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MAGNEGAS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) 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. Our Company We are an alternative energy company that creates a system that produces hydrogen based fuel through the gasification and sterilization of liquid and liquid waste. We have developed a process which gasifies various types of liquid waste through a proprietary plasma arc system. A byproduct of this process is a type of syngas that works as an alternative to natural gas currently sold in the metalworking market as a cutting fuel. We produce gas bottled in cylinders for the purpose of distribution to the metalworking market as an alternative to acetylene and other cutting gases. Additionally, we market, for sale or licensure, our proprietary plasma arc technology for the processing of liquid waste (the "Plasma Arc Flow" or "Plasma Arc Flow System") and for the production of MagneGas for co-combustion with hydrocarbon fuels to reduce emissions. Through the course of our business development, we have established a retail platform to sell our fuel for use in the metalworking and manufacturing industries. History MagneGas Corporation was organized in the state of Delaware on December 9, 2005. We were 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 by Clean Energies Tech Co., a private company owned by Dr. Ruggero Santilli, the inventor of the Plasma Arc Flow™ technology. Following this stock purchase, our name was changed to MagneGas Corporation. 18 Recent Developments The Company has spent the last several months developing its strategy for increasing revenue and reducing costs. To that end, it has identified three major market segments which it will pursue for generating revenue: · Industrial Gas Sales · Equipment Sales for Liquid Waste Processing · Use of MagneGas™ for the Co-Combustion of Hydro-Carbon Fuels to Reduce Emissions The Company has launched a new Research and Development initiative with the following focus: · High volume processing of oil · Combustion of MagneGas with Hydrocarbon fuels, such as coal, to reduce emission · Third party verification of fuel and equipment safety and performance results Sales Industrial Gas Sales The Company has signed several new fuel distributors for the metal working market, including Accugas and GTW Welding in Michigan and Welders Services Incorporated in Indiana. It also continues to sell fuel through existing distributors in Michigan, Florida and Pennsylvania. In addition, the Company is in various stages of negotiation with several other distributors and large end users in the Industrial Gas industry. The Company has received approval by the Clearwater Florida and New York City Fire Departments and they have confirmed that they are in final stages of testing for the use of MagneGas fuel as a replacement for acetylene in metal cutting for extractions and demolitions. Both cities have placed their initial order for fuel and the Company has been in extensive training with fire fighters from both locations for its proper use. These relationships further validate the safety and effectiveness of the MagneGas fuel for metal cutting. On October 27, 2014, the Company closed on the purchase of 100% of the outstanding issued and outstanding Capital Stock of Equipment Sales and Service, Inc. a Florida Corporation, from Robert A. Ficocelli Revocable Trust, Robert A Ficocelli and Stephen R. Homer (each, a Seller Party and together, the "Seller Parties"), The purchase price was $3,000,000 of which $150,000 is being held in escrow for a period of 9 months to ensure no material events not previously disclosed occurred. ESSI will be used as a launching platform to accelerate MagneGas fuel sales into the Florida market by allowing the Company access to a variety of goods and services for the metal working market and access to acetylene customers for potential conversion into MagneGas. Equipment Sales On August 23, 2013, we entered into a definitive agreement with a group from the Central Asian country of Kazakhstan to supply them with a mini-refinery for $499,000 which they plan to use to test various liquid wastes. Based on the results of these tests, they anticipate purchasing an industrial size unit in 2014 or 2015. On August 19, 2013, the Company entered into a Memorandum of Understanding with "EAWC Technologies" of Florida and "Swiss Water Tech" of Switzerland to promote the sale of the MagneGas™ refineries through their network of clean energy and clean water distribution platforms. EAWC Technologies has continued its efforts to sell the technology in Switzerland, Hungary and Pakistan. The Company has started a new marketing campaign aimed at pursuing international equipment sales in strategic areas of the world through social media, industry events and a network of independent brokers. It is in the process of launching a new platform of brochures and other related media to promote international sales in this market. The Company is in various stages of negotiation and testing for the sale of equipment. 