
arrangements under ASC 605-25 “Revenue Arrangements with Multiple Deliverables” (“ASC-605-25”). These
multiple deliverable arrangements primarily consist of the following deliverables: the Company’s Plasma Arc Flow units,
design, configuration, installation and training services. In situations where the Company bundles all or a portion of the separate
elements, Vendor Specific Objective Evidence (“VSOE”) is determined based on prices when sold separately. For the
years ended December 31, 2018 and 2017, multiple deliverable arrangements were immaterial.
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.
Advertising
Costs
The
costs of advertising are expensed as incurred. Advertising expenses are included in the Company’s operating expenses. Advertising
expense was $76,286 and $4,218 for the years ended December 31, 2018 and 2017, respectively.
Research
and Development
The
Company expenses research and development costs when incurred. Research and development costs include engineering and laboratory
testing of products and outputs. Research and development expense was $11,032 and $171,651 for the years ended December
31, 2018 and 2017, respectively.
Stock-Based
Compensation
The
Company accounts for stock-based compensation costs under the provisions of Accounting Standards Codification 718, “Compensation—Stock
Compensation” (“ASC 718”), 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 $161,600 and $425,492 for the years
ended December 31, 2018 and 2017, respectively and has included such amounts in selling, general and administrative expenses in
the consolidated statement of operations.
Stock-Based
Compensation for Non-Employees
The
Company accounts for warrants and options issued to non-employees under Accounting Standards Codification 505-50, “Equity
– 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.
Warranty
Liabilities
The
Company accrues an estimate of their exposure to warranty claims based on both current and historical product sales data and warranty
costs incurred. The majority of the Company’s products carry a 1-year parts and labor warranty. Additional components carry
a warranty from their own manufacturers. All such warranty details will be passed from Manufacturer to Buyer on or before delivery.
The Company assesses the adequacy of their recorded warranty liability annually and adjusts the amount as necessary. As of December
31, 2018, and 2017, the accrued warranty liability was deemed to be immaterial.
Deferred
Rent Expense
The
Company has operating leases, which contain predetermined increases and rent holidays in the rentals payable during the term of
such leases. For these leases, the aggregate rental expense over the lease term is recognized on a straight-line basis over the
lease term. The difference between the expense charged to operations in any year and the amount payable under the lease during
that year is recorded as deferred rent expense on the Company’s consolidated balance sheet, which will reverse to the statement
of operations over the lease term.
Income
Taxes
The
Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recorded based on the differences
between the tax bases of assets and liabilities and their carrying amounts for financial reporting purpose, referred to as temporary
differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates
applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
The Company is subject to examination by U.S. tax authorities beginning with December 31, 2014.
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 December 31, 2018, and 2017 the Company’s common stock equivalents outstanding were as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Options
|
|
|
11,553
|
|
|
|
767
|
|
Common
Stock Warrants
|
|
|
2,336,528
|
|
|
|
11,111
|
|
Convertible
preferred stock
|
|
|
13,512
|
|
|
|
7,395
|
|
Total
common stock equivalents outstanding
|
|
|
2,361,593
|
|
|
|
19,273
|
|
Reclassification
Certain accounts in the prior year’s
consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current
year’s consolidated financial statements. These reclassifications have no effect on previously reported earnings.
Subsequent
Events
The
Company evaluates events that have occurred after the balance sheet date, but prior to the date 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 16.
Recent
Accounting Standards
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 on January 1, 2019. The Company is currently evaluating the
potential impact of adoption of this standard on its 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
November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230)”
, requiring that the statement
of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December
15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented. The adoption of this accounting standard did not have a material
impact on the consolidated financial statements or disclosures.
In
June 2018, the FASB issued ASU No. 2018-07,
Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting
. Subtopic 505-50, Equity — Equity-Based Payments to Non-Employees, addresses aspects
of the accounting for nonemployee share based compensation. The amendments are effective for public business entities for fiscal
years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently evaluating
the potential impact of adopting this guidance on its consolidated financial statements.
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 is currently evaluating
the potential impact of adopting this guidance on its consolidated financial statements.
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
allocation of the consideration transferred is as follows:
Cash
|
|
$
|
767,500
|
|
Total
purchase price
|
|
$
|
767,500
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
44,349
|
|
Inventory
|
|
|
150,000
|
|
Cylinders
|
|
|
325,000
|
|
Trucks
|
|
|
10,000
|
|
Accounts
payable assumed
|
|
|
(148,720
|
)
|
Total
purchase price allocation
|
|
$
|
380,629
|
|
|
|
|
|
|
Goodwill
|
|
$
|
386,871
|
|
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 Company recognized a gain on acquisition due to the total assets purchased being greater
than the total purchase price. The Seller undervalued total assets due primarily to accounting errors. The gain on acquisition
was recorded as other income on the income statement. 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
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
|
|
$
|
15,749
|
|
Accounts
receivable
|
|
|
252,116
|
|
Inventory
|
|
|
652,336
|
|
Cylinders
|
|
|
695,892
|
|
Trucks
|
|
|
282,056
|
|
Fixed
assets
|
|
|
769,440
|
|
Accounts
payable assumed
|
|
|
(154,009
|
)
|
Total
purchase price allocation
|
|
$
|
2,513,580
|
|
|
|
|
|
|
Gain
on acquisition
|
|
$
|
(253,964
|
)
|
April
2018 Stock Purchase:
On
April 3, 2018, Taronis Technologies, Inc. (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”). $547,810 was paid as consulting fees and is included in operating
expenses in the income statement. 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
allocation of the consideration transferred is as follows:
Cash
|
|
$
|
2,000,000
|
|
Total
purchase price
|
|
$
|
2,000,000
|
|
|
|
|
|
|
Cash
|
|
$
|
71,742
|
|
Accounts
receivable
|
|
|
487,951
|
|
Inventory
|
|
|
440,786
|
|
Customer
relationships
|
|
|
468,000
|
|
Cylinders
and trucks
|
|
|
297,792
|
|
Accounts
payable assumed
|
|
|
(985,755
|
)
|
Notes
payable assumed
|
|
|
(282,013
|
)
|
Capital
leases
|
|
|
(227,308
|
)
|
Deferred
tax liability
|
|
|
(117,000
|
)
|
Total
purchase price allocation
|
|
$
|
154,195
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,845,805
|
|
October
2018 Stock Purchase:
On
October 17, 2018, Taronis Technologies, Inc. (the “Company”) entered into a Securities Purchase Agreement (“SPA”)
with Ronald Ruyle, Charlotte Ruyle, Jered Ruyle and Janson 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’ issued and outstanding capital
stock for the gross purchase price of $1,250,000 (“Paris Stock”). $3,000 was paid as legal fees and is included
in operating expenses in the income statement. The SPA included certain other terms and conditions which are typical in securities
purchase agreements. Effective at closing, the Company commenced business operations in Texas through its new wholly owned subsidiary
Paris Oxygen Company and is doing business as “Tyler Welders Supply”.
The
preliminary allocation of the consideration transferred is as follows:
Cash
|
|
$
|
1,250,000
|
|
Total
purchase price
|
|
$
|
1,250,000
|
|
|
|
|
|
|
Cash
|
|
$
|
43,133
|
|
Accounts
receivable
|
|
|
106,516
|
|
Inventory
|
|
|
149,029
|
|
Trucks
|
|
|
105,691
|
|
Customer
relationships
|
|
|
173,475
|
|
Accounts
payable assumed
|
|
|
(53,772
|
)
|
Deferred
tax liability
|
|
|
(36,430
|
)
|
Total
purchase price allocation
|
|
$
|
487,643
|
|
|
|
|
|
|
Goodwill
|
|
$
|
762,357
|
|
October
2018 Stock Purchase:
On
October 22, 2018, Taronis Technologies, Inc. (the “Company”) entered into a Securities Purchase Agreement (“SPA”)
with Melvin E. Ruyle (collectively, 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”). $3,000 was paid as legal fees and is included in operating expenses in the income statement.
