MagneGas: A Zombie Fest Bursting With Hype, Horrifying Financials, Downside Risk

by Sonya Colberg, Senior Editor - 10/22/2015 10:30:27 AM

MagneGas Corporation's (MNGA) outlandish hype and financials remind us of those lurching, snarling, misunderstood zombies populating the horror film “Night of the Living Dead.”

At the center of the company is founder, Ruggero Santilli. The controversial nuclear physicist has been called everything from brilliant to a fringe scientist.

In a manuscript, “HHO gas” was presented as a new form of matter by Mr. Santilli shortly before he started the Tarpon Springs, Florida company.

A Brown University professor wrote in the International Journal of Hydrogen Energy of Mr. Santilli’s “many serious misinterpretations and, misunderstandings of the “data” presented in this (Mr. Santilli’s) manuscript.” Mr. Santilli responded to the professor’s criticism here and built a reputation as a scrappy scientist who used the legal system to attempt to force detractors to take his ideas seriously.

MagneGas is built on Mr. Santilli’s machine designed to gasify pig manure or other liquid waste into fuel.

This “Magnegas” results when the waste is passed through an electric arc and heated. The alternative fuel is primarily used in welding.

But the technology is unproven on a large-scale industrial basis and might not work well on that basis – according to regulatory filings - or produce a fuel able to compete against standard acetylene.

MagneGas has only been able to claim revenue of ~$584,000 last quarter after acquiring Florida welding gas distributor, Equipment Sales and Services, in 2014. Today, the company announced the subsidiary “Lands Largest Single Customer in Company History.” But it is just so much more hype. The touted $400,000 per year customer “has indicated they will be purchasing all of their industrial gases and welding products throughout the year from E.S.S.I and their initial orders have been placed and delivered.”

There are only two months left in this year. Running the math, then, that order for the entire year would amount to just about $66,000 revenue.

And, while there could be something to this announcement, there’s no guarantee the order will be renewed and the word "indicated" is worrisome.

While investors may find other viewpoints here, TheStreetSweeper presents in this ongoing investigation the first six reasons MagneGas hands out downside risk like candy.

*Bought and Paid For Hype

MagneGas is so overvalued and its prospects so low, wise investors would normally run as if zombies really were after them.

So the company buys investors’ love.

In the last few years, MagneGas stock has been hyped by stock promoters an astounding 52 times at a cost to MagneGas and a third party of over $260,000.

Indeed, our analysis of stockpromoters.com data reveals eye-popping details.

*MagneGas itself paid stock promoters roughly $59,000 and 650,000 shares of its own stock.

Yet those payments are just the beginning.

*MagneGas friend ACS Financial Consulting Group pitched in hundreds of thousands of dollars for these stock promoting sites to hype MagneGas through newsletters and other means.

Here’s a snapshot:

(Source: stockpromoters.com. Click on “view” for more details)

These little newsletters and email blasts have a name – and we think you know what that name is.

*Inadequate Hype Disclosure

Another massive issue is this: Securities law requires disclosure of these promotions.

Let’s look at this huge red flag:

A company that engages a stock promoter should disclose in SEC filings the terms of the stock promoter’s engagement, including compensation, in order to avoid becoming a target of securities enforcement actions under the Securities Act.

But here is the MagnesGas incredibly vague disclosure:

“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 and customer awareness and as incentive to its key employees and consultants.”

The SEC-mandated annual report simply states:

“Investor relation and public expense expenses increased $881,600 in 2014 due to the costs associated with our funding and for the increase in regulatory compliance and the promotion of the public awareness.”

And:

“We use restricted common stock as a method of payment for certain services … to increase market awareness …”

The promotional arrangements are not clear, by any means. This is an absolutely significant sign of a highly risky stock.

*Massive Insider Selling

Another jolt to investor psyche comes when one looks at key hype dates and insider selling.

MagneGas hype hits in a series of blitzes. Below, the stars show the number of promotions that occurred on any given date in 2015.

The chart below indicates several things.

First, note the five insider sells in May. These were quickly followed by six big promotional efforts that month (indicated below in yellow), coinciding with a stock price increase.

(Source: Nasdaq.com)

Second, insiders unloaded big-time during July. Then a big promotional blitz hit in July. And a couple more insider sales (highlighted in yellow) occurred shortly afterward.

Third, after a quiet month in August, more promotional efforts occurred in late September and this month, as shown by the last four yellow dots on the graphic above.

Fourth, more insider selling will likely become evident soon, when insiders report this month’s sales.

Most of the shares were sold by a director who is also the founder’s wife, Carla Santilli and another director, Christopher Huntington. Since both people likely have a good sense of the stock’s true value, these sales are worrisome for investors still holding stock.

*Horrifying Financials

Outlandish insider selling and paid promotions call for a little more perspective on what is driving all this activity.

All figures below are from the company’s regulatory filings, here and here.

$$$ MagneGas revenues –primarily from acquiring welding gas distributor ESSI- were just $1 million for all of 2014.

$$$ Selling, general and administrative costs were $3.5 million.

$$$ Stock-based compensation, stock used for services reached $2.7 million!

$$$ Those stock costs exceeded R&D expenses by almost 7 times!

$$$ Total net loss increased 13% to ~$7.2 million.

$$$ Net loss last quarter reached $4.3 million.

$$$ Company losses are now ~ $30 million.

And filings say the only significant sales in its history consisted of a one-time, $1.85 million refinery sale to China in 2010.

*Cash Position, Deadly Accident Suggest Imminent Stock Offering

The sole analyst covering MagneGas hasn’t paid attention since 2012 and institutional interest is almost non-existent at 2 percent.

So almost no one has noticed that the company’s cash – produced by three stock offerings in 2014 - has dwindled down to about $4 million. Yet MagneGas burns through about $1.5 million per quarter.

Cash burn will likely jump significantly. A tragic accident during the gas filling process killed one employee and injured another in April, potentially leading to additional regulatory scrutiny and costly litigation.

So the company will almost certainly need to raise capital - likely through an offering that will dilute stock held by today’s shareholders.

*Fire-Breathing Indicators

Investors can see that there are no bullish indicators for MagneGas but the bearish indicators are mighty, shown below:

(Source: Nasdaq)

*Conclusion:

MagneGas’ spook fest has risen to cataclysmic proportions … and, unless someone drives a stake into the heart of the problem, earnings losses will continue long after Halloween night.

Indeed, trademark qualities such as a short-term rally and high volatility … as shown by the stock chart below … plus bought-and-paid-for hype, inadequate disclosure, insider selling, virtually non-existent upside and financial gloom make MagneGas a great stock to avoid at all costs.

(Source: Yahoo Finance)

We believe MagneGas should be realistically valuated at about 25 cents per share.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in MNGA and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.

 

 

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