Monday, June 11, 2018 6:23:36 PM
If you're honest with yourself, you'll read the whole thing...especially the Q & A. (That's really interesting!)
I've taken the liberty to re-post the entire conference call below.
Sit back and pour yourself a glass of ice tea so you can take your time to understand why this is a once-in-a-lifetime opportunity.
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Revenue for the quarter ended March 31, 2018 increased to $1.2 million compared to $900,000 in the first three months of 2017, a 34% improvement. January was seasonally slow period which is typical in our industry as larger clients take longer to gear up after holiday season. Despite this, we saw steady growth in our Florida operations in February and March. We added three new sales members in November of 2017, and we saw the benefit of this expanded sales reach as we added more than 100 new clients in Florida in the first quarter alone, many of whom will be transitioning their relationship to our local ESSI branches throughout 2018.
We also began marketing to the north of our Clearwater operations, primarily in the town of Lutz, which gives us access to one of our largest customers Covanta and their operations in Pasco County. This expansion also gives us greater access to northern Tampa where there are many potential industrial clients. The Lutz expansion also completes a Clearwater, Tampa, Lutz and Lakeland logistical route, allowing us to reduce distribution costs as we serve multiple customers and branches in this busy Tampa to Orlando business corridor.
During the quarter, we also benefited from new customers in San Diego, California, Tyler, Texas, Shreveport, and Louisiana. These new customers were the direct result of two acquisitions made during the quarter that expanded our access to clients and several of the strongest industrial gas and welding supply markets in the United States today.
We have fully integrated our San Diego operations, and we are in the process of expanding the sales force. Our top MagneGas2 sales executives have already been on multiple joint sales calls with local teams in San Diego. On one recent trip, our team went 12 for 12 in demonstrating MagneGas2 to new clients and successfully converting them away from acetylene. We see the San Diego market, especially with the major military, shipping and commercial activity center on Coronado Island and the surrounding area as a major growth opportunity for our Company.
We’ve also been fortunate to quickly integrate the Green Arc team into our Company. We benefited from day one with an excellent experienced sales team that is ready to unlock their full potential under our ownership and our support. We have authorized the team to increase the sales force in East Texas by up to a 100% as we are seeing major growth opportunities in this market. We have been fortunate to win five major new contract customer accounts in Shreveport, Louisiana and Tyler, Texas markets in the past month. And we won six new customer accounts using MagneGas2 as a key differentiator. And all of that success comes from months of hard work and preparation. These new accounts are expected to increase our sales under the Green Arc business by almost $1 million over the next 12 months with very attractive margins. We are very encouraged by the progress thus far.
We also completed another acquisition at the end of the quarter, expanding into Sacramento and Woodland, California through our acquisition of Trico Welding Supplies. We recently announced record sales in April as a direct result of this acquisition and the immediate synergies. The expansion of organic produce demand and the legal marijuana industry is leading to significant growth in CO2 sales while equipment sales are also rapidly expanding reflecting the improvement of general industry in the Sacramento area. We hope to have many more positive updates on this front in the coming months.
We’re also making progress with our three largest wholesale MagneGas2 customers or partners I should say, Holston, Haun and AWISCO. We’re also in the process of signing a MagneGas2 distributor in Connecticut with six branches, bringing us a total of 58 branches with access to MagneGas2 once they are all rolled out. We have two dedicated MagneGas2 specialists who are focused exclusively on managing these rollouts and the support of MagneGas2 to these distributors. This strategy has been successful as we are already expanding our commitments to these partners in 2018. We are also actively cultivating new distribution relationships in the Midwest and Central regions in the U.S. where our newly acquired gas production capabilities in Tyler, Texas can more effectively service those distributors.
Apart from our excellent sales results, we have also experienced a rapid expansion in our overall team at MagneGas Corp. When include our new team members in Texas, Louisiana, California, we have grown our team from 45 at the end of 2017 to almost 80 people today. Most of this growth has been in sales and client support side at MagneGas as they are very focused on expanding our ability to reach tens of thousands of clients and prospective clients in the first four states now. We have added support members to assist as we look to ramp up our sterilization program as a result of USDA grant sponsored program in Bowling Green, Florida, and our expansion efforts in Europe.
With all this growth, we have continued to maintain strict financial discipline. We have maintained a clear focus on improving profitability and the clearest indication of our improvement in operations with our cash flow from operations. We generated a negative $1.3 million in cash flow from operations in the first quarter compared with the negative $1.5 million in the same period in 2017.
We spent over $600,000 on non-recurring expenses in the first quarter related to acquisitions and capital market activities we completed during the period. Excluding these expenses, our normalized cash flows would have been less than a loss of $700,000, far and away our best quarterly financial performance in over 10 years. This is an indication that as we complete our acquisitions, integrate them and then leverage the combined team to drive growth, profitability is an achievable, near-term objective of the Company.
On the technology front, we are working on several meaningful new opportunities. First, we are undergoing testing with an international medical manufacturing company, which produces a variety of waste that MagneGas can gasify. Our testing thus far has been successful. It’s important to note that the largest waste stream is ethanol, which we believe will be used to produce a gas highly comparable to our existing MagneGas2, metal cutting fuel. This significant potential -- this is a significant potential for the Company as it would accomplish one of our core strategic objectives, to offer waste to energy solutions. And starting with this blue chip medical manufacturing company is a fantastic start. We see this as a very significant opportunity. And second, it would further reduce our cost to produce our renewable gas by another 20% to 25%. This development would further enhance our pricing power relative to acetylene and enabling us to grow our cost more effectively.
Shifting to our emerging sterilization business, we continue to make excellent use of $432,000 grant from the United States Department of Agriculture to accelerate commercialization of the Company’s plasma arc sterilization systems for the treatment of pathogens and nutrients found in bio-wastes. During the first quarter, we completed the first major milestone of the USDA funded project, setting up all the necessary testing equipment to begin a series of live demonstrations and ongoing tests to demonstrate the efficiency of our sterilization equipment in use at active dairy farm in Bowling Green, Florida. In fact, we announced that on May 10th, we held our first live demonstration day with representatives from the USDA, Dairy Farmers Association, University of Florida and many others in attendance. The demonstration was a great success and we look forward to making progress in the coming months.
Shifting to our acquisition strategy, we continue to support our strategy of several acquisitions in the best U.S. markets for industrial gas and welding supplies. These markets primarily center around major industrial super ports where shipping, rail, trucking, oil and gas exploration, production and refining operations converge as well as heavy industries, utilities and infrastructure maintenance existing in concentration. In the U.S., those conditions are best met in Texas centered around Houston markets, California and Los Angeles and the Bay Area.
As a result of the strong market characteristics, we made it a top priority to gain access to these markets through acquisitions. We completed two acquisitions in California, one in San Diego and one in Sacramento. We also completed an acquisition that gives us access to East Texas and Louisiana markets. Combined these operations, we’re now running at about $14 million annual revenue run rate and have a potential to clear -- to clearly double in sales over the next three to five years. While this is compelling, we feel there are additional opportunities that may make sense in the future for us to consider. We have conducted due diligence on additional targets in Los Angeles, San Diego, Sacramento, Sacramento, Oakland, Fresno, Houston, Dallas and other markets as well. Some of these are quite small, such as complete welding transaction in San Diego; others are larger, closer in line to the Trico transaction.
We believe any or all of these targets could be acquired in an accretive manner. However, we are very mindful of our current share price and will prefer to defer any further acquisitions until the share price has appreciated in order to minimize near-term dilution. Additionally, we want to be very clear about the nature of our acquisition strategy. We’re not executing an enlace [ph] consolidation of independent industrial gas distributors across the United States. We’re being precise. We want to gain access to very select markets for compelling organic growth, using MagneGas2 to take market share. We simply want to have access to the best markets in California and Texas and the best levels of economies of scale to then grow organically and profitably thereafter. We believe that over the coming quarters, investors will see the full impact of our strategy unfolding will respond favorably.
Internationally, we have made strong progress in the first quarter, expanding our gasification and sterilization business in Europe. There is significant pent-up demand in the European Union due to the regulatory, environmental and other factors including European climate and energy initiatives. We have attended multiple tradeshows and clean technology events and have been consistently marketing our technology in Germany, France, the UK and the Benelux regions throughout the beginning of 2018.
Learning from some of these key lessons in U.S, we have focused heavily on gaining access to large ports in Europe, including Rotterdam, Amsterdam Antwerp, Southampton, Hamburg, Copenhagen, Calais, and many more that are highly focused on green solutions. We have been very fortunate in meeting with a number of these ports and others at several events over the past quarter. And we are pleased to report that we have gained significant commercial interests. We’re in active discussions with multiple European ports now. And we believe that lasting, scalable, commercial partnerships are forthcoming in 2018 from these efforts.
We have also solidified excellent partnerships with key advisory organizations, including Ernst & Young, Paris; Innovator Capital in London. Both have been invaluable in guiding our Company, leading us to very promising grant opportunities, R&D projects with leading universities and potential commercial partnerships. Overall, we are gaining excellent momentum and we see these compelling growth opportunities in Europe in the coming months.
In conclusion, we are very pleased with the progress MagneGas is making in 2018. We have generated record revenues. We are rapidly improving our cash flow and we are becoming less reliant on external capital to fund our growth. We are executing on our U.S. sterilization opportunities and we believe we are on the verge of unlocking the potential of European market.