The SPA included certain other terms and conditions which are typical in securities purchase agreements. Effective at closing,
the Company commenced business operations in Louisiana through its new wholly owned subsidiary Latex Welding Supply, Inc. and
is doing business as “Tyler Welders Supply”.
The
preliminary allocation of the consideration transferred is as follows:
Cash
|
|
$
|
1,500,000
|
|
Total
purchase price
|
|
$
|
1,500,000
|
|
|
|
|
|
|
Cash
|
|
$
|
57,778
|
|
Accounts
receivable
|
|
|
92,499
|
|
Inventory
|
|
|
70,227
|
|
Trucks
|
|
|
62,774
|
|
Customer
relationships
|
|
|
62,562
|
|
Accounts
payable assumed
|
|
|
(13,353
|
)
|
Deferred
tax liability
|
|
|
(13,138
|
)
|
Total
purchase price allocation
|
|
$
|
319,349
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,180,651
|
|
October
2018 Stock Purchase:
On
October 26, 2018, Taronis Technologies, Inc. (the “Company”) entered into a Securities Purchase Agreement (“SPA”)
with Tyler Welders Supply, Inc., a Texas corporation (collectively, the “Seller”) and United Welding Specialties of
Longview, Inc., a Texas corporation (“United”) for the purchase of all of the issued and outstanding capital stock
of United by the Company. Under the terms of the SPA, the Company purchased one hundred percent (100%) of United’s issued
and outstanding capital stock for the gross purchase price of $750,000 (“United Stock”). $3,000 was paid as legal
fees and is included in operating expenses in the income statement. The SPA included certain other terms and conditions which
are typical in securities purchase agreements. Effective at closing, the Company commenced business operations in Texas through
its new wholly owned subsidiary United Welding Specialties of Longview, Inc. and is doing business as “Tyler Welders Supply”.
The
preliminary allocation of the consideration transferred is as follows:
Cash
|
|
$
|
750,000
|
|
Total
purchase price
|
|
$
|
750,000
|
|
|
|
|
|
|
Cash
|
|
$
|
20,552
|
|
Accounts
receivable
|
|
|
135,180
|
|
Inventory
|
|
|
158,487
|
|
Cylinders
|
|
|
56,580
|
|
Other
assets
|
|
|
17,923
|
|
Accounts
payable assumed
|
|
|
(65,291
|
)
|
Total
purchase price allocation
|
|
$
|
323,433
|
|
|
|
|
|
|
Goodwill
|
|
$
|
426,567
|
|
All
goodwill recorded as part of the purchase price allocations is currently anticipated to be tax deductible.
The
following proforma financial information presents the consolidated results of operations of the Company with NG Enterprises Acquisition,
LLC, MWS Green Arc Acquisition, LLC, Trico Welding Supplies, Inc., Paris Oxygen Company, Latex Welding Supply, Inc. and United
Welding Specialties of Longview, Inc. for the years ended December 31, 2018 and 2017, as if the above discussed acquisitions
had occurred on January 1, 2017 instead of January 19, 2018, February 16, 2018, April 3, 2018, October 17, 2018, October 22, 2018
and October 26, 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 years ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
12,822,889
|
|
|
|
11,987,795
|
|
Gross
Profit
|
|
|
6,145,074
|
|
|
|
5,295,638
|
|
Operating
Loss
|
|
|
(14,010,635
|
)
|
|
|
(9,001,576
|
)
|
Net
Loss
|
|
|
(14,387,334
|
)
|
|
|
(8,289,180
|
)
|
Weighted Average
Common Stock Outstanding
|
|
|
2,491,435
|
|
|
|
35,996
|
|
Loss
per Common Share – Basic and Diluted
|
|
|
(5.77
|
)
|
|
|
(230.28
|
)
|
NOTE
5 – FAIR VALUE
Accounting
Standards Codification 820, “Fair Value Measurements and Disclosure,” (“ASC 820”) defines fair value as
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices
in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The
three levels are described below:
Level
1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company;
Level
2 Inputs – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable,
either directly or indirectly;
Level
3 Inputs – Unobservable inputs for the asset or liability including significant assumptions of the Company and other market
participants.
The
carrying amount of the Company’s financial assets and liabilities, such as cash, accounts payable, accrued expenses and
notes payable approximate their fair value because of the short maturity of those instruments.
Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of
competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply
that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions
unless such representations can be substantiated.
As
of December 31, 2018 and 2017, the Company had no material assets or liability’s that required remeasurement.
The
table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and
liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended
December 31, 2017:
|
|
|
|
|
Embedded
|
|
|
Total
|
|
|
|
Warrant
|
|
|
Conversion
|
|
|
Derivative
|
|
|
|
Liability
|
|
|
Feature
|
|
|
Liabilities
|
|
Balance
– December 31, 2016
|
|
|
7,195,617
|
|
|
|
504,968
|
|
|
|
7,700,585
|
|
Change
in fair value
|
|
|
(2,131,990
|
)
|
|
|
(123,332
|
)
|
|
|
(2,255,322
|
)
|
Reclassification
of derivative liabilities to equity
|
|
|
(396,854
|
)
|
|
|
(30,714
|
)
|
|
|
(427,568
|
)
|
Derivative
extinguishment
|
|
|
(4,666,773
|
)
|
|
|
(350,922
|
)
|
|
|
(5,017,695
|
)
|
Balance
– December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The
Company’s Level 3 liabilities shown in the above table consist of warrants that contain a cashless exercise feature that
provides for their net share settlement at the option of the holder. In addition, the convertible debt conversion feature has
a price reset provision with no floor. The warrants also contain a fundamental transaction provision that permits
their settlement in cash at fair value at the option of the holder upon the occurrence of a change in control. Such change in
control events include tender offers or hostile takeovers, which are not within the sole control of the Company as the issuer
of these warrants. Settlement at fair value upon the occurrence of a fundamental transaction computed using the Black Scholes
Option Pricing Model using the following assumptions:
Assumptions
utilized in the valuation of Level 3 liabilities for the year ended December 31, 2017 are described as follows:
Risk
free interest rate
|
|
|
0.2%
to 1.94
|
%
|
Term
(in years)
|
|
|
0.25
to 7.07
|
|
Volatility
|
|
|
62%
to 142
|
%
|
Dividends
|
|
$
|
0
|
|
The
risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent
with the expected term of the instrument being valued. The expected term used is the contractual life of the instrument being
valued. Volatility was calculated using the Company’s historical common stock price over the expected term of the instruments
valued. Dividends were deemed to be $0 as the Company has historically never declared any dividends to its stock holders.
NOTE
6 - INVENTORY
Inventory,
consisting of production material consumables, hard goods, spare components and CIP, was $2,921,500 and $1,601,899
at December 31, 2018 and December 31, 2017, respectively.
