UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 205

FORM 10-Q

OR

For the transition period from ______________ to _______________.

Commission File Number: 001-35586

TARONIS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

(727) 934-3448

(Registrant’s telephone number, including area code)

MagneGas Corporation; MagneGas Applied Technology Solutions, Inc.

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

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

Yes [X] No [  ]

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

Yes [X] No [  ]

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As of August 12, 2019 there were 86,189,194 shares of the issuer’s $0.001 par value common stock issued and outstanding.

TARONIS TECHNOLOGIES, INC. AND SUBSIDIARIES

(F/K/A MAGNEGAS CORPORATION AND MAGNEGAS APPLIED TECHNOLOGY SOLUTIONS, INC.)

TABLE OF CONTENTS

FORM 10-Q REPORT

June 30, 2019

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Taronis Technologies, Inc. and Subsidiaries

(f/k/a MagneGas Corporation and MagneGas Applied Technology Solutions, Inc.)

Condensed Consolidated Balance Sheets

See accompanying notes to the unaudited condensed consolidated financial statements.

Taronis Technologies, Inc. and Subsidiaries

(f/k/a MagneGas Corporation and MagneGas Applied Technology Solutions, Inc.)

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statement

Taronis Technologies, Inc. and Subsidiaries

(f/k/a MagneGas Corporation and MagneGas Applied Technology Solutions, Inc.)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2019 and 2018

See accompanying notes to the unaudited condensed consolidated financial statements.

Taronis Technologies, Inc. and Subsidiaries

(f/k/a MagneGas Corporation and MagneGas Applied Technology Solutions, Inc.)

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2019 and 2018

(Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

Taronis Technologies, Inc. and Subsidiaries

(f/k/a MagneGas Corporation and MagneGas Applied Technology Solutions, Inc.)

Notes to the Unaudited Condensed Consolidated Financial Statements

June 30, 2019

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 Delaware 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 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.

The reverse stock splits did not modify the rights or preferences of the common stock. Proportional adjustments have been made to the conversion and exercise prices of 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 June 30, 2019, the Company had cash of $1,635,862 and has reported a net loss of $11,537,226 and has used cash in operations of $6,252,234 for the six months ended June 30, 2019. In addition, as of June 30, 2019, the Company has a working capital of $857,696 and an accumulated deficit of $91,156,937. The Company utilizes cash in its operations of approximately $1,000,000 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 unaudited condensed consolidated financial statements.

The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan. The Company has financed its operations through equity and debt financing transactions, but does not believe it will need to do so in the immediate future. The Company does not believe it will continue incurring operating losses for the foreseeable future and that it will be cash-flow positive before year-end. The unaudited condensed 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.

The Company can give no assurance that it will be successful in implementing its business plan. These unaudited condensed consolidated financial statements do not include any adjustments from this uncertainty.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information and include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended June 30, 2019 and 2018. As this is an interim period financial statement, certain adjustments are not necessary as with a financial period of a full year. Although management believes that the disclosures in these unaudited condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s financial statements for the year ended December 31, 2018, which contains the audited financial statements and notes thereto, for the years ended December 31, 2018 and 2017 included within the Company’s Form 10-K filed with the SEC on April 12, 2019. The interim results for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ended December 31, 2019 or for any future interim periods.

Use of Estimates

The Company prepares its financial statements in conformity with U.S. GAAP. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable; 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, collection 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 June 30, 2019 was $816,466. 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 June 30, 2019, and 2018 the Company had no cash equivalents.

Restricted cash consists of cash deposited with a financial institution for $816,466 held in an escrow account.

The following table provides a reconciliation of cash and restricted cash reported in the unaudited condensed consolidated balance sheets that sum to the total of the same amounts show in the statement of cash flows.

Revenue Recognition

The Company follows the guidance of ASC Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). The 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 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 is as follows:

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.

The following table represents external net sales disaggregated by product category for the six months ended June 30,

Preferred Stock

The Company applies the accounting standards for distinguishing liabilities from equity under U.S. GAAP when determining the classification and measurement of its Preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as permanent equity.

Stock-Based Compensation

The Company accounts for stock-based compensation costs under the provisions of 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 for employees, officers and directors of $526,824 and $221,257 for the three months ended June 30, 2019 and 2018, respectively, $744,520 and $221,257 for the six months ended June 30, 2019 and 2018, respectively, and has included such amounts in selling, general and administrative expenses in the unaudited condensed consolidated statement of operations.

The Company incurred stock-based compensation charges for non-employees, net of estimated forfeitures of $1,670,876 and $490,758 for the three months ended June 30, 2019 and 2018, respectively, and $3,309,504 and $839,983 for the six months ended June 30, 2019 and 2018, respectively, and has included such amounts in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.

Basic and Diluted Net (Loss) per Common Share

Basic (loss) per common share is computed by dividing the net (loss) by the weighted average number of shares of common stock outstanding for each period. Diluted (loss) per share is computed by dividing the net (loss) by the weighted average number of shares of common stock outstanding plus the dilutive effect of shares issuable through the common stock equivalents.

