By Steven Ralston, CFA
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MagneGas Expanding in Domestic Industrial Gas Business & Pursuing European Grants
MagneGas Applied Technology Solutions (MNGA) produces, sells and distributes MagneGas2®, a hydrogen-based fuel synthesized through its proprietary, patented Plasma Arc Flow™ process. Currently, the largest commercial application for MagneGas2™ is as an alternative to acetylene, and management is pursuing an aggressive acquisition strategy of domestic gas and welding suppliers in order to significantly expand geographical reach, boost the top-line and achieve profitability. Simultaneously, MagneGas is pursuing opportunities in Europe, primarily through government-sponsored grants that promote emerging clean technology projects. Revenues are expected to over double in 2018.
Key Aspects of the Third Quarter 2018
• Quarterly revenues increase 195% to $2,598,820, primarily due the acquisitions of Complete Welding and Green Arc, but most especially of TriCo.
• The gross margin expanded 155 basis points from 37.2% to 38.4%.
• excluding the accounting treatment of the acquired inventory values related to acquisitions, the gross margin would have been 46%
• Weighted average shares outstanding increased from 719,103 to 39,366,633 shares (YOY); end of quarter shares outstanding were 59,917,080 common shares.
• The company’s working capital position improved sequentially to $2,629,420 from $1,235,575 at the end of the second quarter.
The conference call was well attended with over 500 participants. The call lasted almost 1 ½ hours.
Corporate Restructuring Initiatives
Scott Mahoney Appointed CEO: On November 6, 2018, MagneGas announced that Scott Mahoney was been appointed CEO. Mr. Mahoney previously served as CFO since December 2016 and will now lead the efforts in advancing the company’s commercial growth strategy in the welding and industrial gas business, along with pursuing other emerging plasma arc applications in the fields of sterilization of agricultural waste and waste-to-energy. Ermanno Santilli was appointed Chief Technology Officer (CTO) and will focus on advancing research-centric plasma arc technology initiatives.
Series A Preferred Stock Repurchased and Retired: On November 2, 2018, MagneGas repurchased the company’s 1,000,000 outstanding shares of the Series A Preferred (super-majority voting stock) for $1,000,000 in cash and 5,000,000 shares of restricted common stock. The repurchased Series A Preferred shares were thereafter terminated, which resulted in voting control of the company being given the common stock shareholders.
Rebranding: The company was formally renamed MagneGas Applied Technology Solutions on September 25, 2018 in order to aid in the rebranding effort to better identify and align the company with the marketing efforts in Europe for both industrial metal cutting applications and sterilization/waste-to-energy solutions.
Management is expanding the company’s scale in the domestic metal cutting industry through a strategy of acquiring industrial gas/welding supply businesses. This growth strategy is not only expanding the company’s geographical footprint, but also generating incremental sales by enhancing the sales effort. The growing sales base is expected to eventually lead to profitability though economies of scale. In addition, series of cost-saving initiatives have been undertaken. Operating expenses as a percent of sales is expected to be almost halved in 2018.
• Starting in January 2019, management plans to start disclosing monthly production volumes and gas sales.
• The company’s website is currently being redesigned to better reflect the company’s new strategic direction.
Recent U.S. Acquisitions: In late October 2018, the company’s footprint in east Texas and Louisiana was expanded through the acquisition of three welding and industrial gas suppliers: Paris Oxygen, United Welding Specialties and Latex Welding Supplies.
• Management has met with multiple large port authorities in Europe, including Rotterdam, Amsterdam Antwerp, and Hamburg. MagneGas plans to schedule demonstrations for these large consumers of metal cutting fuels at multiple locations across northeastern Europe.
• MagneGas is pursuing government-sponsored funding opportunities to help advance commercial opportunities for the company’s technology.
o On October 9, 2018, MagneGas announced the closing of the €6.0 million (US$7.0 million) EASME grant under the LIFE program.
o On November 8, 2018, MagneGas announced that a consortium, which includes MagneGas with a fourth-generation gasification unit, submitted an application for a €2.5 million grant through the European Commission’s Horizon 2020 grant program.
o Management plans to apply for a third grant in Europe in February 2019.
• In November, MagneGas announced that the company has initiated monthly billing of consulting fees to the European JV with Infinite Fuels.
MagneGas continues to explore and pursue complimentary technology plasma arc opportunities, particularly in the fields of sterilization of agricultural waste and waste-to-energy.
Third Quarter 2018 Financial Results
On November 14, 2018, MagneGas reported results for the third quarter ending September 30, 2018. The company reported quarterly revenues of $2,598,820, up 195% from $879,511 reported in comparable quarter last year. The revenue increase was due primarily to the acquisitions of Complete Welding of San Diego, Green Arc in Texas and TriCo in Sacramento in January, February and April 2018, respectively. The gross margin expanded 155 basis points (bps) from 37.2% to 38.4%.The gross margin was impacted by the accounting treatment of the acquired inventory values related to the acquisitions that closed during 2018, and management believes that the gross margin will return to the 40% range as the acquired inventory is sold.