At this point, I’d like to turn the call over to our CFO, Scott Mahoney, who will review our financial performance in detail.
Scott Mahoney
Thank you, Ermanno.
The MagneGas team worked diligently to execute a complete business transformation in 2018. In the current year, we have three overall business objectives. First, we want to scale our U.S. industrial gas revenues so that we are financially self-sufficient. Second, we want to unlock the growth potential of the European markets. And lastly, we want to explore new and complementary technology opportunities, leveraging both our existing technology platforms as well as through partnerships or other technology additions to our patent portfolio.
In the three months of 2018, we clearly set in motion our first objective. We delivered $1.2 million in revenues for the three months ended March 31, 2018. This represented our first quarter with more than $1 million in sales in corporate history and we grew revenues at an impressive 38%. At aim to second quarter, we’re happy to report, we exceeded $1 million in sales in the month of April alone, due in part to the acquisition of Trico. This is a clear and strong validation that our strategy is working. We also have kept a clear focus on cost control. With our recent acquisitions, it became increasingly difficult to make year-over-year comparisons to our cost structure for at least several quarters. Having said that, our base line SG&A expenses for the first quarter were $3.1 million, which represents a 20% increase compared to the $2.6 million incurred in the same period in 2017.
However, we incurred over $600,000 in non-cash expenses in the first quarter. We also incurred about $650,000 in nonrecurring expenses, strictly related to our acquisitions and our capital markets activities in the first quarter. We spent significant resources integrating specifically the accounting, the IT and the operational platforms for the three acquisitions as well as excessive travel for training, sales, operations integrations and management transitions. We believe we’re now fully passed this space as we saw significant decrease in these costs in April. As a result, we believe our normalized cash SG&A expenses are approximately $1.9 million per quarter. Payroll is our largest single expense and we consider -- when we consider the Company increased its employee base from only 38 employees in the first quarter of 2017 to 54 at the end of first quarter 2018 and now over 80 employees at the end of April are successful efforts to cost control we more clearly can see.
As direct support for our improved financial performance, we would like to highlight our cash flows from operations. This in my mind is one of the best metrics we’re evaluating for the short-term financial health of the Company.
From MagneGas, we have produced a negative cash flow from operations of $1.3 million in the first quarter of 2018. However, as previously described, this figure included $650,000 in expenses, we clearly deem to be nonrecurring. When those are excluded, our cash flow from operations was a negative $650,000. This represents a 57% improvement in cash flows compared to the same period last year. Again, considering that we employed significantly more people in the first quarter, this is a significant indication of our improved performance, and we believe that this will continue to be a trend in coming quarters. From a balance sheet perspective, we also made significant improvements during the first quarter. We dramatically reduced our accrued vendor liabilities and overall expenses by more than 50%. This was largely masked by that fact that we added over 300,000 additional vendor liabilities when we acquired Complete Welding and Green Arc during the first quarter. In addition, we paid down our -- we continued to pay down our senior debt by more than 50% in the first quarter, and we’re planning to fully retire this debt in the near-term.
We also carried more than $2 million in cash on hand and had a positive working capital position of $2.1 million as compared to a $2.7 million deficit as of March 31, 2017. This represents almost $5 million improvement in our net working capital in the past year. Operationally, our integration of Complete Welding of San Diego is now fully complete. We expect the final stages of our accounting transition for Green Arc to take place in the next 30 days. We then expect to complete the integration of all of Trico’s operations by the end of June. Overall, we’ve minimized costs, managed operations and made the transition seamless for vendors and customers across the United States. We’re very proud of the way our team has handled this entire process.
Our second corporate goal for 2018 has been to drive growth opportunities in Europe. As Ermanno described in detail earlier, he and I’ve made several direct personal commitments to unlock the potential of Europe for MagneGas. We’ve been fortunate to be invited to attend multiple equity conferences where presented some of the leading family offices, clean technology funds and impact investment firms in Europe. We’ve also had the opportunity to attend multiple clean technology forums and tradeshows where we’ve networked in a multiple promising technology opportunities that can complement or enhance our gasification and sterilization businesses. Lastly, we’ve attended several trade events targeting promising scaling government relationships. We have found significant interest within the port authority communities of Europe. Recently in Hamburg, we had the good fortune to directly interact with 12 different port authorities from across the northern and western Europe. Overall, we are very well received and we have already had multiple follow-up dialogues with more than half of these ports.
We also see very promising opportunities for partnership with select universities across Europe. We see potential to qualify for scalable government brands to fund the sterilization and gasification and research in multiple regions of the EU and UK. We also believe through our advisory relationships, we have very promising near-term commercial catalysts for growth in Europe. We see very great potential for our European operations in the near term.
Despite all the positive developments outlined in this call, our management team and our Board believes, there is a significant disconnect between the very the promising direction of our business and the current valuation of MagneGas as measured by our common stock price. We believe our industrial gas business has an intrinsic value well in excess of our current stock price. We also believe there is rapidly increasing value in our intellectual property portfolio for applications in Europe and for sterilization globally. As a result, we have been in active discussions with our Board with our regards to the execution of a variety of corporate endeavors that could enhance and maintain a higher stock price for our Company. This includes a number of initiatives, not the least of which would be a buyback program.
While we’re not in liberty to discuss the immediate details, we do wish to convey this message to ensure that all shareholders recognize that our Board is very sensitive to improving our shareholder value at all times and that we’ll be measured and we will be disciplined in the way we utilize our equity to create future value for all shareholders.
At this point, we’d like to open up the call to questions.
Question-and-Answer Session
Operator
Thank you. At this time, we would like to conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Sameer Joshi from H.C. Wainwright. Please proceed with your question.
Sameer Joshi
Good morning, Ermanno and good morning Scott. Thanks for taking my questions.
Ermanno Santilli
Good morning.
Sameer Joshi
The first question relates to the acquisition strategy and the synergy savings that you may be achieving. You did mention there was a 57% improvement in use of cash flow from operations. Do you expect to see -- or let me rephrase that. How do you expect to realize more synergies and when should we see the full effect of these in your statements?
Ermanno Santilli
Well, from my perspective, and Scott, feel free to jump in. There is several synergies, and the first one of course is the top one. When we support these distributors that are operated somewhat on a limited budget in respect to investments in model stock or sell on [ph] the stock and sales force, we find that they spread their wings and all of a sudden, they start growing much faster than they were before. So, right there, organic growth is at one synergy. And the second is MagneGas2. As we’ve seen in San Diego and in Tyler, Texas and in all markets, when the one of the two or both of our MagneGas2 sales executives travel with their salesmen and they knock on doors of large customers that they have been trying to get into forever but haven’t been able to almost always results in sale of MagneGas2 and with it comes the entire account. So, that’s the second synergy.
On the cost side, of course all the back office that relates to human resources and accounting, Scott and his team have done a fantastic job of driving cost down in respect to legal fees, in respect to all the other fees that when you’re taking a more -- a bigger picture look at and you’re facilitating it whether it’s in-house council or whatever, you’re saving quite a bit of money there. Scott?
Scott Mahoney
Yes. I would echo a lot of what are Ermanno has said. I think, the number one thing that Ermanno and I are looking for are businesses where they probably have only really been able to achieve no more than 50% of their growth potential. They have a clear understanding as to what they’re missing. And then, we fill that gap post acquisition with people and resources. And then, what excites me is when we take one of our -- we call the MagneGas champions; these are the two or three guys that really took this business from nothing and have the guts to go out and call on people throughout Florida, and then up and down the East Coast building our distributor relationships. Now, we’re taking these gentlemen instead of having them focus on supporting wholesale relationships exclusively, now we are putting them to work helping our best salesmen in multiple markets go out and knocking the doors of customers that they knew existed, but did not have some sort of a mechanism to force that door open. And at this point, MagneGas whether it’s for efficacy sake, reputational sake, as a technology innovation, market, or just sheer curiosity, it’s opening doors and it’s opening doors at a rapid rate in huge markets that dwarf opportunities in Florida. And we’re just starting to see the financial benefits. As Ermanno described, we’ve seen immediate significant growth in San Diego. We’ve seen immediate growth. We expected just in the first 60 days of operations, we have a legitimate shot at taking Green Arc and doubling its revenue base. And that’s just the beginning of our potential in these markets.
So, the revenues, the synergies there are huge at the cost level. The synergies in the first year will be masked by the fact that we may consolidate most of the back office into our headquarters in Florida. However, we will most likely be offsetting that expense by adding good salesmen and logistical support as we ramp up the customers. So, you will see our overall payroll stay similar post acquisition. But, when you look at revenue relative to the spending on headcount or revenue per absolute number of people employed by the Company, that number is expected to rapidly increase. And ultimately it’s that multiplying factor that’s going to improve our bottom line.
I think long-term, most of these businesses, early on are businesses where they can generate anywhere between 10% and 20% EBITDA margin. Most of them are kind of in the 13% to 15%. We believe that under our ownership and our ability to drive what we think is disproportionate higher revenue per salesperson, we can get that EBITDA margin long-term north of 15% within our U.S. operations. Hopefully that helps answer the question.
Sameer Joshi
It certainly. From what I understand basically you’re using MagneGas2 as a tool to increase the revenue base of the acquisitions that you’re making. You are improving [ph] back office cost, at the same time adding to your sales force to support the increased sales. That sounds good.
Scott Mahoney
Correct.
