XNAS:MNGA Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-Q
 

 
x
   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
or

o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ______________
 
Commission File Number: 000-51883
 

MagneGas Corporation
(Exact name of registrant as specified in its charter)
 

  
Delaware
 
26-0250418
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
150 Rainville Rd
Tarpon Springs, FL 34689
 
 
34689
(Address of principal executive offices)
 
(Zip Code)
 
 (727) 934-3448
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)
  
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes x No o
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o
 Accelerated filer o
   
 Non-accelerated filer  o   (do not check if smaller reporting company)
 Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No  x
 
As of July 11, 2012, there were 17,721,569 shares of common stock, $0.001 par value issued and outstanding.
 
 
 

 
  
TABLE OF CONTENTS
 
   
Page
Number
 
PART I - FINANCIAL INFORMATION
     
       
Item 1.  
Financial Statements.
  1  
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
  15  
Item 3.  
Quantitative and Qualitative Disclosures About Market Risk.
  18  
Item 4.  
Controls and Procedures.
  18  
         
PART II - OTHER INFORMATION
     
       
Item 1.  
Legal Proceedings.
  19  
Item 1A.
Risk Factors.
  19  
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds.
  19  
Item 3.  
Defaults Upon Senior Securities.
  19  
Item 4.  
Mine Safety Disclosures
  19  
Item 5.  
Other Information.
  19  
Item 6.  
Exhibits.
  20  
         
SIGNATURES
  21  
 
 
 

 
PART I - FINANCIAL INFORMATION
Item 1.   Financial Statements
 
Financial Statements
 
MagneGas Corporation
 
As of June 30, 2012 (unaudited) and December 31, 2011 (audited)
And for the Three and Six Months Ended June 30, 2012 (unaudited) and 2011 (unaudited)
 
Contents
 
Financial Statements:
 
Page
Number
 
       
Balance Sheets June 30, 2012 (unaudited) and December 31, 2011 (audited)
  2  
       
Statements of Operations for the three and six months ended June 30, 2012 and 2010 (unaudited)
  3  
       
Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)
  4  
       
Notes to Financial Statements (unaudited)
  5 - 14  
 
 
1

 
 
MagneGas Corporation
 
Balance Sheets
 
             
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
   
(audited)
 
 Assets
           
 Current Assets
           
Cash
  $ 2,022,713     $ 1,429,412  
Accounts receivable, net of allowance for doubtful accounts of $25,000 and $0, respectively
    99,649       19,050  
Inventory, at cost
    820,674       656,992  
Prepaid and other current assets
    2,500       2,500  
Total Current Assets
    2,945,536       2,107,954  
                 
 Property and equipment, net of accumulated depreciation of $189,561 and $44,538, respectively
    3,664,863       2,561,384  
                 
Deferred tax asset
    456,500       456,500  
Intangible assets, net of accumulated amortization of $175,745 and $151,511, respectively
    551,255       575,489  
Investment in joint ventures
    490,410       490,410  
 Total Assets
  $ 8,108,564     $ 6,191,737  
                 
                 
 Liabilities and Stockholders' Equity
               
 Current Liabilities
               
Accounts payable
  $ 503,337     $ 291,249  
Accrued expenses
    162,537       125,011  
Deferred revenue and customer deposits
    279,996       326,662  
Due to stockholder
    -       210,500  
Due to related parties
    3,676       13,400  
Total Current Liabilities
    949,546       966,822  
                 
 Total Liabilities
    949,546       966,822  
                 
 Stockholders' Equity
               
Preferred stock: $0.001 par;  10,000,000 authorized; 1,000,000 issued and outstanding
    1,000       2  
Common stock: $0.001 par;  900,000,000 authorized; 17,721,569 and 15,438,932 issued and outstanding, respectively
    17,722       15,439  
Additional paid-in capital
    15,116,341       10,334,904  
Issued and unearned stock compensation
    (18,333 )     (28,333 )
Accumulated deficit
    (7,957,712 )     (5,097,097 )
 Total Stockholders' Equity
    7,159,018       5,224,915  
                 
 Total Liabilities and Stockholders' Equity
  $ 8,108,564     $ 6,191,737  
                 
On May 15, 2012 the Company's Board of Directors approved a 1:10 reverse split of common shares, effective June 26, 2012. All share amounts have been retroactively adjusted to reflect the post-split shares

The accompanying notes are an integral part of these financial statements.
 
 
2

 
 
MagneGas Corporation
 
Statements of Operation
 
For the Three and Six Months Ended June 30, 2012 and 2011
 
(unaudited)
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
 Revenue:
                       
    Metal cutting
  $ 165,640     $ 22,529     $ 274,290     $ 48,184  
    License fees
    23,333       23,333       46,666       96,666  
      188,973       45,862       320,956       144,850  
                                 
 Direct costs, metal cutting
    117,733       14,322       183,208       35,596  
      71,240       31,540       137,748       109,254  
                                 
 Operating Expenses:
                               
  Advertising
    11,658       20,306       38,320       33,819  
  Selling
    159,731       99,260       283,515       185,278  
  Professional: technical
    14,456       -       18,201       390  
  Professional: legal and accounting
    134,985       69,187       221,690       139,475  
  Rent and overhead
    42,520       20,551       83,300       48,786  
  Office and administration
    642,061       268,093       957,181       350,107  
  Investor relations
    49,193       7,812       84,475       16,322  
  Stock-based compensation
    1,021,525       259,400       1,027,523       360,640  
  Research and development
    64,216       60,445       113,873       77,504  
  Depreciation and amortization
    97,742       19,633       169,257       35,542  
 Total Operating Expenses
    2,238,087       824,687       2,997,335       1,247,863  
                                 
