MagneGas' (MNGA) CEO Ermanno Santillion Q1 2016 Results - Earnings Call Transcript

| About: MagneGas Corporation (MNGA)

MagneGas Corporation (NASDAQ:MNGA)

Q1 2016 Earnings Conference Call

May 16, 2016 10:00 ET

Executives

Natalya Rudman - IR

Ermanno Santilli - CEO

Luisa Ingargiola - CFO

Analysts

Amit Dayal - Rodman & Renshaw

Brian Murphy - Merriman Capital

Operator

Greetings and welcome to the MagneGas Corporation's First Quarter 2016 Earnings Business & Update call. At this time, all participants are in a listen-only mode. And a brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Ms. Natalya Rudman. Thank you, you may now begin.

Natalya Rudman

Thanks, Michelle and good morning everyone and thank you for joining MagneGas first quarter 2016 financial results and business update conference call. On the call with us today is Ermanno Santilli, Chief Executive Officer of MagneGas; and Luisa Ingargiola, Chief Financial Officer of MagneGas. At the conclusion of today's prepared remarks, we will open the call for your questions. If anyone has any questions after the call please contact Crescendo Communications at 212-671-1020.

Before we begin, let me take a minute to note that this conference call may contain forward-looking statements. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. Such information is subject to known and unknown risks, uncertainties and other factors that could influence actual results or events and cause actual results or events to differ materially from those stated, anticipated or implied in the forward-looking information. Listeners are cautioned not to place undue reliance on forward-looking information as no assurance can be given as to the future results, levels of activity or achievements.

With that out of the way, let me now turn the call over to Ermanno Santilli, Chief Executive Officer. Please go ahead, Ermanno.

Ermanno Santilli

Thanks Natalya and thanks to everybody for joining the call today. I am happy to report we are continuing to execute on our strategy to expand MagneGas2 sales and geographic foot print while increasing our recurring revenue base.

I am pleased to report the revenue for the first quarter for the industrial gas segment increased by 27% up to $665,000 versus the same period last year. We believe that the MagneGas2 was one of the few differentiating products in the industrial gas business due to its high speed cutting renewable source and the safety and ecofriendly attributes.

We believe this differentiation together with our 2014 acquisition of the ESSI led to a significant increase in new customers and distributors. We are also focusing on expanding geographically and recently announced will be opening a third retail location in Central Florida. This new location we will be able to distribute MagneGas2 in areas not previously serviced and we expect that this creates demand, revenue opportunities from industrial gas and welding supplies.

In addition, we expect to be in a much better position to service our projects with the sub-contractors working at NASA and the Kennedy Space Center in Florida. We are now at the tipping point with the distributors where they are approaching us and asking if they can distribute our quarter.

We believe our product allows for above average distributor sales growth through the acquisition of competitive accounts with MagneGas2 as a differentiator. Customers tell us that MagneGas2 adds dollars to their bottom line due to increase productivity, lower fuel consumption and quicker, less costly projects.

In the beginning of the first quarter we announced the two significant industrial gas users expanded their use of MagneGas into multiple facilities. We also announced that international bridge builder Condotte America selected MagneGas2 fuel as its fuel of choice for metal cutting. Condotte extended testing of MagneGas2 under various conditions.

To accommodate the growing demand of MagneGas2 we purchased 2,000 additional cylinders. In addition ESSI, the company's wholly owned gas Distribution Company has put numerous new cylinders into service as well to help accommodate their gas demand. We look forward to seeing the impact of these new cylinders in the coming months as we continue to expand nationwide.

We also are actively looking at other acquisitions in the industrial gas space. The success of following the purchase of ESSI has validated our strategy of expanding our reach through acquisitions and we will continue to opportunistically seek out similar accretive acquisitions. Our near term goal is to aggressively expand in Florida and beyond and within a couple of years plan to become a major regional gas distributor to acquisition in organic growth.

Recently, we announced that a major southeast distributor has placed its first order for MagneGas2 to supply four of its locations in Alabama. Through these locations, the distributor will also supply an existing waste to energy utility customer of MagneGas and will be the company's preferred distributor of MagneGas2 for metal cutting in their territory. We now have distribution coverage in many of the major hubs in the eastern half of United States.

We plan to continue to expand along the east coast or other markets through either plant insulation or joint ventures. MagneGas2 has continued to receive positive feedback from distributors and customers which is allowing us to execute on our expansion strategy. We are also very pleased to have moved into our new headquarters. Our new facility is 18,000 square feet and is located within an industrial area outside Tampa, Florida with close proximity to existing and potential customers and an easy access to major highways.

