Capstone Green Energy Corp (CGRN) 2015 Q2 法說會逐字稿

(audio in progress) -- Capstone Turbine Corporation's earnings conference call for second quarter fiscal year 2015 financial results ended on September 30, 2014. During today's call, Capstone management will be referring to slides that can be located at www.CapstoneTurbine.com under the Investor Relations section.

I will now turn the call over to Jayme Brooks, Vice President Finance and Chief Accounting Officer. Please proceed.

Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the second quarter of fiscal year 2015. I am Jayme Brooks, your contact for today's conference call.

Capstone filed its quarterly report on Form 10-Q with the Securities and Exchange Commission today, November 6, 2014. If you do not have access to this document and would like one, please contact Investor Relations via telephone at 818-407-3628 or email IR@CapstoneTurbine.com, or you can view all of our public filings on the SEC website at www.SEC.gov, or on our website at www.CapstoneTurbine.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, growth in diversification of our end markets, strength in distribution channels, ongoing new order flow, reduced cash usage, growth in revenue, gross margin and backlog, attaining profitability, achievement of our EBITDA and cash goals, adequacy of liquidity and capital resources, improved operating leverage, new product development, shifts to larger markets for our products, benefits from our cost reduction initiatives, continued (technical difficulty) in Russia, growth of key markets, advantages of recent political developments and compliance with government regulations. Forward-looking statements may be identified by words such as expects, objective, intend, targeted, plan, and similar phrases. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties described in Capstone's Form 10-K, Form 10-Q and other recent filings with the Securities and Exchange Commission that may cause Capstone's actual results to be materially different from any future results expressed or implied in such statements.

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 the call over to Darren Jamison, our President and Chief Executive Officer.

Thank you. Good afternoon and welcome, everyone, to Capstone's second-quarter 2015 earnings call. With me today are Ed Reich, our Executive Vice President and Chief Financial Officer.

Today, I'll start the call with a general overview of the second quarter. Ed will then review the financial results, and I will close with some comments about our markets and geographies. As the operator said, during our remarks, we'll be referring to presentation slides that can be found on the Capstone website under Investor Relations.

Let's go ahead and start with Slide 2 for the second-quarter highlights. The second quarter of fiscal 2015 was a vast improvement over the first quarter in terms of timing of shipments and the overall sales volume and revenue. For the second quarter, revenue was $32.2 million, gross margin was $5.2 million, or 16% of revenue, and backlog remained very high at $172.3 million at the end of September 30. New orders were up 12% in dollars compared to the first quarter and 5% in dollars year-over-year. Our balance sheet is strong with almost $41 million in cash at the end of the quarter.

Turning our attention to Slide 3, gross margin increased 240 basis points year-over-year despite the softer revenue which is a direct result of the substantial operating improvements we are continuing to make to reduce our manufacturing costs. This is our eighth consecutive quarter of double-digit gross margin and year-over-year second-quarter trend line clearly shows our steady margin progress.

Turning to Slide 4, we shipped 166 units representing 28.5 megawatts in the second quarter of fiscal 2015 compared to 164 units representing 30.1 megawatts in last year's second quarter. However, our C65 shipments for the quarter were the most in Company history.

In comparison to the first half of last year, we are down just over 5% in megawatts shipped, primarily as a result of timing of customer demand. It's critical to know these are not delayed -- these are delays, not cancellations from our distributors and all leading indicators remain positive. Our pipeline continues to be robust and is in excess of $1.4 billion globally. So, we do believe we can return to year-over-year revenue growth in the second half of fiscal 2015, which historically and typically are our strongest quarters of the year.

I'll pause right there and turn the call over to Ed and let him go over our specific financial results.

Thanks Darren. Good afternoon everyone.

Let's begin on Slide 5 with a review of the second-quarter results. Revenue for the second quarter of fiscal 2015 was $32.2 million compared to $23.3 million for the first quarter and $35.3 million for the same period last year. Product revenue was $26.7 million compared to $17.6 million for the first quarter and $28.7 million for the same period last year. Revenue from accessories, parts, and service was $5.5 million compared to $5.7 million in the prior quarter and $6.6 million for the second quarter of last year.