Ermanno Santilli
And the other thing is that as we continue to grow, the opportunities to have national suppliers of our bulk gases, becomes closer and closer to reality. So, you are actually -- once it happens, you’re driving your cost down significantly and you’re actually -- you can compete with some of the larger accounts of the larger suppliers out there that have a cost basis, which currently is lower than us. So, today, they love MagneGas2; they love our customer service. Tomorrow, they will also love our prices if we choose to, to compete with them on price. But either way, if we start getting national accounts for our bulk gases, which we’re in the process of negotiating right now, it could be a great cost opportunity as well.
Sameer Joshi
Just a second question on those acquisitions. We see that the inventory has increased almost by $900,000. And I know it is associated with the acquisitions but how long do you expect to take -- to completely draw down that inventory?
Scott Mahoney
Ermanno, if you don’t mind, I’ll tackle this one.
Ermanno Santilli
Yes. Go ahead.
Scott Mahoney
This is strictly a GAAP accounting function. One of the things that’s very unusual about acquisition accounting is when you acquire assets and then allocate the purchase price, you have to essentially take the assets and value them individually at fair market value and then whatever has not been allocated to various assets classes, your left over value ends up being your goodwill. And in the instance of buying a distributor like these companies that we acquired in Q1 and continue to acquire in Q2 and beyond, you’re taking inventory that you may have only paid, let’s pretend it’s 50% of what you now have to evaluate at, but you actually have to mark up the value to what it is worse as a retail finished good and then put that in your balance sheet as a final number. So that’s going to distort your inventory turns; it’s going to distort your gross margins temporarily. Typically speaking the businesses that we own and operate or have targeted to acquire rarely have more than between 60 days and 90 days of inventory on hand at any one time.
Then, you might say, well, if you have twice as much value on the balance sheet, it takes twice as long to work out. The answer is no. Basically, the inventories on our shelves have strictly been distorted and valued temporarily because of GAAP accounting that we just walked through. But the time it takes to work that inventory off is really the same window that I just described. So, you’re looking at over 60 to 90-day disruption in your gross margins and your inventory turns. But none of that affects cash flow whatsoever.
So, I think one of the things that will be extremely important to look at over the next couple of quarters is our cash flows from operations because that’s going to be your best barometer of the overall health of the business. And the only thing that could really distort that would be onetime items to execute on some of the things that we’ve done in the past and we may continue it in the future. And the other would be to always sort of reconcile and back out sort of the short-term impacts of changes in net working capital and how that affects your statement of operations.
Sameer Joshi
Understood. Thanks for that clarification. Moving to Europe, do you have any more updates on your JV or relationship that you had? And also, hasn’t there been any progress on the $7.2 million grant that was issued from the European agency?
Ermanno Santilli
Yes. I was actually there a couple of weeks ago and that was [indiscernible]. We had a full review of the grant. These things take quite a bit of time, as you know. It is progressing internally. There is always swings and roundabouts, as I say. But, the EIB, the European Investment Bank is completely enamored with MagneGas solution. So, there is a high probability it’s going to work. You never know. It’s continuing to progress Ernst & Young are completely engaged with us. And we’re actually working with them for some business building opportunities as well. Our partnership -- the joint venture with the German group really depends a lot on the success of that grant. But, we are working with them every day on everything from business development to information for the EIB to just general updates and coordination because we really have three groups now working with us on business development, Innovator Capital, Ernst & Young and our German joint venture partners.
Scott Mahoney
Yes. I think, the only thing I would add to that is what Ermanno just said is extremely important to understand. A year ago, all of our efforts in Europe were centered around a joint venture where we would have anywhere from a minority interest stake in the potential upside of the market to potentially coming for majority. What we’re contemplating now is narrowing that joint venture having it be most likely Germany centric. And the reason why we’re narrowing the scope of the joint venture is because as a model and I have spent more and more time working with our key advisors, rolling up our sleeves and getting involved directly in some of these tradeshows and technology conferences, we’ve come to very significant conclusion, just probably in the last 90 days. And I would argue that the trip that we made together to Hamburg where we interacted with essentially a dozen major ports, the facts that we can do this extremely cost-effectively, time-effectively and we can get this much traction this quickly with ports that are scalable.
And I think it’s important just to kind of give you a sense of how large some of these ports are. One of the ports we’re talking to has an estimated 500 to a 1,000 immediate users of MagneGas, any one of which could be larger than our largest single client today, which took years to cultivate in Florida. So, these ports are massively scalable. They do not require us to sell hundreds of products. We can literally spend less than a $1 million to be up and operational in a port, generating multiple millions of dollars of EBITDA a year from a team of 3 to 5 people. And depending on how quickly permitting and marketing goes, these are opportunities that can from beginning to end take less than six months in some cases but more and likely six to 12 months to implement. So, we’re trying to quickly realize that these are scalable, profitable opportunities. In some instances, all we need is our key advisor to open the door and watch [ph] for us and our technology sells the rest of the solution by itself. And we’re just looking at that same. Why would we give up the upside?
Sameer Joshi
Understood. On the USDA sterilization front, just tried that demo on May 10th, what are the next steps and what is the cadence of that grant coming in over the next few quarters?
Ermanno Santilli
That’s a good question. Basically, over the next three to four quarters, we’re going to continue to provide the USDA the results. We continue to provide them with our expenses that are going to be reimbursing them. Actually, I think they’re advancing with some of them as well. And ultimately, speaking to the farmer when I was there for the demo is a very interesting because every time you’re engage with somebody in the agricultural industry, you always learn something very interesting. For example, there are many nurseries of trees and plants in the area who would love to use his manure as a fertilizer but they don’t because the seeds of what the cows are eating passes through onto the ground and when they are collected and they used as a fertilizer, you end up getting those weeds and those plants in growing in a nursery.
One of the things that we’re going to confirm -- and this is new information, one of the things we’re going to confirm is that we also -- apart from the pathogens, we also kill the seeds. And we’re pretty confident that that is the case. If that’s the case, we have a ready now product for a market that’s waiting as confirmed by the local farmer Bowling Green, Florida. So, this could quite quickly convert into a commercial operation, which will be very exciting.
Sameer Joshi
Interesting. That’s really interesting. Moving onto just a couple of things. At the medical facility, medical manufacturing facility, you mentioned 20% to 25% reduction in costs. What is the rationale from that, like, how are you going to issue those?
Ermanno Santilli
Think of it this way. Anytime you have waste liquid, it has a cost to disposals, typically, okay? When it touches anything from the medical industry, whether it’s a drug or whether it’s a human fluids or anything else, the cost goes up dramatically. So, the idea is instead of paying somebody to take their ethanol, they will pay us to take our ethanol. So, our raw material cost would actually go negative. So, the 20% to 25% is relatively conservative, considering what could transpire regarding that. And the good news is that we have processed ethanol in the past, and it makes a fantastic gas. Actually when we did the trials for the three different potential feedstocks, it was really a tossup between the quality of the gas that was produced from butanol and from ethanol. But we chose butanol because we found a great and consistent supplier of a renewable butanol.
Now, if this medical company engages with us to do that, we will reassess whether it’s -- whether our customers value the renewability of it or not. So, significantly and whether -- switching from renewable gas to waste to energy gas that produces something -- the significantly lower cost, allowing us to farther reach it logistically and allowing us to compete deeper on price that we want to with existing settling suppliers. And this facility has more than 10 factories around the world. I don’t want to say the exact number, because it’s kind of easy to figure who it is, but they have factories all over the world. So, if we succeed here in the United States, we can go to our partners in Europe and present them with exactly the same solution, because they’re producing many of the same products. It’s a huge potential.
Scott Mahoney
Sameer, the way to look from an accounting perspective, theoretically, one of the line items that goes into our cost of goods sold would go to zero. And then, our revenue will be augmented because essentially we would be paying a service fee to dispose off something. So, we would render a service. Then, as a result of that service, we would bear little to no cost for one of our primary cost factors when we manufacture our gas. So, the primary things that go into the cost of making our gas, our labor, electrical current consumption, the feedstock, and then largely the consumables related to the operation of the machinery itself. So, one of the four biggest expense brackets for our production of gas would go to zero. At the same time, there are revenue increases without any corresponding costs. So, you might have a small line item for revenue related to disposal costs but it’s 100% margin or 95% margin. So, that’s what’s ultimately going to hit the growth income line. And because of the pricing power, it gives us discretion to go out and use that to more effectively take market share against the settling.
Sameer Joshi
Yes. I guess, in addition to the medical facilities you probably will find more such applications in other industries as well.
Scott Mahoney
Yes. I think Ermanno will…
Ermanno Santilli
There are 30 [ph] new different waste streams coming from this medical [ph] manufacturer. We’re just talking about. We’re talking about the possibility of again some of their solid waste streams, has a second step, a second development. Also, our generation 4 unit, which we’re prototyping that works is expected, and we can pulverize some of these solids, we can also produce another gas. And we don’t necessarily need to use those gases for -- when you’re being paid to take it, you don’t need to use that gas necessarily to convert it into MagneGas2 or MagneGas3 or anything else. You can burn it to produce energy. You can use some new catalytic processes that we have recently learned about that actually can convert it into a type of biodiesel, additive. So, there are so many opportunities coming from this. And we are probably six months into it already and it still may take a few months to pan out, but so far are very encouraged by this opportunity.