This new location provides an impressive space to demonstrate MagneGas while allowing room for growth and sufficient area of research and development. This new facility enables our gas production units to operate in several shifts with less restricted by weather which allows us to finally meet existing demand and can accommodate our planned business expansion.

We expect to have all three production units online in the coming weeks which will double our current capacity. We will also be able to build several new gasification units a year in our headquarters. In November of last year we also sold a 100 kilowatt Plasma Art-Gasification system for $775,000 and we will receive recurring high-margin royalty payments that equate to approximately 6% of gross sales.

This sales marks the first sale of the unit in United States and signals a complete new era for MagneGas Corporation which is not just to produce the best metal working fuel in the world but also be able to produce it locally for independent distributors who are eager to grow.

This equipment sales allows us to cost effectively demand expand into Louisiana, Texas and Gulf coast region. This system should be operational in the fourth quarter of this year. Once we are successful in getting that unit online and producing gas, we believe it will be one of the most significant events for this year as the green calls for extensive expansion with potential for substantial capital infusions through additional equipment sales in the coming months with the same customer.

Regarding our agricultural opportunities, with one of the largest swine farms in the United States, as I mentioned in the last call, we have successfully completed the pilot demonstration for a 50 kilowatt unit. Through this pilot program we found that our system reduces nitrogen and phosphorus significantly which is important since this often leads to restrictions on how much manure you can apply on the fields.

Through these results we found that this opened up high level meetings at the US Department of Agriculture and we have learned that if a technology is deemed by the USDA as best practice method there is a funding of farms of up to 80% of the cost. I am very pleased to announce today that on May 10th we completed a large grant to the USDA to demonstrate our unit and allow us to be considered as a best practice technology.

This is a great development for MagneGas Agriculture business and affords the opportunity to have an extended demonstration with the USDA. This is exactly the type of showcase for our technology we have been pursuing since the inception of MagneGas Corporation. At the end of last year we announced that we had advanced testing of our co-combustion, we have also filed provisional patents related to proprietary characteristics of our new gas and fuel and as part of an ongoing development of co-combustion technology we have substantially reduced co-emissions and have substantially reduced coal emissions and improved coal burning efficiency.

We also expect future additional patent opportunities. Recent project updates include improved analytics and equipment to better control flu gas in addition to our redesigned co-combustion chamber. We are currently evaluating these improvements, quantifying the emissions obtained and we will be discussing next step through our partners in June.

We are working towards obtaining independent verification of these results from our leading co-combustion partner in association with one of the largest utilities and we anticipate verification to be received in 2016.

I would like to turn the call over to Luisa Ingargiola, our CFO who will review our financial performance in details.

Luisa Ingargiola

Thank you very much, Ermanno. Revenues for the three months ended March 31, 2016 were $665,000 compared to $545,000 for the same period last years. Revenues from the industrial gas segment was $665,000 for the first quarter of 2016 as compared to $522,000 for the same period last year. This is primarily due to an increase in MagneGas2 fuel sales and sales through ESSI.

The acquisition of ESSI has allowed us a platform to increase our metal cutting segment sales through the sales of MagneGas2 which is used as a door opener to our customers. Gross margins remain flat at 45% compared to 45% for the first quarter ending March 31, 2016 versus March 31, 2015. Generally operating expenses increased approximately $900,000 for the first quarter ending March 31, 2016 to $2.9 million from $2 million for the same period last year.

In the first quarter of 2016, the company had approximately $1 million of non-recurring operational and capital expenses related to the move to the new headquarters and various consulting contracts expired in March of this year. The company recently began an aggressive campaign aimed at focusing operational expenses on major business opportunities as an initiative for 2016. As of March 31, 2016 we had a cash balance of $2.2 million versus $5.3 million as of December 31, 2015.

At this point we would like to open the call up for questions. Thank you very much.

Question-and-Answer Session

Operator

Thank you, at this time we will be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Amit Dayal with Rodman & Renshaw. Please proceed with your question.

Amit Dayal

Good morning guys, thank you for taking my question. Luisa, could you break down the revenue mix for the quarter for us please?

Luisa Ingargiola

The revenue mix from the first quarter was, the entire amount of revenue came from industrial gas sales so that's a mix of MagneGas2, oxygen, nitrogen, hard good, tipped torches, regulators. All different types of revenue related to the metal cutting industry. That's a 100% revenue from that mix.

Amit Dayal

Okay, got it, understood. Just looking at all these recent announcements in relation to larger customers, more distributors etcetera, should we be anticipating growth rates to exceed the 22% levels, at least for the first quarter, just want to see how these customers are starting to contribute to revenues and in relation to that what kind of growth rates we should anticipate for the remainder of the year?

