speaker
Operator
Conference Operator

Good day everyone and welcome to the Capstone Green Energy Third Quarter Fiscal Year 2025 Earnings Conference Call and Webcast. At this time, all participants have been placed on a listen-only mode. If you're listening on Webcast, you can submit a question by clicking on the Ask Question button on the left of your screen. Type your question into the box and hit the Send button to submit your question. It is now my pleasure to turn the floor over to your host, Janet Duderstedt. Ma'am, the floor is yours.

speaker
Janet Duderstedt
Host / Director of Investor Relations

Thank you very much. Good afternoon and thank you for joining Capstone Green Energy Holdings Inc. Fiscal 2025 Third Quarter Conference Call. On the call with me today are Vince Canino, the company's President and Chief Executive Officer and John Jurek, the company's Chief Financial Officer. On February 14th, Capstone Green Energy Holdings Inc. issued its earnings release for its Fiscal 2025 Third Quarter, which ended December 31st, 2024. During the call today, we will be referring to slides that can be found on the company's website under the Investor Relations section. Today's conference call contains forward-looking statements representing the company's views as of today, February 19th, 2025. Other than as required by federal security laws, the company disclaims any obligation 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 provision set forth in slide two of the slides accompanying this presentation in today's earnings release and in the company'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 Mr. Canino and Mr. Jurek go through the discussion today, when they mention EBITDA, they are referring to Adjusted EBITDA, which is a non-GAAP financial measure, and to the reconciliations in the earnings release and the appendix to the presentation slides. I would like to now turn the call over to Vince Canino, the company's president and chief executive officer.