19 MagneGas for the Co-Combustion of Hydro-Carbon Fuels to Reduce Emissions On October 8, 2013, the Company signed a Memorandum of Understanding with a confidential party (the "USA MOU"), an unrelated group from the United States, to enter into a joint venture arrangement for the testing, development and pursuit of the Co-Combustion of MagneGas™ with Coal Fired Power Plants to reduce the stack emissions and increase heat extraction (the "Joint Venture"). This Joint Venture included a $100,000 deposit, which was paid to the Company in September 2013 by the confidential party. The Joint Venture includes the creation of a New Company which will hold the exclusive rights for this market for the United States and Canada. A major research center in the United States associated with a large utility company is currently conducting third party testing and validation. The Company has completed internal testing both in the United States and Australia and has demonstrated reduced hydrocarbon emission and increased heat with the Co-Combustion of Coal and MagneGas™. The third party testing is anticipated to also include an analysis of the volume of gas needed to achieve lowered emission results and the economic impact of this solution. Once third party testing is complete, the Company will work through the new Joint Venture to sell equipment, fuel and byproducts to end user coal power plants in this market. On January 16, 2014, the Company established a subsidiary company, Supplemental Energy Solutions, LLC ("SES"), to pursue this market. On June 16, 2014, the Company and the confidential party entered into a Supplement to the USA MOU (the "Supplement") pursuant to which the parties agreed: 1) that the Company is allowed to transfer half of its interest in SES to FutureEnergy Pty Ltd. of Australia; and 2) to extend the term during which SES has the option to purchase a recycler under the USA MOU in order to retain certain exclusivity rights. Currently, the Company owns 25% of SES, FutureEnergy Pty Ltd. owns 25% of SES, and the confidential party owns 50% of SES. Additional partners will be added as warranted. The Company conducted the initial testing of Co-Combustion with Future Energy LLC of Australia, who has since filed a provisional patent for the combustion system used for these tests. The Company entered into a Memorandum of Understanding with Future Energy LLC on September 14, 2013 to share in ownership of this Intellectual Property. The Company is currently negotiating an extended version of this agreement to include other Intellectual Property. On March 19, 2014, the Company signed a Joint Venture agreement with FutureEnergy Pty Ltd of Australia that superseded the Future Energy MOU (the "Future Energy JV Agreement"). Under the terms of the Future Energy JV Agreement, both parties will own 50% of a new Company formed for the purpose of developing, licensing and commercializing new intellectual property for co-combustion of MagneGas fuels with hydrocarbon fuels to reduce emissions and increase energy. The Future Energy JV Agreement t includes and extends beyond the existing partnership of coal co-combustion to include other current and future developments such as the combustion of MagneGas with diesel, heavy oil, aviation fuels, and liquid petroleum gas. Research and Development High Volume Processing of Oil The Company has historically processed oil through the addition of water or other dilution, which limits the volume of oil processed and decreases the flame temperature. There are several customers that have requested larger volume processing of oil based waste. The Company has spent considerable effort to achieve lower dilution levels and higher volume processing and has made significant progress to date. It anticipates the oil processing system will be completed in 2014. This research resulted in an entirely new family of MagneGas gasifiers based on the Venturi system for which MagneGas filed a definitive patent. 20 Smaller Scale Recycler The MagneGas Research and Development team has focused on developing smaller units at lower cost and shorter turnaround times allowing the rapid testing of a variety of liquids. The Company has created a new 20kW micro-unit for the testing of various liquid waste. This unit expedites the testing process for customers and includes a new venturi design which is expected to be the next generation of MagneGas™ refineries. The creation of this new unit has substantially increased the speed and efficiency of the testing process for new customers. Third Party Validation of Fuel and Equipment · The Company received independent test results from a laboratory in Europe that demonstrated that sewage, swine blood and leachates, when passed through the MagneGas™ system, results in full sterilization of bio-contaminates suspended in the liquid. · MagneGas Australia (an unrelated MagneGas distributor) completed testing of MagneGas™ combusted with coal and found that the emissions from the coal were reduced and the heat output was increased. · An independent laboratory in the United States provided certified results that cutting metal with MagneGas does not impact the metal or impede