Sameer Joshi
Okay, great. One last one for me and thanks for taking all these questions. The last question relates to, I think in the last call you’ve mentioned you’re building a gas filling facility at Clearwater. Is it progressing or what’s the status of that?
Ermanno Santilli
Which one? Is this the generation 4 prototype?
Scott Mahoney
No, Ermanno, this is the fill plant in Clearwater. So, Smeer, basically...
Ermanno Santilli
The bulk gas. Yes.
Scott Mahoney
No. This is the fill plant in Clearwater. So, the bulk gas facility already was completed in Q1. Sameer, the bulk -- the fill plant that we’re putting together, it will take about 90 or 120 days to finish permitting, get constructed. And it will start to have an impact on our Florida operations, Ermanno, what you say, the end of Q3, beginning of Q4?
Ermanno Santilli
Yes. I mean, the second [multiple speakers].
Scott Mahoney
I think, basically, the lead time is with permitting and such. So, Sameer that will have two material impacts on Florida. If you compare everywhere else that we operate today, everywhere else has fill plant capabilities. This has two meaningful impacts on the business. The first is half year revenue comes from industrial gases. When you have your own fill plant, you’re able to gas very efficiently at the wholesale prices, and your margin and your gas improving between 10 and 15 percentage points, 1,000 to 1,500 basis points. So, that’s a pretty material impact on your gross revenues. The second is, in many instances in Florida, we know there are people that we would like to onboard, but you need to be able to fill their gases nearly continuously. And you can’t do that unless you have your own internal fill plant. So, one of the things that we’ve budgeted for this year is to have Florida, have its own fill plant, so it can benefit from all the things that I just described.
Operator
Our next question comes from the line of Anne Crow from Edison Investment Research. Please proceed with your question.
Anne Crow
Good morning. And thank you for taking my call. And congratulations on the record first quarter on the sale front.
Ermanno Santilli
Thank you.
Anne Crow
I’d like to pick up on one of the points that I think Scott made. He is talking about the three key goals for FY18. And there is a lot of detail about scaling for U.S. gas operation, what was happening in the EU. And then, third -- and by the way, the UK is still possibly EU, let’s say. That [indiscernible] case much longer, but we are still part. And the third point was a reference expanding technology and maybe doing some partnerships with people. But although that was one of the goals, there wasn’t really any color on that. So, I was hoping perhaps you could provide some color now.
Ermanno Santilli
On the technology side, you’re asking?
Anne Crow
Yes. This is the third goal for 2018.
Scott Mahoney
Ermanno, this is how would we expand or partner to expand our ability to use the portfolio.
Ermanno Santilli
Yes. I think that what we’ve seen as we’ve been engaging and reaching out more into business development opportunities is that we are meeting with a lot of like-minded companies and many of them have complementary organizations or technology that we could use. For example, I went to a biogas conference in Toulouse, France, a couple of weeks ago as part of my European tour for two weeks. And there were a lot of organizations out there that make subsystems that could be very interesting for us. One of them that I mentioned briefly, it is a new catalytic system that will take a gas such as a fluor [ph] gas and it will actually turn it into biodiesel. While typically what you need is, you need something called Fischer-Tropsch that is almost two-stage process and it’s quite expensive and it turns it into wax and then you have to turn the wax into different liquids and you get some biodiesel out of it.
So, as we’re -- and this relates to the medical device company as well, because if we all of a sudden -- let’s say we took all their ethanol, we would have four times more MagneGas2 than we sold last year or three times I should say. So, what do we do with it? Yes, we can ramp as quickly as possible to fill it, but if we have excess gas, we could potentially turn it into say a biodiesel additive and sell as at a premium in the market.
The other thing is that there are lot of organizations out there that are government sponsored that are looking for organizations like ours that have innovative ways to produce the gas that can be used as a fuel. So, all these touch points are leading us to also to new organizations whether that privately held or government owned that then lead to other relationships that are allowing us to complement the organizations and complement new technology. And it’s really opening our eyes to some of the possibilities out there. And I must say that this -- as I mentioned, this has always been a dream of MagneGas Corporation is to be a truly a waste to energy technology. These relationships that we’ve made in the past few months really are leading us in that direction and starting with the medical device company.
Scott Mahoney
So, I think there is two major developments that have happened, say in the last six to nine months that are really leading us to have a broader option set for technology, and I think that ultimately getting access to a lot more touch points in Europe including the UK and also California. We’ve met with a couple of the leading innovation and providing grant -- writing or grant funding entities in California -- USDA. And that has got [ph] into potential opportunities where there’s public private partnerships where you’re working with municipalities to sterilize their water in remote municipalities in northern California because the water is being polluted by the logging industry. Another opportunity that seems to be very compelling and very real is our ability to partner with the big [indiscernible] programs designed to harness and monetize the methane being produced by animal waste in the state. So, we can ultimately come in and as their digested sort of is exhausted for commercial value, still need to be sterilized before it’s disposed off. So, we’re looking applications where we can partner with an existing technology company to accelerate the commercials, not only new gas applications but new sterilization applications.
The only thing I will add is as the direct result for our partnerships and working with a couple of these world-class advisory firms, both in London and Paris, we’re now at the point where we’re starting to talk directly to leading universities, both in the UK and other countries such as France, Germany, Poland, the Benelux region. We’re focused on people that can partner with us for engineering applications for the gases as well as life science programs that can help us expand and validate the sterilization for multiple applications in Europe. So that’s a little bit more color on what we mean by expanding our IP portfolio and leveraging it with partnerships.
Operator
Our next question comes from the line of [Nicole Kauffman from River Edge Capital] [ph]. Please proceed with your question.
Unidentified Analyst
Hello. Good morning. I just want to say great job on all the advancement that was discussed on the call today. I just have a couple of questions. You guys recently announced your live USDA demo day that you hosted last week. Can you tell us about it?
Ermanno Santilli
Yes. So, the demo day is really something that is meant to connect all the partners that are on there. The partners are USDA, United States Department of Agriculture, the local farmer who has a vested interest in making sure that we’re successful and we’re doing things properly, and we also -- it was attended by the agricultural department members of the University of Florida. So, this group, we assembled under a tent in the middle of the field and we gave them a short presentation. We had a quite a bit of Q&A and then we actually demonstrated them the unit and its operation and what the protocol is going to be for not just testing but also testing in a safe manner, so that we’re not releasing any affluent where it shouldn’t go.
The farmer -- that’s the first time I actually met the farmer who was at the demo day. He was completely supportive. And as I mentioned, he himself brought up opportunities for business development that we hadn’t even thought of which are pretty significant in respect of killing the seeds. And it was a great success. We were there for about two or three hours with several people that stuck around and the farmer gave us tour of his milk production facility. And he actually is one of the few farmers that has free range cows, and then on the process of the industries and the process of having a new type of milk market, which underscores the fact that these are free range cows. So, he’s very interested in innovation. He wants to maintain renewability and a green image and footprint as much as possible. So, he is a -- I couldn’t imagine finding a better partner than this gentleman. And it was really a success.
Unidentified Analyst
Well, thank you. And congratulations on the successful demo day.
Ermanno Santilli
Thank you so much.
Scott Mahoney
Yes. Thank you. I think, the only thing I’ll add Ermanno is I think the USDA is an excellent example of how something fairly small and precise in short term financial impact is having a disproportionate impact in our ability to leverage it into bigger opportunities elsewhere. As I mentioned a couple of minutes ago, we’re talking to one of the largest technology funding institutions backed by the California government specifically because of the USDA program. And in Europe, some of the R&D opportunities that we’re working on with Ernst & Young are directly enabled because of the fact that we are actively working with the USDA. So, that’s a good example of how that’s playing out on that side of our business. But, I think as a final thought, because we get a lot of questions why we’re making acquisitions, are we diluting the company, what are we doing? And what people have to understand, this is an incredibly important closing thought. If we were not in meaningful business in multiple large markets in the U.S., we would not be having the discussions we’re having with three of the five largest ports in the world today. They would not take it seriously, they would not believe that our technology was viable because it sounds too good to be true. But the fact that we’re in the sixth largest economy in the world and two of its five largest cities in California, and we’re meaningful in Texas, and we’re meaningful in Florida, and we’re meaningful in Louisiana gives us that instant credibility to walk into the door and potentially transform our business this year and make us a global player.
And we will continue to be extremely mindful of what kind of acquisitions we do and how we do them and how we fund them, but we get an enormous number of questions about are you diluting, I can’t tell investors more clearly that they do not understand the accretive nature of what we’re doing and where we’re going. And when we’re done, we will have substantial value that has barely been touched today. And I think when they see the full impact of when we’re set in motion, they will be very, very pleased that we have the courage to take these initial steps.
Operator
Ladies and gentlemen, we’ve reached the end of question and answer session. And I would like to turn the call back to Ermanno Santilli for closing remarks.
Ermanno Santilli
Thanks you very much. And thank you so much for the questions. It’s always fantastic to get all those questions and provide more color to everybody. As we mentioned, I think we’re well on our way to achieving our three goals for 2018. Once, scalable, profitable refereeing revenues; unlocking the full potential of our direct participation in European market; and unlocking the next technology applications and expanding our IP portfolio, whether it’s with the medical device industry or agricultural industry.
In summary, in just three short months, we have executed on all three phases of our growth efforts for 2018. We’re driving record revenue growth, we’re gaining significant traction in Europe, and we have a number of technology initiatives in the works. These are exciting times for MagneGas. And we’re looking forward to providing further updates soon. Thanks again and thanks once again for the excellent questions. Have a great day.