speaker
Vince Canino
President and Chief Executive Officer

Thank you, Janet. Good afternoon, everyone. Thank you for joining today's earnings call, where in addition to covering our third quarter results, we will discuss some of the strategic initiatives we have in flight for the fiscal year 25 and beyond. If you turn to slide three, I would like to run through today's agenda. Today's call will cover Capstone's business environment as well as our three-year roadmap, including details around some of the initiatives we have launched in early March of 2024. Then I will turn it over to John Jurek for a detailed review of our Q3 and -to-date financial results. We will then cover our perspective on what is turning out to be quite an exciting business climate. We will then conclude with questions from our investors and analysts. I do wish to remind you that today's presentation includes an appendix which provides additional information for your purview. Let's now move on to slide five to begin the discussion on Capstone's business environment. Turning to slide five, third quarter revenue was up $5.5 million when compared to same period last year. However, on a -to-date basis, our revenue was down by $8.3 million. This decline is mainly due to sagging sales in early fiscal year 25. Sales were slow due to what we call a Chapter 11 hangover. This lasted longer than expected. This hangover effect typically happens as customers hold off on making major capex decisions for products that were affected by such a restructuring event. I am happy to report orders have bounced back to above normal levels in Q3. In addition to improved order pace for Q3, revenue strength in Q3 was mainly attributed to our Energy as a Service business unit. Particularly, the rental services segment of EAAS delivered solid revenue performance. This was due to very strong utilization rates and absorption of market-level rental rate price increases. More importantly is our ability to convert revenues into EBITDA. Our -over-year Q3 and -to-date results delivered just that. Post non-recurring expenses due to restructuring costs, the company delivered upward trending adjusted EBITDA margin of .6% for Q3 and .7% for -to-date. These positive results were attributed to a combination of price increase stickiness and optimizing OPEC spend. We achieved these results all while investing in talent that will help us drive sustainable excellence in future business outcomes. I'd like to turn our focus to slide 6. As we exited our restructuring in December of 2023, there was a belief that pent-up demand existed and once we cleared the hurdles of Chapter 11, we would be off to the races in terms of orders. As I mentioned earlier, as much as we were aware, it would be a slow start due to the hangover effect. We expected the ramp-up of orders to accelerate quickly. Simply put, that did not happen. We did see a gradual improvement of orders over the first two quarters of fiscal 25, but the third quarter delivered on the pent-up demand, thus putting us at the volumes you see in this slide. North America has provided the largest volume of orders at a pace 10 times that of any other region worldwide. This volume is mainly attributed to the IRA investment tax credits for combined heat and as well as the impacts of grid restraints causing resiliency issues across a number of vertical markets. Because of the recent pushback of fossil fuels and the war in Ukraine driving lower natural gas supplies and price volatility, Europe has seen a significant softening of orders. All in all, bookings for -to-date for fiscal year 25 are 12.5 megawatts above same period fiscal year 24, which is a 54% increase. Moving to slide 8, before we can sort out where we are going, it is prudent to ground ourselves on why we exist, who we are, and what we do well. At Capstone, we exist to make the impossible possible. When we started out developing micro turbines for mobility back in 1988, there were a number of big players doing the same. The likes of GE, Honeywell, Rolls Royce, Toyota, Ingersoll Rand, Kawasaki, Elliott, and others were all in the micro turbine space in some way. With over 13 different companies chasing the dream of clean, compact, and low emissions micro turbines, today only a very small handful are still here. Many exited this space because they felt it was impossible to make it viable. 36 years later, and over 10,000 units in the field, Capstone has truly made the impossible possible. As the energy landscape has continued to change, it is becoming more and more evident that the world needs a clean technology that sets the global standard for real, sustainable energy using a wide range of energy sources such as biogas, natural gas, both pipeline quality and renewable, landfill gas, sour gas, hydrogen, and eventually methanol, plus other waste stream fuels that can be converted into clean, low-emissions, sustainable energy. Doing so requires us to dare greatly and think beyond. We must think beyond the challenges in front of us and find solutions that can exist in all shapes and spaces, which may not be as obvious. These beliefs are what grounds us so that we may set a new vision with priorities and business imperatives that pave the way for us to meet our new demands of today's marketplace. On slide nine, I would like to shift the discussion to talk about our three pillar strategy and share some outcomes resulting from this approach. For the next three years, we will be focusing on what we call our three pillars of strength, financial health, sustainable excellence, and building culture and talent. Although we will work on all three pillars each and every year, each year we will place a higher focus on one of the pillars. We call this a focus pillar. This focus pillar will receive, say, 50% of our effort, while the remaining two pillars will receive 25% effort each. For fiscal year 25, our focus pillar is financial health. Since early March 24, we have been working to drive discipline into every element of our business. By improving our operating discipline, business discipline, commercial discipline, and financial discipline, we will root out waste, abuse, and non-value added activities. This will improve our financial results and create value added outcomes for our customers and clients. For sustainable excellence, we must do the right things well and measure what matters on a holistic business approach. Getting granular on what we do and how we measure is what will deliver exceptional value to our customers and shareholders. Our last and equally important pillar is around our culture and talent. What's amazing about Capstone is that it really has very good business bones. Now we just need to add the muscle, and that muscle is our people. As we took a hard inward look at ourselves, our company's 36-year history of overcoming difficult technical and commercial challenges, we found a bedrock of values. It was like unlocking a treasure chest. We have formalized those values into a set of guiding principles we call our CLIMB core values. C. Courage to dare greatly. L. Little things matter. I. Iterate to success. M. Mutual trust amongst all. B. Be the best in all you do. We now measure ourselves and all new hires we bring on to join the Capstone team by these very core values. Each and every one of us must have the courage to dare greatly. 