the strength of the weld. · An independent laboratory in the United States provided certified results that MagneGas™ made from a proprietary blend of liquid does not contain Carbon Dioxide. · An independent laboratory tested MagneGas2 vs acetylene on 2 inch plate and found that it cut 38% faster and consumed 30% less oxygen. · An independent laboratory completed shock testing and rapid high compression testing of MagneGas and certified its safety under those conditions. · The Company obtained confirmation from the Environmental Protection Agency that manure which is processed through the MagneGas sterilization system meets Class A treatment requirements. Our Industry Metalworking We produce fuel for the metalworking fuel market. This market is currently dominated by acetylene. Acetylene is a gas that is considered toxic, unstable, emits soot when it burns and can be volatile. In recent years, several acetylene production plants have exploded which has resulted in a restriction of supply, increased regulation and rising prices. MagneGas™ on the other hand, emits oxygen when it burns and independent users have rated MagneGas™ as a cleaner alternative to acetylene. The inherent instability of the chemical composition of acetylene also causes significant and unpredictable risks for firefighters resulting in significant delays and disruption caused by fires involving acetylene. The rescue and fire services of the United Kingdom, US and Australia and the department of labor all recommend alternatives to acetylene and have specific and different firefighting technics for fires involving acetylene. As a result MagneGas is very attractive to fire services as a safer and faster alternative to acetylene for extractions. Liquid Waste Processing Water-based liquid waste such as sewage, sludge and manures, are traditionally sterilized through the use of anaerobic digestion systems or the addition of chemical sterilization agents. Independent chemical analysis shows that the Company's patented Plasma Arc Flow System sterilizes water based waste, without the use of chemical additives or anaerobic digestion, while producing a fuel for use as a natural gas alternative. The byproduct of this process is to produce a sterilized liquid that is under development for use as a liquid fertilizer or irrigation water.Recent studies have shown incomplete sterilization at many sewage treatment facilities resulting in elevated levels of drug resistant microbes in the liquid effluent and air surrounding sewage treatment plants. The recent worldwide scare on Ebola and other infection diseases is driving the industry to develop better and more complete ways to sterilize sewages and sludges. Co-Combustion The Company has tested in the United States and Australia the co-combustion of MagneGas with hydrocarbon fuels to reduce toxic emissions. The results of the tests included a reduction in carbon dioxide and other particulates and an increase in heat output. The power industry traditionally uses external filtration "scrubbing" systems to reduce emissions of hydrocarbon fuels in the production of electricity. It is the Company's opinion that MagneGas can be used to better reduce emissions at a lower cost. It is currently conducting third party testing to confirm the results and determine the volume of gas needed to analyze the economic viability of this solution. 21 Our Products We currently have two products: the fuel called MagneGas™ and the machines that produce that gas known as, Plasma Arc Flow refineries. Fuel In the United States, we currently produce MagneGas™, which is comprised primarily of hydrogen. The fuel can be used as an alternative to natural gas to power industrial equipment, automobiles and for metal cutting. The fuel is stored in hydrogen cylinders which are then sold to market on a rotating basis. However, the Company has found that its current feedstock creates a fuel that has a flow rate which is difficult to control without repeated training of the user. As a result, we are in the process of developing a new version of MagneGas with a slower flow rate. The Company anticipates that it will introduce this new fuel by the end of 2014. The new fuel has a lower cost feedstock, which we believe can not only compete against acetylene but also all other cutting gases such as propane. On July 16, the Company launched a new fuel it has named "MagneGas2". This fuel is produced from renewable waste and independent tests have confirmed that it cuts 38% faster than acetylene. The fuel has similar properties as acetylene making it easier for end users to adopt with limited training. On September 29, the Company launched a new product line it has named "MagneTote". This product is a storage and transport system that can be used by firefighters which allows quicker access to fuel. The system has been designed to be used in emergency extraction situations. Equipment The Plasma Arc Flow System can gasify many forms of liquid waste such as ethylene glycol and sterilize sewage and sludge. Plasma Arc Flow refineries have been configured in various sizes ranging from 50kw to 500kw depending on