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw
Materials
|
|
|
26,568
|
|
|
|
24,472
|
|
Finished
Goods
|
|
|
1,926,576
|
|
|
|
714,478
|
|
WIP
|
|
|
968,356
|
|
|
|
862,949
|
|
Total
Inventory
|
|
|
2,921,500
|
|
|
|
1,601,899
|
|
NOTE
7 – PROPERTY AND EQUIPMENT, NET
|
|
Estimated
useful life
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
3
– 5 years
|
|
$
|
807,859
|
|
|
$
|
482,263
|
|
Furniture
and office equipment
|
|
5
– 7 years
|
|
|
397,779
|
|
|
|
182,305
|
|
Transportation
|
|
3
– 5 years
|
|
|
884,623
|
|
|
|
222,144
|
|
Production
units
|
|
5
– 30 years
|
|
|
8,023,689
|
|
|
|
4,910,736
|
|
Building
|
|
39.5
years
|
|
|
2,255,451
|
|
|
|
2,237,257
|
|
|
|
|
|
|
12,369,401
|
|
|
|
8,034,705
|
|
Accumulated
depreciation and amortization
|
|
|
|
|
(2,683,298
|
)
|
|
|
(2,032,265
|
)
|
|
|
|
|
$
|
9,686,103
|
|
|
$
|
6,002,440
|
|
Depreciation
expense was $697,633 and $616,480 for the years ended December 31, 2018 and 2017, respectively.
NOTE
8 – INTANGIBLE ASSETS, NET
The
Company’s intangible assets consisted of the following:
|
|
Estimated
useful life
|
|
Weighted
average
remaining life
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Intellectual
property
|
|
15
years
|
|
|
12.87
|
|
|
$
|
898,876
|
|
|
$
|
869,502
|
|
Customer
relationships
|
|
10
years
|
|
|
9.65
|
|
|
|
704,037
|
|
|
|
-
|
|
Non-compete
agreements
|
|
1-10
years
|
|
|
4.67
|
|
|
|
2,600,000
|
|
|
|
-
|
|
Less:
Accumulated amortization
|
|
|
|
|
|
|
|
|
(824,150
|
)
|
|
|
(457,171
|
)
|
Intangible
assets, net
|
|
|
|
|
|
|
|
$
|
3,378,764
|
|
|
$
|
412,331
|
|
The
Company recorded amortization expense of $366,320 and $55,894 for the year ended December 31, 2018 and 2017, respectively.
The
following table outlines estimated future annual amortization expense for the next five years and thereafter:
December
31,
|
|
|
|
2019
|
|
$
|
587,866
|
|
2020
|
|
|
579,533
|
|
2021
|
|
|
579,533
|
|
2022
|
|
|
579,533
|
|
2023
|
|
|
442,194
|
|
Thereafter
|
|
|
610,105
|
|
Total
|
|
$
|
3,378,764
|
|
NOTE
9 – GOODWILL
Goodwill
outstanding as of December 31, 2018 and 2017 consisted of the following:
|
|
Goodwill
|
|
December
31, 2016
|
|
|
2,108,780
|
|
Acquisitions
|
|
|
-
|
|
Impairments
|
|
|
-
|
|
December
31, 2017
|
|
|
2,108,780
|
|
Acquisitions
|
|
|
4,581,943
|
|
Impairments
|
|
|
-
|
|
December
31, 2018
|
|
|
6,690,724
|
|
NOTE
10 - CAPITALIZED LEASES
The
Company has equipment under various capital leases expiring through August 2024. The assets and liabilities under the capital
leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets.
The
assets, with costs of approximately $293,597 and $91,299 as of December 31, 2018 and 2017, and accumulated amortization
of approximately $80,595 and $22,725 as of December 31, 2018 and 2017, respectively, are included in machinery and equipment
and are amortized over the estimated lives of the assets. Amortization of assets under capital leases is included in depreciation
expense.
At
December 31, 2018, annual minimum future lease payments under the capital leases are as follows:
For
the year ending December 31,
|
|
Amount
|
|
2019
|
|
|
101,565
|
|
2020
|
|
|
91,420
|
|
2021
|
|
|
70,820
|
|
2022
|
|
|
40,034
|
|
2023
|
|
|
11,507
|
|
2024
|
|
|
3,730
|
|
Total
minimum lease payments
|
|
|
319,075
|
|
Less
amount representing interest
|
|
|
25,478
|
|
Present
value of minimum lease payments
|
|
|
293,597
|
|
Less
current portion of minimum lease
|
|
|
90,303
|
|
Long-term
present value of minimum lease payment
|
|
$
|
203,294
|
|
The
interest rate on the capital leases is approximately 6% and is imputed based on the lower of the Company’s incremental
borrowings rate at the inception of each lease or the lessor’s implicit rate of return.
NOTE
11 – NOTES PAYABLE
Notes
Payable – Related Parties
On
April 3, 2017, the Company entered into a $50,000 promissory note with a member of the Board of Directors. The note bore
interest of 15% and was due on July 3, 2017. During the year ended December 31, 2018, the company repaid
$50,000 in principal and $3,750 in interest. As of December 31, 2018, the Note has been repaid in full.
On
April 11, 2017, the Company entered into a $50,000 promissory note with the Company’s Chief Technology Officer (“CTO”).
The note bore interest of 15% and was due on July 11, 2017. During the year ended December 31, 2018, the company repaid
$50,000 in principal and $3,750 in interest. As of December 31, 2018, the Note has been repaid in full.
Interest
on the aforementioned notes and advances was not material during the year ended December 31, 2018 and 2017.
Note
Agreement
On
November 15, 2017, the Company entered into a settlement agreement with the holder of the senior debenture and entered into a
short-term note agreement having an implicit interest rate of 25% and received net proceeds of $500,000. The short-term note agreement
had a term of twelve (12) months and required the Company to make monthly payments in the amount of $10,417 with a $625,000 balloon
payment at end of term, which included a $125,000 commitment fee. The Company had the right prepay the amounts owed under the
note at any time without penalty.
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 was accreted over the 12-month life of the agreement using the straight-line
method, which approximates the interest rate method. As of December 31, 2018, and 2017, the Company accreted $183,579 and
$65,796 of the discount. The short term note agreement had a blanket lien on the Company’s assets.
As
of December 31, 2018, the note has been paid in full.
Promissory
Note – Mortgage
On
September 30, 2014, the Company entered into a promissory note for a principal sum of $520,000 at an interest rate of 6.5% per
annum as part of the mortgage on its corporate headquarters in Clearwater, FL. Payments of interest only are due and payable monthly
commencing November 1, 2014 until October 1, 2024, at which time the entire principal balance shall be due and payable. As of
December 31, 2018, and 2017, the principal balance payable was $520,000 and $520,000, respectively.
Trico
Notes Payable Assumed
On
April 3, 2018, in conjunction with the acquisition, the Company assumed $282,013 in promissory notes payable by
Trico Welding Supplies, Inc. (“Trico”), when the Company completed the acquisition of Trico. Trico is obligated under
seven promissory notes with interest rates ranging between 4.75-6.75%. As of December 31, 2018, the total principal balance payable
by Trico was $175,590.
At
December 31, 2018, annual minimum future payments under the notes payable are as follows:
For
the year ending December 31,
|
|
Amount
|
|
2019
|
|
|
94,008
|
|
2020
|
|
|
49,352
|
|
2021
|
|
|
32,230
|
|
Total
minimum lease payments
|
|
|
175,590
|
|
NOTE
12 - STOCKHOLDERS’ EQUITY
Reverse
Stock Splits
On
May 18, 2017, the Company filed an amendment to the Certificate of Incorporation to effect a one-for-ten reverse split
of the Company’s issued and outstanding common stock which was effectuated on May 19, 2017.
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.
On
January 30, 2019, the Company filed an amendment to the Certificate of Incorporation to effect a one-for-twenty reverse
split of the issued and outstanding common stock (the “2019 Reverse Stock Split”), which became effective in
accordance with the terms of the Certificate of Amendment on January 30, 2019.
These
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 outstanding common stock warrants, convertible notes, and common stock options.
The number of common stock shares issuable under our equity compensation plan was not affected by the 2019 Reverse Stock Split.
All
share and per share amounts for the common stock have been retroactively restated to give effect to the reverse splits as if
they occurred at the first period presented.