As of June 30, 2019, and 2018 the Company’s common stock equivalents outstanding were as follows:

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 11.

Recent Accounting Standards

In August 2018, the 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.

In April 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 provides further Updates related to financial instruments, following Updates 2016-01, 2016-13 and 2017-12. The amendments in ASU 2019-04 will be effective as of the beginning of the first annual reporting period beginning after April 25, 2019. Early adoption is permitted, including adoption on any date on or after April 25, 2019. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

In May 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-05, Financial Instruments – Credit Losses (Topic 362): Targeted Transition Relief. ASU 2019-05 is an update to ASU 2016-13, Financial Instruments – Credit Losses (Topic 362): Measurement of Credit Losses on Financial Instruments. The amendments in ASU 2019-05 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of this Update as long as an entity has adopted the amendments in Update 2016-13. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

In July 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-07, Codification Updates to SEC Sections. ASU 2019-07 provides amendments to SEC paragraphs pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and other miscellaneous updates. FASB has not provided an effective date as of the date of this filing.

NOTE 4 – ACQUISITIONS

January Stock Purchase:

On January 16, 2019, the Company entered into a Securities Purchase Agreement (“SPA”) with Melvin Ruyle Family Living Trust (the “Seller”) and Tyler Welders Supply, Inc., a Texas corporation (“TWS”) for the purchase of all of the issued and outstanding capital stock of TWS by the Company (“Transaction”). Under the terms of the SPA, the Company purchased one hundred percent (100%) of TWS’s issued and outstanding capital stock for the gross purchase price of $2,500,000 (“TWS Stock”). Effective at closing, the Company will assume business operations at its new location in Texas.

The preliminary allocation of the consideration transferred is as follows:

February Stock Purchase:

On February 15, 2019, the Company entered into a Securities Purchase Agreement (“SPA”) with Melvin Ruyle, Jered Ruyle and Janson Ruyle (collectively, the “Seller”) 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 (“Transaction”). 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 (“CS Stock”). Effective at closing, the Company assumed business operations at its new location in East Texas.

The preliminary allocation of the consideration transferred is as follows:

February Asset Purchase:

On February 22, 2019, Taronis Technologies, Inc. (the “Company”) entered into an Asset Purchase Agreement (“Agreement”) with Complete Cutting and Welding Supplies, Inc., a California corporation (the “Seller”) for the purchase of substantially all of the Seller’s tangible and intangible business assets (“Transaction”). Under the terms of the Agreement, the Company purchased from the Seller substantially all of the Seller’s right, title an interest to the Seller’s business assets and certain other assumed liabilities. The total purchase price paid was $2,500,000 cash. The Agreement includes certain other terms and conditions which are typical in asset purchase agreements.

The allocation of the consideration transferred is as follows:

All goodwill recorded as part of the purchase price allocations is currently anticipated to be tax deductible.

Water Pilot, LLC Stock Purchase:

On May 31, 2019, the Company entered into a Limited Liability Company Unit Purchase and Sale Agreement (“Agreement”) with the sellers listed on the signature page thereto (the “Sellers”) and Water Pilot, LLC, a Florida limited liability company, for the purchase of fifty-one percent (51%) ownership in Water Pilot, LLC. The purchase price for the ownership interest or “Units” was $1,275,000 payable in shares of the Company’s restricted common stock (“Stock Consideration”). The Stock Consideration was priced based on the five (5) day Volume Weighted Average Price of the Company’s common stock immediately preceding the closing date of the Agreement. At closing, the Company was named the Manager of Water Pilot, LLC and took control of the business. The Agreement also included terms and conditions which are standard in similarly situated purchase agreements. The transaction closed on May 31, 2019. The company recorded the full amount to intangible assets.

The allocation of the consideration transferred is as follows:

The following unaudited 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., United Welding Specialties of Longview, Inc., Tyler Welders Supply, Cylinder Solutions, Complete Cutting and Welding Supplies and Water Pilot, LLC for the three and six months ended June 30, 2019 and 2018, as if the above discussed acquisitions had occurred on January 1, 2018 instead of January 19, 2018, February 16, 2018, April 3, 2018, October 17, 2018, October 22, 2018, October 26, 2018, January 16, 2019, February 15, 2019, February 22, 2019 and May 31, 2019, 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.

NOTE 5 – NOTES PAYABLE

On February 22, 2019, the Company entered into a Cylinder Purchase Agreement with Guillermo Gallardo to purchase 10,000 gas cylinders. The Company made an initial purchase of 1,000 cylinders on October 18, 2018 for $300,000. The Company purchased an additional 2,334 cylinders upon execution of this agreement for $700,200. The Company agreed to purchase the remaining 6,666 cylinders for $1,999,800 over a period of two years. There is no interest associated with this agreement. The balance due as of June 30, 2019 was $1,899,800.