Gross margin for the second quarter was $5.2 million, or 16% of revenue, compared to $3.4 million, or 15% of revenue, for the first quarter and $4.9 million, or 14% of revenue, for the same period last year. The 240 basis point year-over-year increase in gross margin primarily reflects lower royalty and warranty expenses and favorable overhead absorption that was partially offset by the adverse impact of customer and product mix.

Second-quarter R&D expenses were $2.1 million compared to $2.3 million last quarter and $2 million for the second quarter last year. SG&A expenses were $9.5 million for the second quarter compared to $7.8 million for the first quarter and $6.6 million for the same period last year. The year-over-year increase is primarily due to a $2.9 million increase in bad debt expense related to an Accounts Receivable allowance for a single distributor. This distributor has been in business for over 20 years and has serviced North Africa and the Middle East for us since 2012. The allowance relates to a single end-use customer order and we are working with our distributor and expect the situation to be resolved by the end of this fiscal year.

Net loss was $6.5 million or a $0.02 loss per share for the second quarter of fiscal 2015 compared to a net loss of $6.8 million or $0.02 per share last quarter and a net loss of $3.9 million or $0.01 per share for the second quarter last year. The loss from operations for the second quarter of fiscal 2015 was $6.4 million compared to $6.7 million for the first quarter and $3.7 million for the second quarter last year.

I'll now provide some comments on the balance sheet and cash flow activity. Please turn to Slide 6.

Cash and cash equivalents totaled $40.8 million at September 30, 2014 compared to $46 million at the end of the prior quarter and $28.3 million a year ago. In September, we extended the maturity date of our export-import sub-facility under our credit facility with Wells Fargo to September 1, 2017. In addition, on November 3, we received a waiver from Wells Fargo with respect to not being in compliance with the annual net income financial covenant of the credit facility as of September 30, 2014 and we amended the agreements with Wells Fargo to reset the net income covenant for the remainder of fiscal 2015.

With our cash on hand combined with our credit facility, we believe that we have ample liquidity to fund our growth plans and to meet increased working capital requirements that are expected as a result of a stronger second half. We continue to maintain our focus on reducing our cash requirements and in the second quarter of fiscal 2015, we used $5.6 million of cash on operating activities, of which $4.4 million was used for working capital, and spent $700,000 in capital expenditures. This compares to cash generated from operating activities of $8 million and $300,000 in CapEx during the second quarter last year. We expect to make additional progress in our cash flow over the remainder of the fiscal year.

Receivables were $23.2 million at September 30 compared to $24.2 million at the end of the prior quarter and $18.4 million a year ago. DSO was 65 days for Q2 compared to 94 days in Q1 and 48 days for the same period last year. Inventories were $22 million at the end of the second quarter, down from $25.4 million last quarter and $23.8 million a year ago. Inventory turns were 4.6 times compared to 3.4 in Q1 and 4.6 a year ago.

Finally, Slide 7 shows our growth in backlog since the beginning of fiscal 2007. While backlog decreased to $172.3 million at quarter end compared to $175.2 million last quarter, it showed a 15% increase from a year ago. While we are disappointed in the continued product shipment delays during the second quarter, we are encouraged by our backlog, which is a positive indicator for future growth. As our customers work through their project completion schedules, we expect to realize year-over-year revenue growth in the mid-single digits for the second half of our fiscal year.

In addition, we anticipate continued margin expansion for the remainder of fiscal 2015 based on continued progress on our cost savings initiatives. We also maintain our expectation of crossing over to positive EBITDA plus stock comp during this fiscal year.

That concludes my comments. Now back to Darren.

Great. Thank you Ed. Now we'll talk about our sales and marketing developments. Please turn to Slide 8.

For our vertical markets by product shipment for the second quarter, 57% of shipments were for the use of natural resource applications, including oil and gas. 39% were for the use in energy efficiency, or CCHP applications, and 4% for the use of renewable energy.