Common
shares and warrants issued for cash
During
the year ended December 31, 2018, the Company entered into two Securities Purchase Agreements (“August SPA” and “October
SPA”), in which the Company issued an aggregate of 2,325,417 shares of common stock and warrants to purchase 2,325,417
shares of common stock. The purchase price of the common stock was $3.00 and $4.64 per share, respectively. Total
gross proceeds received were $8,720,250. The exercise price of the common stock warrants was $6.00 and $7.31 per share, respectively.
The termination date of the common stock warrants is August 31, 2019 and April 11, 2022, respectively. Placement agents received
cash fees equal to 1% and 6% of the aggregate gross proceeds raised in the placement, respectively, for a total of $387,903.
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).
Common
shares issued for services
During
the year ended December 31, 2018, the Company issued 278,645 shares of the Company’s common stock to key advisors, directors
and consultants of the Company. These shares vest over the life of the service term and the fair value of these issuances was
$3,177,100. The Company recorded a charge of $2,804,258 in the statement of operations as a component of selling,
general and administration for the year ended December 31, 2018. As of December 31, 2018, $372,842 remains unvested and
will fully vest over the next year.
The
Company issued 12,517 shares of common stock to consultants for various services rendered during the year ended December 31, 2017.
These shares were fully vested on the date of issuance and the fair value of these issuances was $3,181,167. The charge was
included in selling, general and administration in the statement of operations.
Common
shares issued for settlement of liabilities
During
the year ended December 31, 2018 the Company issued 36,073 of common stock to settle outstanding vendor liabilities of $564,873.
In connection with this transaction, the company also recorded a loss on settlement of liabilities of $41,696, the fair
value of the stock issued with the transaction was in excess of the liabilities extinguished.
During
the year ended December 31, 2017 the Company issued 667 shares of common stock to settle outstanding debt of $48,201. In
connection with this transaction, the company also recorded a loss on settlement of liabilities of $11,715, the fair value
of the stock issued with the transaction was in excess of the liabilities extinguished.
Common
Stock Issued for Exercise of Warrants
During
the year ended December 31, 2018, the Company issued 3,750 shares of common stock for the exercise of warrants. The cash
proceeds were $750.
During
the year ended December 31, 2017, the Company issued 265 shares of common stock for the exercise of warrants. The cash
proceeds were $7,937. The exercise of these warrants resulted in a reclassification of the derivative liability associated with
these warrants of $396,854, which has been reclassified from derivative liability to stockholders’ equity.
Common
Stock Issued for Acquisition of Assets
On
February 16, 2018, the Company closed an asset purchase agreement to purchase certain assets with an aggregate purchase price
of $2,500,000. The aggregate purchase price comprised of a $1,000,000 cash payment and the issuance of 48,077 shares of the Company’s
restricted common stock with a fair value of $1,259,616.
Preferred
Stock
Series
A Preferred Stock
On
November 2, 2018, the Company repurchased the Series A Preferred Stock for $1,000,000 and 250,000 shares of common stock for a
total aggregate purchase price of $2,185,000. The Company recorded the redemption as deemed dividend of $2,185,000 and upon receipt
of the repurchased shares, the Company cancelled and terminated the Series A Preferred class of stock and returned voting control
of the Company back to its common stock shareholders. As of December 31, 2018, and 2017, 0 and 1,000 shares of Series A Preferred
Stock were issued and outstanding, respectively.
Series
B Convertible Preferred Stock
On
May 9, 2017 the Company filed a Certificate of Designation to designate 2,700 shares of Series B Convertible Preferred Stock.
The Preferred Stock is convertible in shares of common stock at a price of $900.00 per share subject to subsequent equity sales
reset provisions. The conversion provision was at the option of the holder and the Series B Convertible Preferred Stock did not
provide for cumulative dividends and did not have any voting rights. The holders of Series B Convertible Preferred Stock would
receive upon liquidation, the same amount that a holder of common stock would receive if the preferred stock were fully converted,
paid pari passu with all holders of common stock.
On
May 9, 2017, the Company entered into an exchange agreement with an institutional investor. Under the terms of the agreement,
the investor agreed to exchange with the Company, warrants exercisable for 73,995 shares of common stock, for (i) 2,700 shares
of Series B Convertible Preferred Stock at a stated value of $1,000 per share and convertible into 3,000 shares of common stock
at a conversion price of $900.00 and (ii) 3,333 shares of common stock.
The
Company cancelled 73,995 of warrants with a fair value of $4,666,773 on the date of the exchange, extinguished the derivative
liability associated with the conversion feature in the amount of $350,922, and issued 2,700 shares of Series B Convertible Preferred
Stock and 333 shares of common stock with an aggregate fair value of $5,652,500. The exchange resulted in an incremental increase
of $513,725 which the Company has recorded as a loss on extinguishment of debt in other income (expense) in the statement of operations
for the year ended December 31, 2017.
During
the year ended December 31, 2017, 2,700 shares of the Series B Convertible Preferred Stock were converted into 3,000 shares of
the Company’s common stock an exchange rate of $900.00 per share.
Series
C Convertible Preferred Stock
On
June 15, 2017 the Company filed a Certificate of Designation to designate 25,000 shares of Series C Convertible Preferred Stock.
The Preferred Shares have a stated value of $1,000 and each share of preferred stock is convertible into common stock at an initial
conversion price of $900 per share. The holders of Preferred Shares are entitled to receive dividends, when and as declared by
the Board and after the occurrence of a triggering event. Until such time as all triggering events then outstanding are cured,
the holders shall be entitled to receive dividends at a rate of eighteen percent (18.0%) per annum.
At
any time, the holder may, at its option, convert any Preferred Shares at an alternate conversion price as follows:
The
lower of (A) the applicable conversion price as then in effect and (B) the greater of (x) $105 and (y) the lowest of (i) 85% of
the Value Weighted Average Price (“VWAP”) of the common stock as of the trading day immediately preceding the delivery
or deemed delivery of the applicable conversion notice, (ii) 85% of the VWAP of the common stock as of the trading day of the
delivery or deemed delivery of the applicable conversion notice and (iii) 85% of the price computed as the quotient of (I) the
sum of the VWAP of the common stock for each of the ten (10) trading days with the lowest VWAP of the common stock during the
twenty (20) consecutive trading day period ending and including the trading day immediately preceding the delivery or deemed delivery
of the applicable conversion notice, divided by (II) ten (10).
In
lieu of conversion, upon a triggering event, the holder may require the Company to redeem all or any of the Preferred Shares at
a price equal to the greater of (i) the product of (A) the conversion amount of the Preferred Shares to be redeemed multiplied
by (B) a redemption premium of 115% and (ii) the product of (X) the conversion rate with respect to the conversion amount in effect
at such time of redemption multiplied by (Y) the product of (1) a redemption premium of 115% multiplied by (2) the greatest closing
sale price of the common stock on any trading day during the period commencing on the date immediately preceding such Triggering
Event and ending on the date the Company makes the entire redemption payment.
The
Company may, at its option following notice to each holder, redeem such amount of Preferred Shares by paying to each holder the
corresponding installment amount in cash. The applicable installment conversion price with respect to a particular date of determination,
shall be equal to the lower of (A) the conversion price then in effect and (B) the greater of (x) $105 and (y) the lower of (i)
85% of the VWAP of the common stock as of the trading day immediately preceding the applicable Installment Date and (ii) 85% of
the quotient of (A) the sum of the VWAP of the common stock for each of the ten (10) trading days with the lowest VWAP of the
common stock during the twenty (20) consecutive trading day period ending and including the trading day immediately prior to the
applicable Installment Date, divided by (B) ten (10).