I've taken the liberty to re-post the entire conference call below.
Sit back and pour yourself a glass of ice tea so you can take your time to understand why this is a once-in-a-lifetime opportunity.
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Revenue for the quarter ended March 31, 2018 increased to $1.2 million compared to $900,000 in the first three months of 2017, a 34% improvement. January was seasonally slow period which is typical in our industry as larger clients take longer to gear up after holiday season. Despite this, we saw steady growth in our Florida operations in February and March. We added three new sales members in November of 2017, and we saw the benefit of this expanded sales reach as we added more than 100 new clients in Florida in the first quarter alone, many of whom will be transitioning their relationship to our local ESSI branches throughout 2018.
We also began marketing to the north of our Clearwater operations, primarily in the town of Lutz, which gives us access to one of our largest customers Covanta and their operations in Pasco County. This expansion also gives us greater access to northern Tampa where there are many potential industrial clients. The Lutz expansion also completes a Clearwater, Tampa, Lutz and Lakeland logistical route, allowing us to reduce distribution costs as we serve multiple customers and branches in this busy Tampa to Orlando business corridor.
During the quarter, we also benefited from new customers in San Diego, California, Tyler, Texas, Shreveport, and Louisiana. These new customers were the direct result of two acquisitions made during the quarter that expanded our access to clients and several of the strongest industrial gas and welding supply markets in the United States today.
We have fully integrated our San Diego operations, and we are in the process of expanding the sales force. Our top MagneGas2 sales executives have already been on multiple joint sales calls with local teams in San Diego. On one recent trip, our team went 12 for 12 in demonstrating MagneGas2 to new clients and successfully converting them away from acetylene. We see the San Diego market, especially with the major military, shipping and commercial activity center on Coronado Island and the surrounding area as a major growth opportunity for our Company.
We’ve also been fortunate to quickly integrate the Green Arc team into our Company. We benefited from day one with an excellent experienced sales team that is ready to unlock their full potential under our ownership and our support. We have authorized the team to increase the sales force in East Texas by up to a 100% as we are seeing major growth opportunities in this market. We have been fortunate to win five major new contract customer accounts in Shreveport, Louisiana and Tyler, Texas markets in the past month. And we won six new customer accounts using MagneGas2 as a key differentiator. And all of that success comes from months of hard work and preparation. These new accounts are expected to increase our sales under the Green Arc business by almost $1 million over the next 12 months with very attractive margins. We are very encouraged by the progress thus far.
We also completed another acquisition at the end of the quarter, expanding into Sacramento and Woodland, California through our acquisition of Trico Welding Supplies. We recently announced record sales in April as a direct result of this acquisition and the immediate synergies. The expansion of organic produce demand and the legal marijuana industry is leading to significant growth in CO2 sales while equipment sales are also rapidly expanding reflecting the improvement of general industry in the Sacramento area. We hope to have many more positive updates on this front in the coming months.
We’re also making progress with our three largest wholesale MagneGas2 customers or partners I should say, Holston, Haun and AWISCO. We’re also in the process of signing a MagneGas2 distributor in Connecticut with six branches, bringing us a total of 58 branches with access to MagneGas2 once they are all rolled out. We have two dedicated MagneGas2 specialists who are focused exclusively on managing these rollouts and the support of MagneGas2 to these distributors. This strategy has been successful as we are already expanding our commitments to these partners in 2018. We are also actively cultivating new distribution relationships in the Midwest and Central regions in the U.S. where our newly acquired gas production capabilities in Tyler, Texas can more effectively service those distributors.
Apart from our excellent sales results, we have also experienced a rapid expansion in our overall team at MagneGas Corp. When include our new team members in Texas, Louisiana, California, we have grown our team from 45 at the end of 2017 to almost 80 people today. Most of this growth has been in sales and client support side at MagneGas as they are very focused on expanding our ability to reach tens of thousands of clients and prospective clients in the first four states now. We have added support members to assist as we look to ramp up our sterilization program as a result of USDA grant sponsored program in Bowling Green, Florida, and our expansion efforts in Europe.
With all this growth, we have continued to maintain strict financial discipline. We have maintained a clear focus on improving profitability and the clearest indication of our improvement in operations with our cash flow from operations. We generated a negative $1.3 million in cash flow from operations in the first quarter compared with the negative $1.5 million in the same period in 2017.
We spent over $600,000 on non-recurring expenses in the first quarter related to acquisitions and capital market activities we completed during the period. Excluding these expenses, our normalized cash flows would have been less than a loss of $700,000, far and away our best quarterly financial performance in over 10 years. This is an indication that as we complete our acquisitions, integrate them and then leverage the combined team to drive growth, profitability is an achievable, near-term objective of the Company.
On the technology front, we are working on several meaningful new opportunities. First, we are undergoing testing with an international medical manufacturing company, which produces a variety of waste that MagneGas can gasify. Our testing thus far has been successful. It’s important to note that the largest waste stream is ethanol, which we believe will be used to produce a gas highly comparable to our existing MagneGas2, metal cutting fuel. This significant potential -- this is a significant potential for the Company as it would accomplish one of our core strategic objectives, to offer waste to energy solutions. And starting with this blue chip medical manufacturing company is a fantastic start. We see this as a very significant opportunity. And second, it would further reduce our cost to produce our renewable gas by another 20% to 25%. This development would further enhance our pricing power relative to acetylene and enabling us to grow our cost more effectively.
Shifting to our emerging sterilization business, we continue to make excellent use of $432,000 grant from the United States Department of Agriculture to accelerate commercialization of the Company’s plasma arc sterilization systems for the treatment of pathogens and nutrients found in bio-wastes. During the first quarter, we completed the first major milestone of the USDA funded project, setting up all the necessary testing equipment to begin a series of live demonstrations and ongoing tests to demonstrate the efficiency of our sterilization equipment in use at active dairy farm in Bowling Green, Florida. In fact, we announced that on May 10th, we held our first live demonstration day with representatives from the USDA, Dairy Farmers Association, University of Florida and many others in attendance. The demonstration was a great success and we look forward to making progress in the coming months.
Shifting to our acquisition strategy, we continue to support our strategy of several acquisitions in the best U.S. markets for industrial gas and welding supplies. These markets primarily center around major industrial super ports where shipping, rail, trucking, oil and gas exploration, production and refining operations converge as well as heavy industries, utilities and infrastructure maintenance existing in concentration. In the U.S., those conditions are best met in Texas centered around Houston markets, California and Los Angeles and the Bay Area.
As a result of the strong market characteristics, we made it a top priority to gain access to these markets through acquisitions. We completed two acquisitions in California, one in San Diego and one in Sacramento. We also completed an acquisition that gives us access to East Texas and Louisiana markets. Combined these operations, we’re now running at about $14 million annual revenue run rate and have a potential to clear -- to clearly double in sales over the next three to five years. While this is compelling, we feel there are additional opportunities that may make sense in the future for us to consider. We have conducted due diligence on additional targets in Los Angeles, San Diego, Sacramento, Sacramento, Oakland, Fresno, Houston, Dallas and other markets as well. Some of these are quite small, such as complete welding transaction in San Diego; others are larger, closer in line to the Trico transaction.
We believe any or all of these targets could be acquired in an accretive manner. However, we are very mindful of our current share price and will prefer to defer any further acquisitions until the share price has appreciated in order to minimize near-term dilution. Additionally, we want to be very clear about the nature of our acquisition strategy. We’re not executing an enlace [ph] consolidation of independent industrial gas distributors across the United States. We’re being precise. We want to gain access to very select markets for compelling organic growth, using MagneGas2 to take market share. We simply want to have access to the best markets in California and Texas and the best levels of economies of scale to then grow organically and profitably thereafter. We believe that over the coming quarters, investors will see the full impact of our strategy unfolding will respond favorably.
Internationally, we have made strong progress in the first quarter, expanding our gasification and sterilization business in Europe. There is significant pent-up demand in the European Union due to the regulatory, environmental and other factors including European climate and energy initiatives. We have attended multiple tradeshows and clean technology events and have been consistently marketing our technology in Germany, France, the UK and the Benelux regions throughout the beginning of 2018.
Learning from some of these key lessons in U.S, we have focused heavily on gaining access to large ports in Europe, including Rotterdam, Amsterdam Antwerp, Southampton, Hamburg, Copenhagen, Calais, and many more that are highly focused on green solutions. We have been very fortunate in meeting with a number of these ports and others at several events over the past quarter. And we are pleased to report that we have gained significant commercial interests. We’re in active discussions with multiple European ports now. And we believe that lasting, scalable, commercial partnerships are forthcoming in 2018 from these efforts.
We have also solidified excellent partnerships with key advisory organizations, including Ernst & Young, Paris; Innovator Capital in London. Both have been invaluable in guiding our Company, leading us to very promising grant opportunities, R&D projects with leading universities and potential commercial partnerships. Overall, we are gaining excellent momentum and we see these compelling growth opportunities in Europe in the coming months.
In conclusion, we are very pleased with the progress MagneGas is making in 2018. We have generated record revenues. We are rapidly improving our cash flow and we are becoming less reliant on external capital to fund our growth. We are executing on our U.S. sterilization opportunities and we believe we are on the verge of unlocking the potential of European market.
At this point, I’d like to turn the call over to our CFO, Scott Mahoney, who will review our financial performance in detail.