Luisa Ingargiola

George, do you want to take it?

Ermanno Santilli

Yes, absolutely, we are happy with MagneGas2 as a product. We continue to feel it's the best product in the industry and our customers continue to tell us that so, and I mentioned this many times, it's a significant differentiator in the purely commoditized market our plan is to continue to grow organically through ESSI to open more stores and to potentially to acquire all of which should result in above average sales growth rates versus the industry which is stuck with the same old, same old commoditized products.

Luisa Ingargiola

And I just want to add that in 2015, we really used that as a testing ground to look at the model of having our own distribution arm and how that worked with relations to increasing sales by using MagneGas2 as a door opener. So we acquired ESSI in late 2014. We spent 2015 really using that as a platform to our customers that this is the best way to grow the company.

And now that we have proven that, we are going to be very aggressive this year in opening stores and looking acquisitions and also fulfilling some of these large customers that we are using as a catalyst to get to the next level.

Amit Dayal

Understood. In relation to these equipment sales, we know you are potentially closing one in the second half of this year, what does the pipeline look like for equipment sales?

Ermanno Santilli

Well, the pipeline in my opinion is once we have proven this unit is sustainable and is profitable for the company that's acquiring is ourselves, that same customer said that they would be willing to expand this model to the other parts of the United States. So, I don't think we have given guidance on the number of units they said they would buy but it's more than several. So our entire focus is going to be ensuring that this unit is delivered, its successful, the product is successful for that market and then we are going to go back to this individual and say okay we are ready for the next steps now.

And with that said, that's the tipping point we are talking about is. Before it was us pushing through distribution or pulling through distribution by speaking to customers directly. Now our product is becoming better known in the industrial gas market we are having distributors coming to us. Green Arc was one of them and they said they want first dibs on future units once this one is installed.

Luisa Ingargiola

And we also have other similar situations in other parts of the country. And our feedback from everyone essentially is they want to see how this first one rolls out and since this is the first one in the United States. That's why this is a major focus of the company to ensure this is successful as we anticipate and it will be a platform for really launching the equipment sales.

Amit Dayal

Understood, just last question from me. In relation to agricultural units, do you have any sense when the agency's going to make a decision on the grant?

Ermanno Santilli

Yes, we expect to have an answer by the end of the third quarter.

Amit Dayal

Okay. Thank you. That's all I have guys. Thank you so much.

Luisa Ingargiola

Thank you, Amit.

Operator

[Operator Instructions] Our next question comes from the line of Brian Murphy from Merriman Capital. Please proceed with your question.

Brian Murphy

Hi, thanks for taking my question. Luisa mentioned you have some non-recurring expenses in the March quarter. Can you just talk a little bit about what kind of expense run-rate you guys are on for 2016 now?

Luisa Ingargiola

Sure, the majority of the non-recurring expenses and capital outlay, let me start with that, in the first quarter were related to our move. About $600,000 of it was related to our move. We had significant capital infusion needed in terms of being able to build up this building and get some of the equipment up and running and make some capital improvements so that obviously is non-recurring and then we also had some consulting contracts related to new business, research & development, investor relations, public relations and marketing that we had initiated last year that have ended at the end of March or the beginning of April, they are phased out.

So for the remainder of this year our goal is to get the operational expenses at or as close to under $2.5 million a quarter as possible. Our internal goal is to get them close of $2 million but in terms of what we are planning for actual exposure to investors, we are looking at somewhere between $2.2 million and $2.5 million a quarter.

Brian Murphy

Okay. And just a follow-up on the revenue growth curve question I guess for 2016. I know you have been expanding your distribution footprint quite a bit. And either you have done some significantly production constraint, when you get the three production units up and running I guess, this month or next month. Can you just, how much of a back log do you guys have right now?

Ermanno Santilli

Hey, this is Ermanno, how are you doing Brian? Yes, the backlog has fluctuated so much, it has gone from a couple of thousand to a thousand bottles. Sales teams have consciously held back selling too aggressively to ensure that we don't lose customers while we are gaining customers because of course it's more difficult and more expensive. And we are all kind of ready, girding ourselves for the three units to come online here. Once they come online the sales team, the restrictions will be off and Jack Armstrong and the rest of the sales team will restart aggressively selling MagneGas2 to new customers as opposed to mostly to existing customers.

Many of the marquee customers you have seen, those sales processes have been in progress for months if not much longer so some of the marquee customers really started a while ago but for the local customers where the transactions are quicker and the gestation period is faster, they have held back on those.

Brian Murphy

Got you. And again to follow-up on the issue of the unit sales in the big deal of Louisiana with Green Energy, can you remind us what the timeline is just in terms of getting that thing installed and cash collection and RevRec in 2016?