36 years ago, this is what our original founders, James Noe, Robin McKay, and the Rosen Brothers did when they embarked on developing oil-free, clean, low-emissions, high-precision, high-speed micro-turbine technology. They and their fellow Capstone employees over the last three decades have truly made the impossible possible. But it doesn't end there. You cannot achieve extraordinary results without making sure you get the little things right. Thus, our second core value, little things matter. Even when we excel in the first two core values, life, business, markets, and whatever, will throw us curveballs. Not giving in or giving up, we learn from our mistakes and misses so we may iterate to success. You will notice that there is no T for team in CLIMB. That is not because we don't believe in teams. It's because just saying teamwork is overused and quite frankly too broad. Every team that performs at the highest of levels is built on something more important. The cornerstone of every great team is trust. That is why we seek and work hard on building mutual trust amongst all. It's not just trust amongst ourselves here at Capstone. It's trust amongst our customers, our suppliers, our distributors, and our shareholders. Lastly, the foundational element to the four core values I've just mentioned is being the best in all we do. These core values become meaningless unless we relentlessly commit to being the best in all we do. It is with these three pillars of strength that Capstone will not only maintain its world leadership in oil-free, low-emissions, micro-turbine technology, it is these three pillars of strength that will enable us to deliver exceptional financial results which will allow us to reinvest in our business. By doing so, we create world-class customer experiences and a sustainable competitive advantage in the marketplace. Now, let's move on to slide 10. As part of driving operational, commercial, and financial discipline into our business, we launched two main programs at the beginning of fiscal year 25. The first program is around developing a set of objectives and key results, also known as OKRs. We started with developing a corporate OKR that was keenly focused on delivering the necessary gross profit needed to cover the fixed costs of the business plus adjusted EBITDA. Additional OKRs were then cascaded through a number of key result initiatives we call KRIs. These KRIs were developed in order to accomplish the key results of the corporate OKR. The OKR discipline fosters focus and accountability across the entire organization. It is now our go-to playbook when executing complex or fast-track projects and issues. The second major program was building talent, knowledge, and action around getting costs out of our business by using an approach called Design for Manufacture and Assembly, also known as DFMA. This naturally became an OKR. The DFMA approach and its software tool facilitates a disciplined set of actions into understanding what each component of our product should cost and could cost without just simply squeezing our suppliers' margins. Over the years, we had lost the operational, commercial, and business discipline in how we work with our suppliers. And as our historical financial performance has shown, we have not been receiving the best value-priced outcomes from our supply chain. DFMA is becoming our DNA. With this expertise, we can now collaborate with our suppliers and vendors to ensure we optimize scope, process, and manufacturing capabilities in the right places with the right suppliers at the right times. With that, let's turn to slide 11, where I will share an example of a very impactful and exciting DFMA cost out project. When we launched the DFMA program, it started with a three-day workshop. In attendance was not just our engineers. We included our service team, our sales team, quality, supply chain, finance, and most importantly, our manufacturing teams. The outcome of this workshop was the creation of five cost out teams where each had identified projects with great opportunity to get cost out through changing manufacturing approaches, use of different materials, part-count reductions, or all of the above. The example in this slide started with a sub-assembly that is on every micro-turbine called a dump valve assembly. We had designed this assembly to cover every application. So originally, the team was going after the dump valve itself and its supporting hardware. However, the deeper they dug in using DFMA, they realized one of the supporting assemblies, called the dump valve hose assembly, was ripe for cost out. By using less expensive material, they went from an overkill stainless steel pipe to a silicon hose. Further, they were able to reduce part count. In the picture on the left, you can see there were eight parts in total for this assembly. When the team used the DFMA approach, they were able to create the same form, fit, and function of the dump valve hose assembly, but with just three parts. Next, they embarked on understanding what this new dump valve hose assembly should cost. Through this process, they took the cost of the silicon hose down by 65% and the dump valve assembly by over 90%. And this is just one sub-assembly amongst hundreds of other components, which now takes us to slide 12. Quite frankly, in the past, Capstone was figuratively taping dollar bills to every unit that left our factory. That was simply unsustainable, as we are not in the razor blade business. Our product is not a commodity product. We are part of a solution solving larger issues on a larger stage with key players known as resiliency, affordability, and sustainability. Sure, high precision, low emissions technology comes at a price, but that doesn't mean every component in our product should be overpriced. Forcing us into an unsustainable financial position. This is why DFMA must be in our DNA. This DNA requires a set of principles that drives discipline, respect, trust, ideation, and collaboration. I will now turn the call over to John Jurich for a deeper dive on financial results.

