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MNGA > SEC Filings for MNGA > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for MAGNEGAS CORP


13-Nov-2012

Quarterly Report


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

Cautionary Notice Regarding Forward Looking Statements

The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

This filing contains a number of forward-looking statements which reflect management's current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, events, or developments which management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words "believe," "expect," "intend," "anticipate," "estimate," "may," variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

Readers should not place undue reliance on these forward-looking statements, which are based on management's current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, the risks to be discussed in our Annual Report on Form 10-K and in the press releases and other communications to shareholders issued by us from time to time which attempt to advise interested parties of the risks and factors which may affect our business. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

Our operating plan and mission is to create a hydrogen-based fuel through the gasification of liquid waste. A process has been developed which transforms various types of liquid waste through a proprietary plasma arc machine. The result of the product is to carbonize the waste for disposal. A byproduct of this process is to produce an alternative to natural gas currently sold in the metalworking market. The patented proprietary technology is owned by our Company. We are putting the majority of our efforts in launching fuel sales to the metalworking market as we feel this is the best opportunity to generate revenue in the near term. We are currently seeking permits to process liquid waste and are purchasing antifreeze (ethylene glycol) to use as a feedstock until permits to process liquid waste have been secured

The majority of our revenue in 2010 was the result of a one-time sale of a refinery to our partner in China for the Municipal Wastewater market. However, since that time, we determined that better opportunities exist in the metalworking market to generate revenue in the immediate term. As a result, we have shifted our focus from selling refineries for sewage treatment to generating recurring revenue in metalworking fuel sales. This has resulted in a drop in revenue from 2010 to 2011 as we ramp up retail and wholesale fuel sales and the deployment of plasma arc refining units at various locations to serve this new market.


Metalworking Market

Our strategy is to expand sales in the metal working fuel market by placing refineries either onsite at large end users or in heavy industrial areas adjacent to fuel distributors. Within the United States, the Company plans to own and operate the equipment and sell the fuel in cylinders by rotating full and empty cylinders in the industrial gas market. Internationally, the Company plans to expand by selling equipment with accompanying royalties.

We are seeking to expand sales in the metalworking market through the use of established industry wholesalers, trade events and media coverage in trade journals. Our strategy is to sell MagneGas for metal cutting to retail, wholesale and large strategic companies. We are actively working with several sales representatives and distributors to support these efforts. We have secured several large customers and are in the process of appointing additional distributors and installing additional refineries at strategic locations. In addition, as part of our execution strategy, we are actively seeking additional locations, sales support and manufacturing personnel in order to place our next refinery installations.

We have completed a one year analysis by General Motors and have received formal approval from the automaker for use of the MagneGas fuel as a replacement to acetylene on a trial basis. We have also completed our initial laboratory testing with Edison Welding Institute for use of the MagneGas fuel in U.S. Naval ship breaking. This laboratory analysis compared the opacity of Propane, Propylene, MagneGas and other fuels and cutting methods. MagneGas and Propane were the only two that have been selected to move to the next stage of onsite testing which includes hands on use in a naval facility in Puget Sound, Washington.

We are in various stages of negotiation with other national companies and military contractors seeking to use MagneGas in their facilities. These large strategic relationships have an inherently long sales cycle with uncertain outcome and as such we are complimenting these efforts with an aggressive direct local retail and wholesale distribution strategy focused mostly on the eastern United States.

We currently have one refinery operating in Florida and one in Michigan. We are in the process of installing two additional refineries and constructing three additional refineries. The Company plans to have 6 or more refineries installed and operating at various stages of utilization during the next twelve months. The Company focus is to place the majority of these refineries on site at large metal working fuel customers. The balance will be placed in heavy industrial areas, near existing fuel distributors.

Our market focus has been scrap yards and demolition companies. However, we have found that this industry is very heavily dependent on the price of steel. During the third quarter of 2012, the price of scrap steel dropped significantly and as a result, there was less cutting fuel used which negatively impacted our third quarter results. Our plan in the 4th quarter is to expand to other markets that benefit from lower steel pricing such as fabricators and shipbuilders to offset the cyclical nature of steel pricing.

Hydrogen Market

We believe that hydrogen can be effectively separated from MagneGas for industrial use. We believe that the hydrogen created from MagneGas can be produced in large quantities and sold for commercial, industrial and military use. We are exploring the infrastructure necessary to enter this market profitably and expect to begin sales in 2013.