Scott Mahoney
Thank you, Ermanno.
The MagneGas team worked diligently to execute a complete business transformation in 2018. In the current year, we have three overall business objectives. First, we want to scale our U.S. industrial gas revenues so that we are financially self-sufficient. Second, we want to unlock the growth potential of the European markets. And lastly, we want to explore new and complementary technology opportunities, leveraging both our existing technology platforms as well as through partnerships or other technology additions to our patent portfolio.
In the three months of 2018, we clearly set in motion our first objective. We delivered $1.2 million in revenues for the three months ended March 31, 2018. This represented our first quarter with more than $1 million in sales in corporate history and we grew revenues at an impressive 38%. At aim to second quarter, we’re happy to report, we exceeded $1 million in sales in the month of April alone, due in part to the acquisition of Trico. This is a clear and strong validation that our strategy is working. We also have kept a clear focus on cost control. With our recent acquisitions, it became increasingly difficult to make year-over-year comparisons to our cost structure for at least several quarters. Having said that, our base line SG&A expenses for the first quarter were $3.1 million, which represents a 20% increase compared to the $2.6 million incurred in the same period in 2017.
However, we incurred over $600,000 in non-cash expenses in the first quarter. We also incurred about $650,000 in nonrecurring expenses, strictly related to our acquisitions and our capital markets activities in the first quarter. We spent significant resources integrating specifically the accounting, the IT and the operational platforms for the three acquisitions as well as excessive travel for training, sales, operations integrations and management transitions. We believe we’re now fully passed this space as we saw significant decrease in these costs in April. As a result, we believe our normalized cash SG&A expenses are approximately $1.9 million per quarter. Payroll is our largest single expense and we consider -- when we consider the Company increased its employee base from only 38 employees in the first quarter of 2017 to 54 at the end of first quarter 2018 and now over 80 employees at the end of April are successful efforts to cost control we more clearly can see.
As direct support for our improved financial performance, we would like to highlight our cash flows from operations. This in my mind is one of the best metrics we’re evaluating for the short-term financial health of the Company.
From MagneGas, we have produced a negative cash flow from operations of $1.3 million in the first quarter of 2018. However, as previously described, this figure included $650,000 in expenses, we clearly deem to be nonrecurring. When those are excluded, our cash flow from operations was a negative $650,000. This represents a 57% improvement in cash flows compared to the same period last year. Again, considering that we employed significantly more people in the first quarter, this is a significant indication of our improved performance, and we believe that this will continue to be a trend in coming quarters. From a balance sheet perspective, we also made significant improvements during the first quarter. We dramatically reduced our accrued vendor liabilities and overall expenses by more than 50%. This was largely masked by that fact that we added over 300,000 additional vendor liabilities when we acquired Complete Welding and Green Arc during the first quarter. In addition, we paid down our -- we continued to pay down our senior debt by more than 50% in the first quarter, and we’re planning to fully retire this debt in the near-term.
We also carried more than $2 million in cash on hand and had a positive working capital position of $2.1 million as compared to a $2.7 million deficit as of March 31, 2017. This represents almost $5 million improvement in our net working capital in the past year. Operationally, our integration of Complete Welding of San Diego is now fully complete. We expect the final stages of our accounting transition for Green Arc to take place in the next 30 days. We then expect to complete the integration of all of Trico’s operations by the end of June. Overall, we’ve minimized costs, managed operations and made the transition seamless for vendors and customers across the United States. We’re very proud of the way our team has handled this entire process.
Our second corporate goal for 2018 has been to drive growth opportunities in Europe. As Ermanno described in detail earlier, he and I’ve made several direct personal commitments to unlock the potential of Europe for MagneGas. We’ve been fortunate to be invited to attend multiple equity conferences where presented some of the leading family offices, clean technology funds and impact investment firms in Europe. We’ve also had the opportunity to attend multiple clean technology forums and tradeshows where we’ve networked in a multiple promising technology opportunities that can complement or enhance our gasification and sterilization businesses. Lastly, we’ve attended several trade events targeting promising scaling government relationships. We have found significant interest within the port authority communities of Europe. Recently in Hamburg, we had the good fortune to directly interact with 12 different port authorities from across the northern and western Europe. Overall, we are very well received and we have already had multiple follow-up dialogues with more than half of these ports.
We also see very promising opportunities for partnership with select universities across Europe. We see potential to qualify for scalable government brands to fund the sterilization and gasification and research in multiple regions of the EU and UK. We also believe through our advisory relationships, we have very promising near-term commercial catalysts for growth in Europe. We see very great potential for our European operations in the near term.
Despite all the positive developments outlined in this call, our management team and our Board believes, there is a significant disconnect between the very the promising direction of our business and the current valuation of MagneGas as measured by our common stock price. We believe our industrial gas business has an intrinsic value well in excess of our current stock price. We also believe there is rapidly increasing value in our intellectual property portfolio for applications in Europe and for sterilization globally. As a result, we have been in active discussions with our Board with our regards to the execution of a variety of corporate endeavors that could enhance and maintain a higher stock price for our Company. This includes a number of initiatives, not the least of which would be a buyback program.
While we’re not in liberty to discuss the immediate details, we do wish to convey this message to ensure that all shareholders recognize that our Board is very sensitive to improving our shareholder value at all times and that we’ll be measured and we will be disciplined in the way we utilize our equity to create future value for all shareholders.
At this point, we’d like to open up the call to questions.
Question-and-Answer Session
Operator
Thank you. At this time, we would like to conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Sameer Joshi from H.C. Wainwright. Please proceed with your question.
Sameer Joshi
Good morning, Ermanno and good morning Scott. Thanks for taking my questions.
Ermanno Santilli
Good morning.
Sameer Joshi
The first question relates to the acquisition strategy and the synergy savings that you may be achieving. You did mention there was a 57% improvement in use of cash flow from operations. Do you expect to see -- or let me rephrase that. How do you expect to realize more synergies and when should we see the full effect of these in your statements?
Ermanno Santilli
Well, from my perspective, and Scott, feel free to jump in. There is several synergies, and the first one of course is the top one. When we support these distributors that are operated somewhat on a limited budget in respect to investments in model stock or sell on [ph] the stock and sales force, we find that they spread their wings and all of a sudden, they start growing much faster than they were before. So, right there, organic growth is at one synergy. And the second is MagneGas2. As we’ve seen in San Diego and in Tyler, Texas and in all markets, when the one of the two or both of our MagneGas2 sales executives travel with their salesmen and they knock on doors of large customers that they have been trying to get into forever but haven’t been able to almost always results in sale of MagneGas2 and with it comes the entire account. So, that’s the second synergy.
On the cost side, of course all the back office that relates to human resources and accounting, Scott and his team have done a fantastic job of driving cost down in respect to legal fees, in respect to all the other fees that when you’re taking a more -- a bigger picture look at and you’re facilitating it whether it’s in-house council or whatever, you’re saving quite a bit of money there. Scott?
Scott Mahoney
Yes. I would echo a lot of what are Ermanno has said. I think, the number one thing that Ermanno and I are looking for are businesses where they probably have only really been able to achieve no more than 50% of their growth potential. They have a clear understanding as to what they’re missing. And then, we fill that gap post acquisition with people and resources. And then, what excites me is when we take one of our -- we call the MagneGas champions; these are the two or three guys that really took this business from nothing and have the guts to go out and call on people throughout Florida, and then up and down the East Coast building our distributor relationships. Now, we’re taking these gentlemen instead of having them focus on supporting wholesale relationships exclusively, now we are putting them to work helping our best salesmen in multiple markets go out and knocking the doors of customers that they knew existed, but did not have some sort of a mechanism to force that door open. And at this point, MagneGas whether it’s for efficacy sake, reputational sake, as a technology innovation, market, or just sheer curiosity, it’s opening doors and it’s opening doors at a rapid rate in huge markets that dwarf opportunities in Florida. And we’re just starting to see the financial benefits. As Ermanno described, we’ve seen immediate significant growth in San Diego. We’ve seen immediate growth. We expected just in the first 60 days of operations, we have a legitimate shot at taking Green Arc and doubling its revenue base. And that’s just the beginning of our potential in these markets.
So, the revenues, the synergies there are huge at the cost level. The synergies in the first year will be masked by the fact that we may consolidate most of the back office into our headquarters in Florida. However, we will most likely be offsetting that expense by adding good salesmen and logistical support as we ramp up the customers. So, you will see our overall payroll stay similar post acquisition. But, when you look at revenue relative to the spending on headcount or revenue per absolute number of people employed by the Company, that number is expected to rapidly increase. And ultimately it’s that multiplying factor that’s going to improve our bottom line.
I think long-term, most of these businesses, early on are businesses where they can generate anywhere between 10% and 20% EBITDA margin. Most of them are kind of in the 13% to 15%. We believe that under our ownership and our ability to drive what we think is disproportionate higher revenue per salesperson, we can get that EBITDA margin long-term north of 15% within our U.S. operations. Hopefully that helps answer the question.
Sameer Joshi
It certainly. From what I understand basically you’re using MagneGas2 as a tool to increase the revenue base of the acquisitions that you’re making. You are improving [ph] back office cost, at the same time adding to your sales force to support the increased sales. That sounds good.
Scott Mahoney
Correct.