speaker
John Jurek
Chief Financial Officer

Thank you, Vince, and good afternoon, everyone. I will now review in more detail our financial results for the third quarter of fiscal year 2025. Moving to slide 14, you will see the financial results for the third quarter of fiscal year 25 compared to the prior year third quarter. Total revenues in the current quarter were $20.1 million, an improvement of $5.5 million compared to the $14.6 million in the third quarter of fiscal year 24. Increased demand in all revenue streams provided the improvement from the prior year. Product and accessories revenue accounted for $3 million of the increase and was $8.2 million up from $5.2 million last year. Parks, service, and rental revenues was $11.9 million, up $2.5 million from the $9.4 million in the same period last year. Gross profit and gross margin increased in the current quarter from the prior year. Gross profit was $5 million, an increase of $2 million from the third quarter of fiscal year 24. Gross margin as a percentage of revenue was 25% in the current quarter, up from 21% in the prior year quarter. The improvement in gross profit and gross margin was due to higher per megawatt product and accessory revenues, the effect of higher utilization rates for product manufacturing, and the impact of a favorable sales mix. Research and development spending in the third quarter of fiscal year 25 was $0.8 million, and an increase from the same quarter of the prior year by $0.2 million as we begin to refocus on product refreshment. SG&A expenses for the third quarter of fiscal year 25 were $6.3 million versus $9.7 million in the same quarter of the prior year. The decline in the current year expenses resulted from reduced legal and accounting fees for the restatement and restructuring activities, and a decrease in stock-based compensation. The net loss for the current quarter was $2.7 million compared to net income of $24.2 million in the prior year quarter. The third quarter of fiscal year 24 included a favorable charge for reorganization items of $32.6 million. Excluding the favorable reorganization charge in the third quarter of fiscal year 24, net loss improved $5.7 million for the third quarter of fiscal year 25 from the prior year quarter. Adjusted EBITDA was positive $0.5 million for the third quarter of fiscal year 25 compared to negative adjusted EBITDA of $0.2 million in the prior year quarter. This resulted in a $0.7 million improvement year over year. Now turning to the nine-month results. Slide 15 shows -to-date fiscal year 25 versus -to-date fiscal year 24 total revenues. Total revenue of $58.5 million for the nine months decreased from $66.9 million for the same period in the prior year, as the sales of products and accessories decreased by 10.3 megawatts because of the Chapter 11 hangover Vince had previously mentioned. Gross profit for the current year nine months was $15.8 million, an increase of $4.1 million from the prior year. And gross margin increased to 27% from 17% in the prior year due to the higher price per megawatt of product and rental revenue and favorable sales mix from parts, service, and rentals. Operating expenses decreased to $21.4 million from $27.6 million for the current year due to the reduction in legal and accounting fees for the restatement and restructuring and the decrease in stock-based compensation expense. Net loss for the nine months was $7.1 million versus net income of $12.7 million. Fiscal year of 24 included a $33 million favorable charge for reorganization items. Again, excluding the favorable effect of the reorganization items, the net loss for fiscal year 25 was reduced by $13.2 million on improved gross profit, lower operating expenses, and lower interest costs. Adjusted EBITDA improved to $5.1 million for the nine months in fiscal year 25 versus $0.3 million for the nine months of the prior year. Turning now to slide 16, you will see select balance sheet and cash flow items. Cash should decrease slightly to $3.3 million from $3.9 million measured at December 31st of both years. Cash provided by operating activities for the nine months in fiscal year 25 was $2.2 million compared to cash used in operating activities of $22.1 in the prior year. During the nine months ended December 31, 2024, the $2.2 million of cash provided by operating activities consists of a net loss for the period of $7.1 million. Cash used in operating assets and liabilities of $0.7 million offset by non-cash adjustments of $10 million. For the nine months ended December 31, 2023, $22.1 million in cash was used in operating activities which consists of net income of $12.7 million plus non-cash adjustments of $9.4 million offset by $35.3 million in non-cash reorganization items and $8.7 million of cash used for operating assets and liabilities. Non-cash charges consist primarily of depreciation and amortization, non-cash lease expenses, paid in kind or PIC interest and stock-based compensation. Accounts receivable at December 31, 2024 was $11.4 million versus $5.6 million at December 31, 2023. The change in accounts receivable balance is due to increased sales and timing of sales in December. Total inventory levels of $22.7 million at December 31, 2024 is a decrease of $10.8 million from December 31, 2023 due to a decline in raw material and finished goods inventory levels that resulted from our focus on inventory management. Accounts payable and accrued expenses of $17.6 million at December 31, 2024 is a decrease of $4.7 million as days payable outstanding declined between periods. Next, I will provide a brief update on the status of our common share trading. Turning to slide 18, on January 6, 2025, Capstone Green Energy Holdings Inc's common shares were quoted on the -the-counter pink market. The assignment of our trading symbol was initiated independently of Capstone and without prior notification. A broker dealer acting on behalf of a requesting party sought a ticker symbol to facilitate share trading. FINRA conducted its due diligence and with Capstone being current with its SEC filings, FINRA approved the request and assigned the ticker symbol CGEH to the pink open market platform. We currently have an existing application with OTC Markets to move to a higher tier platform such as OTCQX which offers shareholders greater trading flexibility. Our long-term goal is to advance to a national securities exchange such as NASBAC. Once we meet the necessary eligibility requirements. With that, I'll turn it back over to Vince.