On May 3, 2019, the Company entered into a Securities Purchase Agreement with one or more investors identified on the signature pages thereto (“Investors”). Under the terms of the SPA, the Company issued an aggregate of $500,000 of shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) and an aggregate of $1,500,000 convertible debentures (“Debentures”) (collectively, the “Transaction Securities”) as set forth on the Purchaser Signature Page attached to the SPA, for a total gross purchase price of $2,000,000 (the “Offering”). The Company received aggregate net proceeds of approximately $1,920,000. The Offering closed on May 3, 2019. The conversion feature on the convertible debentures uses a “Market Conversion Price,” or 85% of the lowest VWAP of the Company’s common stock during the 10 Trading Days immediately preceding the Conversion Date. During the six months ended June 30, 2019, there were no conversions of the convertible debentures.

On June 6, 2019, the Company entered into a non-recourse Agreement for the Purchase and Sale of Future Receipts with C6 Capital Funding, LLC. The Company sold $600,000 in future receipts at a purchase price of $828,000 with weekly payments of $24,645 until the sold amount is delivered. The balance due as of June 30, 2019 was $803,355. The Company made one payment of $24,645 during the six months ended June 30, 2019.

NOTE 6 - STOCKHOLDERS’ EQUITY

Reverse Stock Splits

On January 30, 2019, the Company filed an amendment to the Certificate of Incorporation to effect a one-for-twenty reverse split of the Company’s issued and outstanding common stock which was effectuated on January 30, 2019.

The reverse stock splits did not modify the rights or preferences of the common stock. Proportional adjustments have been made to the conversion and exercise prices of the Company’s outstanding common stock warrants, convertible notes, common stock options. The number of shares of common stock issuable under the Company’s equity compensation plan was not impacted by the reverse split. The Company did not issue any fractional shares in connection with the reverse stock splits or change the par value per share. Fractional shares issuable entitle shareholders, to receive a cash payment in lieu of the fractional shares without interest. All share and per share amounts for the common stock have been retroactively restated to give effect to the reverse splits.

Common Shares Issued for Cash

January Securities Purchase Agreement

On January 11, 2019, the Company entered into a Securities Purchase Agreement (“SPA”) with one or more investors identified on the signature pages thereto (“Investors”). Under the terms of the SPA, the Company issued an aggregate of 1,550,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) and warrants to purchase up to 1,550,000 shares of Common Stock (“Warrants”) for a total gross purchase price of $4,340,000 (exclusive of the exercise of the Warrants) (the “Offering”). The Company received aggregate net proceeds of approximately $4,029,600. The sale of the Common Stock at a price of $2.80 per share was made pursuant to a prospectus supplement and accompanying base prospectus relating to the Company’s shelf registration statement on Form S-3.

February Underwriting Agreement

On February 8, 2019, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC (the “Underwriter”) to issue and sell an aggregate of 10,800,000 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (“Common Stock”) and warrants to purchase an aggregate of up to 8,100,000 shares of Common Stock (the “Warrants”), in an underwritten public offering, for a total gross purchase price of $13,500,000. The combined price to the public in the offering for each Share and accompanying Warrant to purchase 0.75 shares of Common stock is $1.25. The offering was made pursuant to the Company’s registration statement on Form S-3 and a prospectus supplement thereunder.

During the six months ended June 30, 2019, the Company received total proceeds of $17,840,000 and issued 12,350,000 common shares.

June Sales Agreement

On June 6, 2019, the Company entered into a Sales Agreement (“Agreement”) with The Benchmark Company, LLC (the “Agent”) pursuant to which the Agent will act as the Company’s sales agent with respect to the issuance and sale of up to $7,280,000 of the Company’s shares of common stock, par value $0.001 per share (the “Shares”), from time to time in an at-the-market public offering (the “Offering”). Sales of the Shares, if any, through the Agent, were made directly on The Nasdaq Capital Market. The Shares were sold and issued pursuant the Company’s shelf registration statement on Form S-3 and a related prospectus supplement.

During the six months ended June 30, 2019, the company sold 9,032,090 shares of common stock for total gross proceeds of $1,872,379 with the at-the-market public offering.

Common Shares Issued for Services

During the three and six months ended June 30, 2019, the Company issued 5,618,496 and 9,199,908 shares of common stock to consultants, respectively. The total fair value of these issuances during the three and six months ended June 30, 2019 was $2,197,699 and $4,040,112, respectively, which was recognized as stock-based compensation during the three and six months ended June 30, 2019.

During the three and six months ended June 30, 2018, the Company issued 57,758 and 89,341 shares of common stock to consultants, respectively. The total fair value of these issuances during the three and six months ended June 30, 2018 was $712,014 and $1,061,239, respectively, which was recognized as stock-based compensation during the three and six months ended June 30, 2018.

NOTE 7 – PREFERRED STOCK

On March 8, 2019, the Company entered into a Purchase and Conversion Agreement (the “Agreement”) with an institutional investor for (a) the repurchase by the Company of 499 shares of its Series C Preferred Stock (the “Series C Preferred”) and 31,765 shares of its Series E Preferred Stock (the “Series E Preferred”) 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 of the Company, par value $0.001 per share (collectively, the “Transaction”).