 Operating Loss
    (2,166,847 )     (793,147 )     (2,859,587 )     (1,138,609 )
                                 
 Other Income and (Expense)
                               
  Interest
    594       (7 )     (1,028 )     42  
 Total Other (Income) Expense
    594       (7 )     (1,028 )     42  
                                 
 Net Loss before tax benefit
    (2,166,253 )     (793,154 )     (2,860,615 )     (1,138,567 )
 Provision for Income Taxes
    -       (294,100 )     -       (424,100 )
 Net Loss
  $ (2,166,253 )   $ (499,054 )   $ (2,860,615 )   $ (714,467 )
                                 
 Loss per share:
                               
    Basic and dilutive
  $ (0.12 )   $ (0.04 )   $ (0.17 )   $ (0.06 )
 Weighted average common shares:
                               
    Basic and dilutive
    17,613,154       12,446,351       16,544,172       12,397,045  
                                 
On May 15, 2012 the Company's Board of Directors approved a 1:10 reverse split of common shares, effective June 26, 2012. All share amounts have been retroactively adjusted to reflect the post-split shares
 
The accompanying notes are an integral part of these financial statements.
 
 
3

 
 
MagneGas Corporation
 
Statement of Cash Flows
 
For the Six Months Ended June 30, 2012 and 2011
 
(unaudited)
 
       
   
June 30,
 
   
2012
   
2011
 
 Cash Flows from Operations
           
 Net loss
  $ (2,860,615 )   $ (714,467 )
                 
 Adjustments to reconcile net loss to cash used in operating activities:
               
 Depreciation and amortization
    169,257       35,542  
 Stock compensation
    1,027,523       360,640  
 Waiver of related party expenses
    -       11,220  
 Provision for bad debts
    25,000       622  
 Deferred income taxes
    -       (424,100 )
Changes in operating assets:
               
 Accounts receivable
    (105,599 )     (2,010 )
 Inventory
    (163,682 )     (610,832 )
 Prepaid & other current assets
    -       30,000  
 Accounts payable
    212,088       24,519  
 Accrued expenses
    37,526       64,511  
 Deferred revenue and customer deposits
    (46,666 )     (96,666 )
 Total adjustments to net income
    1,155,447       (606,554 )
 Net cash (used in) operating activities
    (1,705,168 )     (1,321,021 )
                 
 Cash Flows from Investing Activities
               
 Acquisition of equipment
    (1,248,502 )     (64,459 )
 Net cash flows (used in) investing activities
    (1,248,502 )     (64,459 )
                 
 Cash Flows from Financing Activities
               
 Repayments to stockholder
    (210,500 )     -  
 Advances from related party
    -       (11,201 )
 Repayments on notes payable from related party
    (9,724 )     -  
 Proceeds from issuance of common stock
    3,767,195       500,000  
 Net cash flows provided by financing activities
    3,546,971       488,799  
                 
 Net increase (decrease) in cash
    593,301       (896,681 )
 Cash balance, beginning
    1,429,412       917,495  
 Cash balance, ending
  $ 2,022,713     $ 20,814  
                 
                 
 Supplemental disclosure of cash flow information and non cash investing and financing activities:
               
      Interest paid
  $ -     $ -  
      Taxes paid
  $ -     $ -  
                 
The accompanying notes are an integral part of these financial statements.
 
 
4

 
 
MagneGas Corporation
Notes to Financial Statements
(Unaudited)
For the Three and Six Months Ended June 30, 2012 and 2011
 
1. Background Information
 
MagneGas Corporation (the “Company”) was organized in the state of Delaware on December 9, 2005. The Company was originally organized under the name 4307, Inc, for the purpose of locating and negotiating with a business entity for a combination. On April 2, 2007 all the issued and outstanding shares of 4307, Inc. were purchased and the Company name was changed to MagneGas Corporation.

MagneGas Corporation is an alternative energy company that creates and produces hydrogen based alternative fuel through the gasification of liquid waste. We have developed a process which transforms various types of liquid waste through a proprietary plasma arc machine. The result of the product is to carbonize the waste for normal disposal. A byproduct of this process is to produce an alternative to natural gas currently sold in the metalworking market. We produce gas bottled in cylinders for the purpose of distribution to the metalworking market as an alternative to acetylene. Additionally, we market, for sale or licensure, our proprietary plasma arc technology. Through the course of our business development, we have established a retail and wholesale platform to sell our fuel for use in the metalworking and manufacturing industries. In 2010, we recognized our initial sale of a Plasma Arc Flow unit and are continuing efforts to sell or lease additional equipment to end users.

2. Summary of Significant Accounting Policies
 
The significant accounting policies followed are:
 
Basis of Presentation
 
In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair statement of (a) the result of operations for the three and six month periods ended June 30, 2012 and 2011; (b) the financial position at June 30, 2012; and (c) cash flows for the six month periods ended June 30, 2012 and 2011, have been made.
  
Certain reclassifications have been made to prior year classifications for comparability purposes.

Use of Estimates
 
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 financial statements presented include estimates for patent life, recoverability of deferred tax assets and collections on our receivables.  Our estimates include consideration of the useful lives of our intellectual property, allocations to research and development costs and recognition of deferred tax assets.
 
Variable Interest Entities
 
The Company considers the consolidation of entities to which the usual condition (ownership of a majority voting interest) of consolidation does not apply, focusing on controlling financial interests that may be achieved through arrangements that do not involve voting interest.  If an enterprise holds a majority of the variable interests of an entity, it would be considered the primary beneficiary.  The primary beneficiary is generally required to consolidate assets, liabilities and non-controlling interests at fair value (or at historical cost if the entity is a related party) and subsequently account for the variable interest as if it were consolidated based on a majority voting interest. The Company has investments in joint ventures that are in development of the MagneGas technology, however the Company is not identified as a primary beneficiary; therefore no consolidation is required and the investments are listed at their cost.  
 
