Capstone Green Energy Corporation

Good day, ladies and gentlemen, and welcome to your Capstone Green Energy Earnings Conference call and webcast for the financial results for the third quarter of fiscal year 2022, ended on December 31st, 2021. All lines have been placed in a listen-only mode, and there will be a question and answer session following the presentation. As a reminder, today's program will be recorded. At this time, it's my pleasure to turn the floor over to Mr. Colby Peterson, Corporate Counsel. Sir, the floor is yours.

Thank you very much. Good afternoon, and thank you for joining today's fiscal 2022 third quarter conference call. On the call with me today is Darren Jamieson, Capstone Green Energy's President and Chief Executive Officer, and Eric Henkin, Chief Financial Officer. Today, Capstone Green Energy issued its earnings release and filed its quarterly 10-Q report with the Securities and Exchange Commission for its fiscal 2022 third quarter, ended December 31st, 2021. During the call today, we will be referring to slides that can be found on our website under the Investor Relations section. I want to remind everyone that this conference call contains estimates and forward-looking statements that represent the company's views as of today, February 10, 2022. Capstone disclaims any obligations to update or revise these statements to reflect future events or circumstances. You should not place undue reliance on these forward-looking statements because they involve known and unknown risk. uncertainties, and other factors that are, in some cases, beyond our control. Please refer to the Safe Harbor provisions set forth on slide 2 in today's earnings release and in Capstone's filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. Please note that as Darren and Eric go through the discussion today, When they mention EBITDA, they are referring to adjusted EBITDA and the reconciliations in the earnings release and the appendix to the presentation slides. I would now like to turn the call over to Darren Jamieson, President and Chief Executive Officer. Thank you, Colby.