On the right-hand side of Slide 8, you can see our geographic markets by revenue for the second quarter. North America was 50%, followed by Europe at 35%. Africa was 6%, Asia 5%, and Australia and rest of world were each 2%.

Let's turn now to Slide 9. You can see our microturbine shipments by megawatt for the second quarter. First, North America at 12 megawatts with Horizon, E-Finity, Regatta, and DTC again making up four of our top six distributors from a total revenue perspective in the second quarter. This indicates the continued strength of the North American microturbine market, particularly in oil and gas and combined heat and power.

Turning to Slide 10, in the US, we sold our first CHP projects into Kansas during the second quarter, two for a micro-grid demonstration project with Black & Veatch at their worldwide headquarters and two for CHP in a class A office building. In the mid-Atlantic area, E-Finity secured a follow-on order for 25 C65 micro-turbines totaling 1.6 megawatts for use in various commercial industrial CHP and oil and gas applications.

Looking North to Alaska, Chenega secured an order for 11 C65 liquid fuel units to repower McMurdo, the main US station in Antarctica. Chenega will use their prior cold-weather packaging experience they gained from packaging four C30 units for Altock Point, which is located at the north slope of Alaska on the coast of the Arctic Ocean. With this development in Antarctica, Capstone will now have micro-turbines at both geographic poles.

Horizon continues to be a leader in worldwide C65 sales and delivered another strong quarter with shipments to Anadarko and WPX Energy, both loyal, big, repeat customers. Horizon also shipped a C65 to Texas utility Encore for use as a micro-grid demonstration unit. Micro-grid and power resiliency demand seem to be picking up generally and these are areas Capstone provides additional value to CHP installations. In addition, Horizon has 75 C65 micro-turbines scheduled for shipment now through December 2014 for several US oil and gas customers.

Elsewhere in the natural resources market, E-Finity received a follow-on order for an additional six C600s totaling 3.6 megawatts for an independent oil and gas producer. That producer has operations in both the Marcellus and the Utica shale.

In Southern California, Regatta Solutions secured an order for two C1000 micro-turbines to upgrade a technology innovation firm. Energy Systems of the Caribbean secured a C1000 order to power an exclusive resort in the US Virgin Islands and also sold their first C1000 in Puerto Rico now that there's new natural gas price structure in place.

And finally, in Mexico, in Industrias Energeticas was invited to participate in a gas pipeline bid for six C800s and 16 C30s. Also, Mexico EMS received an order for a liquid C200 to be installed at the Institute of Electrical Research.

Let's turn our focus to Slide 11 for Europe. In Europe, we shipped 12 megawatts during the second quarter. Europe continues to show positive signs of economic recovery for Capstone.

In Russia, despite sanctions and a softening ruble, BPC had a very strong quarter and was our largest revenue producer in Q2, slightly edging out Horizon. They sold two ultrahigh efficiency CHP installations, further illustrating the ongoing Capstone growth in Russia's manufacturing sector as BPC continues to add to its over 1,500 unit Capstone fleet. We are excited to see BPC continue to grow its business, not only in oil and gas but also in the manufacturing sector, as these two great projects showcase.

At this time, there is nothing that would restrict microturbine sales to Russia or BPC. However, the sanctions with Russia are certainly a concern and we'll continue to monitor the situation closely.

Overall, our Russian market is up approximately 33% on a year-over-year basis, or trailing 12 months. This is all obviously despite the geographic geopolitical tensions.

Germany continues to do very well for us. E-quad continues to enjoy the benefits of the strengthening economy. It is now our fifth largest distributor over a trailing 12-month period.

In the UK, our business opportunities are expanding rapidly with both of our partners, Turner and Cogenco developing solid project pipelines, and we look forward to future growth. In France, we have a new distributor, the former Turbec microturbine distributor, which has plans to start replacing fielded Turbec 100 kilowatt units with Capstone product.