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.

NOTE 8 – COMMON STOCK WARRANTS

On January 11, 2019, in conjunction with that certain Securities Purchase Agreement entered into on the same date, the Company granted certain institutional investors warrants to purchase up to 1,550,000 shares of Common Stock at an exercise price of $4.64 per warrant share. There were no warrants exercised from this SPA during the six months ended June 30, 2019.

On February 8, 2019, in conjunction with that certain Underwriting Agreement entered into on the same date, the Company granted certain investors warrants to purchase an aggregate of up to 8,932,500 shares of Common Stock in an underwritten public offering. The exercise price of the warrants is $0.14 per warrant share due to a price reset triggered by the at-the-market transaction. During the six months ended June 30, 2019, there were 52,500 warrants exercised for net proceeds of $24,151. There are 8,880,000 warrants remaining as of June 30, 2019.

NOTE 9 - 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.

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.

In addition, on April 15, 2019, we received notice that a class action lawsuit was filed on behalf of our shareholders who purchased shares of the Company, f/k/a MagneGas Applied Technology Solutions, Inc. from January 28, 2019 through February 12, 2019, inclusive. The lawsuit seeks to recover damages for the Company’s investors under the federal securities laws. The litigation is in the early stages and it is unknown whether it will have a financial impact on the Company.

On June 25, 2019, a shareholder derivative complaint was filed against certain of the Company’s directors and officers in the United States District Court for the District of Arizona. The case is captioned Falcone v. Dingess, et al., No. CV-19-04547-PHX-DJH (D. Ariz.). The complaint alleges, among other things, that the defendants violated federal securities laws, including Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, by making alleged false and/or misleading statements and failing to disclose certain information regarding the Company’s business with the City of San Diego. The factual allegations upon which these claims are based are similar to the factual allegations made in the class action lawsuit filed against the Company on April 15, 2019. The Company has not accrued for any liability related to this lawsuit at this time.

As of June 30, 2019, the Company has not accrued for any litigation contingency.

NOTE 10 – LEASES

The Company has entered into various operating and finance lease agreements. The finance lease agreements include equipment and vehicles for the use in daily operations and range from five to six-year terms.

The Company currently has seventeen office leases. The first operating lease is for its welding supply store in Clearwater, FL, effective September 1, 2018, for ten years. The initial lease rate was $6,728 per month with escalating payments. The second operating lease is for its welding supply store in Spring Hill, FL. This lease was effective May 1, 2018 and will end on April 30, 2019. The current lease rate is $1,338 per month. The third operating lease is for its welding supply store in Lakeland, FL, from March 31, 2016 through March 31, 2020. The initial lease rate was $2,100 per month with escalating payments. The fourth operating lease is for its welding supply store in Sarasota, FL, from August 1, 2016 through July 31, 2021. The current lease rate is $1,700 per month. The fifth operating lease is for its welding supply store in Sulphur Springs, TX, from February 1, 2019 through January 31, 2020. The current lease rate is $2,000 per month. The sixth operating lease is for its welding supply store in Woodland, CA, from April 4, 2018 through April 3, 2019. The current lease rate is $14,000 per month. The seventh operating lease is for its gas fill plant in Flint, TX, from August 24, 2015 through August 23, 2020. The current lease rate is $900 per month. The eighth operating lease is for its storage facility in Flint, TX, from August 1, 2016 through August 23, 2020. The current lease rate is $5,500 per month. The ninth operating lease is for its welding supply store in Shreveport, LA, from December 1, 2015 through May 31, 2021. The initial lease rate was $2,846 per month with escalating payments. The tenth operating lease is for its welding supply store in Palestine, TX, from August 13, 2015 through August 12, 2020. The current lease rate is $1,800 per month. The eleventh operating lease is for its welding supply store in Paris, TX, from October 18, 2018 through October 17, 2020. The current lease rate is $3,000 per month. The twelfth operating lease is for its welding supply store in Longview, TX, from October 27, 2018 through October 26, 2020. The current lease rate is $2,000 per month. The thirteenth operating lease is for its cylinder repair shop in Tyler, TX, from February 16, 2019 through February 15, 2020. The current lease rate is $2,500 per month. The fourteenth operating lease is for its welding supply store in Tyler, TX, from January 17, 2019 through January 16, 2020. The current lease rate is $6,500 per month. The fifteenth operating lease is for its welding supply store in Compton, CA, from February 22, 2019 through October 31, 2026. The current lease rate is $29,400 per month. The sixteenth operating lease is for its welding supply store in Pomona, CA, from February 22, 2019 through October 31, 2026. The current lease rate is $11,200 per month. The seventeenth operating lease is for its welding supply store in Oxnard, CA, from February 22, 2019 through February 1, 2020. The initial lease rate was $3,394 per month with escalating payments. The eighteenth operating lease is for its welding supply store in Lynwood, CA, from April 1, 2019 through September 30, 2023. The initial lease rate was $2,000 per month with escalating payments. The Company has no other operating with terms greater than 12 months.

