Capstone Green Energy Corp (CGRN) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Capstone Turbine earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Ms. Jamie Brooks, Vice President, Financial Planning and Analysis. Please proceed ma'am.

Thank you. Good afternoon, and welcome to Capstone Turbine Corporation's conference call for the second quarter of fiscal 2009, ended September 30, 2008. I'm Jamie Brooks, your contact for today's conference call. Today, we will be using a short PowerPoint presentation that we will reference during the call. The presentation is posted on our web site at www.microturbine.com, and can be found under Investor Relations in the Presentations section. Capstone has filed its quarterly report on Form 10-Q with the Securities and Exchange Commission today, November 10, 2008. If you do not have access to this document and would like one, please contact Alison [Versimilian] (audio difficulties) at 818-407-3628. Or, you can view all of our public filings on the SEC website at sec.gov or our website at www.microturbine.com.

During the course of this conference call, Management may make projections or other forward-looking statements regarding future events or financial performance of the Company within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, future financial performance in obtaining profitability, the ability to reduce costs and approve inventory turns and contribution margins, continued growth in current market conditions, the ability to obtain a line of credit, the launch of the C200 and C1000 products, compliance with certain government regulations and increased government awareness of our products, increased opportunities for our products in the Obama administration, [developing] new markets for our products and attracting large customers to our products, increased product parts commonality between the C30 and C65 products. New applications for our products, including the hybrid [buff], [coal seam] gas and oil and gas markets. Revenue growth and increased sales volume, our success in key markets, our ability to enter in to new relationships with channel partners and distributors and other third parties, energy efficiencies, reliability and low cost of ownership of our products and the expansion of production capacity.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties including the following -- our expectations about expansion into key markets may not be realized, certain strategic business initiatives and relationships may not be sustained or may not lead to increased sales. We may not be able to reduce cost or improve customer satisfaction. Growth in our backlog has significantly exceeded our internal forecast. In order to meet this increased demand, we may need to raise additional funds to meet our anticipated cash needs for working capital or capital expenditures during the next 12 months.

The current financial crisis and possible future recession could make it difficult or impossible for us to raise the necessary funds, and for our customers to buy our products. We may not be able to secure a line of credit. We may not be able to expand production capacity to meet demands for our products. We may not be able to obtain sufficient materials at reasonable prices. Our release of our new products may be delayed, or new products may not perform as we expect. We may be unable to increase our sales and sustain or increase our profitability in the future. We may not be able to obtain or maintain customer,distributor and other relationships that result in increase in volume and revenue. We may not be able to comply with all applicable government regulations. We may not be able to retain or develop distributors in our targeted markets, in which case our sales would not increase as expected. And if we do not effectively implement our sales marketing service and product enhancement plans, our sales will not grow and therefore may not generate the net revenue we anticipate.

These are among many factors which may cause Capstone's actual growth to be materially different from future results, predicted or implied in such statements. We reefer you to the Company's Form 10-K, Form 10-Q and recent other filings with the Securities and Exchange Commission for a description of these and other risk factors. Because of the risks and uncertainties, Capstone cautions you not to place undue reliance on these statements, which speak only as of today We undertake no obligation and specifically disclaim any obligation to release any revision to any forward-looking statements to reflect events or circumstances after the date of this conference call, or to reflect the occurrence of unanticipated events. I will now turn over the call to Darren Jamison, our President and Chief Executive Officer.

Thank you, Jamie. Good afternoon and welcome everyone to Capstone's second quarter earnings call. With me today are Ed Reich our Executive Vice President and Chief Financial Officer, and Mark Gilbreth, our Executive Vice President and Chief Technology Officer. Today, I will start with a review of the significant events of the second quarter, and then Ed will walk us through the financial results. Ed will then turn the call back over to me, and I will discuss our progress towards our strategic objectives and review developments in some of our key market segments, and finally talk about what we hope to achieve in the coming quarters before I open the call to your questions.