the application. Plasma Arc Flow refineries range in price from $500,000 to $5 Million. A 200Kw refinery was sold in 2010 to a customer in China for $1.855 Million. We signed an agreement on August 23, 2013 with a group from Central Asia for $499,000 which has been paid in full. Manufacturing Equipment MagneGas™ systems are produced by us at our facility in Tarpon Springs, Florida. The proprietary components of the system are manufactured on location, while commercially available components such as generators and compressors are purchased from existing suppliers and assembled in Tarpon Springs. A new facility was purchased in September in Clearwater, Florida and the Company plans to relocate its headquarters to this new location. Fuel MagneGas™ currently has the ability to produce fuel in Florida and ship the fuel to its various distributors. The fuel is compressed into standard industrial gas cylinders and delivered directly to local retail customers and distributors. Current MagneGas™ production is temporarily from a feedstock of virgin ethylene glycol (anti-freeze) and used vegetable oil. We are currently working to enhance our ability to process and compress fuels produced from waste oils on a high volume basis. Jointly, our plan includes provisions to secure the feedstock supplies, relationships and logistical abilities to process post-consumer waste oils such as used motor oils and/or anti-freeze. We estimate that the cost of using post-consumer waste steam feedstock, including related costs such as permitting and waste disposal, will be least 50% lower than the cost of virgin feedstock furthering MagneGas's advantage over acetylene and allowing us to effectively compete in the propane market. Customers We distribute products through several industrial gas companies in Michigan, Florida, Georgia, Indiana, and Pennsylvania. In addition, we have direct retail customers in both Michigan and Florida. In order to become a full service supplier of metal cutting fuel and hard goods, we have entered into an agreement with Matheson Tri-Gas, Inc. to purchase oxygen, argon, nitrogen and other gases at wholesale prices. In addition, we have now started distributing hard goods such as tips, torches, and regulators through Nasco, Inc. a national company that distributes welding supplies. On October 27, 2014, the Company closed on the acquisition of a regional gas distributor from Florida. 22 Strategic Relationships We recently entered into commercial testing and discussion with a select group of leading U.S. strategic industrial companies and military contractors which, after conducting preliminary reviews of MagneGas™, are now seeking further testing or have agreed to purchase MagneGas™. These types of relationships inherently have a long sales cycle and have been under development for several years. Navy The U. S. Navy has been working with us to explore both the use of MagneGas™ for metal working and the use of the Plasma Arc Flow system for liquid waste processing. The National Center for Manufacturing Sciences, a testing contractor for the U.S. Navy, completed testing of MagneGas™ as an environmentally-friendly alternative for major metal cutting projects, particularly to reduce emissions during the breakup and recycling of retiring vessels. The final written report compared seven methods and gases for metal cutting to find the lowest opacity and showed MagneGas™ as one of the only two methods with positive results. The Company has developed a gas without Carbon Monoxide to meet the Navy standards for this project. On November 1, 2013 the Navy accepted the specifications of this gas and requested onsite testing which occurred in December 2013. The Company has provided the Navy pricing on fuel and is awaiting response. Due to the slow response time, the Company has hired two independent consultants with military backgrounds to assist with the project. Fire Department Initiatives Both the Clearwater, Florida and New York City Fire Departments have begun to purchase and test MagneGas as a replacement to acetylene and other cutting systems used by firefighters. Most vehicles used by fire departments in the United States are equipped with acetylene gas to use with demolition and extraction emergencies. MagneGas is stored in cylinders that are much lighter than acetylene, making it easier to handle. In addition, MagneGas has a much smaller heat affected zone, which can be critical to prevent further injury in the event of human extraction from a vehicle or dwelling. Sterilization Equipment Sale Strategic Alliances The Company has entered into three Memorandum of Understanding with a select group of strategic partners to launch the sterilization equipment sale market. One was signed with a major hog farm in Indiana, one with a fish farm in Louisiana and one with a waste treatment company in Florida for treating medical waste. The strategy of the Company is to test various liquid wastes in key industries, place MagneGas recyclers on site for industrial testing and use and then take advantage of the various sites as demonstration centers to further sales in those