During the second quarter, we shipped C1000 series products to IBT in Italy, Sarlin in Finland and we also expanded our presence in Slovenia with the sale of a C1000 microturbine to upgrade a large plastic manufacturing facility.

Let's go ahead and turn to Slide 12. As you can see, in South America in Q2, we continued our efforts and missionary work in this region, penetrating areas where we have sold little product before and planting seeds for what we see is a very strong future growth market. In Ecuador, Capstone was selected to participate in a 20 megawatt associated gas to energy project. In Brazil, Capstone distributor Fluxo was invited to participate in a wastewater treatment plant bid for 2 megawatts.

In Colombia, Capstone distributor Supernova commissioned two milestone projects for the oil and gas industry. The first is an offshore platform for Chevron that is using two C65s, and the second is a gas treatment plant for Perenco using one C1000 and one C200.

In Bolivia, Capstone distributor Monelco was requested to participate in the specification and engineering of several compressor stations, including C1000 units, for a current C30 and C65 customer.

Let's move to the Middle East and Africa on Slide 13. Much like in South America, we are continuing our efforts and missionary work to establish a stronger foothold in these regions. We conducted our first product application training in the region with participants from Oman, Qatar, Egypt, Iraq, and the UAE in attendance. Capstone also participated in an oil and gas summit in Africa during September where we held meetings with EXPAREL France, BP Angola, and Chevron Angola.

Our Nigerian distributor sold two C1000s for Capstone's first offshore oil and gas application in the region and our first units to the Middle East to our Oman distributor are arriving this month. The end-use customer in Oman is considering the purchase of three C200s as a follow-on to the original C65 order for flare gas to power applications.

Finally, we'll go to Slide 14 and talk about the policy front. On August 11, 2014, Mexico's President signed into law a comprehensive energy reform act opening up the previously wholly state-owned energy sector to private energy firms. This is expected to lead to an increase in foreign investment to develop Mexico's vast energy resources.

On August 19, the Alaska oil tax cuts veto referendum which was on the primary ballot in Alaska was narrowly defeated. This is a positive outcome as it is expected to drive increased investment by oil and gas companies in Alaska.

In North Dakota, flaring standards intended to incentivize more natural gas capture were passed in July of 2014 with the goal of reducing 90% by 2020. These new standards went into effect this October.

California extended its self-generation incentive program which was set to expire at the end of 2014, extending it through 2019. And Illinois, they've added a CHP public sector pilot program to the Illinois Energy Now program, providing incentives for development and operation of CHP projects in public sector applications. All of these policy developments bode well for Capstone's future growth initiatives in North America. In addition, these policy related developments, the US EPA Natural Gas STAR program has requested a presentation by Capstone highlighting best practices in oil and gas development for minimized methane waste for their international programs. This opportunity will give broad exposure to Capstone across natural resource applications both nationwide and overseas.

Finally, despite the impact of softer gas prices on US shale activity, drilling productivity is up in the US according to October 2014 EAI report. In an analysis of drilling data through September 2014 and projected production through November 2014, new well oil production per rig and new well gas production per rig is up all over the major US shale plays. This is certainly encouraging news for our natural resource vertical and is in line with what we see in our pipeline activity.

On the R&D front, as you can see on Slide 15, we continue to make progress in several areas. We successfully completed the C370 system design review. We received carb recertification of our C30 natural gas turbine for the light and medium duty truck market in California. In our labs, we demonstrated continuous operation of 70% CO2 of our C200 and C1000 series for digester landfill and global flare gas markets.

In addition, we achieved ATEX third-party certification of the C200 for offshore oil and gas applications and installed a $0.5 million grid simulator and upgraded our lab to commence the European grid interconnect certification testing later this year. And finally, we continue our lifecycle testing of the lower-priced AFA material under our current deal we contract.

Today, we are holding this call from New York in preparation for an investor event which will happen tomorrow morning. We have invited a select group of institutional investors to learn more about the greater New York CHP market and the market potential, and we'll be holding a lunch and learn session where we will tour the New York Palace Hotel's 12 C65 microturbine installation.