During the second quarter of fiscal 2009, we continued to see the impact of our marketing and branding strategies and the success of our new products. We continued to strengthen our relationships with our business partners, and we have been focusing on our key suppliers as we significantly increase our C30 and C65 production rates in the second quarter, while simultaneously launching the new C200 product line. second quarter revenue increased 74% from the first quarter, to $13.1 million. And new orders again outpaced shipments as we received $17.6 million in new orders and shipped $9.9 million in new product, resulting in product backlog increasing to a Company record $50.4 million.

As you can see from the first slide, our backlog has increased from $13.1 million at the end of Q3, to $27.9 million in Q4, to over $42 million in Q1, again to today's record of $50.4 million at the end of Q2. This backlog is highlighted by$27.6 million of our new C200 and C1000 product in that backlog. As discussed in our last earnings call, the metric we use to measure the develop in the health of the business, is the sum of the quarterly revenue and backlog as seen on slide one.

Because Capstone is developing business, our revenues can and will be lumpy. If you measure the business on quarterly revenue and backlog combined, you will see a much clearer picture of where the business is headed. This metric for the last five quarters has grown from $11 million in the first quarter in fiscal 2008 to over $63 million today. I believe that this continued growth, with combined revenue and backlog, illustrates Capstone has finally reached the critical inflection point with our disruptive ultra-low emission technology, and we are making significant inroads in multiple markets and multiple applications around the world.

Management continues to be impressed with the early market acceptance of the C200 and C1000 family of products, as we now have 49 C200s and 29 C1000 family units in backlog, totaling 187 equivalent C200 engines. Capstone has achieved this growth despite a challenging world economy. However, I believe that Capstone is less suspectable to market conditions than some of our competition, for four important reasons.

First, as illustrated on slide number two, Capstone sells in a diversified portfolio of end markets, from oil and gas, telecom, transit bus, landfills, hotels, hospitals, and municipalities, just to name a few. Also, our markets are global, so we are somewhat insulated from our specific country's economic issues. Today, are largest markets are Europe, Russia, followed by the North America or the United States. However, Asia, South America and Australia are starting to pick up positive momentum.

The third reason is because our average selling price is about $1000 per kilowatt, and our projects tend to be smaller in nature and less dependant on outside or third-party financing. Therefore, for projects other than [attractive economic] benefit, most companies can afford to fund our products with their working capitals without relying on outside funding. Lastly, because we have less than 1% of the annual $4 billion-dollar distributed generation market. Therefore, it is reasonable to assume that we can continue to increase market share even in declining markets.

We continue to see customers move from demonstration projects or test projects into the full product implementation and product adoption. Recently, I've been very encouraged by the recent rollout of a major European grocery store chain that quickly moved from a single unit trail to a 36 unit-order in the second quarter, and is currently evaluating several stores that would benefit from our unique, high efficiency product. W We continue to see interest from transit customers around the globe, who are watching what [marquee] transit properties like New York City are doing with our products. And they are requesting their own demo [bugs] for their own fleet evaluations.

I am pleased to see a significant international-only gas customer move from testing to single C30 in coal seam gas in Australia earlier this year, to order over 100 units for insulation in a single gas field in the first quarter. In the second quarter, they ordered three C1000s, all this in one single customer in Australia. Energy companies in Australia looking to drill tens of thousands of coal seam gas wells in the coming years, and Capstone is aggressively targeting this market.

However, by far, the highlight of the second quarter was the shipment of the first commercial C200 unit back on August 28 to our Italian distributor, IAVT. This was a tremendous achievement by the Capstone C200 team, as well as the United Technologies team. that provided both financial assistance as well as insightful engineering support. In September, we initiated the C200 production line at a rate of one unit per week.

During the second quarter, Capstone increased manufacturing production rates for both the C30 and the C65 in the plants, delivering over $13 million in total revenue as well as simultaneously launching the C200 product line. In short, the second quarter, I believe Capstone took another important step towards achieving our strategic goal of near-term profitability and building long-term shareholder value. At this point, I would like to turn the call over the Ed to review our specific second quarter results. Ed?