Fair Value of Financial Instruments
 
In September 2006, the Financial Accounting Standards Board (FASB) introduced a framework for measuring fair value and expanded required disclosure about fair value measurements of assets and liabilities.  The Company adopted the standard for those financial assets and liabilities as of the beginning of the 2008 fiscal year and the impact of adoption was not significant. FASB Accounting Standards Codification (ASC) 820 “ Fair Value Measurements and Disclosures ” (ASC 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principle or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
  
Level 1 -
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
 
5

 
 
Level 2 -
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 -
Inputs that are both significant to the fair value measurement and unobservable.

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2012. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include accounts receivable, inventory, other current assets, accounts payable, accrued compensation and accrued expenses. The fair value of the Company’s notes payable is estimated based on current rates that would be available for debt of similar terms which is not significantly different from its stated value.  The Company applied ASC 820 for all non-financial assets and liabilities measured at fair value on a non-recurring basis.

Cash and Cash Equivalents
 
The majority of cash is maintained with a major financial institution in the United States.  Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed on demand and, therefore, bear minimal risk.  The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
 
Accounts Receivable, Credit
 
Accounts receivable consist of amounts due for the delivery of MagneGas sales to customers. An allowance for doubtful accounts is considered to be established for any amounts that may not be recoverable, which is based on an analysis of the Company’s customer credit worthiness, and current economic trends.  Based on management’s review of accounts receivable, an allowance for doubtful accounts was considered necessary, based on considerations of limited credit history with our customers and in consideration of the economy.  Receivables are determined to be past due, based on payment terms of original invoices.  The Company does not typically charge interest on past due receivables.
 
Revenue Recognition

The Company generates revenue through two processes: (1) Sale of MagneGas fuel for metal cutting and (2) Sale of its Plasma Arc Flow units.  Additionally we also recognize revenue from territorial license arrangements.
 
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.
 
Inventories
 
Inventories are stated at the lower of standard cost or market, which approximates actual cost. Cost is determined using the first-in, first-out method.  Inventory is comprised of filled cylinders of MagneGas and accessories (regulators and tips) available for sale and accumulated costs incurred in the manufacturing process of units held for future sales.
 
 
6

 
Long-Lived Assets

Property and equipment is stated at cost.  Depreciation is computed by the straight-line method over estimated useful lives (3-7 years).  Intellectual property assets are stated at their fair value acquisition cost. Amortization of intellectual property assets is calculated by the straight line method over their specific life (15 years).  Historical costs are reviewed and evaluated for their net realizable value of the assets.  The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or the unamortized balance is warranted. Based upon its most recent analysis, the Company believes that no impairment of property and equipment existed at June 30, 2012 and December 31, 2011.

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.
 
Stock Based Compensation

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.   The Company recognized consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for services.  Stock compensation for the periods presented were issued to consultants for past services provided, accordingly, all shares issued are fully vested, and there is no unrecognized compensation associated with these transactions.  In May 2008 the Company entered into a consulting agreement for services to be rendered over a five year period.  The consulting expense is to be recognized ratably over the requisite service period.
 
Shipping Costs
 
The Company includes shipping costs and freight-in costs in direct costs, for those expenses associated with revenue process. The Company has incurred shipping and delivery costs associated with establishing units at production sites as well as incurring costs in shipping samples, trade shows and other business related functions, which are charged to selling or administrative expense.
 
Advertising Costs
 
The costs of advertising are expensed as incurred.  Advertising expenses are included in the Company’s operating expenses.   Advertising expense was $11.658, $20,306, $38,320 and $33,819 for the three and six months ended June 30, 2012 and 2011, respectively.
 
Research and Development
 
The Company expenses research and development costs when incurred.  Research and development costs include engineering and laboratory testing of product and outputs.  Indirect costs related to research and developments are allocated based on percentage usage to the research and development.
 
Income Taxes
 
The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purpose, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
 
 
7

 
Earnings (Loss) Per Share
 
Basic earnings (loss) per share calculations are determined by dividing net income (loss) by the weighted average number of shares outstanding during the year. Diluted earnings (loss) per share calculations are determined by dividing net income (loss) by the weighted average number of shares.  In periods of net loss, stock equivalents are excluded, as those shares would be anti-dilutive. The Company has issued options to several investors, upon their purchase of shares.  Options, whose strike price is less than the current market value, are considered common stock equivalents and are included in dilutive earnings per share.
 
   
June 30,
   
June 30,
 
   
2012
   
2011
 
 Net loss
 
$
(2,860,615
)
 
$
(714,467
)
                 
 Weighted Average Shares(a)
               
    Common Stock
   
16,544,172
     
12,397,045
 
    Common stock equivalents (Options)
   
-
(b)
   
-
(b)
     
16,544,172
     
12,397,045
 

(a) On May 15, 2012 the Company's Board of Directors approved a 1:10 reverse split of common shares, effective June 26, 2012.  All share amounts have been retroactively adjusted to reflect the post-split shares 

(b) Net loss for the period, options and other dilutive common stock equivalents are anti-dilutive and are excluded from computation.
 
3. Recently Issued Accounting Pronouncements

Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards Codification™ (“ASC”) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company.  Management has reviewed the aforementioned rules and releases and believes any effect will not have a material impact on the Company's present or future consolidated financial statements.
 