Slide 16 highlights the hotel's economics which we will review in more detail tomorrow.

We will also hear from Capstone's Distributor RSP Systems about the favorable outlook for the New York CHP market and we will also have a presentation from NYSERDA, the New York State Energy Research and Development Authority, on their programs designed to increase CHP adoption in New York. All of tomorrow's presentations will be available on our website under the Investor Relations section tomorrow.

In closing, I want to reiterate that, based on our order flow and pipeline, we are very confident that we will return to year-over-year revenue growth and advance toward profitability in the second half of 2015. Clearly, the first quarter of fiscal 2015 was disappointing, but the second quarter bounced back very nicely. All indicators point to a much stronger second half of the year as we advance toward EBITDA stock comp breakeven and modestly higher revenue compared to last year.

We have worked extremely hard over the past years to improve our margin profile, and today we're very pleased to see the benefits of lower manufacturing costs relative to margins. As revenue expands in the future, this will drive our cross-over into profitability.

The fiscal third and fourth quarters are typically and historically our strongest quarters of the year for revenues and shipments. Our pipeline is solid and we are excited about the future growth opportunity in the second half of fiscal 2015.

So, with that, operator I'll now open the call up for our analysts.

(Operator Instructions). Eric Stine, Craig-Hallum.

This is Aaron Spychalla. Thanks for taking the questions. Maybe first, on the delayed shipments can you just talk about how much of those from one quarter that you saw the impact of in 2Q? And then you mentioned further delays in 2Q. Can you just talk about or quantify those, what they were in the quarter, and then just talk about what's driving those and what's going to make that kind of subside throughout the rest of the year?

We talked about it in the first quarter. We had I think five or six C1000s that were on the docket in the first quarter. Those all shipped in the second quarter. We did a better job matching our shipments and our production build, so we had very little finished goods this quarter.

We are still seeing mostly oil and gas projects. Those slipped to the right. And I think that's why as we see the US oil and gas market pick up, that's helpful. I also think the CHP market will benefit us as well as we are seeing the CHP market, especially in North America, pick up, and Mexico.

I'm excited about all the distributors we have and a lot of the distributors that were not contributing previously are now starting to get up the torque curve. And as you see in the slides we put together, quite a few distributors around the globe are contributing to revenue. So, Q3 is typically our strongest quarter, has been the last several years. We are expecting another strong Q3 and falling into Q4.

Okay. And then you kind of talked about it, but just with the lower oil prices, can you just talk about potential impact on your business? If so, where that might be? And it doesn't sound like you're seeing much yet and maybe not expecting any, but at what price levels would you get concerned?

It's really just about the drilling activity. I think the reality is we are still probably mid-single digits as far as penetration, maybe high single digits in some areas. So we have a lot of opportunity, even with the slowdown in drilling, to capture more market share from folks. Obviously, we think that Mexico, which is off for us year-over-year because of the changes, will eventually come around. If you look at the year-over-year revenue mix, it's mostly Mexico where we have the change in law on the energy reform and in Australia where we changed distributors and so we've had a little bit of a hiccup in revenue in Australia. Both of those things are short-term issues and will rectify themselves.

So we don't look at the ultimate gas price. It's more about drilling activity. And I think as I mentioned before, we've got very little market at all in the Middle East or Africa. That's all virgin territory. South America, very small for us, big opportunities there. So I think between more market adoption of the technology and more customer concentration and getting more market share with each individual customer, we have lots of room to grow.

Okay, good. Thanks for the color. And then maybe lastly, in the past, you had talked about the large orders, 10-plus megawatts, that were in the pipeline. Can you just give us an update on those and --?

Yes. I mentioned a couple of them in the call. There was a 20 megawatt down in Ecuador. That total opportunity is over 100 megawatts. We've got several large opportunities in Mexico. We are seeing some in Australia as well and in Africa. So, they are moving forward. We haven't won a significant one yet. Obviously, we'll press release that when it happens, but I think we are feeling very good at getting some of these, especially in the associated gas.