Thanks, Darren. Good afternoon everyone. I would like to [bribe] you with our results for the second quarter ended September 30, 2008. As Darren mentioned, backlog at the end of the quarter was $50.4 million, an increase of approximately 18% from the prior quarter, and over 385% from the prior year comparable quarter. Revenue for the quarter ended September 30, 2008 was $13.1 million, an increase of 82%, from the $7.2 million reported for the same period last year, an increase of 74% from last quarter's revenues of $7.5 million. We shipped 172 units in the second quarter, compared to 96 for the same period last year, and 89 last quarter.

Our growth loss for the quarter was $300,000 or 2% of revenue, compared to $800,000 or 10% of revenue from the same period last year, and $1.1 million or 15% of revenue last quarter. The decrease in growth loss in the improvement of eight points in the gross loss percentage over the past year reflects increased sales of C30, C60 series and C200 units, along with higher absorption of overhead costs and the ending inventory, offset by increased manufacturing and warranty expense.

Research and development costs were $2 million for the second quarter, a decrease of $400,000, or approximately 17% from the same period last year, and flat when compared to last quarter. R&D expenses decreased as a result of additional funding from UTC Power Corporation for the cost-sharing program that was offset by increased spending for supplies, consulting, shared costs and labor expenses. We expect R&D to be lower in fiscal 2009 than it was in fiscal 2008. Excuse me. This decrease is expected to incur as a result of lower overall spending due to outside funding from UTC Power Corporation for the C200 commercialization.

G&A expenses were $7.7 million for the quarter, an increase of $800,000 or 11% from the prior quarter, and an increase of $1.8 million or 31% from the same period last year. The net increase in SG&A expenses year-over-year, was comprised of an increase in non-cash stock compensation, as well as labor, travel, consulting and professional expenses. The increase in labor and travel costs reflected the continued effort of developing worldwide distribution and launching the C200 and C1000 products.

Our second quarter net loss was $9.9 million or $0.06 per share, an increase of $1.4 million from the $8.5 million loss or $0.06 per share reported for the same period last year. Cash balances increased by $13.3 million during the second quarter due to our registered direct offering of common stock that closed on September 23, 2008, resulting in net proceeds of $29.5 million. As of September 30, 2008, cash and cash equivalents were $46 million. We're currently in negotiation with a potential lender to obtain a line of credit during the third quarter of fiscal 2009. We currently anticipate that borrowings under the line of credit would be approximately $10 million, and will be very beneficial in managing our working capital going forward. Now let me turn the call back over to Darren.

Thank you, Ed. Capstone has moved from a period of product acceptance to a focus on increasing production rates and manufacturing yields. As shown on slide number three, Management's focus for the coming quarters is to continue to increase manufacturing rates of the C30, the C65, C200, and then launch the new C1000 in January. This means we will continue to add to our second shift,, work to reduce manufacturing, costs per unit and diversify and strengthen our supplier base.

I'm very confident in our manufacturing capabilities and that of our production team as they work their plan to meet these challenges in the coming quarters. In addition, we have been working to improve inventory turns to lower our working capital requirements, another key initiative to increase contribution margin on all of products. As we begin production of the new C200 today, the initial units are not meeting our target contribution margin rates. However, we have a detailed cost reduction plan to meet our target contribution margins for the C200 and the C1000 product. And we have begun implementing and expect to see improved margins over the coming quarters.

Today, the C65s are our most profitable products from a contribution margin perspective. However, we have done a tremendous job in developing a strategy to increase the product parts commonality between the C30 and the C65 product. We have designs for a new common package, that will house either the C30 or the C65, and greatly simplify the design and reduce the packaging cost of both units, as shown on slide number four. We have also identified a design to use one recuperator for both the C30 and C65 products, thus allowing us to lower our cost to the recuperator, and drive towards higher inventory turns.

In addition, we have identified a path to move to a common C30, and C65 architecture, electronics package. This will again lower our per-unit cost by better leveraging our supply chain and increase inventory turns. As our engineering group rolls off the C200 and C1000 development program, they will roll into the key cost reduction programs. I look forward to seeing the success of these cost-reduction programs, leading to improved contribution margin rates per unit over the next several quarters. Management has implemented a detailed plan and associated organizational changes in support of these key business initiatives.