4. Inventory

Inventory primarily consists of:   
 
   
June 30,
   
December 31,
 
  
 
2012
   
2011
 
Metal cutting fuel
  $ 51,307     $ 10,098  
Units, Construction in process
    769,367       646,894  
    $ 820,674     $ 656,992  
 
5. Long Lived Assets
 
Property and equipment consists of:
 
   
June 30,
   
December 31,
 
  
 
2012
   
2011
 
 Land and building, deposit on property
  $ 131,500     $ -  
 Machinery and equipment
    125,577       125,577  
 Furniture and office equipment
    42,170       20,381  
 Transportation
    78,373       27,050  
 Production units
    1,972,750       1,972,750  
 Cylinders
    1,504,054       460,164  
  
    3,854,424       2,605,922  
 Less accumulated depreciation
    189,561       44,538  
  
  $ 3,664,863     $ 2,561,384  

Depreciation of equipment was $85,625, $7,517, $145,023, and $11,310 for the three and six months ended June 30, 2012 and 2011, respectively.
 
 
8

 
Intellectual property:
 
The Company owns intellectual property, which it is amortizing on a straight-line basis over the assets useful life.  The Company assesses fair market value for any impairment to the carrying values.  As of June 30, 2012 and December 31, 2011 management concluded that there was no impairment to the intangible assets.
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Intellectual property
 
$
727,000
   
$
727,000
 
Less accumulated amortization
   
175,745
     
151,511
 
   
$
551,255
   
$
575,489
 
                 
Future amortization through December 31,:
               
2012
 
$
24,233
         
2013
   
48,467
         
2014
   
48,467
         
2015
   
48,467
         
2016
   
48,467
         
2017 and thereafter
   
333,154
         
   
$
551,255
         

Amortization of the intangible assets was $12,117, $12,116, $24,234 and $24,232 for the three and six months ended June 30, 2012 and 2011, respectively.

Management periodically reviews the valuation of this asset for potential impairments.  Consideration of various risks to the valuation and potential impairment includes, but is not limited to:  (a) the technology’s acceptance in the marketplace and our ability to attain projected forecasts of revenue (discounted cash flow of projections); (b) competition of alternative solutions; and (c) federal and state laws which may prohibit the use of our production machinery as currently designed.   Management has not impaired this asset, to date, and does not anticipate any negative impact from known current business developments. Management continuously measures the marketplace, potential revenue developments and competitive developments in the scientific industry.

6. Investment in Joint Ventures

On June 25, 2010, the Company entered into agreement with a Belgium company, whereby 250,000 shares of MagneGas Corporation’s common stock and territorial license rights were exchanged for a 20% interest in MagneGas Europe.  The Company valued the investment in the Joint Venture at the fair market value of the shares issued ($23,750).   The Company does not have effective or beneficial control over the European entity and is to account for the investment under the Equity Method.
 
On June 28, 2010, the Company entered into agreement with DDI Industries, a China company, in formation of MagneGas China.  The Company is to provide mechanical drawings (for complete construction), computer programs, license of patents (Greater China Region), trademarks, etc. of the Plasma Arc Flow Recyclers to the new entity in exchange for a $2 million investment in MagneGas Corporation (received as of September 30, 2010; subscription at a share price of $0.135 or 14,814,814 common shares) and 20% share in MagneGas China.  The Company’s investment has been valued at $466,660, a mutually agreed amount for the technology license.  The MagneGas China entity has been funded in cash for an amount which reflects the intellectual property’s value. The Company does not have effective or beneficial control over the China entity and is to account for the investment under the Equity Method.

Our investments in joint ventures are considered as Level 3, as defined in FASB Accounting Standards Codification (ASC) 820 “ Fair Value Measurements and Disclosures ” (ASC 820), and management considers alternative methods for valuing these investments to determine if there would be impairment to the current carrying value, currently our cost basis.   As of June 30, 2012 and December 31, 2011, management does not believe any impairment exists with regard to the investments in joint ventures.
 
7. Deferred Revenue and Customer Deposits

The Company has received deposits on production units and fees for exclusive territorial license.  We have deferred the associated revenues until such time that production order is placed and produced (recognition under percentage of completion method) or through the passage of time (recognition over the life of the license term).
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Mexico territory license, non-refundable payment from a company for a six-month period ending February 28, 2011
 
$
150,000
   
$
150,000
 
China territory license, exclusive 5 year license, expiring June 28, 2015
   
466,660
     
466,660
 
Philippines, deposit on production unit
   
100,000
     
100,000
 
     
716,660
     
716,660
 
Portion recognized
   
436,664
     
389,998
 
Deferred revenue and customer deposits
 
$
279,996
   
$
326,662
 

The amount recognized as revenue under licensing arrangements was , $23,333, $23,333, $46,666 and $96,666 for the three and six months ended June 30, 2012 and 2011, respectively.
 
 
9

 
 
8. Income Tax

Provision (Benefit) for Income Taxes
 
The provision for income taxes consists of the following:
 
  
 
March 30,
2011
   
March 30,
2011
 
Current Tax Provision
 
$
-
   
$
-
 
Deferred Tax(Benefit) Provision
   
-
     
(424,100
)
Total Tax (Benefit) Provision
 
$
-
   
$
(424,100
)
 
Deferred Income Taxes
 
Deferred income taxes are the result of timing differences between book and tax basis of certain assets and liabilities, timing of income and expense recognition of certain items and net operating loss carry-forwards.
 
The Company assesses temporary differences resulting from different treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our balance sheets. The Company evaluates the realizability of its deferred tax assets and assesses the need for a valuation allowance on an ongoing basis. In evaluating its deferred tax assets, the Company considers whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of deferred tax assets depends upon generating sufficient future taxable income prior to the expiration of the tax attributes.  In assessing the need for a valuation allowance the Company must project future levels of taxable income. This assessment requires significant judgment. The Company examined the evidence related to a recent history of tax losses, the economic conditions in which it operates recent organizational changes, its forecasts and projections. The Company therefore has recorded deferred tax assets as of December 31, 2011, as it is satisfied the realization standard for the year ended December 31, 2011.  The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit.