If
the Company elects to effect an installment redemption in lieu of an installment conversion, in whole or in part, such Preferred
Shares shall be redeemed by the Company in cash on the applicable Installment Date in an amount equal to 103% of the applicable
installment redemption amount.
As
a result of such Triggering Event discussed above, the Series C Preferred Stock has redeemable features which are not in the Company’s
control and therefore Management has classified the Series C Preferred Stock in temporary equity in accordance with ASC 480-10-S99-3A
on the Consolidated Balance Sheet.
On
June 12, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with one or more investors. Under
the terms of the agreement, the Company issued to each investor, Series C Convertible Preferred Stock, Series C Convertible Preferred
Warrants and Common Stock Warrants, for a total gross purchase price of up to $25,000,000. At the initial closing under the SPA,
the Company issued a total of 75 Preferred Shares at a purchase price of $900 per share. The Preferred Warrants are exercisable
for a total of 24,925 Preferred Shares at an exercise price of $900 per share. The Preferred Shares have an initial conversion
price of $900 and are initially convertible into an aggregate of 646 shares of common stock. The Common Stock Warrants are exercisable
for 11,111 shares of common stock, representing thirty-five percent (35%) of the total number of shares of common stock initially
issuable upon conversion of the Preferred Shares. The exercise price of the Common Stock Warrants is $900 per share and are exercisable
for 5 years.
During
the years ended December 31, 2018 and 2017, the warrant holders exercised 21,088 and 3,528 Preferred Warrants into 21,088
and 3,528 Preferred Shares. The investors simultaneously converted 21,088 and 3,413 shares (and the previously issued 75 Preferred
Shares) which had a stated value of $21,088,000 and $3,413,000 into 4,538,317 and 31,724 shares of the Company’s Common
Stock.
Management
analyzed the conversion features of the Series C Preferred stock underlying the Preferred Warrants and recorded a beneficial conversion
feature during the years ended December 31, 2018 and 2017, in the amount of $2,097,300 and $3,528,000. The beneficial conversion
feature was recognized as a deemed dividend. In addition, because the Preferred Warrants may not be exercised into preferred shares
unless the registration statement is effective, no derivative liability has been recognized.
As
of December 31, 2018, and 2017, the Company had 0 and 115 Series C shares outstanding with a stated value of $0 and $115,000.
Series
E Convertible Preferred Stock
On
September 15, 2017, the Company designated a new class of preferred stock as Series E Convertible Preferred Stock. The authorized
number of Series E Convertible Preferred Stock was 455,882. Each preferred share shall have a par value of $0.001. The holders
are entitled to receive dividends, when and as declared by the Board. The Preferred Shares have a stated value of $1.36 per share.
The initial conversion price of the preferred shares to common stock will be $27.20. In addition, under the Series E Convertible
Preferred Stock designation holders representing at 65% of the aggregate stated value amount of the Preferred Shares then outstanding
shall be required for any change, waiver or amendment to the certificate of designations provided, that 65% must include the holders
as long as they beneficially own any preferred shares.
Upon
the occurrence of a triggering event as disclosed in the Series E Convertible Preferred Stock designation until such time as all
triggering events then outstanding are cured, the holders shall be entitled to receive dividends at a rate of 18.0% per annum.
At
any time the holder may, at its option, convert the Series E Convertible Preferred Stock under an alternate conversion price which
is the lower of the applicable conversion price in effect on the applicable conversion date of the applicable alternate conversion
and the greater of the following:
|
a)
|
the
floor price and the lowest of 75% of the closing bid price of the common Stock as of the trading day immediately preceding
the delivery or deemed delivery of the applicable conversion notice,
|
|
|
|
|
b)
|
75%
of the variable weighted average price of the common stock as defined in the preferred designation
|
In
lieu of conversion, upon a triggering event, the holder may require the Company to redeem all or any of the preferred shares at
a price equal to the greater of calculations as defined in the preferred designation Accordingly the Company has classified the
Series E Convertible Preferred Stock as temporary equity
.
During
the year ended December 31, 2017, the Company issued 36,765 shares of Series E Convertible Preferred Stock and issued 419,117
Series E Preferred Convertible Preferred Stock Warrants as part of a security purchase agreement for consideration of $50,000
which was for stock issuance cost. The Series E Convertible Preferred Stock Warrants have a life of 2.28 years and an exercise
price of $27.20. The Company recorded a beneficial conversion feature in the amount of $620,000 for the underlying preferred shares
of the preferred warrant. The beneficial conversion feature was recognized as a deemed dividend.
During
the years ended December 31, 2018 and 2017, the warrant holders exercised 0 and 419,117 Preferred Warrants into 0 and 419,117
Preferred Shares for a total gross purchase price of $0 and $569,999. During the years ended December 31, 2018 and 2017,
the investors simultaneously converted 280,110 and 139,007 shares of Preferred Series E which had a stated value of $380,950 and
$189,049 into 6,788 and 1,801 shares of common stock.
As
of December 31, 2018, and 2017, the Company had 36,765 and 316,875 Series E shares Convertible Preferred Stock outstanding with
a stated value of $50,000 and $430,950.
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 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 $13.60 per share and will be convertible into common stock.
Upon
execution of the SSA, the Company reduced its outstanding obligations by $556,016.
During
the year ended December 31, 2018, investors converted 817,670 shares of Series F Convertible Preferred Stock, which had a stated
value of $556,016, into 156,605 shares of the Company’s common stock for settlement of payables to the placement agents.
Equity
Incentive Plan
On
July 12, 2017, the Board of Directors submitted the following actions to the Majority Stockholder for ratification and approval
by consent in lieu of meeting, and the Majority Stockholder has ratified and approved the following actions: approving the MagneGas
Corporation Amended and Restated 2014 Equity Incentive Award Plan. The principal purpose of the action was for increasing the
number of shares that may be issued or transferred pursuant to awards under the New Plan.
As
of December 31, 2018, and 2017, there are 11,553 and 767 shares to be issued upon exercise of outstanding options and 3,827,083
shares remaining available for future issuance under equity compensation plans.
Under
the terms of the Company’s plan, incentive stock options (ISOs) may be granted to officers and employees and non-qualified
stock options and awards may be granted to directors, consultants, officers and employees of the Company. The exercise price of
ISOs cannot be less than the fair market value of the Company’s Common Stock on the date of grant. The options vest over
a period determined by the Company’s Board of Directors, ranging from immediate to four years, and expire not more than
ten years from the date of grant.
Options
Options
outstanding as of December 31, 2018 and 2017 consisted of the following:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
in Years
|
|
|
Value
|
|
December
31, 2016
|
|
|
1,625
|
|
|
|
1,870.80
|
|
|
|
1.23
|
|
|
|
272
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(858
|
)
|
|
|
694.60
|
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
767
|
|
|
|
3,186.80
|
|
|
|
1.58
|
|
|
|
-
|
|
Granted
|
|
|
11,250
|
|
|
|
18.57
|
|
|
|
10.00
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(464
|
)
|
|
|
3,393.23
|
|
|
|
-
|
|
|
|
-
|
|
December
31, 2018
|
|
|
11,553
|
|
|
|
93.89
|
|
|
|
8.84
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2018
|
|
|
9,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2018, the fair value of non-vested options totaled $46,700 which will be amortized to expense until December 31,
2019.
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 year ended December 31, 2018 were as follows:
Risk
free interest rate
|
|
|
2.84
|
%
|
Expected
term
|
|
|
10
years
|
|
Volatility
|
|
|
183
|
%
|
Dividends
|
|
$
|
0
|
|
The
Company had no grants during the year ended December 31, 2017.
