speaker
Operator
Conference Call Operator

Good day, ladies and gentlemen, and welcome to your Capstone Green Energy Earnings Conference call and webcast for the financial results for the first quarter fiscal year 2022, ended on June 30th, 2022. 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 is my pleasure to turn the floor over to Mr. Don Ayers, Vice President of Technology. Sir, the floor is yours.

speaker
Don Ayers
Vice President of Technology

Thank you very much. Good afternoon, and thank you for joining today's fiscal 2023 first quarter conference call. On the call with me today are Darren Jamieson, Capstone Green Energy's President and Chief Executive Officer, and Scott Robinson, Interim Chief Financial Officer. Today, Capstone Green Energy issued its earnings release and filed its quarterly 10Q report with the Securities and Exchange Commission for its fiscal 2023 first quarter ended June 30th, 2022. We will be referring to slides that can be found on our website under the investor relations section during the call today. I want to remind everyone that the conference call contains estimates and forward-looking statements. representing the company's views as of today, August 11, 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 risks, uncertainties, and other factors that are, in some cases, beyond our control. Please refer to the safe harbor provisions set forth on slide two in today's earnings release and in Capstone's filings with the Security 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 Darren and Scott 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 like to now turn the call over to Darren Jamison, President and Chief Executive Officer. Thank you, Don.

speaker
Darren Jamieson
President and Chief Executive Officer

Good afternoon, everyone. Thank you for joining today for a review of our first quarter fiscal 2023 results ending June 30th, 2022.

speaker
Slide Moderator
Technical Support / Presentation Coordinator

Go ahead and turn to slide three.

speaker
Darren Jamieson
President and Chief Executive Officer

I would like to run through today's agenda on the call. I will start with this quarter's financial highlights and then review our positive EBITDA plan. followed by an overview of our energy as a service or EAS business. We will then jump to a detailed review of our Q1 financial results and conclude with a general review of the company and then take Q&A from our analyst community.

speaker
Slide Moderator
Technical Support / Presentation Coordinator

Let's go ahead and look at slide five. Revenues for the quarter, $18.7 million.

speaker
Darren Jamieson
President and Chief Executive Officer

up 18% from $15.8 million in revenue in Q4 fiscal 2022, and 16% from the same period last year. I'm very pleased with our progress. It has been a very tough inflation and supply chain environment, but we're extremely happy with the results for the first quarter. I'd also like to highlight our continued success in our energy as a service strategy, where we are seeing demand way above our expectations. To give some perspective, we had 7 megawatts under contract in March 2021, And as of July 15, 2022, we have contracted for more than 34 megawatts, which includes nearly 31% growth in the last 100 days. Our strategy is proving out, and the numbers show it for themselves. To remind everybody, 50 megawatts remains our near-term goal for our energy as a service business, and we believe this is very achievable by the end of this fiscal year. Energy and service strategy is paramount to reaching our profitability targets. The EAS business generates a very profitable and predictable cash flow. Margins for Q1 2023 were 25% compared to 6% in Q4 fiscal 22, driven by this new energy and service business growth, as well as a May price increase we implemented. Our backlog remained relatively stable, with gross product bookings in Q1 of $12.4 million, A slight decrease from $12.7 million in Q4 and product book to bill ratio dropped slightly to 1.4 in Q1 from 1.7 in Q4. This is due to lower product shipments in Q4. The backlog was $24.8 million on June 30, 2022 compared to $25.3 million on March 31, 2022. Most importantly, our adjusted EBITDA for Q1 fiscal 23 showed great progress. and was a positive $400,000 compared to an adjusted EBITDA loss of $4.7 million in Q4 and an adjusted EBITDA loss of 2.3 million in the year-ago quarter. Let's turn to slide six, shows just a high-level P&L reconciliation showing our positive EBITDA for the quarter.

speaker
Slide Moderator
Technical Support / Presentation Coordinator

Let's go ahead and turn to slide eight.