markets. Regulation We are subject to several state, federal and local laws and oversight by several agencies, including the U.S. Environmental Protection Agency, Florida Department of Transportation, Florida Department of Environmental Protection ("DEP") and the Occupational Safety and Health Act in addition to local city and state zoning, fire and other regulations. We have obtained a hazardous material transportation permit from the Department of Transportation to allow the transport of MagneGas throughout the state of Florida. We use licensed hazardous waste transporters to deliver fuel to the rest of the country. We currently use virgin ethylene glycol to produce fuel and thereby are not subject to the DEP permit required to process liquid waste. However, we are currently exploring the application process to obtain a hazardous and non-hazardous liquid waste processing permit. Internationally, we recently obtained a compliance certification that confirms that the manufacturing and operation of our equipment is in conformance with the mechanical and electrical safety requirements of the European Community laws. We and our customers may be required to comply with a number of federal, state and local laws and regulations in the areas of safety, health and environmental controls. In as much as we intend to market the Plasma Arc Flow System internationally, we will be required to comply with laws and regulations and, when applicable, obtain permits in those other countries. 23 We cannot be certain that required permits and approvals will be obtained, that new environmental regulations will not be enacted, or that if they are, our customers and we can meet stricter standards of operation or obtain additional operating permits or approvals. Facilities We presently lease 5,000 square feet for our principal offices at 150 Rainville Rd, Tarpon Springs, FL 34689 on a month-to-month basis. The property is a commercial property for our production facility with an attached office. In addition, we have purchased a manufacturing facility adjacent to our current offices, which will allow the construction of up to 30 refineries at a time. This manufacturing facility consists of 2.7 acres of land, a structure to be converted to future office space and a structure currently used to manufacture refineries. In addition, in September we purchased an industrial building in Clearwater, Florida and will be moving our headquarters to that location. The Company will be terminating the lease at its current headquarters, located at 150 Rainville Road, Tarpon Springs, FL 34689, and will be placing the property at 1500 Rainville Road for sale. Intellectual Property The Plasma Arc Flow refinery forces a high volume flow of liquid waste through an electric arc between carbon electrodes. The benefit of this from a competitive perspective is that it sterilizes the bio-contaminants within the waste without the need to add any chemical disinfecting agents. In addition, while sterilizing the liquid, a clean burning fuel is produced. In addition to the patents list below, the Company has several patents pending. MagneGas Corporation has patent ownership on the technology in the United States and is exploring filing patents under the Patent Cooperation Treaty in other areas of the world as needed. MagneGas Corporation has a 20% ownership interest in MagneGas entities that control the intellectual property in Europe, Africa and China. MagneGas Corporation owns the following U.S. patents: U.S. Patent No. 6,926,872 - issued on August 9, 2005 entitled Apparatus and Method for Producing a Clean Burning Combustible Gas With Long Life Electrodes and Multiple Plasma-Arc-Flows; U.S. Patent No. 6,972,118 - issued on December 6, 2005 entitled Apparatus and Method for Processing Hydrogen, Oxygen and Other Gases; U.S. Patent No. 7,780,924 - issued August 24, 2010 entitled Operating Under High Power, Pressure and Temperature Conditions to Produce A Combustible Gas. U.S. Patent No. 8,236,150 -issued on August 20, 2012 entitled, "Plasma-Arc-Through Apparatus and Process for Submerged Electric Arcs." We also own the United States and Mexico Trademark for "MAGNEGAS." Recent Financings On January 27, 2014, the Company closed on a sale of securities to an institutional investor (the "January 2014 Investor") providing for the issuance and sale by the Company (the "January 2014 Offering") of 2,323,584 shares of the Company's common stock, par value $0.001 per share, for a purchase price of $1,858,867.20 and $2,141,132.80 million of shares of the Company's Series B convertible preferred stock (the "Series B Preferred Stock") which were convertible into a total of 2,676,416 shares of common stock (the "Series B Conversion Shares"). In connection with the purchase of shares of Series B Preferred Stock in the January 2014 Offering, the January 2014 Investor received warrants to purchase a number of shares of common stock equal to 100% of the number of Series B Conversion Shares at an exercise price equal to $1.11 (the "January 2014 Warrants"). Each January 2014 Warrant shall be initially exercisable on the six (6) month anniversary of the issuance date and have a term of exercise equal to five (5) years from the date on which first exercisable. As of March 31, 2014, all of the shares of Series B Preferred Stock had already been converted into the Series B Conversion Shares. 