Common
Stock Warrants
Warrants
outstanding as of December 31, 2018 and 2017 consisted of the following:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
in Years
|
|
December
31, 2016
|
|
|
7,664
|
|
|
|
2,730.00
|
|
|
|
5.80
|
|
Granted
|
|
|
11,111
|
|
|
|
9,112.60
|
|
|
|
5.00
|
|
Exercised
|
|
|
(265
|
)
|
|
|
300.00
|
|
|
|
|
|
Forfeited/Exchanged
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
(7,400
|
)
|
|
|
2,730.00
|
|
|
|
|
|
December
31, 2017
|
|
|
11,111
|
|
|
|
9,112.60
|
|
|
|
4.45
|
|
Granted
|
|
|
2,329,167
|
|
|
|
6.60
|
|
|
|
2.17
|
|
Exercised
|
|
|
(3,750
|
)
|
|
|
0.20
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
December
31, 2018
|
|
|
2,336,528
|
|
|
|
49.92
|
|
|
|
1.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2018
|
|
|
2,336,528
|
|
|
|
|
|
|
|
|
|
During
the years ended December 31, 2018 and 2017, the Company exercised 3,750 and 265 shares of warrants with cash proceeds of
$750 and $7,937, respectively.
At
December 31, 2018 and 2017, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
In
connection with the October SPA, the Company agreed to grant the investors one common stock purchase warrant for every share of
common stock purchased under the October SPA at an exercise price of $7.31 per share. 1,090,000 common stock warrants were issued,
expiring on April 14, 2022. The exercise price was subsequently adjusted
to $4.64 as part of
the January 11, 2019 SPA. Any deemed dividend associated with the exercise price adjustment will be recorded in the first quarter
of 2019.
In
connection with the August 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 $6.00 per share. 1,235,417 common stock warrants were issued,
expiring on August 31, 2019.
During
the year ended December 31, 2018, the Company issued 3,750 shares of common stock for the exercise of warrants,
with cash proceeds of $750. The fair value of the common stock warrants was $316,501, of which $302,589 was recognized as stock-based
compensation for the year ended December 31, 2018.
Maxim
Group, LLC (“Maxim”) acted as the exclusive placement agent for the Series C preferred stock transaction. The Company
agreed to pay Maxim a cash fee payable upon each closing equal to 6.0% of the gross proceeds received by the Company at each Closing
(the “Placement Fee”). Such fees were recognized as stock issuance costs. Additionally, the Company granted to Maxim
(or its designated affiliates) warrants to purchase up to 11,111 shares common stock (the “Placement Agent Warrants”).
The Placement Agent Warrants expire five (5) years after the Closing. The Placement Agent Warrants are exercisable at a price
per share equal to $990, are not be redeemable and are exercisable for 5 years. The Placement Agent Warrants may be exercised
in whole or in part and provide for a “cashless” exercise, except in the event the shares of common stock issuable
upon exercise of the Placement Agent Warrants are registered for resale, in which case they provide for a “cash” exercise
only. The Placement Agent Warrants were recorded at fair value as stock issuance costs. Although the Placement Agent Warrants
contain certain change in control provisions that are potentially settleable in cash, such settlement is at the Company’s
discretion.
Preferred
Stock Warrants
Warrants
outstanding to purchase Series C Preferred Stock as of December 31, 2018 consisted of the following:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
in Years
|
|
December
31, 2017
|
|
|
24,925
|
|
|
|
900
|
|
|
|
5.45
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,528
|
)
|
|
|
900
|
|
|
|
|
|
Forfeited/Exchanged
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
21,397
|
|
|
|
900
|
|
|
|
4.45
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,973
|
)
|
|
|
900
|
|
|
|
|
|
Forfeited/Exchanged
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
December
31, 2018
|
|
|
424
|
|
|
|
900
|
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2018
|
|
|
424
|
|
|
|
|
|
|
|
|
|
At
December 31, 2018 and 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. Rent expense under this lease was approximately $20,000
the year ended December 31, 2017. The lease was terminated on May 27, 2017.
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 year ended December 31, 2018, the Company repaid $50,000 in principal
and $3,750 in interest. As of December 31, 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 Technology Officer (“CTO”).
The note bore interest of 15% and was due on July 11, 2017. During the year ended December 31, 2018 the Company repaid
$50,000 in principal and $3,750 in interest. As of December 31, 2018, the balance payable was $0 including interest of $0.
Asset
Purchase Agreement – Related Parties
On
April 4, 2018, the Company entered into a $500,000 asset purchase agreement with LBJ, a California general partnership owned by
Joseph Knieriem and Robert Baker. At the time of the asset purchase agreement, Mr. Knieriem and Mr. Baker were full-time employees
of the Company.
Accrued
Expenses – Related Parties
During
the period July 1, 2017 through December 31, 2017, the CTO, excluding the notes described above, continued to fund working capital
in the amount of $249,570. There was no formal note agreement, stated interest rate or maturity date and was payable on demand.
As of December 31, 2018, and 2017, $0 and $182,070 was payable to the CTO and was included in accrued expenses.
Interest
on the aforementioned notes and advances was not material during the year ended December 31, 2018.
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.
From
time to time the Company may be a party to litigation matters or regulatory investigations involving claims against the
Company or its wholly-owned subsidiaries. The Company is subject to an increased risk of litigation and regulatory investigation
due to the Company’s operation in a highly regulated industry.
On
April 16, 2015, an accident occurred at the Company’s facility 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 the final report from the Occupational Safety and Health Administration (“OSHA”) related
to the accident. The OSHA report included findings, many of which had already been 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 other various operational issues and received an initial fine of $52,000 which was paid.
The Company has also been informed by the DOT that it has closed its preliminary investigation into the accident with no
findings or citations to the Company, however, the DOT 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 our operations or sales. The Company
continues to be fully operational and transparent with all regulatory agencies. As of December 31, 2018, the Company has
not accrued for any contingency as there was no stated amount of a claim.
A
lawsuit was filed on November 18, 2016 in the Circuit Court of the Sixth Judicial Circuit in Pinellas County, Florida by the Estate
of Michael Sheppard seeking unspecified damages (file number 2016CA1294). The lawsuit alleged that the Company was negligent
and grossly negligent in various aspects of our safety, training and in our overall work environment at the time of the accident.
The Company believes that the lawsuit was without merit and responded to the lawsuit in 2016. On February 27, 2019, the
judge for this matter issued an order granting summary judgment and dismissed the case with prejudice, in the Company’s
favor.
The
Company is
not involved
in any other litigation that could have a materially adverse effect on the financial condition or results of operations.
There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company’s executive officers or any of the subsidiaries,
threatened against or affecting the Company, our common stock, any of the subsidiaries or subsidiaries’ officers
or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Operating
Leases
The
Company leases facilities located in various states in the United States for its office and operations under non-cancelable operating
leases that expire at various times through 2028. The total amount of rent expense under the leases is recognized on a straight-line
basis over the term of the leases. As of December 31, 2018 and 2017, deferred rent payable was $0 and $0, respectively. Rent expense
under the operating leases for the years ended December 31, 2018 and 2017 was $503,089 and $174,100, respectively.
|
●
|
On
September 1, 2006, the Company entered into a lease for an operating facility
in Sacramento, CA, through a wholly owned subsidiary. The lease agreement has a term
of 5 years with minimum monthly payments of $4,700 ($56,400 per annum). Upon the expiration
of the initial term of the lease, the lease converted to a month to month tenancy and
the Company continues to pay rent and occupy the premises set forth in the lease.
|
|
|
|
|
●
|
On
August 1, 2012, the Company entered into a lease for an operating facility in
Shreveport, LA, through a wholly owned subsidiary. The lease agreement has a term of
5 years with minimum monthly payments of $4,750 ($57,000 per annum). Upon the expiration
of the initial term of the lease, the lease converted to a month to month tenancy and
the Company continues to pay rent and occupy the premises set forth in the lease.