speaker
Darren Jamieson
President and Chief Executive Officer

By date, I want to address our fiscal year 2023 positive adjusted EBITDA plan. We've outlined four key pillars to the strategy, and I'm proud to say we have achieved success in three of those four pillars and are showing great strides in the fourth. The first was reduce operating expenses, which we did by $1.2 million in the quarter, and we are forecasting a total of $4.3 million for the full fiscal year. We did this in part by restructuring the business around our EAS strategy, This was spread across the board from executive personnel cuts to moving employee assets into our distribution channel and heavy active management of our labor force. The second pillar is price increases. We needed to keep pace with inflation, and in doing so, we implemented a new product price increase on May 1st in the range of 7% to 10%, depending on the product. We also increased existing FPP contracts by 5% for CPI, and increased the pricing on new FPP contracts by 5%, which also increased spare parts pricing to offset inflation factors and focus on supply chain integrity, like many U.S. manufacturers today. The third pillar, we increased the distributor DSS fee from 3% annually to 5% annually, which is a fee we charge our global distributors for training, marketing, branding, customer acquisition, and trade shows. Lastly is the more significant strategy change to include more EAS business in our mix. The numbers show the progress from 7 megawatts under contract in March 31, 2021 to 34 megawatts under contract today, representing nearly a 31% growth in the last 100 days and 240% overall growth in the last year. Again, our target is to get to 50 megawatts by March 31st. Slide nine shows components we expect that will lead us to successfully achieve our 2023 goals of positive adjusted EBITDA for the full year. I think the waterfall chart clearly sets our goals and shows we have very specific quantifiable plan to reach our positive adjusted EBITDA goal for the full fiscal year. So this slide walks us from last year's negative adjusted EBITDA to our goal this year of positive adjusted EBITDA for the full year. We move on to slide 10 and 11. I want to provide you with an EAS update. You can see on slide 11 that the economics sit heavily in our favor of EAS versus traditional product sales. In the first case on the left graph is a traditional product sale model, which is similar to Caterpillar and Cummins and Janbacher and Siemens, the traditional engine-based technologies. The traditional way of doing things shows very low margin for capstone and lower sales levels. The middle bar shows what sales look like for a capstone long-term service offering, or FPP, which was our first move to direct long-term predictable income and cash flow. But most importantly is the third set of bars, which shows the EAS model can do and how powerful it is for our business mix. For the same C1000 unit, we can generate $1.8 million in revenue at a 60% margin over five years. This compares to a traditional product sale with spare parts for five years of $1 million and 20% margin. This is a significantly more impactful business model for us with EAS. We've already touched on our success with EAS, but slide 12 illustrates the picture. It's important to note that the supply chain constraints and working capital limitations required that we build, or excuse me, that we generate 14 megawatts of re-rentals for the period, which is not optimal from a margin standpoint, but the demand has been so strong we need to find ways to deliver products for our customers and not lose orders. To the extent we can achieve some working capital improvements and some supply chain relief, our goal is to return to shipping primarily new units from the rental fleet this year. I will now hand the call out to Scott Robinson, our interim CFO. Scott?

speaker
Scott Robinson
Interim Chief Financial Officer

Thanks, Darren, and good afternoon, everyone. I will now review in more detail our financial results for the first quarter of fiscal 23. Moving to slide 14, you can see our Q1 23 results compared to Q4 22. Financial results for the first quarter of fiscal 23 had revenue of $18.7 million compared to $15.8 million in the fourth quarter of fiscal 22. Product and accessory revenues was $9.2 million, up 15% from $8 million in the fourth quarter of fiscal 22. Parts, service, and rental revenue, which includes rentals, FPP long-term service contracts, and distributor support subscription fees, was $9.5 million, up 22% from $7.8 million in the fourth quarter of fiscal 22, primarily due to an increase in rental revenue. Growth margin as a percentage of revenue was 25% in Q1 23, up from 6% in Q4 22, primarily due to higher margins generated by the rental business and price increases implemented in May 22. Total operating expenses decreased $1.2 million to $5.4 million from $6.6 million in the previous quarter, benefiting from the implemented cost savings measures. Net loss was $2.1 million for the quarter, compared to a net loss of $6.9 million in the fourth quarter of fiscal 22. Adjusted EBITDA was a positive $0.4 million, compared to adjusted EBITDA of negative $4.7 million in the fourth quarter of fiscal 22. Turning to slide 15, you will see the financial results for the first quarter of the fiscal year 23 compared to the prior year period, which had revenue of $18.7 million, up 16% compared to $16.1 million in the first quarter of fiscal 22. This is driven by higher product sales activity, particularly in the rental business. Product and accessory revenue was $9.2 million, up 10% from $8.4 million in the first three months of fiscal 22, while parts, service, and rental revenue was $9.5 million, up 23% from $7.7 million in the first three months of fiscal 22. Gross margin as a percentage of revenue was 25%, up from 17% in the year-ago period, primarily due to the higher margins generated by the rental business price increases introduced in May of 2022, and lower expenses due to our cost reduction plan. Total operating expenses decreased to $5.4 million, or 13% from $6.2 million in the year-ago period, again benefiting from cost reduction activities. Net loss was $2.1 million for the three months into June 30, 2022, compared to a net loss of 2.2 million in the prior year period. The June 30, 2021 net loss was favorably impacted by $2.6 million of debt forgiveness on the COVID-related PPP loan. Adjusted EBITDA was positive 0.4 million compared to adjusted EBITDA of negative 2.3 million in the prior year period. Turning to slide 16, you will see select balance sheet and cash flow items. Cash decreased $5.7 million to $16.9 million at June 30, 2022, compared to $22.6 million in cash balances at March 31, 2022. The cash use was primarily driven by our net loss, which was partially offset by depreciation, amortization, and other non-cash expenses. And from working capital changes, driven by a decrease in accounts payable. Accounts receivable have had a decrease of 0.7 million from the previous quarter, reflecting improved collection activity. Inventory levels increased 0.5 million due to the acquisition of spare parts to support our warranty program. I will turn it back over to you, Darren.