Luisa Ingargiola

Sure, our contract calls for the delivery of the unit by August 12, and the remainder of payments by that time prior to delivery. So once the unit is delivered, then we are going to recognize the revenue and after that there will be installation process and we will be assisting them to make sure that everything is running smoothly so on terms of actually starting to see royalty payments, we don't believe that it will occur till the end of this year. But in terms of the actual revenue recognition for the unit itself, we anticipate that will be in the third quarter.

Brian Murphy

Okay. So I guess with the combination of sort of more production capacity coming online and collecting the cash from this unit, we should expect the cash flow situation to improve. Can you just talk a little bit about how investor's should think about your cash burn versus cash in the balance sheet right now?

Luisa Ingargiola

Sure, we are looking at all different alternatives in terms of how to bring in cash to the company whether it's a capital raise or it's a debt type of situation we are looking at different alternatives. And we are also looking at acquisitions. We are looking at several cash flow positive acquisitions and actually two or three of those which we are planning on having at least one done this year. So if we combine a cash acquisition, the cash infusion we anticipate from the sale of the unit as well subsequent sale as well as any capital raise that we do, we are very confident in terms of our cash needs this year. I don't know if that answers your question totally but that's how we are looking at it, kind of a three-tiered approach.

Brian Murphy

No, that does. Thanks very much. I will jump back in the queue.

Luisa Ingargiola

Thank you.

Operator

Our next question comes from the line of Nick Sibers [ph] with Forest Capital Management. Please proceed with your question.

Unidentified Analyst

First of all, congratulations on another strong growth quarter. First question, is there anything you can add about co-combustion and any upcoming milestones we should be looking for?

Ermanno Santilli

Yes, thanks for the question. Co-combustion, we have really learned about co-combustion in general. We have done very recently a lot of benchmarking between the results that we have found in Australia and the results that we have found here. We have added more resources to that project actually as recently we have added one full time engineering analyst I should say that has a lot of combustion and gasification experience. And Rick Conz, our VP of Engineering has also been attached to that project at a kind of project planning and involvement perspective and so we have really doubled down on it. We are really just trying to improve the repeatability of the results that we see. We are trying to continue to improve on the purity of the gas that we are producing from the seed stocks that we found works well for co-combustion.

And we really just making sure that the next time we call out our coal industry partners, we are guaranteed to be successful. That's really where we are right now. We had conference calls with our team in Australia as well and we are expecting them to come over in June to have a hands-on assessment of where we are as well and as I said, we have doubled down. We have added more resources and we are little frustrated for taking as long as it is and we get a lot of calls from investors which is understandable but really we have never been more excited about it and we are adding more resources. We are making sure that there is enough analysis, there's enough data capture. We have improved the analytics, we have improved the equipment, and we are really in a very good situation right now in respect to co-combustion.

Unidentified Analyst

That's very good to know. From a technology standpoint, sounds like everything is on track and working. Next question, could you explain a little bit more detail, the goal of the USDA grant program and what do you see that will accomplish?

Ermanno Santilli

Yes, the USDA like I said, we at MagneGas have been shooting for many years now. Ultimately the agricultural space is very tight margins. A lot of the equipment is already leased or provided at the very low cost from one agency or another so to drop a half a million dollar unit or a $300,000 unit on a farm is really struggling with increasingly lower margins in the past decade is problematic. The only way to do that is to get to the USDA for the agricultural space as we say, get to the USDA and have them validate that our equipment is the best practice and then they will finance it and we will see the farmers coming out of the wood work like crazy.

So it's a huge opportunity for us, we expect the project to last with analysis about 15 months, 12 of those months would be on site at the farm. We have found the farm locally, which is great because then we are not having to travel up to another location and the travel costs will be significantly lower and we want to have some of the challenges with the weather that we had in the past at the pig farm that we had.

Unidentified Analyst

Got it, thanks. You have obviously done a good job with ESSI. Can you talk a little bit more about what types of other companies you will be looking at for acquisitions?

Ermanno Santilli

Yes, we are looking for other companies that are similar to ESSI that have a very strong base that are innovative and are stressed at because many distributors are really not actively selling their account managing but they are doing very well. And we are looking for distributors who are innovative and would be able to bolt on MagneGas to their existing operation and leverage it to expand. So ESSI had a very small footprint, we bolted MagneGas2 onto that operation, we have expanded the footprint both organically and respect of the radius of the market served and also by adding stores up north and east of us. So really it's worked, we are happy with it. We are growing above average versus the industry. We are getting more and more feedback and interest from larger gas companies as well. And really, we would like to repeat the success of the ESSI. Ideally would be in Florida or south-east but we are actively discussing some great opportunities on the west coast as well.