Now I would like to take a minute update you on the progress in sales of our key markets, and discuss what you should expect to see from Capstone n the coming quarters. The European and Russian markets continue to show a growth from last year, and have been enthusiastic early adopters of the new C200 and C1000 products. In addition, incentives in markets like Germany, France, Spain and Italy, continue to drive Capstone products into bio gas, landfill gas, wastewater treatment plants and the like. Therefore, you should expect to see the European and Russian markets continue to grow as the year goes on.

The market in New York continues to be a prime opportunity for Capstone's products because of its need for clean and reliable power solutions, and the fact that buildings make up 79% of the city's greenhouse gas emissions. New York is a model city for Capstone, as we have C30s going into MTA buses, C65s deployed in commercial buildings and hotels, and the C200 and C1000 going into multi-tenant, high-rise office buildings, such as marquee buildings like the Met Life building, Helmsley and Daily News. California remains a good market opportunity, which was limited, if you remember, absent [carbs] 2007 certified product. I'm proud to say today, our California distributor, Colicutt Energy, is gaining strong momentum, and was one of our top three customers in the second quarter. I expect to see continued steady growth in both the East and West Coast markets, as our key partners increase marketing efforts to achieve improved results.

In addition, with last week's election of Barack Obama. the opportunity for Capstone's unique. ultra -clean and high-efficiency products should only increase in the US and be similar to what we enjoy in Europe, which today is our largest single market. The Obama platform outlines the following plan that should be beneficial to the Capstone product. This plan would reduce emissions 80% from 1990 levels by 2050; spend $15 billion a year towards clean energy; increase the renewable energy portfolio standard by 10%,by 2012, and 25% by 2025.And again, increase overall energy efficiency standards in buildings.

I applaud President-elect Obama for his vision on clean energy, his [dedication] (audio difficulty) to energy efficiency, which is truly the lowest cost solution in solving this country's energy independence issues. That being said, we are still decades away from freeing our nation from dependence on foreign oil and traditional fossil fuels. Therefore, Capstone will continue to focus on the oil and gas markets and should continue to gain market penetration as petroleum exploration, production and transportation companies are more focused on reliability, maintain ability and total cost of ownership than they are on product-first costs.

We continue to work hard in Asia, with a focus on the markets China, Korea, Japan and India. We continue to see slow but deliberate growth in these markets, as Capstone brings on additional distributors, like we recently announced in Vietnam. In the second quarter, we received several large orders from Samsung in South Korea, as they continue to make good inroads into the high-rise condominium market. In addition, we continue to work with UTC Power as they expand their pure comfort reach into the markets in China and India. We have seen a substantial increase in quotation activity in China since the recent Olympic Games.

I believe this quarter was significant as Capstone managed to increase it manufacturing capability and successfully launch the new C200 product. In the coming quarters ,we will continue to focus on improving our manufacturing ramps, improving our production yields, so we can start to close the gap between product bookings and product shipments. We will turn our engineering focus towards improving our contribution margin rates, with a development program that will better integrate our C30 and C65 product, and provide greater parts commonality and system architecture between the two proven products. The outcome of this development effort will be a lower-cost design for both the C30 and C65, so we'll further leverage purchasing power and lower our stocking levels and improve inventory turns.

I am proud of my Management team and the entire Capstone organization, including our valued employees, valued vendors, key distributors, all of which are continuing to deliver positive momentum, with increased revenues, record backlog, and narrowing growth loss and the successful launch of the new C200 product. I continue to believe that despite the global economic conditions today, Capstone will deliver the best year in the Company's 20-year history. At this point, I would like to open up the call to your questions. Operator.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Sanjay Shrestha, from Lazard Capital Markets. Please proceed.

Thank you and congratulations on a good quarter, guys. Couple of quick questions. First. in this backlog number, again a point of clarification, that does not include that service contract, right?

That's correct.

Accessories, parts or service or training revenue, that is correct.

That's usually about 30% of the backlog.