Bio-Waste Market

We believe we have one of the only systems that can sterilize bio-waste such as manure, without chemical or biological additives, while creating a gas that can be used as a replacement for natural gas while also creating a sterilized liquid that can be used as a fertilizer. To that end, we have completed testing of our system in that capacity with preliminary successful results. Our plan is to place a refinery onsite at a swine facility for further short term testing of the potential for this market.


International Expansion

We are seeking to expand globally through the sale of equipment and the establishment of distribution and joint venture arrangements. We are currently in various stages of negotiation with representatives from entities in various countries.

On July 16, 2012, MagneGas Corporation and Clear Sky Energy S.A. de C.V. entered into a binding initial contract by which CSE will purchase a refinery from the Company for an aggregate purchase price of $2.7 million plus 5% royalties, calculated based upon the Company's gross revenue. The Company and Clear Sky Energy are actively working towards the finalization of the Definitive Agreements related to the purchase. Clear Sky Energy has also purchased 500 cylinders of MagneGas fuel and temporarily imported a 50kw MagneGas test refinery to complete various liquid testing and demonstrations with major customers in Mexico. It is anticipated that the final agreements will be signed in 2012.

Business Continuation and Succession

We have developed and trained a team of engineers and consultants to become knowledgeable with MagneGas product and the Plasma Arc Flow System. In addition, Ermanno Santilli, son of Dr. Santilli, became Chief Executive Officer on June 15, 2012, following the retirement of Dr. Santilli as Chief Executive Officer.

Sale of Securities to Investors

In the quarter ended March 31, 2012 the Company entered into a definitive agreement with investors to sell in a private placement an aggregate 1,941,250 shares of common stock and warrants to purchase 970,625 shares of common stock at a purchase price of $2.00 per unit, resulting in gross proceeds to the Company of $3,882,500, before deducting placement agent fees and other offering expenses. The warrants are exercisable at an exercise price of $4.00 per share and expire five years from the initial closing date. The Company conducted two closings, on March 29, 2012, and April 3, 2012.

On August 16, 2012 the Company completed a public offering of 2,850,000 shares of common stock at a price to the public of$3.00 per share. Of the 2,850,000 shares of common stock, an aggregate 652,173 shares were offered by three stockholders of the Company. In addition, the Company and the selling stockholders had granted the underwriters a 45-day option to purchase up to an additional 427,500 shares of common stock solely to cover over-allotments, if any. The Company intends to use the net proceeds from the offering to further develop its products and operations, for working capital, and general corporate purposes. The Company did not receive any of the proceeds from the sale of shares by the selling stockholders. The offering resulted in the net issuance of 2,197,827 shares of common stock (2,850,000, less 652,173 common shares of the selling shareholders) for gross proceeds of $6,593,481 less offering and closing costs of $451,361, resulting in net proceeds of $6,142,120. The underwriter did not exercise its over-allotment option.

Results of Operations

For the three and nine months ended September 30, 2012 and 2011

Revenues

For the three and nine months ended September 30, 2012 and 2011 we generated revenues of $201,096, $81,253, $522,052 and $226,103, respectively. For the three and nine months ended September 30, 2012 and 2011 we generated revenues from our metal cutting fuel of $177,763, $57,920, $452,053, and $106,104, respectively. We have recognized an increase in revenue through our sales efforts and increased our demand for future orders for our metal cutting fuel due to industry acceptance and sales focus. We anticipate sustained and increasing revenue growth as our operations develop in fulfilling our increasing backlog of orders. Orders have increased due to our expanded locations and our products performance in initial sales testing with distributors and potential volume customers. Sales and delivery has been slowed during the first quarter due to our attention to efforts in establishing our facilities in Michigan and Florida, which has been our focus, as we believe our return on investment will be immediately recognized in the near term. We believe that there is a significant market share which we should attract due to our abilities to set up locations where there is immediate demand. We are experiencing increased interest from new and existing customers. We believe that our metal cutting fuel orders will increase significantly as the economy and the building market recovers.


For our technology licensing we have recognized $23,333, $23,333, $69,999 and $119,999 for the three and nine months ended September 30, 2012 and 2011, respectively. These license fees are ratably earned over the terms of the licensing agreement.

Of our four available units, we have delivered two units for production and distribution at key locations for our metal fuel resellers. Based on our volume projections, we anticipate that there will be cost recovery within approximately a two year period.