speaker
Darren Jamieson
President and Chief Executive Officer

Great. Thank you, Scott. As part of our quarterly update, I'd like to take a few minutes to remind investors of our overall strategy and how we're working to achieve our profitability goals. Let's turn to slide 18 that sets out those goals. We have the right solution in the AAS business. We've proven that. And we have the right technology in our microturbine solutions. However, we must be more effective at selling it. Let me address our direct sales force effort and then how we are leveraging and expanding our distributor sales network. At Direct Sales Force, we continue to adjust our Direct Sales Force to maximize our EAS rental growth and the sale of our new network partner products. As the Direct Sales Force continues to grow and mature, I anticipate a couple more quarters until we reach the desired efficiencies and desired output. Now that the impact of COVID-19 is fading, we are pushing our global distributors hard for new sales resources to drive EAS rental growth and to continue to increase the attachment rate on our industry-leading FEP service contract business. Growth of the EAS business is key to our success, as we've talked about, and we have been highly motivated and focused on this transformation process and will continue to be so. It is key to our profitability, it's key to our growth, and it's a key to higher valuation of our business. The near-term goal is 50 megawatts, but we are only limited by our balance sheet and working capital regarding how much and how fast we can grow this key business. We need to be flexible and diversify our energy products and service offerings to provide custom solutions because today we operate in a very dynamic market with a wide range of solutions and are expanding our business to ensure we can be flexible and problem solver for our customers. This means helping customers with energy efficiency, helping them with resiliency, helping them meet their carbon reduction goals, and integrating multiple clean energy products into microgrid solutions. Increasing our aftermarket margins and escalating our parts availability is key to drive customer satisfaction and repeat orders. We need to continue the growth of our parts remanufacturing program in the US and abroad in our UK facility. We need additional remanufacturing parts not only for the environmental standpoint, but also typically remanufactured parts carry 40% of a lower price than a new part. We're continuing to look at additional ways to remanufacture parts to drive margins and make more parts available to our customers in this challenging supply chain environment. Focusing on managing working capital inventory turns is key. Our DSO dropped in the quarter to 123 days, but we still have over 10 million in past-due receivables. As we come out of COVID business environment, we look to reduce DSO back to pre-COVID levels of approximately 65 days. Reducing our DSO back to 65 days and tight inventory management would free up cash from our balance sheet for higher margin rental growth. Growing the Distributor Support System, or DSS, subscription program to drive marketing and customer acquisition efforts, we have increased our Distributor Support System annual fee from 3% to 5%, which I stated earlier, which affords us more money for marketing, for branding, customer acquisition efforts, as we look to grow both the EAS business as well as our traditional product business. Now let's turn to slide 19. Slide 19 shows the markets that we operate in. I put this slide in as I want to remind our investors how our solutions are being used across several industries and applications. I won't go through each in detail, but I want to highlight renewable energy, microgrids, and EV charging as our next potential growth markets on top of our traditional growth markets in energy efficiency, or CHP, and oil and gas markets. As a push toward electrification and the move to a low-carbon world, these markets should continue to grow for Capstone. There are several positive tailwinds driving our industry, but U.S. government policy changes have been the more noteworthy impact on our business recently. Slide 20 summarizes key elements of the Infrastructure Investment and Jobs Act. This touches on several of our applications as you tie them together from the previous slide. Microgrids, EV charging, renewables, critical power supply should all be bolstered by this bill, providing tailwinds for our energy solutions. Moving on to slide 21, here is yet another piece of legislation in our favor. If enacted, the pending Inflation Reduction Act is expected to raise $739 billion, of which $369 billion would be dedicated to climate and energy programs. The biggest impact for us is related to tax credits, Section 45, production tax credit, and Section 48, investment tax credit. You can see the details on the slide in the most simple form. Decarbonization and greener energy solutions are here and are being driven by governments, driven by consumers, and corporations alike. We transformed into capstone green energy in April of last year to meet that need. And on slide 22, we highlight how we solve these needs for our customers. First, we can provide complete microgrid solutions that can run standalone or connect to the grid. In addition, our traditional microturbines can be used offering along with solar and battery storage solutions, in partnership with our new network providers. Combining these products with our Capstone microterm technology can create a complete, custom-tailored, and off-grid microgrid solution. In January, we announced a new partnership with Global Ray at Energy Storage Solutions for the supply of our modular, low-voltage, DC-to-DC solar rotate kits for use in Capstone's 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. At the end of March of this year, we announced a new 30% hydrogen, 70% natural gas blend commercial microturbine system. As previously stated, we intend to devote further resources to develop towards 100% hydrogen as the market dictates. We want the products we offer to be fuel flexible and not just meet the needs of the market today, but where it will be in the future when it comes to decarbonization solutions. We also offer solutions that can help commercial and industrial customers with efficiency and resiliency, saving them money and providing energy security, whether it's a combined heat and power solution with our 65 kilowatt or multiple megawatt microturbine systems or the Baker Hughes 5 megawatts to 16 megawatt turbines. custom heat recovery solutions through Alpha Laval, or food waste management and recycling solutions through Waste2ES.