25% to 30%, correct.

As the revenues are going up, we are starting to see it become closer to 25% of total.

Great. In terms of the backlog number, right, how much of that is going to get recognized over the next 12 months?

The current portion of the backlog, which is the majority of it, we expect to turn into revenue over the next 12 months.

Terrific. Now, have you guys gone and looked at this existing backlog and sort of evaluated the mix of customer. And do you really think that, given what's going on in the credit market or the macro-economic environment, could actually have a potential negative impact or any cancellation or anything like that? Or, in other words, do you guys see any potential slowdown to this fantastic momentum from a business growth standpoint you are seeing given the current environment?

Sanjay, obviously one of our bigger concerns. We've been --- first of all, let me clarify we are not seen any project cancellation or slowdown yet. We've reached out to our largest customers and distributor partners, asking what they are seeing in the marketplace, And, again, they are not seeing any major slowdowns downs or issues, especially on landfills and [digests] on a lot of municipal projects have been funded quite a while ago and are moving forward. But as I said on the call, because their average selling price is low enough, a lot of customers are paying for this product out of their own internal working capital. And if the payback periods are short enough, they're better off moving forward. Again also because we are very small in our market share, we've got a great opportunity to continue to grow the markets in these multiple markets we serve, and gain market share even in a declining market. We haven't seen it yet, knock on wood we won't. But we are still very aggressive, moving forward, going to trade shows, marketing the product and full steam ahead.

Great, one last question, then, guys. Taking into consideration your focus on increasing the contribution margin of C200 and C1000, and focus on inventory management, what was your cash flow in the quarter? And two, what level of revenue do we need to get to the see the operating break even, the cash flow break even, given some of the recent initiatives that you are undertaking.

Sure. It's Ed. Sanjay. We burned a little over $17 million in cash during the quarter. That was to ramp up the inventories to get them to where we need them too be. We don't expect the inventories to go any higher than they are now. We should just be able to improve the turns at the same level that they are at which is about $24 million to $25 million. With respect to cash flow break-even, again because of what we've seen in DMCs and other costs, we feel we that we're still pretty close. We've revised our estimate for cash flow break-even from a 250-unit quarter to a 280-unit quarter based on mix and net margins.

The good news, Sanjay, is with this kind of backlog, it really allows us to stage our inventory. We have not been able to do [Just in Time] and [Combonding] and some of the things we'd like to do in a more mature manufacturing business. With $50 million in backlog, we are able to do that. We're moving toward manufacturing slots, increasing efficiency of the plant and moving to higher inventory turns. The difference between where we are today, just under under two terms versus four to six turns, from a working capital perspective is tremendous. So margins and working capital inventory turns are the major focus of our organization right now. As I mentioned, we've made a couple of organizational changes internally to better focus the organization, take down some -- any barriers that we had, and extremely focus on that and delivering higher margin rates going forward.

Okay. That's great. Thanks a lot guys.

Your next question comes from the line of Eric Stine from Northland Securities. Please proceed.

Hey guys. Nice quarter.

Hey Eric, how are you doing?

Not too bad. First thing, I just wanted to talk about the C200. You guys still feel that 48 in the calendar year is still your plan?

48 is definitely the plan. I would say today we are at a one-per-week rate. So we need to see what we can do between now and the end of the year to get that rate up. If we do miss the 48, then I think we will catch that up in the first part of next year. So we've got some material in. You can see the increase in inventory quarter over quarter. We are driving the production line as fast as we can. Our operating expenses are up again this quarter, as we've brought in a bunch of new people. Those people are being trained, and again, we're in the process of increasing that rate from one a week to hopefully three or four a week. Or even five a week is where we need to get to in the short term. So I don't want to comment specifically on the 48, but that's still our goal and working hard to meet it.

Okay. Fair enough. I guess this is more focused on UTC. Last quarter, you guys said that six of the C200s were in backlog for UTC. Can you comment on that. I guess especially in light of the fact that they've been actively advertising their Pure Comfort product with the C200?

