Here's Why MagneGas Corporation (NASDAQ:MNGA) Is Up 20%

MagneGas Corporation(NASDAQ:MNGA) is up 20% ahead of the US open on Wednesday on far heavier than normal volume. More than 12.5 million shares changed hands on Tuesday, versus a 3m average of a little over 522K, as the company announced successful results of its recent testing of its developmental wastewater sterilization equipment.The gains bring MagneGas to a $31 million market cap, but is this really justifiable by way of the positive results and ongoing operations, or is there something else going on?Let's take a look.At core, the company is a renewable energy company. It's got a technology that allows it to turn waste into fuel, and it sells this fuel as a natural gas alternative. The tech (and the fuel product) has some pretty big name support – specifically, Dr. Kent Moors of Oil & Energy Investor – and plenty of potential as a space disruptor. It’s a family run company, so there's also plenty of combined incentivized interest in its success.The recent gains come on the back of two things.First, the above mentioned wastewater sterilization tests. A third of all homes in Florida use septic tanks, and the companies that empty these tanks have a pretty inefficient way to purify the contents. The latest tests show that MagneGas' tech is a better alternative, and so if the company can execute on a successful commercialization effort, there's plenty of potential for sales.The second, and likely the primary driver, several top newsletters have recommend MNGA. MagneGas has been touted as a top pick on the back of the aforementioned results. So the $31 million valuation – what supports it?Well, there's potential in the technology the company has developed, but as far as quantifiable progress is concerned, there's little to justify a valuation anywhere near its current price. The company lost more than $9 million last year, and $1.6 million in the first quarter of this year. Revenues came in at $665K first quarter 2016, down slightly on the $676K reported a quarter earlier. Cash isn’t bad, $2.2 million at March 31, and it covers current liabilities of $1.4 million, but there are nearly 12 million warrants outstanding, and it looks like the company is going to have to raise funds through dilutive issue to meet its operational costs going forward.There was also a death at its factory in April last year, and potential plaintiffs have until April 2017 to initiate litigation surrounding the situation. Estimates put the impact of this at a $20-30K fine (appealed down from an auto-issue $52K fine) but that doesn’t take into account third party litigation potential. It shouldn’t be too materially effective, but it's worth keeping in mind.So what’s the bottom line here? The company has a strong patent portfolio, and a steady base of customers for its current tech. It's also making steps to increase its market potential, with the opening of a fresh location last month and the testing of its water treatment tech. Right now, however, it looks as though the majority of its market capitalization is rooted in promotional activity, not fundamental growth. Cash is ok, current debt is not bad, but warrant liability and the necessity for future toxic financing is a red flag.All this being said, we expect further strength short term as its promotional push heats up.Sign up to our free newsletter below and get our current updates on MNGA!Disclosure: We have no position in MNGA and have not been compensated for this article.