Operating expenses increased 73.5% to $4,546,454 from $2,620,664 (or $1,925,790) in comparable quarter last year, primarily from SG&A expenses increasing 68.5% (or $1,679,913). Management is addressing the relatively high level of SG&A expenses through its acquisition strategy; operating expenses declined from 298% to 175% of sales as a result of the acquisitions of Complete Welding, Green Arc Supply and TriCo.
The company reported a net loss attributable to common shareholders of $4,028,388 (or $0.10 per diluted share) versus a net loss of $4,159,737 (or $5.78 per diluted share) in the third quarter of 2017. Weighted average shares outstanding increased 5,374% from 719,103 to 39,366,633 year-over-year. At the end of the third quarter, 59,917,080 common shares were outstanding. The company’s working capital position improved sequentially to $2,629,420 from $1,235,575 at the end of the second quarter.
View Exhibit I
The sequential decline in quarterly revenues was due to the seasonal factors, particularly summer slowdowns Florida and California.
On November 14, 2018, MagneGas Applied Technology Solutions announced that sales for the month of October were $1.05 million, which represents a 180% YOY increase. Though the sales growth was primarily driven by the three acquisitions completed earlier in 2018 (Complete Welding, Green Arc Supply and TriCo), sequential monthly sales were also strong (+15% in California and +9% in Florida).
In late October 2018, the company’s footprint in east Texas and Louisiana was expanded through the acquisition of three welding and industrial gas suppliers: Paris Oxygen, United Welding Specialties and Latex Welding Supplies.
On October 21, 2018, MagneGas completed the acquisition of Paris Oxygen Company, an industrial gas and welding supply distributor in Paris, Texas. The purchase price was $1,250,000, which was paid in cash. This third acquisition in Texas will expand the company’s operational capabilities in the state. Management anticipates that Paris Oxygen will generate annual sales of approximately $1.0 million.
View Exhibit II
Latex Welding Supplies
On October 26, 2018, MagneGas completed the acquisition of Latex Welding Supplies (dba ARC-La-Tec Welding Supply), an industrial gas and welding supply distributor in Shreveport, Louisiana. The purchase price was $1,500,000, which was paid in cash. The acquisition expands the company’s footprint in the northern Louisiana, a significant industrial corridor with strong demand for metal cutting fuels, particularly by the oil & gas industry. Latex Welding also serves the medical gas business. Management expects that Latex Welding Supplies will generate monthly sales of approximately $80,000.
View Exhibit III
United Welding Specialties
At the end of October 2018, MagneGas Applied Technology Solutions acquired United Welding Specialties, an industrial gas and welding supply distributor located in Longview, Texas. The purchase price was $750,000, which was paid in cash. This fourth acquisition in Texas further expands the company’s geographic footprint in this important industrial area and should further improve the operating efficiency through additional economies of scale. Management expects that United Welding will generate monthly sales of more than $60,000.
View Exhibit IV
2nd USDA Sterilization Demonstration Day
On October 23, 2018, MagneGas Applied Technology Solutions conducted the company’s second USDA-funded sterilization demonstration day. The demonstration at the Lake Branch Dairy Farm (located in Bowling Green, Florida) included a tour of a MagneGas 50 KW sterilization system and a presentation on some of the changes implemented based on the results of Phase 1 under the USDA Conservation Innovation Grant (CIG). Currently, Phase 2 (of the 18-month, 4-phase CIG project) is near completion and the preliminary results and analysis of the Phase 2 testing were also presented.
Phase 2 expands the scope of testing sterilization efficacy to additional pathogens and living organisms. The company has mentioned that the study will expand to the study of sterilization of other animal waste solids, pharmaceutical wastes and potentially the blue green algae blooms that have plagued the waterways in Florida. The preliminary results and analysis of the Phase 2 testing were also presented during the October 2018 demonstration day.
EUROPEAN INITIATIVE UPDATE
On October 9, 2018, MagneGas Applied Technology Solutions announced the closing of the €6.0 million (US$7.0 million) EASME grant under the LIFE program.
On November 8, 2018, MagneGas announced that a consortium, which includes MagneGas, submitted an application for a €2.5 million grant through the European Commission’s Horizon 2020 grant program. Specifically, the grant is under LC-SC3-RES-1-2019-2020: Developing the next generation of renewable energy technologies. The grant application process entails two phases, first an initial vetting procedure, and if the initial proposal is approved, the submission of a comprehensive proposal in April 2019. The grant application is for fully-funded €2.5 million, 24-month project that would utilize a fourth-generation MagneGas gasification unit. The consortium consists of MagneGas (via MagneGas Limited), the Danish Technology Institute, The Welding Institute and the Netherlands Standardization Institute. Attracting such world class partners further validates the company’s plasma arc gasification process.
View Exhibit V
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By Steven Ralston, CFA