They've been doing a tremendous job advertising the C200. They've got a great data center demo advertising what they are doing, that is very compelling. During the quarter, we didn't get anymore C200 orders. They did quite a bit of C65s during the quarter. The major grocery store chain in Europe I referenced is a UTC customer, and they're doing a great job with that client and getting past the initial test of the C65 on bio diesel to 36 bio diesel natural gas units, and then working on multi-store rollout plans with them. So, very exciting relationship with them, it's very good. They're running the unit we ship them as part of their demo program, and we expect to see more good things out of UTC going forward.

Okay. And this is more on the cost side. Can you remind me of your hedging policy? I believe you don't hedge. Question on that, but also, when should we start thinking about you guys benefiting from that? I know you have some long lead times. But when should we think that you will benefit from that?

Hey, Eric, you're right we don't hedge. We do all our transactions in US dollars.

I think one of the big issues we've had, is some material costs have gone up in the world market. Those are now coming back down again. So I think as we are seeing some of those metals and other things come down, we can leverage that pretty quickly, another way to get some our our costs down. But, again, with the designs Mark and his team have come up with on a common enclosure, which obviously helps from planning perspective, helps from a cost perspective, helps from an inventory turns perspective, going to common recuperators is huge. The recuperator is our single biggest cost item in the package, whether it's a C30 or C60 or a C200 as well as what he's doing on the architecture side. So, the common architecture he's talking about from a pyro-electronic side, will take us from three controllers to one, three boards to one. I mean, it's a very significant cost savings for us. So, again, now that we have the backlog we've really got the momentum going. We want to keep that going, but really turn our internal focus on cost production, manufactured ability to product, manufacturing yields and output, as well as total inventory turns.

Okay, and then just one last question, just on the hybrid bus segment, and I will jump back in to line. Can you give an update at all on design line, and maybe where they are in their ramping, their manufacturing? I saw that they did put in an order for battery -- battery systems for the Ecosaver Four. Any idea where they are at?

Yes, they just -- word we got is they'veopened their plant. They have some initial shipments going out right now. We expect them to pretty heavily increase those rates and start burning down the backlog we have with them. Like you said, you're seeing them order other components from other manufactures. I know they want to get to a 700-units-per-year production rate in that plant in North Carolina. How long it takes them to go from from 0 to 700 is really the question. My guess is, obviously, probably three or four quarters before they get there. We're expecting to see nice run rates. We talk to their sales folks and continue to hear good things. Lots of folks requesting demos, [obviously] New York, Chicago, New Jersey.We're also seeing Syracuse, several people in Florida, Antelope Valley, LAX Airport. So the amount of people interested in the product continues to grow. I think the more product they can get out in the field, the more momentum they are going to get. So -- and our OEM over in Europe is also doing very well and continues to make inroads. So, very excited about the product line, obviously, and where it can go.

Okay. Thanks a lot, guys. I will jump back into the line.

Thanks, Eric.

Your next question comes from the line of Ronald Havner, from Broadpoint [Perea] AmTech. Please proceed.

Good afternoon, guys. Hey Ron, how are you doing?. Good. I wanted to get a quick question.A common question I get, is your exposure to natural gas prices, those have obviously come down. I was just wondering if you could provide some color with regards to, first how much of your business is exposed to natural gas prices, and how the payback period might have changed if it has changed as gas prices have come down from $10 levels to $6 to $7 range.

Ron, great question. I think at lot of people tend to peg our stock to either natural gas or oil prices, which isn't 100% the best to look at -- the most accurate forecast of our business. Less than half of our product today is run on natural gas. It's probably closer to 40% About 60% of our product is other types of gaseous fuels,so landfill gas, [divesture] gas, coal seam gas, which I mentioned, gas from drilling operations, obviously any kind of methane, cow manure, pig manure, agricultural waste. So those types of projects are -- we call resource recovery, it's about 60% of our projects today. And obviously, those aren't driven by natural gas or oil prices. if you look at liquid fuels, we're doing a lot with diesel and bio diesel, especially in telecom. And, as I mentioned, that grocery store chain over in Europe is using bio diesel as well as and natural gas.