speaker
Vince Canino
President and Chief Executive Officer

Thank you, John. In slide 20, I would like to talk about today's energy landscape and how it has changed in a multitude of ways. Customers are now looking beyond just a simple payback of combined heat and power application. Today's demands require customers to not only lower their energy costs but to do so by lowering their carbon footprint. The surge of using renewable energy as the vehicle for the race to net zero has created unexpected resiliency and sustainability issues. There became a need for sustainable microgrids. This is where the Capstone micro-turbine plays well. Because of our inverter-based technology, we are able to become the backbone to form microgrid and maintain it, thus solving the energy trilemma of resiliency, affordability, and sustainability. Solving technical challenges are just one part of the customer's equation. In slide 21, I'd like to discuss how we are addressing some of their other pressing commercial and business needs. As we think about today's customers in terms of their wants, concerns, and goals, finding a solution set of outcomes to address each area could be a challenge for most. We see the opposite. Although our first cost on a product basis may be higher, we can win in many applications based on a total cost of ownership. We certainly realize we cannot be all things to all customers, but that's why we believe in evaluating our solution set on the basis of total cost of ownership, also known as TCO. This approach saves us and our customers valuable evaluation time. It must be noted TCO doesn't stop at the combination of total installed cost, maintenance cost, and fuel cost. We must be mindful of the downstream effects on the environment and the sustainability of performance and emissions over time due to degradation and wider operating windows. Including these elements into the total cost of ownership paints a very different picture and yet a more accurate picture. This is how we must realign our value proposition. Through collaboration, trust, and respect, we can help guide our customers to the right solution even if it does not include using capstone. Moving on to slide 22, the inherent challenge in any power generation business is the long evaluation cycle or cycles needed to justify a major capex want. As we look at creating a sustainable business model that can withstand the ebbs and flows of these long cycle projects, a steady flow of what we call transactional products is needed. These transactional products could be complementary to our current product lines. Our goal is to build a portfolio rich with clean tech products that exist in the same markets we pursue and will enhance our overall capstone solution set offering. We are in the beginning stages of reshaping our portfolio, so we thought it might be useful to provide you a window to the future. This portfolio approach not only helps us provide greater value added outcomes for our customers, it also helps us strengthen our balance sheet which in turn creates investment dollars for future technology development. With that, we would like to move to the Q&A session. Kim, might you please queue up the first question submitted?

speaker
Kim
Moderator

Thank you, Vince. I think we'd like to take our first question from Aaron Martin who's on the line with us now.

speaker
Aaron Martin
Investor

Hi, Vince and John. First of all, it's good to be having a call like this again. It's been a really long time. In terms of this has been a long time, can you talk about the different end markets that are significant to the company, let's say year to date, and as you look forward, which end markets you're seeing success in and which one less so, where are the end markets where the ROI is making sense and the customer cycles are working?

speaker
Vince Canino
President and Chief Executive Officer

Sure, sure. First off, today speaking in the current situation, oil and gas is definitely a hot spot for us. We're seeing significant upturn in that market both in the rentals business and the new unit sale business. That's actually a very nice market because we actually get both of those business dreams. We also see though for the future, obviously data centers are a hot market with AI being what it is, but there are some hurdles that we're trying to clear and provide and figure out a good solution for the data center space, so stay tuned there. Lastly, around electrification, we're seeing a lot of challenges with infrastructure and being able to get power in order for folks to electrify different operations of the businesses. EV charging and other electrification mobility, I think is going to be another big play for us.

speaker
Aaron Martin
Investor

Anyway, you can quantify the breakdown of those end markets. Oh, well

speaker
Vince Canino
President and Chief Executive Officer

in terms of dollar values or just sizes?

speaker
Aaron Martin
Investor

However you think about it, however you think would be helpful.