24 On March 28, 2014, the Company completed an offering (the "March 2014 Offering") with an institutional investor (the "March 2014 Investor"). The securities sold in the March 2014 Offering consisted of 2,000,000 shares (the "Shares") of the Company's common stock, par value $0.001 per share, and 2,100.5 shares of the Company's Series C convertible preferred stock (the "Series C Preferred Stock") which are convertible into a total of 1,448,276 shares of common stock (the "Series C Conversion Shares") for an aggregate purchase price of $5,000,000 (the Shares, the Preferred Stock and the Conversion Shares shall be referred to as the "Registered Stock"). The Registered Stock is being offered by the Company pursuant to an effective shelf registration statement on Form S-3, which was initially filed with the SEC on May 17, 2013 and declared effective on May 28, 2013 (File No. 333-188661) (the "Registration Statement"). In connection with the purchase of shares of the Registered Stock in the March 2014 Offering, the Company issued warrants to the March 2014 Investor to purchase 1,724,138 shares of common stock at an exercise price equal to $2.15 (the "March 2014 Warrants"). Each March 2014 Warrant shall be initially exercisable on the six (6) month anniversary of the issuance date and have a term of exercise equal to five (5) years from the date on which first exercisable. On October 23, 2014, the Company issued 3,000,000 shares, pursuant to an effective shelf registration statement, of the Company's common stock, par value $0.001 per share, at a purchase price of $1.00 per share, 1,060 shares, pursuant to an effective shelf registration statement, of the Company's Series D-1 convertible preferred stock, par value $0.001 per share, at a purchase price of $1,000 per share, which are convertible into a total of 1,060,000 shares of common stock for an aggregate purchase price of $4,060,000 and 940 unregistered shares, in a private placement, of the Company's Series D-2 convertible preferred stock, par value $0.001 per share, at a purchase price of $1,000 per share, which are convertible into a total of 940,000 shares of the Company's Common Stock for an aggregate purchase price of $940,000. In connection with the purchase of the Series D-2 Private Placement Preferred Shares, the Investor received unregistered warrants to purchase 5,000,000 shares of the Company's common stock at an exercise price equal to $1.31. Each Warrant shall be initially exercisable on the six (6) month anniversary of the issuance date and have a term of exercise equal to five (5) years from the date on which first exercisable. Employees We presently have twenty six full-time employees. We have leased employees and independent technicians perform production and other duties, as required. We consider our relationship with our employees to be excellent. Results of Operations Comparison for the three and nine months ended September 30, 2014and 2013 Revenues For the three months ended September 30, 2014 and 2013 we generated revenues of $146,400 and $125,410, respectively. For the three months ended September 30, 2014 and 2013, we generated revenues from our metal cutting fuel of $123,067and $102,077, respectively. For the nine months ended September 30, 2014 and 2013 we generated revenues of $516,331 and $391,698, respectively. For the nine months ended September 30, 2014 and 2013, we generated revenues from our metal cutting fuel of $391,991 and $321,699, respectively. Our increase in revenue was primarily due to an increase in metal cutting gas sales, along with the balance of the revenue recognized from the sale of a recycler to our customer from Kazakhstan. The increase in metal cutting gas sales were a result of the signing of new distributors, the addition of new direct customers and the selection of MagneGas fuel for several demolition projects. For our technology licensing, we have recognized $23,333 and $23,333 for the three months ended September 30, 2014 and 2013, respectively, and $69,999 and $69,999 for the nine months ended September 30, 2014 and 2013, respectively. These license fees are ratably earned over the terms of the licensing agreement. Operating Expenses Operating costs for the three months ended September 30, 2014 and 2013 were $1,954,518 and $1,559,799, respectively, and for the nine months ended September 30, 2014 and 2013 were $5,125,100 and $4,690,376, respectively. During the three months ended September 30, 2014 we recognized a non-cash charge of $380,535 in stock based compensation, compared to $394,727 in the comparable three months ended September 30, 2013. Other non-cash operating expenses were due to depreciation and amortization charges of $104,707 for the three month period ended September 30, 2014, compared to $113,390 for the three months ended September 30, 2013. During the nine months ended September 30, 2014 we recognized a non-cash charge of $1,112,563 in stock based compensation, compared to $1,180,021 in the comparable nine months ended September 30, 2013. Other non-cash operating expenses were due to depreciation and amortization charges of $269,921 for the nine month period ended September 30, 2014, compared to $420,289 for the nine months ended September 30, 2013. The increase in expenses were primarily due to the an increased focus on investor relations as well as for research and development related to co-combustion and the new oil processing system, while still being able to recognize an offset in our general and administrative operating expenses. 