speaker
Slide Moderator
Technical Support / Presentation Coordinator

Let's go ahead and turn to slide 23.

speaker
Darren Jamieson
President and Chief Executive Officer

On slide 23, you can see our comprehensive energy production offering. All these technology components can be deployed separately or in a comprehensive microgrid solution. Our strategic focus is to provide a complete solution for our customers, and we have picked what we believe are best in breed partners to solve energy needs for our customers. As you can see, we have moved beyond simply being able to supply the energy generation system with our turbine to solving comprehensive energy needs for our clients. I'll provide a brief overview of our technology platform and refer to this presentation's appendix for greater detail on the highlighted products. Let's start with the capsule microturbines, which are our core proprietary technology. Our products range from 65 kilowatt to a megawatt and are designed to be primary energy source for micro and nano grids with power needs between 65 kilowatts up to 5 megawatts. Our energy technology platform offers superior performance, emissions, fuel flexibility, and optimal output for energy efficiency or combined heat and power. In order to further expand our TAM and provide more flexibility for our customers, we have partnered with Baker Hughes, to facilitate more extensive power needs in the range of 5 megawatts to 16 megawatts and beyond. Energy storage is a key component in most microgrid solutions and facilitates peak shifting and peak shaving. We have partnered with CorePower to meet this requirement, giving us the solution we need to provide energy solutions for our customers. Combined heat and power, CHP, is a key system component that can generate even higher energy efficiency and optimize the performance of a microgrid. We are now using Alfa Laval heat recovery systems which have specific performance advantages over the industry standard. Let's move on to slide 24. Slide 24 sets out what I believe are the key takeaways in market trends. There are several factors converging to create what I believe is the best industry backdrop we have ever experienced in my 16 years at Capstone. As you can see, we expanded our product lineup to ensure we have the right solutions to meet customer requirements. First is simply the need for more energy. Electrification is here, and the demand curve going forward is steep. We need more energy on a global basis. We believe much of this demand will be met by decentralized solutions leveraging distributed energy resources and microgrids. At Capstone, we sit right in the middle of this upcoming expansion. Renewables on their own have limitations, but renewables are nonetheless the future. This growth will require grid balancing, resiliency, and on-site generation to support this need. Using natural gas, low-carbon fuels, and other turbines, we can solve this problem in the cleanest way possible. We know battery energy storage is seen as the technology of choice for balancing an arbitrage, which is creating a substantial growth opportunity. As noted earlier, we have partnered with CorePower to meet this need and ensure that we have a solution for our customers when they require it. Combined heat and power, or CHP, is a clean technology, and it is often not well understood, but plays a critical role in reducing carbon emissions and maximizing customers' overall efficiency. Moving on, the oil and gas sector presents some great opportunities for capstone with today's oil and energy prices. Specifically, the industry is increasingly looking at ways to monetize waste gases versus flaring. As gas prices rise, investors and shareholders demand sustainability in the oil field. We solve this problem by developing a turbine that we can put into the field using the gas that would otherwise be flared into the atmosphere and uses fuel for power generation. Our turbines have unique proprietary properties to enable us to use this flare gas for excellent solution for our customers. In conclusion, I believe we have put ourselves in a great position to succeed. Our energy as a service strategy and the broadening of our product offerings gives us the tools we need to flourish in the low carbon economy. Growth is not without challenges. We must ensure we have the strongest balance sheet to leverage the opportunities in EAS that we see short-term and long-term benefits from. We have evolved from a single technology provider to offering comprehensive microgrid solutions and building a very robust EAS business. I want to thank our shareholders for sharing our vision and helping us get to this major inflection point in our company's history. With that, I would like to open up to questions from our analyst operator.