The Company had not previously recognized an income tax benefit for its operating losses generated since inception through December 31, 2009 based on uncertainties concerning its ability to generate taxable income in future periods of which, at the time, the realization could not be considered more likely than not.  Based on events subsequent to the balance sheet date, management has re-assessed the valuation allowance and the recognition of its deferred tax losses, however, based on the Company’s history of losses and other negative evidence resulting in the allowance, no income tax benefit will be recognized for prior periods.  The tax benefit for the prior periods, in the amount of $348,800, arising from operating losses as a start-up company and other temporary differences, has been off-set by an equal valuation allowance.
 
The following is a schedule of the deferred tax assets and liabilities as of June 30, 2012 and 2011:
 
   
March 30,
   
December 31,
 
  
 
2011
   
2011
 
Deferred Tax Assets
           
Net Operating Loss Carry Forwards
 
$
456,500
   
$
456,500
 
                 
Deferred Tax Liabilities
               
Total Deferred Tax Assets (Liabilities)
 
$
-
   
$
-
 
                 
Net Deferred Tax Asset (Liabilities)
 
$
456,500
   
$
456,500
 

For balance sheet presentation the Company nets its current deferred tax assets and liabilities and non-current deferred tax assets and liabilities.
 
Management believes that the Company has matured and product acceptance will generate the revenues and achieve a level of profitability that would create taxable income of approximately $1.2 million which would utilize the recognized deferred tax assets.
 
 
10

 
Under the Internal Revenue Code of 1986, as amended, these losses can be carried forward twenty years.  As of December 31, 2011 the Company has net operating loss carry forwards remaining from the following years:
 
   
Net
       
   
Operating
   
Year
 
Year Generated
 
Loss
   
Expires
 
2007
 
$
375,000
     
2027
 
2008
   
977,000
     
2028
 
2009
   
1,255,000
     
2029
 
2011
   
2,126,000
     
2031
 
   
$
4,733,000
         
 
The adoption of provisions, required by Accounting Standard Codification (“ASC”) No. 740, did not result in any adjustments.
 
The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2006 through 2011. The Company state income tax returns are open to audit under the statute of limitations for the years ending December 31, 2006 through 2011.
 
The Company recognizes interest and penalties related to income taxes in income tax expense. The Company had incurred no penalties and interest for the three and six months ended June 30, 2012 and 2011.
 
9. Equity

The company has two classifications of stock:
 
Preferred Stock includes 10,000,000 shares authorized at a par value of $0.001. Preferred Stock has been issued as Series A Preferred Stock. Preferred Stock has liquidation and dividend rights over Common Stock, which is not in excess of its par value. The preferred stock has no conversion rights or mandatory redemption features. There have been 1,000,000 shares of Preferred Stock issued to an entity controlled by Dr. Ruggero Santilli and other members of the Board of Directors. Each share of Preferred Stock is entitled to 100,000 votes.
 
Common Stock includes 900,000,000 shares authorized at a par value of $0.001. The holders of Common Stock and the equivalent Preferred Stock, voting together, shall appoint the members of the Board of the Directors. Each share of Common Stock is entitled to one vote.
 
Reverse Stock Split

On May 15, 2012 the Company's Board of Directors approved a 1:10 reverse split of common shares, effective June 26, 2012.  All share amounts have been retroactively adjusted to reflect the post-split shares

Common Stock Issuances

Founding contributors were issued 6,705,200 shares during 2007.   As management determined that the Company had negligible value, no value was attributed to the founders’ shares.   

During year ended December 31, 2009, the company issued 3,000,000 common shares, valued at $727,000 to secure intellectual property rights and 10,000 common shares under a consulting agreement (see Related Party Transactions). The Consulting agreement was for a five year period, the unearned portion is ratably charged to operations with corresponding reduction to unearned stock compensation, reflected as a contra-equity.

The use of an initial small production refinery has been contributed by Dr. Ruggero Santilli, the Chairman of the Board and former Chief Executive Officer of the Company.  The computed rental values were based on the cost basis of the unit, which is approximately $210,500; the month to month rental agreement is $1,870 per month and has been charged to equipment rental expense in the operating expenses.  To reflect the contributed value, the corresponding entry has been charged to additional paid in capital, and is included in the statement of stockholders’ equity.  Total contributed value was $5,610 for the three and six months ended June 30, 2011 and $22,440 for the year ended December 31, 2011.  Due to production demand, on December 28, 2011, the Company and Dr. Santilli entered into an agreement to transfer the title of the unit to the Company in exchange for a demand note in the amount of $210,500 at an interest rate of 3%.  As of June 30, 2012 the amount has been paid in full.

During 2009, the Company issued investor incentive options attached to their stock subscription.  A total of 85,476 options were issued at various prices and expiring within three years.  During the quarter ended June 30, 2012, 4,762 options were exercised at the  option price of $2.10, for proceeds of $10,000, included in proceeds from sale of stock in financing activities of the statement of cash flows.
 
The Company issued 998,000 shares of preferred stock to the controlling members in January 2012, valued at $998.

On June 1, 2011 (the “Closing Date”), the Company executed agreements for two private offerings of its common stock (each an “Offering”).  In connection with the Offerings, the Company entered into two securities purchase agreements (each a “Securities Purchase Agreement”) with DDI Industry International (Beijing) Co., Ltd (the “Investor”).  Pursuant to the first Securities Purchase Agreement, the Company issued an aggregate of 384,625 shares of its common stock (the “Shares”) to the Investor for a purchase price of $500,000, at $1.30 per share.  Pursuant to the second Securities Purchase Agreement, the Company issued an aggregate of 333,333 Shares to the Investor for a purchase price of $561,248, at $1.68 per share.  The Company has received the proceeds from both offerings. The second offering, in the amount of $561,248 was received in August 2011.
 