The Company adopted ASC Topic 842 effective January 1, 2019 using the prospective approach. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 months or less. On January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use asset of $4,037,472, lease liability of $4,037,472 and eliminated deferred rent of $0. The Company determined the lease liability using the Company’s estimated incremental borrowing rate of 8.0% to estimate the present value of the remaining monthly lease payments.

Supplemental balance sheet information related to leases was as follows:

Supplemental lease expense related to leases was as follows:

Other information related to leases where the Company is the lessee is as follows:

Supplemental cash flow information related to leases was as follows:

Maturities of lease liabilities were as follows:

NOTE 11 – SUBSEQUENT EVENTS

May Securities Purchase Agreement

During the period of July 1, 2019 through the date of this filing, YA Global elected to convert $999,915 of the Principal and Interest into 3,847,927 shares of common stock. The principal amount of debenture unconverted is $522,248 as of the date of this filing.

June Sales Agreement

During the period of July 1, 2019 through the date of this filing, the company sold 25,490,910 shares of common stock for total gross proceeds of $5,407,429 with the at-the-market public offering. This completes the Sales Agreement with The Benchmark Company, LLC.

Consultants

During the period of July 1, 2019 through the date of this filing, the Company issued 2,428,863 shares of common stock to various consultants as compensation for their services.

Settlement Agreement

On July 23, 2019, the Company entered into a Settlement and Mutual Release Agreement with its former employee and director Ermanno Santilli. Pursuant to the agreement, Ermanno Santilli was awarded an aggregate amount of $523,146, which included 393,154 shares of restricted common stock at an approximate fair value of $170,000. At the time of this filing, the settlement was paid in full.

Warrants Exercised

During the period of July 1, 2019 through the date of this filing, the company issued 8,378,250 shares of common stock for CMPO warrants exercised for total proceeds of $1,172,955.

During the period of July 1, 2019 through the date of this filing, the company issued 1,162,500 shares of common stock for warrants exercised from the January 2019 securities purchase agreement for total proceeds of $0.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a “safe harbor” statement under the Private Securities Litigation Reform Act of 1995. Statements contained in this document that are not based on historical facts are “forward-looking statements.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions that are not statements of historical facts. This document and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “continue,” “should,” “would,” “could,” “potentially,” “will,” “may” or similar words and expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements.

The forward-looking statements in this document are based upon various assumptions, many of which are based on management’s discussion and analysis or plan of operations and elsewhere in this Report. Although we believe that these assumptions were reasonable when made, these statements are not guarantees of future performance and are subject to certain risks and uncertainties, some of which are beyond our control, and are difficult to predict. Actual results could differ materially from those expressed in forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements, which reflect management’s view only as of the date of this Report.

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”. 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.

Gasification Mode – MagneGas Cutting Fuel

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. 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. After production, the MagneGas is stored in hydrogen cylinders which are then sold to market on a rotating basis.

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.

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.

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.

During 2019 and 2018, 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.

Subsequent Events

May Securities Purchase Agreement

During the period of July 1, 2019 through the date of this filing, YA Global elected to convert $999,915 of the Principal and Interest into 3,847,927 shares of common stock. The principal amount of debenture unconverted is $522,248 as of the date of this filing.

June Sales Agreement

During the period of July 1, 2019 through the date of this filing, the company sold 25,490,910 shares of common stock for total gross proceeds of $5,407,429 with the at-the-market public offering. This completes the Sales Agreement with The Benchmark Company, LLC.

Consultants

During the period of July 1, 2019 through the date of this filing, the company issued 2,428,863 shares of common stock to various consultants as compensation for their services.

Settlement Agreement

On July 23, 2019, the Company entered into a Settlement and Mutual Release Agreement with its former employee and director Ermanno Santilli. Pursuant to the agreement, Ermanno Santilli was awarded an aggregate amount of $523,146, which included 393,154 shares of restricted common stock at an approximate fair value of $170,000. At the time of this filing, the settlement was paid in full.

Warrants Exercised

During the period of July 1, 2019 through the date of this filing, the company issued 8,378,250 shares of common stock for CMPO warrants exercised for total proceeds of $1,172,955.

During the period of July 1, 2019 through the date of this filing, the company issued 1,162,500 shares of common stock for warrants exercised from the January 2019 securities purchase agreement for total proceeds of $0.

Results of Operations

Comparison for the three and six months ended June 30, 2019 and 2018

Revenues

For the three months ended June 30, 2019 and 2018 we generated revenues of $5,860,062 and $2,907,712, respectively. The 102% increase in revenue was due primarily to acquisitions completed in the past year and organic sales growth in the area of pre-existing operations. The Company expanded through acquisition into the markets in California, Texas and Louisiana. Organic revenue growth was strongest in the Texas market, where the Company has continued to capitalize on its scale and capabilities relative to smaller independently owned competitors. The California market was partly impact by the national shortage of helium, which offset otherwise steady organic growth. The Florida market’s ability to grow was in part negatively affected by the lack of an industrial gas fill plant facility, which became fully operational in August 2019.