speaker
Vince Canino
President and Chief Executive Officer

Well, we'll just talk to generic sizes because right now it is hard for us to understand some of them, but if we think about oil and gas, that definitely has a substantial size to it compared to commercial and industrial applications where they're just chasing let's say energy savings. The nice thing about oil and gas is they need products that are remote that can run in remote applications and very low maintenance and we fit that bill. The other interesting play for us in that space is because we actually have 70% lower emissions than resip engines. As these oil and gas providers are being pushed to become more clean, we think that this technology certainly is a way to go for them. We've seen a lot of positive response around there, but it's a very big space. It can be volatile as you know depending on the price of oil and what that range looks like. When we think about data centers, some of the folks that are out there, they talk about gigawatts of power. We can't provide gigawatts of C1000s, but there are blocks of power that we think can match very nicely and fit some of their solution sets where they may not have power for three or four years or they need to get a 15 megawatt expansion and there might be a play there. That's a very, very big market that as we've been hearing, they've been looking at big combined cycle power plants and nuclear plants. That's obviously not where we compete, but there's a space there for us to play in.

speaker
Aaron Martin
Investor

You're focusing now on really operational excellence and you gave us a real deep dive into that. Can we talk a little bit about gross margin? It's great to see 25% gross margin. Presumably you're not done there. How should we think about the gross margin? Obviously, it fluctuates quite a bit as we move between rentals, outright sales and parts,

speaker
Operator
Conference Operator

but smooth

speaker
Aaron Martin
Investor

out overall or maybe even just focus on the pure product gross margin. How much room is there and how should we think about that?

speaker
Vince Canino
President and Chief Executive Officer

Sure. As you saw in this presentation today, a lot of the focus was around the product. We believe that there's a lot of room to improve our product gross margin. As we deploy the FMA and really put discipline back into the business, we think we can get some good margin expansion that way. In addition, gross margin is also a function of absorption rates. If we can get our volumes up, then we can cover our fixed manufacturing costs. That's also equally important. When it comes to service, again, it's the discipline on how we take care of our customers and also how we manage our rental business as well as our long-term service agreement business. As we get better operationally in managing those, we can get margin improvements there. We get a daily double here because as we take costs out of our product, we also then can take costs out of our parts margins, or not take them out of the margins, but take it out of the parts cost. That's how we're looking at it. Right now, the most important one for us is really around product margin.

speaker
Aaron Martin
Investor

Is a lot of the noise around tariffs, is that a material item for you in terms of COGS, or how it affects overall the company? I don't know if you're North America-sourced. How does that go into the gross margin?

speaker
Vince Canino
President and Chief Executive Officer

Well, we're watching it very closely because it does affect us and many others. It depends on which tariff you look at. We're constantly modeling and monitoring the different tariffs. If we think about the latest one that came out last week with steel and aluminum, that is going to have a big effect on us because that's what our product pretty much is. As we look at different regions and low-cost countries and associated tariffs there, those can have an effect. On the flip side, tariffs for products coming from Europe, that could actually help us in the U.S. possibly with our competition that manufactures in Europe and brings products here. It's something that we're keeping a keen eye on and we're modeling the different possible scenarios. We'll see where it all plays out.

speaker
Aaron Martin
Investor

To summarize, because you're a manufacturer here in the U.S., it affects you on the component level, but may benefit you on the overall finished product level?

speaker
Vince Canino
President and Chief Executive Officer

Correct.

speaker
Aaron Martin
Investor

Lastly, I don't know if you're ready to give guidance on your first public callback, but how should we think about Q4 and going into fiscal 2026 from a top line level and revenue trends now that the pent-up demand has finally started coming back? I'm going to let John answer that one.

speaker
John Jurek
Chief Financial Officer

Hey, Aaron. Good to speak with you again. As you're aware, Capstone doesn't really give detailed follow-up guidance, but I think if you refer back to what Vince said earlier in the presentation and how we're seeing our product order book improving and how that has improved and is carrying forward, I would say that we should be able to expect similar performance to where we are today as we go forward. From a service side of the business, we're set pretty good going into the short term. We'll have to do a little bit more work on that midterm.

speaker
Aaron Martin
Investor

Okay. Thank you, guys, and congratulations on getting back in the public market. Thank you.

speaker
John Jurek
Chief Financial Officer

Feels good.

speaker
Kim
Moderator

All right, gentlemen. We have a question that was submitted on the webcast, and this one is, is the DOE working capital grant in the near future, any other grants pending? Then to double down on that, is the Department of Energy financing any hydrogen research?