speaker
Operator
Conference Call Operator

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. Our first question is coming from Rob Brown with Lake Street Capital. Please go ahead.

speaker
Rob Brown
Analyst, Lake Street Capital

Good afternoon. Thanks for taking my question, and nice progress on the rental business.

speaker
Slide Moderator
Technical Support / Presentation Coordinator

Thanks, Rob.

speaker
Rob Brown
Analyst, Lake Street Capital

In the EAS business, where are you sort of seeing the strength in demand? I know you've announced a number of contracts, but where are you seeing the most interest right now, and where do you sort of see that interest coming from over the next year?

speaker
Darren Jamieson
President and Chief Executive Officer

Yeah, no, definitely we're seeing, you know, as I said, stronger demand than we anticipated. In fact, we've had to go to a re-rent strategy to keep up with the demand. So I think We're seeing really four different markets. Traditional markets for us is oil and gas, and that market is really coming online for the rental businesses. They're looking to put wells back online or redeploy assets without having to go through the capital approval process. In fact, our first rental was for Blue Crest three years ago. We just put another two years on that rental for now a five-year rental. So we're very excited about the oil and gas business and the rental market. Next is more of our traditional CNI market, mostly in hospitality. A lot of hotels are coming out of the pandemic and do not have a lot of capital dollars to spend. And if they do, they want to freshen up the hotel, the lobby, or put new amenities in. So we're doing one of our first rentals for the Playa Group, who's through the Caribbean and parts of Mexico. They've got 29 locations. We hope to do many more for them. But definitely that's hospitality, the key market for us. The last two are fairly new market vehicles for us. The cannabis business has been very good for the rental market as well as sale of product. They're very energy-intensive and very green, and so that business has been moving very briskly, both in new product sales and rentals. And last but definitely not least has been Bitcoin. We've seen a big influx of Bitcoin operators looking to take associated gas you'd normally flare, run our microturbines on that for low-cost fuel, to generate low-cost energy for their Bitcoin mining operations. And so we've got Bitcoin miners from Louisiana, Pennsylvania, several different parts of the U.S. where we've got stranded associated gas.

speaker
Slide Moderator
Technical Support / Presentation Coordinator

Okay, great. Thank you.

speaker
Rob Brown
Analyst, Lake Street Capital

And then on your pricing actions you've taken and increases, are those sort of fully implemented now or do you have – a lag to get into contracts and get into kind of flow into the P&L or those fully down to this point?

speaker
Darren Jamieson
President and Chief Executive Officer

Yeah, so most of our contracts, the distributors have a 90-day grace period. So when we announce a new increase, it takes 90 days for it to take effect. Plus you have whatever's in backlog at the old pricing. So I'd say in Q1, you're seeing the benefit of some of that. The price increase was in effect May 1st, but you'll see more of that benefit in Q2. Same thing, I think if you look at the margin rates between last year, Q1 or Q4, you're really seeing the benefit of that price increases, but more importantly, the growth of that EAS business. And we're at 35 megawatts contracted today, but not all those contracts are up and running generating revenue. So you'll see additional revenue growth in Q2 and Q3 as we continue to implement against those contracts and then put new contracts out there.

speaker
Rob Brown
Analyst, Lake Street Capital

Okay, great. And then the margin kind of levels as that happens, should they sustain in this range and grow, or is there still some lumpiness depending on the mix?