|
|
●
|
On
August 13, 2015, the Company entered into a lease for an operating facility in
Palestine, TX, through a wholly owned subsidiary. The lease agreement has a term of 5
years with minimum monthly payments of $1,800 ($21,600 per annum).
|
|
|
|
|
●
|
On
August 24, 2015, the Company entered into a lease for an operating facility in
Flint, TX, through a wholly owned subsidiary. The lease agreement has a term of 5 years
with minimum monthly payments of $5,550 ($66,600 per annum).
|
|
|
|
|
●
|
On
December 1, 2015, the Company entered into a lease for an operating facility in
Shreveport, LA, through a wholly owned subsidiary. The lease agreement has a term of
66 months with minimum monthly payments of $2,846 ($34,152 per annum).
|
|
|
|
|
●
|
On
April 5, 2016, the Company entered into a lease for an operating facility in Lakeland,
FL, through a wholly owned subsidiary. The lease agreement has a term of 3 years with
minimum monthly payments of $2,200 ($26,400 per annum). The lease was subsequently renewed
for an additional one-year term with a minimum month payment of approximately $2,750
($33,000 per year).
|
|
|
|
|
●
|
On
August 1, 2016, the Company entered into a lease for an operating facility in
Flint, TX, through a wholly owned subsidiary. The lease agreement has a term of 4 years
with minimum monthly payments of $900 ($10,800 per annum).
|
|
|
|
|
●
|
On
August 4, 2016, the Company entered into a lease for an operating facility in
Sarasota, FL, through a wholly owned subsidiary. The lease agreement has a term of 5
years with minimum monthly payments of $1,700 ($20,400 per annum).
|
|
|
|
|
●
|
On
November 16, 2017, the Company entered into a lease for a testing facility in
Bowling Green, FL, through a wholly owned subsidiary. The lease agreement has a term
of 1 year with minimum monthly payments of $3,000 ($36,000 per annum). Upon the expiration
of the initial term of the lease, the lease converted to a month to month tenancy and
the Company continues to pay rent and occupy the premises set forth in the lease.
|
|
|
|
|
●
|
On
April 4, 2018, the Company entered into a lease for an operating facility in Woodland,
CA, through a wholly owned subsidiary. The lease agreement has a term of 1 year with
minimum monthly payments of $14,000 ($168,000 per annum). Upon the expiration of the
initial term of the lease, the lease converted to a month to month tenancy and the Company
continues to pay rent and occupy the premises set forth in the lease.
|
|
|
|
|
●
|
On
May 1, 2018, the Company entered into a lease for an operating facility in Spring
Hill, FL, through a wholly owned subsidiary. The lease agreement has a term of 1 year
with minimum monthly payments of $1,250 ($15,000 per annum). Upon the expiration of
the initial term of the lease, the lease converts to a month to month tenancy and the
Company will continue to pay rent and occupy the premises set forth in the lease.
|
|
|
|
|
●
|
On
September 1, 2018, the Company entered into a lease for an operating facility
in Clearwater, FL, through a wholly owned subsidiary. The lease agreement has a term
of 10 years with minimum monthly payments of $6,728.40 ($80,740.80 per annum).
|
|
|
|
|
●
|
On
October 18, 2018, the Company entered into a lease for an operating facility in
Paris, TX, through a wholly owned subsidiary. The lease agreement has a term of 2 years
with minimum monthly payments of $3,000 ($36,000 per annum).
|
|
|
|
|
●
|
On
October 27, 2018, the Company entered into a lease for an operating facility in
Longview, TX, through a wholly owned subsidiary. The lease agreement has a term of 2
years with minimum monthly payments of $2,000 ($24,000 per annum).
|
At
December 31, 2018, annual minimum future lease payments under these operating leases are as follows:
For
the year ending December 31,
|
|
Amount
|
|
2019
|
|
|
683,588
|
|
2020
|
|
|
663,259
|
|
2021
|
|
|
664,859
|
|
2022
|
|
|
664,859
|
|
2023
|
|
|
664,859
|
|
Total
minimum lease payments
|
|
|
3,341,423
|
|
NOTE
15 - INCOME TAX
On
December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Bill”) was signed into law. Prior to the enactment of
the Tax Reform Bill, the Company measured its deferred tax assets at the federal rate of 34%. The Tax Reform Bill reduced the
federal tax rate to 21% resulting in the re-measurement of the deferred tax asset as of December 31, 2017. Beginning January 1,
2018, the lower tax rate of 21% will be used to calculate the amount of any federal income tax due on taxable income earned during
2018.
Income
tax expense (benefit) consisted of the following for the years ended December 31,
|
|
2018
|
|
|
2017
|
|
U.S.
federal
|
|
|
|
|
|
|
|
|
Current:
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
3,160,000
|
|
State
and local
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
Total
|
|
|
-
|
|
|
|
2,160,000
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance
|
|
|
-
|
|
|
|
(
2,160,000
|
)
|
Income
Tax Provision
|
|
|
-
|
|
|
|
-
|
|
The
reconciliation between the U.S. statutory federal income tax rate and the Company’s effective rate for the years ended December
31, 2018 and 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
U.S.
federal statutory rate
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
State
income taxes, net of federal benefit
|
|
|
5.07
|
%
|
|
|
4.22
|
%
|
Other
permanent items
|
|
|
(0.04
|
)%
|
|
|
4.74
|
%
|
Effect
of federal tax rate change
|
|
|
-
|
%
|
|
|
(66.97
|
)%
|
Effect
of state tax rate change
|
|
|
-
|
%
|
|
|
3.76
|
%
|
Return
to provision true-up
|
|
|
(2.97
|
)%
|
|
|
(0.03
|
)%
|
Change
in valuation allowance
|
|
|
(27.66
|
)%
|
|
|
20.27
|
%
|
Other
|
|
|
4.61
|
%
|
|
|
-
|
%
|
Effective
rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
As
of December 31, 2018, and 2017, the Company’s deferred tax assets (liabilities) consisted of the effects of temporary differences
attributable to the following:
|
|
2018
|
|
|
2017
|
|
Deferred
tax assets
|
|
|
|
|
|
|
|
|
Net
Operating Loss carryover
|
|
$
|
17,974,275
|
|
|
$
|
14,161,596
|
|
Stock-based
compensation
|
|
|
548,929
|
|
|
|
602,872
|
|
Business
interest limitation
|
|
|
48,720
|
|
|
|
-
|
|
Charitable
contribution carryforward
|
|
|
224
|
|
|
|
-
|
|
Bad
debt allowance
|
|
|
325,252
|
|
|
|
27,874
|
|
Intangible
assets book/tax difference
|
|
|
67,331
|
|
|
|
-
|
|
Inventory
reserve
|
|
|
-
|
|
|
|
12,720
|
|
Total
deferred tax asset
|
|
|
18,964,733
|
|
|
|
14,805,062
|
|
Less
reserve for allowance
|
|
|
18,964,733
|
|
|
|
14,805,062
|
|
Total
Deferred tax asset net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
The
tax loss carry-forwards of the Company may be subject to limitation by Section 382 of the Internal Revenue Code with respect to
the amount utilizable each year. This limitation reduces the Company’s ability to utilize net operating loss carry-forwards.
The Company has performed an analysis of its Section 382 ownership changes and has determined that the utilization of all of
its federal net operating loss carry forward is limited by Section 382. All of net operating loss carry forwards as of December
31, 2018, are subject to the limitations under Section 382 of the Internal Revenue Code. Federal net operating loss carry forwards
will expire, if unused, between 2031and 2029.