speaker
Vince Canino
President and Chief Executive Officer

In terms of grants pending, we do not have any. In terms of DOE grants that are out there, we are actually pursuing an opportunity to actually put a CHP in our facility right here, and the DOE has a very nice program that we think we can take advantage of and not only lower our energy costs here at STAG, but also walk the talk and demonstrate to anybody that comes to visit us that we actually use our own product. We feel that's a very important initiative. In terms of hydrogen, that one is now becoming a little bit fuzzy, but we are not aware of any DOE hydrogen projects, but we are working closely with some universities, one in Australia and one here in Irvine, where they are using hydrogen at different levels, some of them 100 percent and some of them blending with natural gas, and we're seeing very positive results out of that. So we're pretty excited about where that future goes, but we still have some work to do in terms of the hydrogen space.

speaker
Kim
Moderator

Okay. What are the plans for the 7.8 million exit notes that are due in December 2nd, 2025?

speaker
John Jurek
Chief Financial Officer

Yes, so with the notes that are coming due in December of 2025, we are actively in discussions with various parties on refinancing those notes.

speaker
Kim
Moderator

Next question is, will the accounts receivable allowance reduction of 3.2 million be collected soon, and why the large sequential increase in deferred revenue from 9 million to 15 million? Thank you from a long-time shareholder.

speaker
John Jurek
Chief Financial Officer

Yes, so the change in the allowance and the reduction there is a result of some long overdue receivables going back to, I guess, the COVID era, where products had been sold, projects had been cancelled, and distributors had no means for payments. The company has pursued collections of those over the past two years, but it's finally gotten to a point in the realization that the distributors have no means to make payments. So the collectability of what was written off is extremely remote, is how I would view this. And then as far as deferred revenue, that's more of a reflection of the increase in the order book, because this deferred revenue includes deposits as well. And as we've seen and as Vince mentioned earlier in the presentation today, we have seen uptick in orders, which have led to increased deposits, which will lead to increased sales revenue over the future periods.

speaker
Kim
Moderator

Is the Australian distributor active?

speaker
Vince Canino
President and Chief Executive Officer

Yes, very. Do you want me to elaborate? Well, it is interesting because it's an interesting question. Australia, like Europe, has been faced with the anti-gas movement. And so it really did put a big damper on projects that are going on in Australia itself. But the Australian distributor has gone outside of Australia and has actually ended a couple of other nice projects that are natural gas driven. In addition to that, they are working previously on alternative fuels. So hydrogen is a play, they feel, and then methanol is another play. So they're trying to reinvent themselves and we're supporting them fully. And we can see some great things that will bring Australia back to the grandeur that it used to be.

speaker
Kim
Moderator

Will you use DFMA on the core technology of the microturbine?

speaker
Vince Canino
President and Chief Executive Officer

Good question. Our goal today is to not touch the powertrain and the hot gas path. And it will require a significant amount of investment qualification, validation, and cycle testing. So that one we're going to treat very judiciously. But we don't need to go there right away because there really is a lot of low-hanging fruit. And there are a ton of opportunities that exist outside of the powertrain that we can focus on and make some significant impacts into improving the product gross margins. So it's certainly on our radar and it's in our midterm plans, but it's not something that we are focused on at this moment. And one thing I'd like to add, because I think we failed to mention this, in the DFMA program, one of the other important requirements was everything that we do will not sacrifice quality, performance, and reliability. And that's been really great about the projects that we've seen is that every single project has either maintained or improved quality, reliability, or performance.

speaker
Kim
Moderator

Excellent. Is Capstone seeking any refinancing?

speaker
John Jurek
Chief Financial Officer

Yeah, as I mentioned previously, we are in discussions for refinancing.

speaker
Kim
Moderator

How many turbines were lost in the LA fire?

speaker
Vince Canino
President and Chief Executive Officer

There were no turbines lost in the LA fire to our knowledge.

speaker
Kim
Moderator

When is the new market maker coming online? You said you were working with another one.

speaker
John Jurek
Chief Financial Officer

Well, our stock started trading from a quote, not from the market maker, but from a specific request. We have only been working with one market maker. We're in the process. We're trying to finalize that process within the next couple of weeks to roll out that information.