speaker
Darren Jamieson
President and Chief Executive Officer

Rob, as you know, 25% has been our target margin for a couple years now, so getting there is a great success for us. The re-rentals are a much lower margin. I mean, they're closer to 20% as opposed to 60%. In fact, our capstone-owned assets, I think our current margin rates are closer to 70%. because most of the rental units are brand new. But I think as the mix between our own units and re-rented product shifts, you're going to see those margin rates move around a little bit. But our goal is to get to 50 megawatts in the fleet, both with re-rents and our own product. And then once we get there, obviously, we're going to want to either purchase those re-rent units and put them on our balance sheet at a lower cost or return them and build our own. And so I think We've done some different modeling, but if we had a 50 megawatt fleet that was 100% capstone owned on our balance sheet, we'd be throwing off like $8 million of EBITDA a year, positive EBITDA. So very lucrative business. We just got to figure out how to get there with our working capital and with our restrictions on our balance sheet.

speaker
Slide Moderator
Technical Support / Presentation Coordinator

Okay, good. Thank you. I'll turn it over. Thanks, Rob. Good questions.

speaker
Operator
Conference Call Operator

Thank you. Our next question is coming from Sameer Joshi with HC Wainwright. Please go ahead.

speaker
Sameer Joshi
Analyst, HC Wainwright

Hey, Sameer. Hey, Dan. Hey, Scott. Nice to see the progress, especially on the contracted 34 megawatt EAS. I know you answered Rob's question with the four sectors or industries that are attracting this, but what is the breakdown of the existing 34 megawatt EAS? install base, so to speak.

speaker
Darren Jamieson
President and Chief Executive Officer

Yeah, it's pretty similar to what I've said. I haven't gone through and looked at it from a megawatt or unit perspective. I would say units is probably more heavily oil and gas because they tend to rent 65s, 200s as well as big box machines, megawatt machines. Most of the Bitcoin we're doing is all megawatt machines. We put a 40-foot container of Bitcoin mining equipment with our one megawatt solution, one-to-one That's what we're doing in most of our applications, especially in Pennsylvania. The cannabis stuff seems to be mostly megawatt solutions as well, and the hotels seem to be megawatt solutions. So I think the biggest markets are probably oil and gas and Bitcoin right now, but that fluctuates. The fleet is still somewhat small at 35 megawatts. As it gets bigger, we'll see more of a natural split of the pie. I think the hospitality and C&I markets, markets are still kind of coming out of the COVID fog, and I think they'll pick up steam here in the back half of the year. But our goal, frankly, is just like our investors, we want kind of a diversified portfolio of market verticals as well as customers and geographies. So today, 90% of the fleet is in the U.S., but we are starting to sign up outside the U.S., and that's part of our growth plan, especially when we get beyond 50 megawatts, we'll start moving into other parts of the world.

speaker
Sameer Joshi
Analyst, HC Wainwright

Understood. Thanks for that. In terms of backlog and then extending to pipeline, question one is, is it possible that some of this backlog can be converted to rental install? And part two of that question is, how much of the potential 50 megawatt that you're targeting is sort of in your pipeline or you have visibility on that you can get these rental contracts?

speaker
Darren Jamieson
President and Chief Executive Officer

Yeah, no, I think I'm not looking to convert any product backlog to energy service backlog. We're in trouble keeping up as it is. We don't want to lose customers and lose momentum. So we haven't missed a delivery date yet, but it's very, very challenging. And so we've had to jump through hoops with re-rentals. We've even re-rented from competitors and Now, we are renting capstone equipment. So this is – we have Warren Cat down in Texas, had four of our C1000 machines we managed to re-rent, and then we re-rented from customers who had idle equipment or our distributors who had equipment on hand. But really the goal is to build more new products because that's where the margin is. And so we've got, you know, I would say about 35 megawatts under contract today. We've got probably another 12 that I think will close in the next 60 days. We've got over 100 megawatts quoted in the pipeline. So our problem is not, you know, getting new orders or converting product orders to rental orders or energy service orders. Our problem is getting the equipment, meeting the demand, cash, you know, required to do it. It is a capital-intensive business. So that's our biggest challenge. Now, I am hopeful that this quarter we'll continue to see our DSO come down. As I mentioned in my preparative remarks, we have about $10 million left. of severely past due or significantly past due AR, that if we could pull that off our balance sheet, that would go a long way to funding that additional growth of 50 megawatts. So that's really the focus. If we were at five inventory turns instead of three and a half, and if we had that $10 million of AR collected, that would be a big, big step to building the 15 megawatts I want to build by the end of the fiscal year.