Ermanno Santilli
And the other thing is that as we continue to grow, the opportunities to have national suppliers of our bulk gases, becomes closer and closer to reality. So, you are actually -- once it happens, you’re driving your cost down significantly and you’re actually -- you can compete with some of the larger accounts of the larger suppliers out there that have a cost basis, which currently is lower than us. So, today, they love MagneGas2; they love our customer service. Tomorrow, they will also love our prices if we choose to, to compete with them on price. But either way, if we start getting national accounts for our bulk gases, which we’re in the process of negotiating right now, it could be a great cost opportunity as well.
Sameer Joshi
Just a second question on those acquisitions. We see that the inventory has increased almost by $900,000. And I know it is associated with the acquisitions but how long do you expect to take -- to completely draw down that inventory?
Scott Mahoney
Ermanno, if you don’t mind, I’ll tackle this one.
Ermanno Santilli
Yes. Go ahead.
Scott Mahoney
This is strictly a GAAP accounting function. One of the things that’s very unusual about acquisition accounting is when you acquire assets and then allocate the purchase price, you have to essentially take the assets and value them individually at fair market value and then whatever has not been allocated to various assets classes, your left over value ends up being your goodwill. And in the instance of buying a distributor like these companies that we acquired in Q1 and continue to acquire in Q2 and beyond, you’re taking inventory that you may have only paid, let’s pretend it’s 50% of what you now have to evaluate at, but you actually have to mark up the value to what it is worse as a retail finished good and then put that in your balance sheet as a final number. So that’s going to distort your inventory turns; it’s going to distort your gross margins temporarily. Typically speaking the businesses that we own and operate or have targeted to acquire rarely have more than between 60 days and 90 days of inventory on hand at any one time.
Then, you might say, well, if you have twice as much value on the balance sheet, it takes twice as long to work out. The answer is no. Basically, the inventories on our shelves have strictly been distorted and valued temporarily because of GAAP accounting that we just walked through. But the time it takes to work that inventory off is really the same window that I just described. So, you’re looking at over 60 to 90-day disruption in your gross margins and your inventory turns. But none of that affects cash flow whatsoever.
So, I think one of the things that will be extremely important to look at over the next couple of quarters is our cash flows from operations because that’s going to be your best barometer of the overall health of the business. And the only thing that could really distort that would be onetime items to execute on some of the things that we’ve done in the past and we may continue it in the future. And the other would be to always sort of reconcile and back out sort of the short-term impacts of changes in net working capital and how that affects your statement of operations.
Sameer Joshi
Understood. Thanks for that clarification. Moving to Europe, do you have any more updates on your JV or relationship that you had? And also, hasn’t there been any progress on the $7.2 million grant that was issued from the European agency?
Ermanno Santilli
Yes. I was actually there a couple of weeks ago and that was [indiscernible]. We had a full review of the grant. These things take quite a bit of time, as you know. It is progressing internally. There is always swings and roundabouts, as I say. But, the EIB, the European Investment Bank is completely enamored with MagneGas solution. So, there is a high probability it’s going to work. You never know. It’s continuing to progress Ernst & Young are completely engaged with us. And we’re actually working with them for some business building opportunities as well. Our partnership -- the joint venture with the German group really depends a lot on the success of that grant. But, we are working with them every day on everything from business development to information for the EIB to just general updates and coordination because we really have three groups now working with us on business development, Innovator Capital, Ernst & Young and our German joint venture partners.
Scott Mahoney
Yes. I think, the only thing I would add to that is what Ermanno just said is extremely important to understand. A year ago, all of our efforts in Europe were centered around a joint venture where we would have anywhere from a minority interest stake in the potential upside of the market to potentially coming for majority. What we’re contemplating now is narrowing that joint venture having it be most likely Germany centric. And the reason why we’re narrowing the scope of the joint venture is because as a model and I have spent more and more time working with our key advisors, rolling up our sleeves and getting involved directly in some of these tradeshows and technology conferences, we’ve come to very significant conclusion, just probably in the last 90 days. And I would argue that the trip that we made together to Hamburg where we interacted with essentially a dozen major ports, the facts that we can do this extremely cost-effectively, time-effectively and we can get this much traction this quickly with ports that are scalable.
And I think it’s important just to kind of give you a sense of how large some of these ports are. One of the ports we’re talking to has an estimated 500 to a 1,000 immediate users of MagneGas, any one of which could be larger than our largest single client today, which took years to cultivate in Florida. So, these ports are massively scalable. They do not require us to sell hundreds of products. We can literally spend less than a $1 million to be up and operational in a port, generating multiple millions of dollars of EBITDA a year from a team of 3 to 5 people. And depending on how quickly permitting and marketing goes, these are opportunities that can from beginning to end take less than six months in some cases but more and likely six to 12 months to implement. So, we’re trying to quickly realize that these are scalable, profitable opportunities. In some instances, all we need is our key advisor to open the door and watch [ph] for us and our technology sells the rest of the solution by itself. And we’re just looking at that same. Why would we give up the upside?
Sameer Joshi
Understood. On the USDA sterilization front, just tried that demo on May 10th, what are the next steps and what is the cadence of that grant coming in over the next few quarters?
Ermanno Santilli
That’s a good question. Basically, over the next three to four quarters, we’re going to continue to provide the USDA the results. We continue to provide them with our expenses that are going to be reimbursing them. Actually, I think they’re advancing with some of them as well. And ultimately, speaking to the farmer when I was there for the demo is a very interesting because every time you’re engage with somebody in the agricultural industry, you always learn something very interesting. For example, there are many nurseries of trees and plants in the area who would love to use his manure as a fertilizer but they don’t because the seeds of what the cows are eating passes through onto the ground and when they are collected and they used as a fertilizer, you end up getting those weeds and those plants in growing in a nursery.
One of the things that we’re going to confirm -- and this is new information, one of the things we’re going to confirm is that we also -- apart from the pathogens, we also kill the seeds. And we’re pretty confident that that is the case. If that’s the case, we have a ready now product for a market that’s waiting as confirmed by the local farmer Bowling Green, Florida. So, this could quite quickly convert into a commercial operation, which will be very exciting.
Sameer Joshi
Interesting. That’s really interesting. Moving onto just a couple of things. At the medical facility, medical manufacturing facility, you mentioned 20% to 25% reduction in costs. What is the rationale from that, like, how are you going to issue those?
Ermanno Santilli
Think of it this way. Anytime you have waste liquid, it has a cost to disposals, typically, okay? When it touches anything from the medical industry, whether it’s a drug or whether it’s a human fluids or anything else, the cost goes up dramatically. So, the idea is instead of paying somebody to take their ethanol, they will pay us to take our ethanol. So, our raw material cost would actually go negative. So, the 20% to 25% is relatively conservative, considering what could transpire regarding that. And the good news is that we have processed ethanol in the past, and it makes a fantastic gas. Actually when we did the trials for the three different potential feedstocks, it was really a tossup between the quality of the gas that was produced from butanol and from ethanol. But we chose butanol because we found a great and consistent supplier of a renewable butanol.
Now, if this medical company engages with us to do that, we will reassess whether it’s -- whether our customers value the renewability of it or not. So, significantly and whether -- switching from renewable gas to waste to energy gas that produces something -- the significantly lower cost, allowing us to farther reach it logistically and allowing us to compete deeper on price that we want to with existing settling suppliers. And this facility has more than 10 factories around the world. I don’t want to say the exact number, because it’s kind of easy to figure who it is, but they have factories all over the world. So, if we succeed here in the United States, we can go to our partners in Europe and present them with exactly the same solution, because they’re producing many of the same products. It’s a huge potential.
Scott Mahoney
Sameer, the way to look from an accounting perspective, theoretically, one of the line items that goes into our cost of goods sold would go to zero. And then, our revenue will be augmented because essentially we would be paying a service fee to dispose off something. So, we would render a service. Then, as a result of that service, we would bear little to no cost for one of our primary cost factors when we manufacture our gas. So, the primary things that go into the cost of making our gas, our labor, electrical current consumption, the feedstock, and then largely the consumables related to the operation of the machinery itself. So, one of the four biggest expense brackets for our production of gas would go to zero. At the same time, there are revenue increases without any corresponding costs. So, you might have a small line item for revenue related to disposal costs but it’s 100% margin or 95% margin. So, that’s what’s ultimately going to hit the growth income line. And because of the pricing power, it gives us discretion to go out and use that to more effectively take market share against the settling.
Sameer Joshi
Yes. I guess, in addition to the medical facilities you probably will find more such applications in other industries as well.
Scott Mahoney
Yes. I think Ermanno will…
Ermanno Santilli
There are 30 [ph] new different waste streams coming from this medical [ph] manufacturer. We’re just talking about. We’re talking about the possibility of again some of their solid waste streams, has a second step, a second development. Also, our generation 4 unit, which we’re prototyping that works is expected, and we can pulverize some of these solids, we can also produce another gas. And we don’t necessarily need to use those gases for -- when you’re being paid to take it, you don’t need to use that gas necessarily to convert it into MagneGas2 or MagneGas3 or anything else. You can burn it to produce energy. You can use some new catalytic processes that we have recently learned about that actually can convert it into a type of biodiesel, additive. So, there are so many opportunities coming from this. And we are probably six months into it already and it still may take a few months to pan out, but so far are very encouraged by this opportunity.
Sameer Joshi
Okay, great. One last one for me and thanks for taking all these questions. The last question relates to, I think in the last call you’ve mentioned you’re building a gas filling facility at Clearwater. Is it progressing or what’s the status of that?