speaker
Kim
Moderator

Excellent. How about a direct sale of shares to existing shareholders to raise some capital?

speaker
John Jurek
Chief Financial Officer

That's a very interesting approach. It's not something that we're currently considering, but as we become more active and once we get things settled with the -the-counter market and the positioning of our stock and we get elevated to a higher level on the OTC market, we will start looking at various capital raise opportunities through stock sales.

speaker
Kim
Moderator

To couple onto that, how do you see the best ways to improve your cash position?

speaker
John Jurek
Chief Financial Officer

The DFMA program is a very strong way and provides some of the shortest timeline to improving cash. That is one of the areas and that's why it is such a critical part and part of our DNA here at the company. Secondly, what we see is the continuation of the demand on our rental fleet and the ability to keep that at a high utilization rate, optimizing the revenue stream from that price per megawatt basis. As the oil and gas activities expand in this country as we're expecting based on the new direction of the administration related to oil and gas, we see that as a very positive opportunity that can help produce additional cash for us.

speaker
Kim
Moderator

What is the average delivery time from order to billing of a 1 megawatt or similar size order?

speaker
Vince Canino
President and Chief Executive Officer

Well, we have been currently running 13 to 14 weeks,

speaker
Kim
Moderator

but

speaker
Vince Canino
President and Chief Executive Officer

as we've seen a pretty good surge of orders in Q3, some of that is getting pushed out, but we have been managing shorter lead times and again, this is the critical piece of repairing our relationships with our supply chain and getting them to be able to respond faster, especially when we have certain blips in the order stream.

speaker
John Jurek
Chief Financial Officer

I'd just like to add, one of the things that we're testing with many of our suppliers is the paradigm on the extended lead times that kind of evolved during the COVID era. I think the paradigm there is shifting and we are applying pressure on our supply chain, especially the ones that are continuing to have extended lead times to really provide substantiation for those positions. Good point.

speaker
Kim
Moderator

Is Capstone checking out all the Capstone turbines and parts to sell on the internet for possible conversion to rentals?

speaker
Vince Canino
President and Chief Executive Officer

So we certainly see units that have been sold where a customer may no longer need that unit as an opportunity to put into our rental fleet. That is one of the nice things is we have the ability to bring those units back in, do an overhaul, give them tip top shape and then put them back out into the rental space where otherwise it would be very hard for them to try to sell it into a secondary market.

speaker
Kim
Moderator

Now that the financials are current, are any of the board, management or employees purchasing any stock?

speaker
John Jurek
Chief Financial Officer

Well, first to that question, as most, well, maybe, you may not know, but insiders, i.e. board members, executive management have very limited windows where they are able to acquire shares. That window just opened earlier this week, actually yesterday. I am not aware that there's been any request by any of the insiders to make any purchases of stock at the moment.

speaker
Kim
Moderator

John, you mentioned investments in technology refresh activities. Can you elaborate?

speaker
John Jurek
Chief Financial Officer

Sorry, repeat that question, please.

speaker
Kim
Moderator

Sure. You mentioned investments in technology refresh activities. Can you elaborate on that?

speaker
John Jurek
Chief Financial Officer

Yes. So we've begun a program to refresh our electronics and overall design consolidation using today's component technology. I think the biggest focus at the moment is really on the electronic components of our turbines is where we're focusing our efforts.

speaker
Kim
Moderator

Excellent. Well, that concludes all of our questions on the webcast. So I'll turn it back over to the moderator.

speaker
Operator
Conference Operator

Thank you. That concludes our Q&A session. I'll now hand the conference back to Vince Canino for closing remarks. Please go ahead.

speaker
Vince Canino
President and Chief Executive Officer

Thank you. You know, Aaron touched on something when he had asked our original question, and that was today we spent most of our time on operational items instead of top-line growth strategies. And that will come in due time. Right now, our focus has had to be around the operational muscle needed to repair our ship and get it off the roof. As we do this and we get the ship back into open waters, we can then put the winds of the market growth in ourselves. So we ask you to stay with us, be patient. We're entering some very dynamic times, and we do appreciate your patience as we reinvent ourselves of what should be a very exciting future.

speaker
Operator
Conference Operator

Thank

speaker
Vince Canino
President and Chief Executive Officer

you.

speaker
Operator
Conference Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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