Operating Expenses

Operating costs for the three and nine months ended September 30, 2012 and 2011 were $2,166,514, $612,773, $5,163,849 and $1,860,636, respectively. During the three and nine month ended September 30, 2012 we recognized non-cash charge of $672,099 and $1,755,609 in stock based compensation, compared to $95,850 and $456,490 in the comparable three and nine month ended September 30, 2011. Other non-cash operating expenses were due to depreciation charges of $278,079 for the nine month period ended September 30, 2012, compared to $53,311 for the nine months ended September 30, 2011. Operating expenditures increase was primarily attributable to increases in: (a) technical sales support for production; (b) establishing two locations, as we increase our ability to serve our major customers; (c) stock-based compensation; (d) depreciation and amortization and
(e) research and development efforts, due to environmental testing and efficiency design. Additional expenses were incurred in efforts of securing our financings through private placements and public offering, which were accounted for as a period expense. During the course of the last year we have executed our operating plan which included the hiring of personnel, primarily technical persons, thereby certain expenses are not comparable to prior year expenses, specifically expenses for technical professionals.

In the current quarter, as in prior quarters, we used common stock as a method of payment for certain services, primarily the advertising and promotion of the technology to increase investor awareness and as incentive to its key employees and consultants. We expect to continue these arrangements, though due to a stronger operating position this method of payment may become limited to employees.

Net Loss

Our operating results have recognized losses in the amount of $2,098,385, $366,041, $4,959,000 and $1,080,508 for the three and nine months ended September 30, 2012 and 2011, respectively. The increase in the losses was attributable to stock based compensation and for a general increases incurred for our general internal support for our increasing metal cutting segment.

Liquidity and Capital Resources

In the nine months ended September 30, 2012 and 2011 we received investments of $9,339,824 (net of offering costs of $1,136,157) and $4,354,500, respectively. We believe we can currently satisfy our cash requirements for the next twelve months with our current cash and expected revenues. Management plans to increase revenue to sustain future operational growth.

Completion of our plan of operations is subject to attaining adequate and continued revenue. We cannot assure investors that adequate revenues will be generated. In the absence of our projected revenues, we believe that we will be able to proceed with limited plan of operations. Even without significant revenues within the next twelve months, based on our current cash position, we anticipate being able to continue with our present activities.

As reflected in the unaudited financial statements we have an accumulated a deficit of approximately $10.0million dollars. Our cash flow from operations for the nine month period ending September 30, 2012 used $4.0 million of cash. Cash was used primarily for the manufacturing and completion of our refineries for future use and the commencement of an additional unit. Our investing activities used $2.8 million of cash for the acquisition of cylinders to supply our locations and the acquisition of property to expand our current facility for $1.4 million.


Recent Accounting Pronouncements

We have reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. We have carefully considered the new pronouncements that alter previous generally accepted accounting principles and do not believe that any new or modified principles will have a material impact on the corporation's reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration. Those standards have been addressed in the notes to the unaudited financial statement and in our Annual Report, filed on Form 10-K for the period ended December 31, 2011.

Critical Accounting Policies

The Company's significant accounting policies are presented in the Company's notes to financial statements for the period ended September 30, 2012 and fiscal year ended December 31, 2011, which are contained in the Company's 2011 Annual Report on Form 10-K. The significant accounting policies that are most critical and aid in fully understanding and evaluating the reported financial results include the following:

The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with the Board of Directors; however, actual results could differ from those estimates.

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

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

The Company generates revenue through three processes: (a) Sale of MagneGas fuel for metal cutting; (b) Sale of its Plasma Arc Flow units; and (c) licensing.

? Revenue for metal-working fuel is recognized when shipments are made to customers. The Company recognizes a sale when the product has been shipped and risk of loss has passed to the customer.
? Revenue generated from sales of its production unit is recognized on a percentage of completion, based on the progress during manufacturing of the unit. Our machine is a significant investment and generally requires a 6 to 9 month production cycle. During the course of building a unit the actual costs are tracked to our cost estimates and revenue is proportionately recognized during the process. Significant deposits are required before production. These deposits are classified as customer deposits. During our production, costs and progress earnings are accumulated and included in "Costs and earnings" as an asset.
? Licenses are issued, per contractual agreement, for distribution rights within certain geographic territories. We recognize revenue ratably, based on the amounts paid or values received, over the term of the licensing agreement.


Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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