 
11

 

Prior to this Offering, the Company and the Investor did have a material relationship.  In June 2010, the Company entered into an agreement with the Investor to form a Chinese joint venture (“MagneGas China”).  Pursuant to the agreement, the Investor acquired exclusive MagneGas™ Technology and manufacturing rights for the Greater China Market.  The Investor also acquired 1,481,482 shares of the Company’s common stock at a purchase price of $2 million and purchased a 300Kw Plasma Arc Refinery at a purchase price of $1.855 million.  The Company owns 20% of the equity in MagneGas China and the Company’s Chief Executive Officer, Dr. Ruggero Santilli, is a member of the board of directors.  Allen Feng, the President and Chief Executive Officer of the Investor, is also a member of the Board of Directors of the Company.
 
In November 2011, the Company entered into a definitive agreement with investors to sell in a private placement 2,034,950 shares of its common stock at a purchase price of $1.60 per unit, including warrants to purchase 2,079,563 shares of its common stock at an exercise price of $3.00, resulting in gross proceeds to the Company of $3.2 million, before deducting placement agent fees and other offering expenses. The warrants are exercisable at a price of $3.00 per share and expire five years from the initial closing date.  During the quarter ended June 30, 2012, 84,125 options were exercised at the  option price of $3.00, for proceeds of $252,375, included in proceeds from sale of stock in financing activities of the statement of cash flows.
 
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 its common stock and warrants to purchase 970,625 shares of its 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. Pursuant to the terms of the definitive agreement, the Company conducted two closings with parties to the definitive agreement.  The initial closing occurred on March 29, 2012, for gross proceeds of $3,117,500 in exchange for 1,558,750 shares of common stock and warrants to purchase an additional 779,375 shares of common stock.  The second closing was completed on April 3, 2012 for gross proceeds of $765,000 in exchange for 382,500 shares of common stock and warrants for an additional 191,250 shares of common stock.  No warrants have been exercised during the three and six month period ending June 30, 2012.
 
Options and Warrants

In the period ending March 31, 2011, the Company issued 50,000 warrants to a consultant with an exercise term of 5 years and a strike price of $1.50.  The Company calculated the value of these shares at $68,500, based on using Black Sholes model.  Assumptions used in the calculation were volatility of 151.7%, estimated life of 2.5 years, 0% forfeiture and risk free interest rate of 1.8%.  On June 28, 2012 these warrants were exercised on a cashless basis, resulting in the issuance of 37,500 common shares.

During 2011, the Company also issued options attached to the purchase of shares at a 1:1 ratio, resulting in the issuance of 2,079,563 options.  Value for these attached options was included in the original capitalized transactions.  These options are exercisable within 3 years at a price of $3.00 per share. During the quarter ended June 30, 2012, 84,125 options were exercised for proceeds of $252,375.

During the six month period ended June 30, 2012, in association with the private placement stated above, there were 1,067,687 warrants issued with the $3,882,500 raise.  These warrants are for a five year period with an exercise price of $4.00 per share.
 
In the period ending March 31, 2012, the Company issued 60,000 options to a consultant with an exercise term of 5 years, vesting over a one year period, and a strike price of $1.50.  The Company calculated the value of these shares at $19,300, based on using Black Sholes model.  Assumptions used in the calculation were volatility of 31.6%, estimated life of 1.5 years, 0% forfeiture and risk free interest rate of 1.8%.  On June 28, 2012 these warrants were exercised on a cashless basis, resulting in the issuance of 37,500 common shares.
 
During the second quarter of 2012, the Company issued 2,910,000 options to employees, in connection with employment agreements, at an exercise price of $1.50, vesting over a 3 year period.  The Company calculated the value of these shares at $3,921,900, based on using Black Sholes model.  Assumptions used in the calculation were: volatility of 31.6%; estimated life of 2.5 years; 0% forfeiture; and risk free interest rate of .39%.  The Company recognized stock-based compensation, on a straight-line basis over the ratable vesting period, in the amount of $325,900 for the three and six month period ending June 30, 2012.
 
The following is a summary of outstanding options and warrants:
 
               
Weighted Average
   
Options
   
Options
   
Intrinsic
   
Exercise
 
Remaining
   
Outstanding
   
Vested
   
Value
   
Price
 
Term
 Options, December 31, 2010
    119,476       119,476     $ 4.11     $ 1.49  
 .1 years
    Granted
    2,129,563       2,129,563     $ 2.64     $ 2.96  
1.4 years
    Exercised
    -       -                  
    
    Forfeited
    (34,000 )       (34,000 )                
    
 Options, December 31, 2011
    2,215,039       2,215,039                  
    
    Granted
   
3,977,687
     
1,320,187
    $ 3.43     $ 2.17  
4.8 years
    Exercised
    (88,887 )       (85,887                
    
    Forfeited
    (130,714 )       (130,714 )                
    
 Options, June 30, 2012
   
5,973,125
     
3,315,625
                 
    
 
10. Related Party Transactions
 
At various times we received advances from Dr. Santilli and Carla Santilli for unsecured promissory notes. All funds are at the same terms of the original stockholder note. These promissory notes have no repayment date; however they are payable within 30 days of written demand. Payment is to include accrued simple interest at 4%. Since 2007, the Company received promissory notes in the aggregate amount of $257,200. All note principal has been paid in full. Accrued interest, in the amount of $9,771, has been accrued on the net balances contributed, and remains outstanding as of the current date.
 