The real key for us is the difference between the price of natural gas and the price of the local utilities. So, if the local utility is tied to natural gas prices, that could impact us. But it's really that [spark] spread between what we can buy the gas for, and what we can make electricity for. So, gas prices going down are great short-term because that helps the economics. If they go up, as long as utilities can adjust to those higher prices, then we are okay. Really what drives us crazy is when gas prices fluctuate and are unstable, because that makes it very difficult for our customers to look at the economics and figure out what the paybacks are.

Okay, and then last quarter, I think you said an order from a customer slipped at the very last second because of some credit issues. Can you give an update on the status of that order and just any other delays -- have their been any other delays with potential orders because of similar type issues?

No other delays of similar issues. that customer was out of Africa, we -- Because he could not get the (inaudible) in place, we moved him to the back of the line. We actually took that out of backlog for the quarter until he has the LT opened up, but he is still actively working to get that done. Unfortunately, we were loyal to him last quarter, and hung onto the 11th hour. This quarter, with the kind of backlog we have today, if you don't have your LT in place by the 15th of the month, we are going to give your slot to somebody else. So, we want to be loyal to partners, but we don't want to have product sitting on the back dock when we have so many people wanting it. So, again, that's the only issue we have, and we don't see that really being related to the issues going on today.

Okay. And as you mentioned, the change from -- 280 from 250 to get the cash flow break even. What drove that change? What was the big change because of -- that resulted in that?

Direct materials cost that we're experiencing right now. Higher than anticipated costs, on the early C200 and C1000 production. That again -- that's a range from that land 280, so it could vary to either side of it again, depending on product mix. But we do expect that number to come down as we work to decrease materials costs and other labor and overhead costs.

Any update on timing of when you might reach that cash flow break-even level?

We haven't talked about timing on it. So I think what we do, is we'll just watch the progression rate. We did 172 units this quarter. And there were only four C200s in there, excuse me. So, I watched to it track it from there, track our progress. You should see us working to increase revenues over the next two periods as backlog -- as we get the backlog flow through.

Yes, intuitively, as we increase revenue rates, our cost per unit goes down. As our engineers roll off the C200 program, as we finalize that program, and onto the cost side, you will see our gross margins get better, our contribution margins get better. So it's really a combination of contribution margins getting better and revenue rates getting higher, and I think you can plot both those curves and get a feeling for where it is.

Great. Thank you. And Ed, if you could just -- I missed what you said about SG&A rates. If you could comment on that and I will hang up. Thanks.

Okay. SG&A was increased quarter-over -quarter. A couple of one-time items in there that we didn't -- that we don't count in our going-forward rate. You should still expect to see SG&A and R&D combined, running at about $9 million to $9.5 million per quarter.

At his time, there are no questions in queue. I would now turn the call over the Darren Jamison, President and CEO, for closing remarks.

Great. I want to thank everybody for attending the call today and continuing to follow our story. I think it's just been a tremendous quarter for us, obviously we have a lot of work to do still. But as somebody once said, you can't make policy if you don't get elected. So having $50 million in backlog or 60 megawatts in backlog, gives us an opportunity to focus internally on our production rates, on our margins and our efficiencies, and really increase our margins to get profitable. So we are happy with the sales of the C200 and C1000 product. Again, it gives us an opportunity to put production slots in place and go in an orderly fashion of increasing our manufacturing rates. So we'll continue to add to the second shift, continue to focus on costs, continue to work down our working capital requirements and manage our inventory levels.

Ed mentioned the bank line. I think it's very important that we do get a bank facility in place. Obviously in this challenging market, it's taken us longer than anticipated to get that in place. But we're very hopeful that by the end of this quarter, we'll get that done. That bank line will be tied to our inventory levels and our receivables. So as the business grows,that bank line should grow with us. Hopefully, we've got enough cash on the balance sheet with that bank line combination, is some belts and suspenders to get us profitable and balance sheet left to look for strategic opportunities thereafter. Again, thanks everybody for listening to the call, and we'll look forward to talking to you next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.