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. 25 Net Loss Our operating results have recognized losses in the amount of $1,905,701 and $1,473,416 for the three months ended September 30, 2014 and 2013, respectively, and losses in the amount of $4,935,903 and $4,487,390 for the nine months ended September 30, 2014 and 2013, respectively. The increase in the losses was attributable to increase in expenses related to investor relations of which some were offset by decreases in general and administrative expenses through better utilization of funds and implementing tighter controls and policies focusing on priorities to develop new strategies and approaches to the market. Liquidity and Capital Resources The Company recently completed three capital raises and has $5,113,791 in cash as of September 30, 2014. The Company does not anticipate any additional capital raises in 2014 as it strives to obtain cash through the sale of fuel and equipment. As reflected in the unaudited financial statements we currently have an accumulated a deficit of approximately $23.5 million dollars. Our cash flow from operations for the nine month period ending September 30, 2014 used approximately $2.7 million of cash. Cash was used primarily to fund ongoing operations. Recent 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 these consolidated financial statements. Critical Accounting Policies Our significant accounting policies are presented in this Report in our notes to financial statements for the period ended September 30, 2014 and in our notes to financial statements for the fiscal year ended December 31, 2013, which are contained in the Company's 2013 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 GAAP. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with our board of directors; however, actual results could differ from those estimates. We issue restricted stock to consultants for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete. Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable. When required impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available, 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. We generate revenue through three processes: (a) our sale of our 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. We recognize 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. Subsequent Events On October 10, 2014, MagneGas Corporation (the "Company") signed a Letter of Intent (the "LOI") with Pioneer Recycling ("Pioneer"), to test and treat liquid medical waste and expired pharmaceuticals. The LOI calls for Pioneer to provide initial testing of medical waste and expired pharmaceuticals. Ultimately, the companies want to form a joint venture to market a comprehensive treatment solution. On October 23, 2014, the Company issued 3,000,000 shares, pursuant to an effective shelf registration statement, of the Company's common stock, par value $0.001 per share, at a purchase price of $1.00 per share, 1,060 shares, pursuant to an effective shelf registration statement, of the Company's Series D-1 convertible preferred stock, par value $0.001 per share, at a purchase price of $1,000 per share, which are convertible into a total of 1,060,000 shares of common stock for an aggregate purchase price of $4,060,000 and 940 unregistered shares, in a private placement, of the Company's Series D-2 convertible preferred stock, par value $0.001 per share, at a purchase price of $1,000 per share, which are convertible into a total of 940,000 shares of the Company's Common Stock for an aggregate purchase price of $940,000. In connection with the purchase of the Series D-2 Private Placement Preferred Shares, the Investor received unregistered warrants to purchase 5,000,000 shares of the Company's common stock at an exercise price equal to $1.31. Each Warrant shall be initially exercisable on the six (6) month anniversary of the issuance date and have a term of exercise equal to five (5) years from the date on which first exercisable. On October 27, 2014, the Company purchased 100% of the outstanding issued and outstanding Capital Stock of Equipment Sales and Service, Inc. a Florida Corporation, from Robert A. Ficocelli Revocable Trust, Robert A Ficocelli and Stephen R. Homer. The purchase price was $3,000,000 of which $150,000 is being held in escrow for a period of 9 months to ensure no material events not previously disclosed occurred. 26 Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. |