speaker
Sameer Joshi
Analyst, HC Wainwright

Understood. Just one last one, sort of related question. Is the bottleneck for going to own rentals versus re-rentals the production capacity, or is it capex dollars?

speaker
Darren Jamieson
President and Chief Executive Officer

Capital dollars. No, we've got, I think as you know, we're running at 20%, 25% capacity. Capital dollars is our issue. As you can see, this quarter we've built more rentals and used more of our cash, so it's definitely a cash consumer for us. Even though the margin rates are 60% to 70% and the IRR is over 30%, it still takes capital dollars to build the units. We put them on our balance sheet and depreciate them over 10 years in a straight-line fashion. So it's a great business, but it is a capital-intensive business. And so until we get to the point where we can self-generate enough cash to continue to grow the rental fleet without needing dollars, we're going to have to figure out how to get it from debt or the capital markets or out of our balance sheet like I was just referring to.

speaker
Sameer Joshi
Analyst, HC Wainwright

Got it. Thanks a lot, Dan, for all the answers, and good luck.

speaker
Slide Moderator
Technical Support / Presentation Coordinator

Thank you.

speaker
Operator
Conference Call Operator

Our next question is coming from Sean Severson with Water Tower Research. Please go ahead.

speaker
Sean Severson
Analyst, Water Tower Research

Hey, Sean. Thank you. Good afternoon, everyone. Hey, Darren, it seems like you've hit kind of an inflection point in EAS, and I'm just trying, a two-part question here, trying to understand what sort of brought that there, you know, over the recent months. Obviously, you had a pretty big surge, and is there something specific you would cite or point to there? And then, secondarily from that, what are the specific things you want to address in the sales effort? I know you talked about, you know, the index distributors, but... and the direct sales force, but what are some of the specific things, action items that you want to take there?

speaker
Darren Jamieson
President and Chief Executive Officer

Yeah, no, I think on the energy to service business, you know, we started this really as COVID hit. And so we put together a direct sales force that we couldn't meet in person. We had to hire via Zoom. We were trying to launch a new energy to service rental business, which was a new business for us. And so we were trying to learn of new business in the middle of a global pandemic with a brand new sales force we hadn't met in person. So Getting that business going was more challenging than we thought. As I said, from March to March, we went from 7 megawatts to 25 megawatts or 240% improvement. The last 90 days, you know, you've seen dramatic improvement as we've booked another almost 10 megawatts. So I think for us, it's really just getting the right people in place, training the people on how to sell it. The rental business is a different business. I mean, markets vary. We don't have a set price list. We go in with customers. And it depends on what their economics look like, what the length of the rental term or energy service term is. We have agreements that are one year. We have agreements that are seven years, which are priced differently. Obviously, the shipping costs, logistic costs, startup costs, installation costs vary. And so the rentals are somewhat of a custom business depending on the client, the markets, the geography. And so that is harder for a sales force to get their head around than just simply a catalog sale. Our distributors were kind of mixed on how they adopted the rental business. Some of our distributors were very quick to pick that up and were doing rentals very fast. Others either didn't see the value in the rental business or struggled to understand how to be effective in it. And so we've worked hard to get all of our distributors, especially in the U.S., up to speed on selling rentals. As I look at the pending legislation, especially the one that's currently moving its way through Congress, if that bill gets passed, that's going to increase our investment tax credit today that's 10% to 30%, and it could have an additional 10% for U.S. manufacturers. So that could be a 4X improvement on our federal ITC. That's really going to be a hammer that we need to go get our distributors to hire more salespeople and go make some real hay with that. That's going to give us significant advantage. in the marketplace that's going to lower payback times for our customers. And our customers are already looking for green energy solutions. They're being pushed on ESG. They're looking for ways to reduce their carbon footprint. So the government, you know, turbocharging that with additional tax benefits and breaks will make that sales process even easier for us. And so I think a lot of our distributors were kind of, you know, had kind of, pulled in their horns during COVID like a lot of businesses and retrenched a little bit. Well, now I think it's time to hire some folks and get back out there and really work on growth. And so we want to grow both the top line. We want to grow our service business and our rental business. And obviously as the more our distributors business grow, then our DSS collections grow as well. So all of it is very good for us. And we have a very scalable business because we sell through distribution, because we've got such manufacturing capability and capacity that we don't have to add a lot of folks to dramatically grow the top line.