On
December 22, 2017, new legislation was signed into law, informally titled the Tax Cuts and Jobs Act, which included, among other
things, a provision to reduce the federal corporate income tax rate to 21%. Under ASC 740, Accounting for Income Taxes, the enactment
of the Tax Act also requires companies, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities
and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. There is no further
change to its assertion on maintaining a full valuation allowance against its U.S. deferred tax assets. The Company’s gross
deferred tax assets have been revalued from 35% to 21% with a corresponding offset to the valuation allowance and any potential
other taxes arising due to the Tax Act will result in reductions to its net operating loss carryforward and valuation allowance.
The
Company files income tax returns in the U.S. federal and various state jurisdictions. As of December 31, 2018, and 2017, the Company
has federal and state net operating loss carryforwards each of $68,955,725 and $54,753,437 respectively.
As
of December 31, 2018, the tax returns for the years from 2014 through 2017 remain open to examination by the Internal Revenue
Service and various state authorities. ASC 740, “Income Taxes” requires that a valuation allowance is established
when it is “more likely than not” that all, or a portion of, deferred tax assets will not be recognized. A review
of all available positive and negative evidence needs to be considered, including the Section 382 limitation, the scheduled reversal
of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all the information
available, management believes that uncertainty exists with respect to the future realization of its deferred tax assets and has,
therefore, established a full valuation allowance as of December 31, 2018, and 2017. For the year ended December 31, 2018, the
change in valuation allowance was $4,159,671.
As
of December 31, 2018, and 2017, the Company has evaluated and concluded that there were no material uncertain tax positions requiring
recognition in the Company’s financial statements. The Company’s policy is to classify assessments, if any, for tax-related
interest as income tax expenses. No interest or penalties were recorded during the years ended December 31, 2018, and 2017. The
Company does not expect its unrecognized tax benefit position to change during the next twelve months.
NOTE
16 – SUBSEQUENT EVENTS
Acquisitions
On
January 16, 2019, the Company entered into a Securities Purchase Agreement (“SPA”) with Melvin Ruyle Family Living
Trust and Tyler Welders Supply, Inc., a Texas corporation (“Tyler”) for the purchase of all of the issued and outstanding
capital stock of Tyler by the Company. Under the terms of the SPA, the Company purchased one hundred percent (100%) of Tyler’s
issued and outstanding capital stock for the gross purchase price of $2,500,000. 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 locations in Texas.
On
February 15, 2019, the Company entered into a Securities Purchase Agreement (“SPA”) with Melvin Ruyle, Jered Ruyle
and Janson Ruyle and Cylinder Solutions, Inc., a Texas corporation (“CS”) for the purchase of all of the issued and
outstanding capital stock of CS by the Company. Under the terms of the SPA, the Company purchased one hundred percent (100%) of
CS’s issued and outstanding capital stock for the gross purchase price of $1,500,000. 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
February 22, 2019, the Company entered into an Asset Purchase Agreement (“APA”) with Complete Cutting & Welding
Supplies, Inc. and closed the purchase of certain assets related to the Seller’s welding supply and gas distribution business
located in California. The total purchase price for the purchased assets and assumed liabilities was $2,500,000. The APA included
certain other terms and conditions which are typical in asset purchase agreements. On October 22, 2018, the Company made an initial
non-refundable deposit of $250,000 for the purchase of the assets. Upon execution of the APA, the Company funded the remaining
$2,250,000 balance due. Effective at closing, the Company commenced business operations in California through its wholly owned
subsidiary MagneGas Welding Supply – Complete LA, LLC and is doing business as “Complete Welding”.
Securities
Purchase Agreement
On
January 11, 2019, the Company entered into a Securities Purchase Agreement (“SPA”). Under the terms of the
SPA, the Company issued 1,550,000 shares of the Company’s common stock and warrants to purchase up to 1,550,000
shares of common stock for a total gross purchase price of $4,340,000. The warrants have a life of 42 months
and are exercisable at a price of $4.64 per share. The warrants are exercisable for 6 months following the closing date and,
subsequent to July 15, 2019, the warrant holder may exercise by means of a cashless exercise in the event there is no effective
registration statement registering, or no current prospectus is available for the resale of the underlying shares of common stock.
In addition, subsequent to July 15, 2019, if the daily volume weighted average price of the common stock fails to exceed the exercise
price, the aggregate number of warrant shares issuable in a cashless exercise will be equal to the product of (i) the aggregate
number of Warrant Shares that would be issuable upon exercise of the Warrants if such exercise were by means of a cash exercise
and (ii) 15.00.
The
Company received aggregate net proceeds of approximately $4,029,600. In addition, pursuant to the SPA, the Company agreed to amend
the common stock purchase warrants dated October 15, 2018 to reduce the exercise price of the warrants from $7.31 to $4.64.
In
conjunction with the SPA, the Company entered into a placement agency agreement with investment
bankers. Under the terms of the agreement, the bankers acted as the exclusive placement agent for the transaction,
for an agreed upon cash fee payable upon the closing of the offering equal to 6.0% of the gross proceeds received from
the offering. The arrangement is subject to certain conditions, to reimburse all travel and other out-of-pocket expenses
of the bankers, including but not limited to legal fees, up to a maximum of $50,000.
Equity
Issuances and Warrant Grants
During
the period January 1, 2019 through April 8, 2019, the warrant holders exercised 499 Preferred Warrants into 499 Series
C Preferred Shares. The investors converted 0 Series C Preferred Shares into 0 shares of the Company’s Common Stock.
During
the period January 1, 2019 through April 8, 2019, the Company issued 617,347 shares of free trading Common
Stock and 1,300,000 shares of restricted Common Stock to employees as bonus compensation due under employment agreements.
During
the period January 1, 2019 through April 8, 2019, the Company issued 166,998 shares of free trading Common Stock and 334,002 shares
of restricted Common Stock to the board of directors as bonus compensation due under employment agreements.
During
the period January 1, 2019 through April 8, 2019, the Company issued 793,065 shares of free trading Common Stock and 520,000 shares
of Common Stock to vendors as payment due pursuant to consulting agreements.
Reverse
Stock Split
On
January 30, 2019, the Company filed a Certificate of Amendment to the Certificate of Incorporation with the Delaware
Secretary of State to effect a one-for-twenty reverse split of the issued and outstanding common stock. The consolidated
financial statements and accompanying notes give effect to the reverse stock split as if they occurred at the first period presented.
Underwriting
Agreement
On
February 8, 2019, the Company entered into an Underwriting Agreement with investment bankers to issue and sell an
aggregate of 10,800,000 shares of common stock, and warrants to purchase an aggregate of up to 8,100,000 shares of common stock,
in an underwritten public offering. The warrants have a life of 5 years and are exercisable at a price of $1.25 per share.
The Company granted the bankers an option to purchase, for a period of 30 days, up to an additional 1,120,000 shares
and/or 840,000 Warrants. The net proceeds from the offering were approximately $12,731,250, after deducting underwriting
discounts and estimated offering expenses.
Preferred
Stock
Purchase
and Conversion Agreement
On
March 8, 2019, the Company entered into a Purchase and Conversion Agreement (the “PCA”) with an institutional
investor for (a) the repurchase by us of 499 shares of the Series C Preferred Stock and 31,765 shares of our Series E Preferred
Stock from the investor, in exchange for an aggregate cash payment of $3,500,000, and (b) the conversion by the investor of 5,000
shares of Series E Preferred into 500,000 shares of common stock. Effective at closing, the classes of Series C Preferred and
the Series E Preferred were cancelled and the Company no longer has any preferred shares of any class issued and outstanding.
Subsidiary
Dissolution
On
April 2, 2019, the Company filed a certificate of cancellation with the State of Delaware for the subsidiaries MagneGas Energy
Solutions, LLC and MagneGas Europe, LLC.