For the six months ended June 30, 2019 and 2018 we generated revenues of $10,773,393 and $4,079,464, respectively. The 164% increase in revenue was due primarily to acquisitions completed in the past year and organic sales growth in the area of pre-existing operations.

For the three months ended June 30, 2019 and 2018 cost of revenues were $3,206,435 and $1,972,586, respectively. For the three months ended June 30, 2019 and 2018, we generated a gross profit of $2,653,626 and $935,126, respectively. Gross margins for the three months ended June 30, 2019 and 2018 were 45% and 32%, respectively. The improvement in gross margins was primarily due to improved buying power and economies of scale gained through recent acquisitions. The Company has systematically negotiated better pricing terms as it has continued to scale through acquisitions. Gross margins are expected to continue to improve as the Company upgrades its industrial fill plant facilities across all of its markets.

For the six months ended June 30, 2019 and 2018 cost of revenues were $5,887,250 and $2,730,459, respectively. For the six months ended June 30, 2019 and 2018, we generated a gross profit of $4,886,143 compared to $1,349,005. Gross margins for the six months ended June 30, 2019 and 2018 were 45% and 33%, respectively. The improvement in gross margins was primarily due to improved buying power and economies of scale gained through recent acquisitions.

Operating Expenses

Operating costs for the three months ended June 30, 2019 and 2018 were $8,106,298 and $4,355,964, respectively. The increase in our operating costs in 2019 was primarily attributable to non-cash stock compensation paid for several prior acquisitions. This expense category was the second largest expense after payroll, representing approximately 24% of expenses. These payments are now all complete and are not expected to continue in the third quarter or beyond.

Operating costs for the six months ended June 30, 2019 and 2018 were $16,502,579 and $7,670,321, respectively. The increase in our operating costs in 2019 was primarily attributable to non-cash stock compensation paid for several prior acquisitions. This expense category was the second largest expense after payroll, representing approximately 24% of expenses. These payments are now all complete and are not expected to continue in the third quarter or beyond. Payroll also decreased in both dollar terms and as a percentage of sales. Payroll averaged 67% of revenues in the first quarter of 2019 and decreased to 49% of sales in the second quarter. All other expenses also decreased in dollar terms and as a percentage of revenues during the second quarter as compared to the first quarter of 2019. Expense decreased approximately 11% in the second quarter when compared to the first quarter of 2019. This was primarily due to elimination of many non-recurring expenses for capital raising and acquisitions activities that were incurred during the first quarter. The Company also saw a significant improvement in expenses as a percentage of sales, which decreased from 82% of sales during the first quarter of 2019 to 61% of sales in the second quarter. This was largely due to the Company’s ability to eliminate costs and control expenses while growing revenues.

Net Loss

Our operating results for the three months ended June 30, 2019 have recognized losses in the amount of $5,374,828 compared to $3,495,061 for the three months ended June 30, 2018. The increase in our loss was primarily attributable to non-cash stock compensation paid for several acquisitions.

Our operating results for the six months ended June 30, 2019 have recognized losses in the amount of $11,537,226 compared to $6,514,500 for the six months ended June 30, 2018. The increase in our loss was primarily attributable to non-cash stock compensation paid for several acquisitions.

Liquidity and Capital Resources

As of June 30, 2019, the Company had cash of $1,635,862, has reported a net loss of $11,537,226 and has used cash in operations of $6,252,234 for the six months ended June 30, 2019. As of June 30, 2019, the Company had a positive working capital position of $857,696, and a stockholder’s equity balance of $33,123,235. As a result of the Company’s negative cash flow generation, 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. The Company has financed its operations through equity and debt financing transactions, but does not anticipate having to do so in the immediate future. The Company expects to be cash-flow neutral or positive in the foreseeable future. The Company utilizes cash in its operations of approximately $1,000,000 per month.

The Company has recently gained sufficient scale in revenues and gross income that are expected to significantly improve its ability to funds it operations. Management believes that the Company will be increasingly able to independently support its growth without reliance on additional outside capital, but may be required from time to time to raise additional capital through either equity offering or indebtedness.

If these sources do not provide the capital necessary to fund our operations during the next twelve months from the date of this report, we may need to curtail certain aspects of our operations or expansion activities, consider the sale of our assets or consider other means of financing. We can give no assurance that we will be successful in implementing our business plan and obtaining financing on terms advantageous to us or that any such additional financing would be available to us.