 
12

 
 
In 2008, an advance in the amount of $10,000 was made by a company owned by Dr. Santilli and Carla Santilli, for initial deposit for services. There were no repayment terms to this advance, no stated interest, and the amount was payable upon demand. This advance has been paid in full.
 
In February 2008, we entered into a five-year consulting agreement with Dr. Santilli, whose knowledge and expertise of the technology is essential in the development of the MagneGas product. The terms of the consulting agreement consist of issuance of common stock (10,000 shares) and payment of $5,000 per month to Dr. Santilli, upon the determination by the board of directors of MagneGas Corporation of achieving adequate funding. The board of directors has since determined that Dr. Santilli’s monthly accrued salary will be $15,000 per month.
 
Beginning in April 2008, we entered into a month-to-month lease, at a monthly rate of $2,500 per month for facilities to occupy approximately 3,000 square feet of a 6,000 square foot building and the use of certain equipment and utilities, as needed. In January 2011, the Company expanded to occupy 5,000 square feet of the building and as a result, the rent was increased to $4,000 per month. The facility allows for expansion needs. The lease is held by EcoPlus, Inc., a company that is effectively controlled by Dr. Santilli.
 
On December 28, 2009 we acquired all relevant patents and intellectual property for the MagneGas technology from  Hyfuels, Inc., a company that is related by common management which originally secured an intellectual property license. Dr. Santilli is the President and Chief Executive Officer of Hyfuels, Inc., Carla Santilli is the Secretary of Hyfuels, Inc. and Ermanno Santilli is a director of Hyfuels, Inc. We issued 3,000,000 shares of common stock, valued at the fair market trading value of the stock at the time of purchase, in exchange for the intellectual property and U.S. patents. The intellectual property and U.S. patents were valued at the fair market value of $627,000 at the time of the transaction. We have no further transactions contemplated with Hyfuels, Inc.
 
The use of an initial small production refinery has been contributed by Dr. Santilli. The value of the refinery is approximately $210,000; the computed fair value of this month to month rental agreement is $1,870 per month and has been charged to equipment rental expense in the operating expenses, beginning in July 2008. Due to production demand, on December 28, 2011, the Company entered into an agreement to transfer the title of the unit to the Company in exchange for a promissory note of $210,500. The note was paid in full in April 2012. Accrued interest has been aggregated into the total accrued interest amount noted above.
 
On June, 25, 2010, we entered into an agreement to acquire a 20% ownership of MagneGas Europe. In exchange, we issued to Magnegas Europe 25,000 shares of common shares, which were valued at the fair market price at the date of grant, June 25, 2010, at $0.95 per share for an aggregate of $23,750.  Dr. Santilli is a stockholder of MagneGas Europe, and at the time of the agreement, Ermanno Santilli, our current Chief Executive Officer, was the Chief Executive Officer of MagneGas Europe and Vice President of MagneGas Corporation.

Employment Agreements:
 
During the second quarter of 2012, we entered into employment agreements with our key employees.  A summary of these agreements are as follows:
 
Executive Title
Term*
 
Annual
Salary**
 
Options***
Dr. Ruggero Santilli,
Chairman of the Board and Chief Scientist
March 31, 2014
  $ 180,000  
37,500 vesting per quarter, exercisable at $1.50
Luisa Ingargiola,
Chief Financial Officer
March 31, 2014
  $ 120,000  
25,000 vesting per quarter, exercisable at $1.50
Ermanno Santilli,
Chief Executive Officer
March 31, 2014
  $
144,000
 
37,500 vesting per quarter, exercisable at $1.50
Scott Wainwright,
President
March 31, 2014
  $ 120,000  
37,500 vesting per quarter, exercisable at $1.50
*   Term is extendable at mutual consent.
** Annual salaries also stipulate performance bonuses, to be determined and approved by Board of Directors.
*** Options, valued to be $3,921,900, using Black-Scholes method, The Company recognizes stock-based compensation, on a straight-line basis over the ratable vesting period.  Assumptions used in the calculation were: volatility of 31.6%; estimated life of 2.5 years; 0% forfeiture; and risk free interest rate of .39%.  The Company has recognized $325,900 as stock-based compensation in the current quarter ending June 30, 2012.

 
13

 
 
11. Segment Information

The following information is the results of our operating revenue segments:
 
   
Revenue
   
Costs
   
Margin
 
 June 30, 2012
                       
 Segments:
                 
    Metal Cutting
 
$
274,290
   
$
183,208
   
$
91,082
 
    License Fees
   
46,666
     
-
     
46,666
 
    Unit Sales
   
-
     
-
     
-
 
   
$
320,956
   
$
183,208
   
$
137,748
 
                         
 June 30, 2011
                       
 Segments:
                       
    Metal Cutting
 
$
48,184
   
$
35,596
   
$
12,588
 
    License Fees
   
96,666
     
-
     
96,666
 
    Unit Sales
   
-
     
-
     
-
 
   
$
144,850
   
$
35,596
   
$
109,254
 

12. Contingencies
 
From time to time the Company may be a party to litigation matters involving claims against the Company.  The Company operates with waste, hazardous material and within a highly regulated industry, which may lend itself to legal matters.  Management believes that there are no current matters that would have a material effect on the Company’s financial position or results of operations.
 
 
14

 

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 normal 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 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 sales in this new market.

Metalworking Market

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 independent sales representatives and distributors to support these efforts. The Company has completed the installation of its refinery in Michigan and initiated operations in that location as we execute our strategy.  We have secured several large customers and are in the process of appointing additional distributors and installing additional refineries at strategic customers. 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 finished a one year analysis by a large automobile manufacturing company in Detroit and have received formal approval for use of the gas as a replacement to acetylene on a trial basis.  We are in the process of introducing the fuel at various locations in Michigan to further this relationship. In addition, 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 in Michigan and Florida.
 