Good afternoon, everyone, and thank you for joining today for a review of our third quarter fiscal 2021 results ending December 31st, 2021. If you turn to slide four, I wanted to remind everyone of our fiscal 2022 goals and then give an update on our progress through our third quarter. Our strategic initiatives are built around driving growth and reaching profitability. As you know, we have been focused on increasing our reoccurring revenue as part of our energy as a service or EAAS strategy. In particular, we have highlighted our rental growth because of its high contribution margins. Achieving our goals here translates into better margins, improving our cash flow, and also the predictability of that cash flow. Our fiscal 22 goals include the following. First is broadening our diverse energy products and service offerings. I'll reinforce what we've been doing here on an upcoming slide. Second is our new direct solution sales team, which is focused on growing top line revenue, and I'm happy to announce that we received orders for our first non-microturbine energy generation technologies for both solar PV and battery energy storage solutions during the quarter. As discussed last quarter, we are continuing to invest in our direct solution sales team because we see that as growth driver for our business. The direct solution sales team continues to show a growing pipeline of traditional microturbine products, long-term rentals, and newer green energy product offerings like solar and battery storage. Third is expanding our long-term rental fleet to 21 megawatts We announced today that we grew the fleet to 17.7 megawatts during the third quarter, which was slightly ahead of our expectations and was up from 13.1 megawatts at the end of the second quarter. In January, we announced our largest rental contract to date, a four megawatt order with a two year contract where the end use customer is a cryptocurrency miner. We fully expect to reach our 21 megawatt goal by March 31st, 2022. This high margin reoccurring revenue is expected to be a significant contributor to our EBITDA in fiscal 2023, and we'll discuss this on a slide later in the presentation. Fourth goal is increasing our aftermarket margins and escalating parts availability to drive customer satisfaction and repeat orders. During the quarter ended March 31st, 2021, we set up a reserve of $4.9 million to replace affected spare parts by one of our suppliers that had a defect. As expected, this program was completed successfully during the third quarter, and we continue to see significantly reduced failure rates on our powerheads, which has lowered warranty expense and should drive repeat orders. Next is focusing on managing working capital and inventory terms. In the third quarter, we generated cash from working capital, primarily due to an increase in collections of accounts receivable while maintaining very tight management over inventory controls and payables. For the year-to-date period cash used in operating activities and specifically for working capital and inventory, it has been somewhat heavier than expected, partially due to the ramping up of parts to build the rental fleet and also to ensure we can continue to manufacture product in this extremely challenging COVID-19 supply chain environment. Collections have also been slower than expected due to extended cash cycles with our distributors primarily resulting from COVID-19-related pandemic impacts, but we are encouraged by the collections we had from our distributors in the third quarter. Now let's turn to slide five. There is no doubt that the world is moving toward decarbonization and greener energy solutions, and that's why we transformed into Castor Green Energy Corporation. This slide highlights the types of solutions we can now provide to address end customers' as the world moves towards these greener solutions. First, we can provide complete microgrid solution that can run standalone or connected to the grid. In addition to our traditional microturbine, we're now offering solar and battery storage solutions in partnership with our network partners. Combining these products with our capsule microturbine technology can create a complete custom tailored on and off grid microgrid solution. In January, we announced a new partnership with Global Reyes Energy and Storage Solutions for the supply of modular, low-voltage, DC-to-DC solar voltaic kits for use in capstones, commercial and industrial, or CNI-focused microgrid solutions. This is another great example of how we are leveraging strategic partnerships to increase our total addressable market, or TAM. We continue to develop our offerings in the hydrogen space. We still expect to offer 30% hydrogen, 70% natural gas blend commercial micro turbine system by March 31st, 2022. Currently our micro turbine based systems can commercially run on 10% hydrogen, 90% natural gas blend. As previously stated, we intend to spend money on development towards 100% hydrogen as the market dictates. We want our products we offer to be fuel flexible and not just meet the needs of where the market is today, but where it will be in the future when it comes to decarbonization solutions. We also offer solutions that help commercial and industrial customers with efficiency and resiliency, saving them money and providing energy security, whether it's with a combined heat and power solution of our C65 all the way up to multiple megawatt microturbine systems, or our Baker Hughes 5 megawatt to 16 megawatt large-scale turbines, or our custom heat recovery solutions through Alpha Laval, or food waste management and recycling solutions through Waste2ES. Now let's turn our attention to slide six. On Earth Day 2021, we expanded our portfolio of products and services and transformed from Capstone Turbine Corporation to Capstone Green Energy. We now view our business as four key strategic business lines. This is important because it goes hand in hand with our strategic goal of growing our offerings to expand our revenue opportunity with each end-use customer and meaningfully accelerate top-line growth and recurring revenue. Let's begin with Energy as a Service or EAAS. This line is built on the base of recurring revenue and includes long-term rental contracts, long-term service contracts, or FPP, installation services, service, spare parts, leasing, PPAs, project financing, and last but not least, our DSS, distributors' subscription fees. The common elements on all these business lines are steadier cash flows, predictability, higher margin rates, and all of them are critical to continuing our transition to a more predictable cash flow and higher margin business. Next is Energy Generation Technologies, or EGT. This is the foundation on which Capstone was built and is based on Capstone's core microturbine technology that you're all familiar with, that we can operate on a wide range of fuels from natural gas to biogas to blended hydrogen. These products produce high-efficiency CHP, or CCHP, generating electricity and multiple forms of thermal energy. The EGT line includes our small hybrid DC microgrid product and our larger Baker Hughes industrial turbine solution, for both CHP and CCHP applications. Moving on to the Energy Storage Solutions, or ESS, line. As mentioned earlier in January, we entered into an agreement with Global RAIS to provide solar modules and also have agreements in place for energy storage, which are both essential additions to microgrid. We'll be using a custom-tailored combination of multiple technologies, energy storage, and monitoring software that maximize energy efficiency for emissions and create resilient systems that meet customers' specific requirements and energy needs. Next is hydrogen sustainable product business line, or H2S. Fuel flexibility has always been critical to Capstone, and so hydrogen is the next big fuel source we need to address. Our new hydrogen solution business line is leveraging the recently released second commercially available hydrogen-based combined heat and power microturbine, which can safely run on, as I said, 10% hydrogen, 90% natural gas mix. Now let's turn our attention to the most recent quarterly results. Let's go ahead and turn over to slide eight. I'll give you a quick overview of our third quarter financial highlights, and we'll focus on top line revenue here and let Eric provide a complete financial overview in just a minute. Total revenue for the quarter was $20.6 million, which was essentially flat compared to $20.7 million in the third quarter last year. We were happy with this result as there was an unusually large four megawatt order in the prior year quarter, and without that order, we were still showing overall solid growth over the prior quarter. The long-term micro-term rental fleas, as I said, increased 4.6 megawatts to 17.7 megawatts, up from 13.1 megawatts during the quarter as the company continues to execute against its plan. to increase the micro turbine rental fleet to 21.1 megawatts by the end of our fiscal year, which is coming up here in March 31st, 2022. The book deal ratio was 0.5 to one for the quarter and new gross product orders was 5.8 million, down from 10.8 million the second quarter. Orders were down partially due to the timing of some expected orders in December that were delayed due to COVID-19 Omicron variant. If you turn to slide nine, We had similar slide last quarter that shows the last four quarters of revenue, but updated it for the current quarter because it still highlights our revenue growth trends. I'll point out two things on this slide. First, that each quarter of fiscal 2022 has been better sequentially improving. The third quarter was flat year over year. However, as mentioned, there's an unusually large four megawatt shipment in the prior year third quarter. Second, If you look at our last 12 months of revenue, we are still showing strong growth, being up 17% compared to the same period the previous year. I'll now turn the call over to Eric to discuss the details of our financial results for the most recent quarter.