Cash Flows from Operations

Cash flows from continuing operations for operating, financing and investing activities for the three months ended June 30, 2019 and 2018 are summarized in the following table:

For the six months ended June 30, 2019, we used cash of $6,252,234 in operations in 2019 and used cash of $3,974,246 in operations in 2018. Our cash use for 2019 was primarily attributable to cash used to reduce vendor balances, accrued expenses and other short-term liabilities. Our cash use for 2018 was primarily attributable to general corporate needs, acquisitions, the overhaul of our capital structure, and organic growth initiatives. During the six months ended June 30, 2019, cash used by investing activities consisted of $11,480,896 primarily due to the three acquisitions completed in 2019. During the six months ended June 30, 2018, cash used by investing activities consisted of $5,516,975. Cash provided by financing activities for the six months ended June 30, 2019 was $17,780,255 as compared to cash provided by financing activities for the six months ended June 30, 2018 of $10,051,919. Our cash provided for 2019 was primarily attributable to the Securities Purchase Agreement completed January 11, 2019, the Underwriting Agreement completed February 8, 2019, the Securities Purchase Agreement dated May 3, 2019 and the Sales Agreement dated June 6, 2019. The net increase in cash during the six months ended June 30, 2019 was $47,125 as compared to a net increase in cash of $560,698 for the six months ended June 30, 2018.

Recent Accounting Standards

Included in the Note 3 to Financial Statements.

Critical Accounting Policies

Our significant accounting policies are presented in this Report in our Notes to financial statements, which are contained in this Quarterly Report. The significant accounting policies that are most critical and aid in fully understanding and evaluating the reported financial results include the following:

We prepare our financial statements in conformity with U.S. GAAP. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with our Board of Directors (the “Board”); however, actual results could differ from those estimates.

We issue restricted stock to consultants for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete.

Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available, we estimate fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets.

The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which would require a cumulative effect adjustment for initially applying the new revenue standard as an adjustment to the opening balance of retained earnings and the comparative information would not require to be restated and continue to be reported under the accounting standards in effect for those periods.

Based on the Company’s analysis, the Company did not identify a cumulative effect adjustment for initially applying the new revenue standards.

The Company principally generates revenue through three processes: (1) the sale of MagneGas fuel for metal cutting and through the sales of other industrial and specialty gases and related products through our wholly owned subsidiaries, (2) by providing consulting services and (3) through the sales of our Plasma Arc Flow Systems. The Company’s revenue recognition policy for the year ending December 31, 2018 is as follows:

The fair value of an embedded conversion option that is convertible into a variable amount of shares and warrants that include price protection reset provision features are deemed to be “down-round protection” and, therefore, do not meet the scope exception for treatment as a derivative under ASC 815 “Derivatives and Hedging”, since “down-round protection” is not an input into the calculation of the fair value of the conversion option and warrants and cannot be considered “indexed to the Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815. The accounting treatment of derivative financial instruments requires that we record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date.

We reassess the classification of our derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. As a result of entering into a convertible credit facility for which such instruments contained a variable conversion feature with no floor, we have adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees.

The Black-Scholes option valuation model was used to estimate the fair value of the warrants and conversion options. The model includes subjective input assumptions that can materially affect the fair value estimates. We determined the fair value of the Binomial Lattice Model and the Black-Scholes Valuation Model to be materially the same. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the warrants. Conversion options are recorded as debt discount and are amortized as interest expense over the life of the underlying debt instrument.

Goodwill and Indefinite-lived Assets

We have recorded goodwill and other indefinite-lived assets in connection with our acquisitions. Goodwill, which represents the excess of acquisition cost over the fair value of the net tangible and intangible assets of the acquired company, is not amortized. Indefinite-lived intangible assets are stated at fair value as of the date acquired in a business combination. The recoverability of goodwill is evaluated at least annually and when events or changes in circumstances indicate that the carrying amount may not be recoverable.

We analyze goodwill first to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a detailed goodwill impairment test as required. The more-likely-than-not threshold is defined as having a likelihood of more than 50%.

Events and circumstances for an entity to consider in conducting the qualitative assessment are:

Management has evaluated goodwill currently carried on the balance sheet and has evaluated the outlook for profitability and the ability for the recently acquired businesses to support the value of the goodwill on a go forward basis. Management completed this evaluation using two distinct business units, the water decontamination business and the fuel business. The water decontamination business operates at a loss and has no goodwill. The fuel business, which includes all of the welding supply stores, operates at a profit and has all of the goodwill. The Company believes that the business prospects and financial outlook for the businesses with the associated goodwill, adequately supports the carried value of the goodwill at this time. Management will continue to evaluate goodwill for potential impairment in subsequent periods. Should there be a deterioration of event and circumstances in the third quarter, management will record an impairment of the goodwill.

The Company’s intangible assets consisted of the following:

Off-balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is a “Smaller Reporting Company” as defined by § 229.10(f)(1) and is not required to provide the information required by this Item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this report, an evaluation was carried out by the Company’s management, with the participation of the chief executive officer and chief financial officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of June 30, 2019. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

During the evaluation of disclosure controls and procedures as of June 30, 2019, management concluded that Company’s disclosure controls and procedures were not effective.

Notwithstanding the existence of these material weaknesses, management believes that the consolidated financial statements in this report on Form 10-Q fairly present, in all material respects, the Company’s financial condition as reported, in conformity with United States Generally Accepted Accounting Principles (“GAAP”).