Ermanno Santilli
Which one? Is this the generation 4 prototype?
Scott Mahoney
No, Ermanno, this is the fill plant in Clearwater. So, Smeer, basically...
Ermanno Santilli
The bulk gas. Yes.
Scott Mahoney
No. This is the fill plant in Clearwater. So, the bulk gas facility already was completed in Q1. Sameer, the bulk -- the fill plant that we’re putting together, it will take about 90 or 120 days to finish permitting, get constructed. And it will start to have an impact on our Florida operations, Ermanno, what you say, the end of Q3, beginning of Q4?
Ermanno Santilli
Yes. I mean, the second [multiple speakers].
Scott Mahoney
I think, basically, the lead time is with permitting and such. So, Sameer that will have two material impacts on Florida. If you compare everywhere else that we operate today, everywhere else has fill plant capabilities. This has two meaningful impacts on the business. The first is half year revenue comes from industrial gases. When you have your own fill plant, you’re able to gas very efficiently at the wholesale prices, and your margin and your gas improving between 10 and 15 percentage points, 1,000 to 1,500 basis points. So, that’s a pretty material impact on your gross revenues. The second is, in many instances in Florida, we know there are people that we would like to onboard, but you need to be able to fill their gases nearly continuously. And you can’t do that unless you have your own internal fill plant. So, one of the things that we’ve budgeted for this year is to have Florida, have its own fill plant, so it can benefit from all the things that I just described.
Operator
Our next question comes from the line of Anne Crow from Edison Investment Research. Please proceed with your question.
Anne Crow
Good morning. And thank you for taking my call. And congratulations on the record first quarter on the sale front.
Ermanno Santilli
Thank you.
Anne Crow
I’d like to pick up on one of the points that I think Scott made. He is talking about the three key goals for FY18. And there is a lot of detail about scaling for U.S. gas operation, what was happening in the EU. And then, third -- and by the way, the UK is still possibly EU, let’s say. That [indiscernible] case much longer, but we are still part. And the third point was a reference expanding technology and maybe doing some partnerships with people. But although that was one of the goals, there wasn’t really any color on that. So, I was hoping perhaps you could provide some color now.
Ermanno Santilli
On the technology side, you’re asking?
Anne Crow
Yes. This is the third goal for 2018.
Scott Mahoney
Ermanno, this is how would we expand or partner to expand our ability to use the portfolio.
Ermanno Santilli
Yes. I think that what we’ve seen as we’ve been engaging and reaching out more into business development opportunities is that we are meeting with a lot of like-minded companies and many of them have complementary organizations or technology that we could use. For example, I went to a biogas conference in Toulouse, France, a couple of weeks ago as part of my European tour for two weeks. And there were a lot of organizations out there that make subsystems that could be very interesting for us. One of them that I mentioned briefly, it is a new catalytic system that will take a gas such as a fluor [ph] gas and it will actually turn it into biodiesel. While typically what you need is, you need something called Fischer-Tropsch that is almost two-stage process and it’s quite expensive and it turns it into wax and then you have to turn the wax into different liquids and you get some biodiesel out of it.
So, as we’re -- and this relates to the medical device company as well, because if we all of a sudden -- let’s say we took all their ethanol, we would have four times more MagneGas2 than we sold last year or three times I should say. So, what do we do with it? Yes, we can ramp as quickly as possible to fill it, but if we have excess gas, we could potentially turn it into say a biodiesel additive and sell as at a premium in the market.
The other thing is that there are lot of organizations out there that are government sponsored that are looking for organizations like ours that have innovative ways to produce the gas that can be used as a fuel. So, all these touch points are leading us to also to new organizations whether that privately held or government owned that then lead to other relationships that are allowing us to complement the organizations and complement new technology. And it’s really opening our eyes to some of the possibilities out there. And I must say that this -- as I mentioned, this has always been a dream of MagneGas Corporation is to be a truly a waste to energy technology. These relationships that we’ve made in the past few months really are leading us in that direction and starting with the medical device company.
Scott Mahoney
So, I think there is two major developments that have happened, say in the last six to nine months that are really leading us to have a broader option set for technology, and I think that ultimately getting access to a lot more touch points in Europe including the UK and also California. We’ve met with a couple of the leading innovation and providing grant -- writing or grant funding entities in California -- USDA. And that has got [ph] into potential opportunities where there’s public private partnerships where you’re working with municipalities to sterilize their water in remote municipalities in northern California because the water is being polluted by the logging industry. Another opportunity that seems to be very compelling and very real is our ability to partner with the big [indiscernible] programs designed to harness and monetize the methane being produced by animal waste in the state. So, we can ultimately come in and as their digested sort of is exhausted for commercial value, still need to be sterilized before it’s disposed off. So, we’re looking applications where we can partner with an existing technology company to accelerate the commercials, not only new gas applications but new sterilization applications.
The only thing I will add is as the direct result for our partnerships and working with a couple of these world-class advisory firms, both in London and Paris, we’re now at the point where we’re starting to talk directly to leading universities, both in the UK and other countries such as France, Germany, Poland, the Benelux region. We’re focused on people that can partner with us for engineering applications for the gases as well as life science programs that can help us expand and validate the sterilization for multiple applications in Europe. So that’s a little bit more color on what we mean by expanding our IP portfolio and leveraging it with partnerships.
Operator
Our next question comes from the line of [Nicole Kauffman from River Edge Capital] [ph]. Please proceed with your question.
Unidentified Analyst
Hello. Good morning. I just want to say great job on all the advancement that was discussed on the call today. I just have a couple of questions. You guys recently announced your live USDA demo day that you hosted last week. Can you tell us about it?
Ermanno Santilli
Yes. So, the demo day is really something that is meant to connect all the partners that are on there. The partners are USDA, United States Department of Agriculture, the local farmer who has a vested interest in making sure that we’re successful and we’re doing things properly, and we also -- it was attended by the agricultural department members of the University of Florida. So, this group, we assembled under a tent in the middle of the field and we gave them a short presentation. We had a quite a bit of Q&A and then we actually demonstrated them the unit and its operation and what the protocol is going to be for not just testing but also testing in a safe manner, so that we’re not releasing any affluent where it shouldn’t go.
The farmer -- that’s the first time I actually met the farmer who was at the demo day. He was completely supportive. And as I mentioned, he himself brought up opportunities for business development that we hadn’t even thought of which are pretty significant in respect of killing the seeds. And it was a great success. We were there for about two or three hours with several people that stuck around and the farmer gave us tour of his milk production facility. And he actually is one of the few farmers that has free range cows, and then on the process of the industries and the process of having a new type of milk market, which underscores the fact that these are free range cows. So, he’s very interested in innovation. He wants to maintain renewability and a green image and footprint as much as possible. So, he is a -- I couldn’t imagine finding a better partner than this gentleman. And it was really a success.
Unidentified Analyst
Well, thank you. And congratulations on the successful demo day.
Ermanno Santilli
Thank you so much.
Scott Mahoney
Yes. Thank you. I think, the only thing I’ll add Ermanno is I think the USDA is an excellent example of how something fairly small and precise in short term financial impact is having a disproportionate impact in our ability to leverage it into bigger opportunities elsewhere. As I mentioned a couple of minutes ago, we’re talking to one of the largest technology funding institutions backed by the California government specifically because of the USDA program. And in Europe, some of the R&D opportunities that we’re working on with Ernst & Young are directly enabled because of the fact that we are actively working with the USDA. So, that’s a good example of how that’s playing out on that side of our business. But, I think as a final thought, because we get a lot of questions why we’re making acquisitions, are we diluting the company, what are we doing? And what people have to understand, this is an incredibly important closing thought. If we were not in meaningful business in multiple large markets in the U.S., we would not be having the discussions we’re having with three of the five largest ports in the world today. They would not take it seriously, they would not believe that our technology was viable because it sounds too good to be true. But the fact that we’re in the sixth largest economy in the world and two of its five largest cities in California, and we’re meaningful in Texas, and we’re meaningful in Florida, and we’re meaningful in Louisiana gives us that instant credibility to walk into the door and potentially transform our business this year and make us a global player.
And we will continue to be extremely mindful of what kind of acquisitions we do and how we do them and how we fund them, but we get an enormous number of questions about are you diluting, I can’t tell investors more clearly that they do not understand the accretive nature of what we’re doing and where we’re going. And when we’re done, we will have substantial value that has barely been touched today. And I think when they see the full impact of when we’re set in motion, they will be very, very pleased that we have the courage to take these initial steps.
Operator
Ladies and gentlemen, we’ve reached the end of question and answer session. And I would like to turn the call back to Ermanno Santilli for closing remarks.
Ermanno Santilli
Thanks you very much. And thank you so much for the questions. It’s always fantastic to get all those questions and provide more color to everybody. As we mentioned, I think we’re well on our way to achieving our three goals for 2018. Once, scalable, profitable refereeing revenues; unlocking the full potential of our direct participation in European market; and unlocking the next technology applications and expanding our IP portfolio, whether it’s with the medical device industry or agricultural industry.
In summary, in just three short months, we have executed on all three phases of our growth efforts for 2018. We’re driving record revenue growth, we’re gaining significant traction in Europe, and we have a number of technology initiatives in the works. These are exciting times for MagneGas. And we’re looking forward to providing further updates soon. Thanks again and thanks once again for the excellent questions. Have a great day.
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