Unidentified Analyst

Got it. And then there has obviously been some expenses with the move to the new headquarters. Can you just give a little bit more clarification why you are confident why this all will double your gas production and also what is the future scalability of the location?

Ermanno Santilli

Yes, this location is really ideal for gas production. If those of you that were at the old location, I think know what I am talking about. The units were outside, they were exposed to the elements. Tampa has the highest rate of injuries from lightning strikes so of course [ph] is very clear about the rules so within a certain radius of miles, you have to stop working with lightning or you have to go inside even. So apart from the deluge of rains, or the lightning or being mixed into a residential/industrial area kept us from really operating at night. Here all of our units under cover. The covers are metal and grounded so the rain won't bother us, the lightning won't bother us and our neighbor is really a retention pond so we can operate in as many shifts as we want which means that we estimate that the three units here versus the two units operating there even without overtime or I should say second or third shifts, we should be able to double our production. Scalability wise, we have some room for expansion here. Regarding placing of the units, although it is quite limited but this industrial park here even just adjacent to our building is available and that would be somewhere where we could expand to if we wanted to in the future.

Unidentified Analyst

Great, thanks. And last question, if you could explain a little bit more about MagneGas2 itself helps to grow overall industrial sales as well as other potential product line you might be able to leverage?

Ermanno Santilli

Yes, that is a good question because I recently learned that we cannot repeat that enough. For some reason, this is difficult to grasp in the industrial gas business I believe and we just need to do a better job of communicating it and keep repeating it over and over. The industrial gas base is highly base commoditized. It's the definition of commodity. If you have air gas and you've got mattress [ph] and they have Oxygen, those balls of Oxygen are exactly the same. Those balls of Nitrogen are exactly the same. Those balls of Propane, Acetylene, of Argon mixes it's all the same. So it really just comes down to price and service.

The ESSI team do a fantastic service and we hear that all the time. For example, I have seen your rep more than I have seen my rep from the major this year than for the past 10 years. So we are there, we are present, we are actively selling, we are not just account managing. But on top of that we have MagneGas2 which nobody else can offer so, I said this few times on the call and I will say it again. If I call a 100 customers with Acetylene and act as excited as I can about it I am probably going to get 10 to 15 people who are interested in seeing my ball of Acetylene because it is exactly the same as the others because probably, I will have a lower price or at least if I want to grow, I will have to drop my price.

With MagneGas we found that we have a fantastic opportunity to open doors that no other product in the industry can do which is to finally provide a replacement for Acetylene. It's the only renewable gas in the market and we have a good sales team that is capable of value selling it as opposed to price selling. So we literally opened doors to $150,000 accounts by selling them 10 bottles of MagneGas. They love MagneGas so much they have to have it and with it they switch their entire account to us from whoever they were with previously. So it's a differentiator, it is a fantastic way to grow sales without dropping your price and we have proven that with ESSI which is why we have continued to actively expand that business model.

Unidentified Analyst

Terrific, thanks. Again, congrats on the quarter.

Ermanno Santilli

Thank you very much.

Operator

There are no further questions at this time. I would like to turn the floor back over to Mr. Ermanno Santilli for any closing comments.

Ermanno Santilli

Thank you very much. I think the quarter with our growth rate has shown that we have the right product, we have got the right sales team and customers continue to value our product. We are on track and there has been a lot of activity to make sure that the unit we are shipping to Green Arc is going to be successful and we have several discussions with Luisa and I have mentioned to expand that business model by selling units to other gas distributors around the United States once we have proven that that will be successful and we are confident it will be.

Co-combustion, we continue to be aggressive. We are little frustrated it's taking so long, but we are in a much better space than we were before in respect to data capture, analytics, resources and everything else and the USDA is a fantastic opportunity that we are looking forward to speaking to them about and hopefully they will be approving it, which should open the door for subsidized units going to farmers who want them.

So finally getting into our new facility, I think those of you who were at our old facility know what I am talking about. This new facility is so fantastic. There's plenty of space for what we want to do. It's very modern from the infrastructure to every safety code you can imagine to even above and beyond requirements so we are very excited for the June 15 customer demonstration day and ribbon cutting.

And I have been told to expect a local Florida barbeque to be cooked on site and we will be taking a trolley tour down street to visit our ESSI facility as well so it should be a fun day and informative day and we are all looking forward to seeing our customers and welcoming them to our new building.

Operator

This concludes today's conference. Thank you for your participation and you may disconnect your lines this time and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!