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal control over financial reporting is a process, under the supervision of the chief executive officer and chief financial officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management has not completed a proper evaluation, risk assessment and monitoring of the company’s internal controls over financial reporting as of June 30, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result, management has concluded controls were not effective and identified material weaknesses in internal control over financial reporting.

A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses identified are disclosed below:

Failure to Segregate Duties. 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. Our failure to segregate duties has been a material weakness for the period covering this report.

Sufficiency of Accounting Resources. The Company has limited accounting personnel to prepare its financial statements and handle complex accounting transactions. The insufficiency of our accounting resources has been a material weakness for the period covering this report.

Evaluation. The Company did not perform a proper evaluation, risk assessment or monitor their internal controls over financial reporting.

As a result of the material weaknesses in internal control over financial reporting described above, the Company’s management has concluded that, as of June 30, 2019, the Company’s internal control over financial reporting was not effective based on the criteria in Internal Control – Integrated Framework issued by the COSO.

This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we, engaged the Company’s independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Controls over Financial Reporting

There has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the six months ended June 30, 2019 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.

Item 1A. Risk Factors.

Risks Relating to Our Business

We can provide no assurance that our Common Stock will continue to meet Nasdaq listing requirements.

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 has been provided an initial period of 180 calendar days, or until November 5, 2018, to regain compliance. The letter states that the Nasdaq Staff will provide written notification that the Company has achieved compliance with the minimum bid price listing requirement if at any time before November 5, 2018, the bid price of the Common Stock closes at $1.00 per share or more for a minimum of ten consecutive business days. On November 6, 2018, the Company was informed by NASDAQ Listing Qualifications Staff that the Company’s request for an additional 180-day period, or until May 6, 2019, was granted. On May 7, 2019, the Company received notice that it failed to regain compliance with the Bid Price Rule and that its Common Stock will be delisted, unless it is successful in appealing Nasdaq’s determination.

The Company appealed the Staff’s determination to a Hearings Panel (the “Panel”), pursuant to the procedures set forth in the Nasdaq Listing Rule 5800 Series, which request stayed the suspension of the Company’s securities and the filing of the Form 25-NSE pending the Panel’s decision for an indeterminable amount of time.

On July 11, 2019, the Company was formally notified by Nasdaq that Panel granted the Company’s request for continued listing on Nasdaq, pursuant to an extension through September 19, 2019, to evidence compliance with the $1.00 per share bid price requirement set forth in Nasdaq Listing Rule 5550(a). In accordance with the terms of the Panel’s decision, the Company’s continued listing is subject to the timely satisfaction of a number of interim milestones; ultimately, the Company must evidence a closing bid price of at least $1.00 per share for 20 consecutive trading days on or before September 19, 2019 to evidence compliance with the terms of the Panel’s decision and to thereafter maintain its Nasdaq listing.

If we are unable to meet these requirements and are not successful in our appeal, our Common Stock will be delisted from Nasdaq. If our Common Stock is delisted from Nasdaq, our Common Stock could continue to trade on the OTCQB or similar marketplace following any delisting from Nasdaq. 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 the value of our shareholders’ investments to decline.

We have a significant amount of goodwill and other intangible assets on our balance sheet that are subject to periodic impairment evaluations; an impairment of our goodwill or other intangible assets may have a material adverse impact on our financial condition and results of operations.

As of June 30, 2019, we had goodwill and other intangible assets of $17,833,144, which represented approximately 38% of our total assets. Accounting standards require us to test goodwill for impairment annually, and more frequently when events or changes in circumstances indicate impairment may exist. There can be no assurance that reviews of our goodwill and other intangible assets will not result in impairment charges. Although it does not affect cash flow, an impairment charge does have the effect of decreasing our earnings, assets and shareholders’ equity. Factors that could indicate our goodwill or intangible assets are impaired include a decline in our stock price and market capitalization or lower than projected operating results and cash flows. Our stock price historically has shown volatility and often fluctuates significantly in response to market and other factors. Declines in our stock price or lower operating results could increase the risk of impairment. If we determine that further impairment exists, it may result in a significant non-cash charge to earnings and lower stockholders’ equity.

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.

In addition, on April 15, 2019, we received notice that a class action lawsuit was filed on behalf of our shareholders who purchased shares of the Company, f/k/a MagneGas Applied Technology Solutions, Inc. from January 28, 2019 through February 12, 2019, inclusive. The lawsuit seeks to recover damages for the Company’s investors under the federal securities laws. The litigation is in the early stages and it is unknown whether it will have a financial impact on the Company.

For a discussion identifying additional risk factors and other important factors that could cause actual results to differ materially from those anticipated, see the discussions under Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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

During the six months ended June 30, 2019, the Company issued 2,603,333 shares of restricted common stock to consultants and 1,634,002 shares of restricted common stock to certain employees. The total value of these issuances was $1,915,214 and $1,039,225, respectively. These shares were partially amortized as stock-based compensation during the six months ended June 30, 2019.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits

* In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.