 
15

 
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 profitability and expect to begin sales in early 2013.
 
Municipal Market

Although the majority of our focus has shifted to establishing sales in the metalworking market, our long-term plan is to still expand commercially into the municipal wastewater market.  In order to pursue this market, a municipal plant scale demonstration center converting sludge or sewage to fuel and other byproducts is needed. We do not anticipate this will occur until 2013 or later as we are focusing our efforts on generating revenue in the metalworking market and converting existing equipment to produce gas for that market. Although we still plan to pursue the municipal wastewater market in the long term, we are relying on our partners in China and Europe to conduct the extensive testing needed to provide the empirical data to launch this market properly.

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 various countries.
 
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 has been appointed as Chief Executive Officer effective June 15, 2012.
 
2012 Private Placement
 
In the quarter ended March 31, 2012 the Company entered into a definitive 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.
 
Results of Operations

For the three and six months ended June 30, 2012 and 2011
 
Revenues

For the three and six months ended June 30, 2012 and 2011 we generated revenues of $188,973, $45,862, $320,956 and $144,850, respectively. For the three and six months ended June 30, 2012 and 2011 we generated revenues from our metal cutting fuel of $165,640, $22,529, $274,290, and $48,184, 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.
 
During the second half of 2010 we received contracts for our technology licensing. We have recognized $23,333, $23,333, $46,666 and $96,666 for the three and six month periods ended June 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 a 3 – 4 year period.
 
Operating Expenses
 
Operating costs for the three and six months ended June 30, 2012 and 2011 were $2,238,087, $824,687, $2,997,335 and $1,247,863, respectively. During the three and six month periods ended June 30, 2012 we recognized non-cash charge of $1,021,525 and $1,027,523 in stock based compensation, compared to $259,400 and $360,640 in the comparable three and six month period ended June 30, 2011.  Operating expenditure 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.  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.
 
 
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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 a losses in the, amount of $2,166,253, $499,054, $2,860,615 and $714,467 for the three and six months ended June 30, 2012 and 2011, respectively.  The increase in loss 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 six months ended June 30, 2012 and 2011 we received investments of $3,767,195 (net of offering costs of $377,680) and $500,000, 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 operation 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 operation.  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.  Although we believe we currently are adequately financed for limited growth, we plan to complete a second round of funding through a fully registered offering in the next six months to allow the complete fulfillment of our long term strategic plan.
 
As reflected in the unaudited financial statements we have an accumulated a deficit of approximately $7.7 million dollars.  Our cash flow from operations used $1,705,168 of cash, primarily used in the manufacturing and completion of our refineries for future use and the installation of two units at locations.  Our investing activities used $1,248,502 of cash for the acquisition of equipment, primarily cylinders to supply our locations.  Our financing activities resulted in cash provided in the amount of $3,546,971 for the six months ended June 30, 2012, primarily due to the sale of our common shares for net proceeds of $3,767,195, net of $377,680 of offering costs.  

At June 30, 2012 we had $2,022,713 in cash to meet current obligations.  

Management believes that current revenue generated and recent proceeds from the sale of our common stock provides the opportunity for the Company to continue as a going concern and fund the-long term strategic plan.

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 June 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.  
 
 
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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.
 
Item 3. 
Quantitative and Qualitative Disclosures About Market Risk.

We are a Smaller Reporting Company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
   
Item 4. 
Controls and Procedures.
 
Disclosure of controls and procedures.
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports, filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
 
18

 
 
As required by the SEC Rule 13a-15(b), we carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
 
Changes in internal controls over financial reporting.
 
There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q 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.
 
We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
 
Item 1A.   Risk Factors.
 
We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s 2011 Annual Report filed on Form 10-K.   
 
Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds.
 
On April 18, 2012, we issued 215,000 shares of our common stock to certain individuals as compensation for services rendered to the Company. These shares were issued in reliance on the exemption under Section 4(2) of the Securities Act of 1934, as amended (the “Securities Act”). These shares of our common stock qualified for exemption under Section 4(2) since the issuance shares by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of shares offered. We did not undertake an offering in which we sold a high number of shares to a high number of investors. In addition, the investors had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such shares are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these shares would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.
  
Item 3.      Defaults Upon Senior Securities.
 
None
 
Item 4.      Mine Safety Disclosures.
 
Not applicable

Item 5.      Other Information
 
None
 
 
19

 
 
Item 6.      Exhibits
 
Exhibit
Number
 
Exhibit Title
     
31.1
 
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
101.INS *
XBRL Instance Document
   
101.SCH *
XBRL Taxonomy Schema
   
101.CAL *
XBRL Taxonomy Calculation Linkbase
   
101.DEF *
XBRL Taxonomy Definition Linkbase
   
101.LAB *
XBRL Taxonomy Label Linkbase
   
101.PRE *
XBRL Taxonomy Presentation Linkbase
 
In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.

* Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 
20

 
  
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.
 
 
MagneGas Corporation
 
     
 
By:
/s/ Ermanno Santilli
 
   
Ermanno Santilli
 
   
Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)
 
       
 
Dated:
 July 13, 2012
 
 
 
By:
/s/  Luisa Ingargiola
 
   
Luisa Ingargiola
 
   
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
 
       
 
Dated:
 July 13, 2012
 
 
 
21

XNAS:MNGA MagneGas Corp Quarterly Report 10-Q Filling

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XNAS:MNGA Quarterly Report 10-Q Filing - 6/30/2012
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