speaker
Sean Severson
Analyst, Water Tower Research

Kind of a follow-up to that, when you look at some of the customers, especially the larger global or whatever you want to say, they have lots of facilities, lots of opportunity. In the EAS business, are they looking at this, some of these programs like pilots, are there opportunities for large-scale deployments? Obviously, it would be limited by working capital constraints and things like that, but kind of get a sense from your customer base, When they're looking at this, is this a one-off? We're just going to do this one spot? Are they looking at it, let's try this in this one spot, and maybe we have a chance for rollout across multiple assets inside the same company?

speaker
Darren Jamieson
President and Chief Executive Officer

No, absolutely. Our goal in the last couple of years is to look for large-scale customers that can do large-scale rollouts, and so definitely the energy and service business is no different. So we're looking for customers that have multiple facilities, multiple opportunities, or if they're building a campus or adding on to their loads to grow with them over time. And that's definitely the answer. And so that's another part of our challenge is as we bring some of these customers online and they want to give us additional rentals, we can't really say no, right? They've committed to our technology. They've gone with us. And so as their loads grow or they bring on new assets, we need to be there to make sure we service those loads. So, again, yeah, you're absolutely right, Sean. That is our key goal going forward.

speaker
Slide Moderator
Technical Support / Presentation Coordinator

Thanks. I'll jump back in the queue. Thanks, Sean.

speaker
Operator
Conference Call Operator

Ladies and gentlemen, this ends the Q&A session for today. So I would like to hand it back to Darren Jameson for his closing statement.

speaker
Darren Jamieson
President and Chief Executive Officer

Great. Thank you. Great questions. I appreciate everybody listening today. As I said in my prior remarks, this is the best industry backdrop we've ever had in the 16 years that I've been here. The company is better positioned than we've ever been. We've been even up positive before, but we've never been able to do it two quarters in a row. I believe we can do it all four quarters this year, which is a substantial change from the past and, frankly, very different than the fuel cell companies and other people that I consider somewhat competitors in our space. And so I think we've developed a business model that is not only EBITDA positive, cash positive, and can really generate nice returns for our investors. Our balance sheet and working capital will be an issue as we grow the energy and service business, so that's something we'll have to continue to figure out and get smarter at, getting additional capital at lower rates. But that's a good problem to have. And if you have a good business with good returns and good margins, finding cheaper costs of capital shouldn't be a problem for us. Definitely we want to push our distributors to, one, get their bills paid so we can have money to grow our energy service business, but also to sell our new network provider products and also add additional sales resources. So they've already heard it from me, but if they're listening to the call, they're going to hear it again. Now is the time to add more sales resources, expand their capabilities, and go after more business. You know, I think if I look at the different U.S. policies that are in place and being put in place by the government, And even globally, you're going to see more green energy, energy efficiency, CHP, hydrogen, all the stuff that you hear on the news is going to fuel our business but wind in our sails. And so very excited about that. You can have the best technology in the world, but if the market in the world is not ready for it, it doesn't really make a difference. And so I think right now we're just getting started as most governments look to build back better and build back green in the recovery from COVID. I think we're going to see a much more fertile landscape than we have in the past. Plus, customers are looking to be energy efficient, to reduce their carbon footprint, and their employees and their shareholders and their board of directors want the same thing. So I think that's all moving in the right direction. The reliability of the product has never been better. It's made the energy service business much easier to get into because of the high reliability and lack of maintenance we need on the machines. So very, very excited about getting to this quarter. We've seen this quarter coming for the last year as the energy and service business is growing to be back to even out positive and to hit our 25% gross margin rates. But I'm even more excited about the next couple quarters as we continue to execute against our plan and put up even better numbers. You know, we really need to get that $10 million off our balance sheet and into our bank. We need to get DSO back to 65 days. We need to build more rental units and keep executing with direct sales force and in concert with our key distributors. We do get a lot of questions today on supply chain issues. We are suffering the same way every global manufacturer is. The good news is we've got a very talented, dedicated team here at Capstone that is searching the world, doing everything they can creatively to solve part shortages, expedite parts, find second, third, or fourth suppliers. and keep hitting our manufacturing requirements. So it is definitely challenging, but the good news is we have a really talented team that's done an amazing job to keep hitting customer delivery dates and allow us to keep growing the business year over year like we wanted to. With that, I'll go ahead and sign off for today and look forward to talking to everybody next quarter. Thank you.

speaker
Operator
Conference Call Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.

Disclaimer

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