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 second quarter fiscal year 2022 ended on September 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's my pleasure to turn the floor over to Mr. Don Ayers, Vice President of Technology. Sir, the floor is yours.

Thank you very much. Good afternoon and thank you for joining today's fiscal 2023 second 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 10-Q report with the Security and Exchange Commission for its fiscal 2023 second quarter ended September 30th, 2022. We will be referring to slides that can be found on our website under the investor relations section during the call today. This conference call contains estimates and forward looking statements representing the company's views as of today, November 14th, 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 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 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 now like to turn the call over to Darren Jamieson, President and Chief Executive Officer. Thank you, Don.

Good afternoon, everyone. Thank you for joining today for a review of our second quarter fiscal 2023 results ending September 30th, 2022. If you turn to slide three, I'd like to run through today's agenda. We'll start with the quarter's financial highlights and then review our positive EBITDA plan followed by an overview of our energy as a service or EASS business. I would like to then provide a brief overview of our financial results and then a review of the company and then the recent US policy changes including the Inflation Reduction Act or IRA Act, and then conclude with a business summary. We'll then be open to take questions from our analysts. Let's go ahead and jump to slide five. Slide five shows revenues of 20.8 million for the quarter, an increase of 11% sequentially from 18.7 million in the first quarter, and up 21% from the second quarter in the year-ago quarter. I remain extremely encouraged by our team's ability to grow revenue in a tough macro and supply chain backdrop. Revenues for the first half of fiscal 2023 totaled $39.4 million, up 18% from $33.3 million for the first half of fiscal 2022. This revenue growth is being led by our energy as a service growth strategy. However, gross margins for the quarter fell to 11% compared to 25% in the first quarter due to increased supply chain costs specifically related to the C-1000 enclosures and the need to source alternative recuperator materials to meet customer delivery requirements during the quarter. Our net loss was $4.9 million, an 18% improvement from a net loss of $6 million last year. Sequentially, the net loss increased from $2.1 million in the first quarter, which was impacted by approximately $1.6 million of additional supply chain expenses quarter to quarter. Adjusted EBITDA improved 19% to negative 2.2 million from negative 2.7 million versus last year, but sequentially again was down from a positive 400,000 in the first quarter. Again, this is due to the approximately 1.6 million of additional supply chain expenses, freight, and expediting charges. On a first half basis, though, EBITDA improved 66%. to negative 1.7 million for the first half of fiscal 23, compared to negative 5 million last year. The improvement was driven by growth in the high-margin energy-to-service, or EAS, business, offset by increased supply chain costs, freight, and expediting charges, as discussed. Lastly, and perhaps most importantly, the total energy-to-service long-term rental fleet under contract on September 30, 2022, was approximately 34 megawatts versus 12.7 megawatts on September 31. 30th, 2021, this represents 168% growth year over year. Today, the EAS long-term rental fleet under contract is approximately 39 megawatts. And as a reminder, as we've been saying for several quarters, our goal is to get to 50 megawatts under contract by March 31st, 2023. Let's continue over to slide six. You can see the EAS rental revenue was 1.8 million for the second quarter, up 1.2 million or 200% from 0.6 million or 600,000 a year ago. Also importantly, the EAS rental gross margin was extremely strong during the quarter at 72%. Gross new product bookings for the second quarter were solid at 15.4 million, up from 12.4 million sequentially, and product book-to-bill ratio improved to 1.6 to 1. Ending product backlog of September 30, 2022 was $28.9 million, up $4.1 million, or 16.5%, from $24.8 million in the June quarter. Also extremely important is cash. Total cash as of September 30, 2022 was $23.8 million, up from $16.9 million as of June 30, due primarily to net proceeds of $7.3 million from the Lake Street public offering on August 23, 2022. This was offset by working capital needs to manufacture new rental assets for the quarter. As a result, net cash provided by operating activities was positive $900,000 compared to a loss of $3.4 million in the June quarter. As I mentioned earlier, the supply chain has presented some challenging headwinds this quarter, To mitigate this, we're implementing a new price increase for all of our products, spare parts, and factory protection plan or FPP service contracts. That price increase will go into effect January 30th, 2023. Let's go ahead and move to slide eight. I want to review our fiscal year 2023 positive adjusted EBITDA plan. We have outlined four key pillars in this strategy and have fully executed on three of them. with significant progress in the fourth. The first pillar was to reduce operating expenses by 4.3 million for the full fiscal year, led by restructuring the business around our energy as a service model. This was spread across the board from reductions to executive personnel, board of directors, moving assets to our distribution partners, and active labor force management. The second pillar was a price increase, as we need to keep pace with inflation Effective May 1st, we did a price increase in the range of 7% to 10%. We also increased existing FPP contracts by 5% for CPI increase. And the pricing on new FPP contracts is also increased by 5% as well as spare parts to offset the inflation factors and to focus on the supply chain integrity. Also noted earlier, we're implementing a second round of price increases in January 23. Third pillar was the increase of the distributor DSS fee from 3% to 5%, which is an annual fee we charge our global distributors for training, marketing, branding, customer acquisition, and trade shows. And the fourth and last pillar is the more significant strategy change to include additional energies of service business in our business mix. The numbers show progress from 7 megawatts under contract to 39 megawatts under contract today, well away to our target of 50 megawatts by March. Let's go ahead and turn to slide 9. Slide 9 shows the details of our adjusted EBITDA first half through the second quarter of fiscal 23 versus the first half of fiscal 22, showing our improvements in negative $5 million last year to negative $1.7 million this year in adjusted EBITDA. and it shows the components from which we expect will lead us to successfully achieving our 2003 goal of positive adjusted EBITDA for the full year. Next, I'll provide you with an EAS update. I'm sure you've seen slide 11 before in previous presentations, but it's worth reviewing again as it is the cornerstone to our positive EBITDA strategy. The fact is the economics heavily favor the EAS business versus traditional product sales for our type of technology. In case one on the left of the graph is a traditional product sales model, which had been the existing way of doing things for many years. The middle bars show what that model looks like with our capstone long-term service offering, or FPP, which was our first strong move to drive long-term predictable income and cash flow. And the last third set of bars to the far right of the slide illustrates what the EAS model can do and how powerful it is and can be for us. For the same C1000 unit, we can generate 1.8 million in revenues at a 60% gross margin over five years, and this compares to a product sale with spare parts for five years at 1 million or 20%. Let's go ahead and move to slide 12. Slide 12 sets out the growth picture for us. On March 2021, we had seven megawatts under contract in our rental fleet, and as of October 31-22, we had 39 megawatts under contract in our rental fleet. We believe we are well on our way on track to reach our 50 megawatt goal by the end of March 2023. It is important to note that supply chain constraints and working capital limitations require the 15 megawatts of the rentals to date have been re-rented equipment, which does negatively impact our margins, but we had to do this to meet customer demand. To the extent we can achieve some more working capital improvements and some supply chain relief, our goal is to return to shipping primarily new units for rentals and at even higher margin rates. I'll now turn the call over to Scott, our CFO, to go through some of the specific financial results.