My comments about running on 70% CO2 was very important for some of the associated gas sites, oil and gas sites. You can see high levels of CO2 where reciprocating engines can't run at those levels. So, it's another differentiator for us with our technology besides the emissions and the reliability. So we do think we are going to see some 10 megawatt to 20 megawatt orders here hopefully before the end of the fiscal year, but those projects are moving ahead, as we talked about.

All right. sounds good. Thank you.

Ajay Kejriwal, FBR Capital Markets.

Good to see the disclosure on the shipments by geography. I had two questions. Firstly, could you elaborate a little bit more on if you are seeing any changes in bidding activity levels in Europe. And I know you touched on Russia. If you could elaborate a little bit more on that. And then, are you contemplating any price changes, given the changes in the currency here?

I'll take the second answer first. We do sell in US dollars. We are sensitive to the fact that the strengthening of the US dollar is impacting some of our customers. We will look at it on a case-by-case basis. We're not going to do a wholesale price reduction, and we wouldn't do more than probably 3% to 5%. But we will look at that. If there is a project that made economic sense six months ago and it doesn't today, if it's that borderline, we'll look at potentially doing a case-by-case basis. So we are sensitive to that. And I think as we become more of a global company, geopolitical issues and currency risk and all that stuff will be more important, so more time analyzing that.

As far as Europe goes, as I mentioned during the prepared remarks, we had a great quarter in Germany. We saw orders out of Italy. We saw them out of Finland, out of Slovenia. We are seeing a lot of activity in the UK with Cogenco and Turner. So, we are feeling much better about Europe. We have a new distributor in France, which we haven't had a distributor for quite some time, so that's a great opportunity. And they want to go repower up to 100 Turbec installations, which is an Italian microturbine manufacturer. So, we see Europe as being very strong in the second half of the year and continuing into next year.

As I mentioned, BPC is up 33% year-over-year. A lot of that is, as they get into more CHP customers and not being so focused on oil and gas, which is great, they are doing a lot more industrial users, hotels, hospitals.

My second question is on the order flow. So, on a more high level, your recent order flow has been more diversified away from the oil and gas market. Could you sort of touch on how should we think about bidding activity levels and maybe as you look at the next 12 months or so, where can we expect the most conversions there in terms of potential bidding activity?

I think you are seeing more bidding activity because of the new geographies we are getting into. I was just in Ecuador recently. We don't have a single microturbine running in Ecuador. You know, Brazil, Colombia, all these are areas where we've had very little penetration but have some great opportunities. So I think that's going to help us quite a bit. As we get into Africa and the Middle East, that's going to help us.

I think, when you see tomorrow's presentation by RSP, our New York distributor, they put a good timeline together of how the market in New York has developed from a CHP standpoint, what their pipeline looks like today, what it's looked like in the past, and you're going to see very exciting growth, future growth potential for them. It's taken a while to seed this market and get projects like the Palace Hotel up and running, but now that we have enough installations in New York, we are starting to see the real traction with great support by NYSERDA. So, I think, if folks do come to that investor presentation tomorrow, they'll be very excited about the future opportunity of CHP in New York but also throughout the US.

Thank you. Thanks for the update.

Matt Koranda, ROTH Capital Partners.

This is Phil on for Matt. So, a quick follow-up on the pricing discussion earlier. I know you guys update your pricing I think once a year if I recall correctly. Can you talk in general about the pricing environments? Our back of the envelope analysis suggests the ASPs per unit in the quarter were $161,000, and I think in the year-ago period you guys were at $180,000 per unit. Have you had to make any pricing changes at all either intra-year, or just any thoughts on that would be helpful. Thank you.

No. No pricing changes intra-year. Like I said, as we see pricing pressure because of the strong dollar, we may on a case-by-case basis do a small incentive to help offset that. We do raise prices every April, April 1. We did raise prices approximately 2.5% this year, 3% on some product. We see continuing to do that going forward. So really we look at the project economics as the most important thing. So, if the project economics support the sale of the product, we go forward. If they don't and the distributor is close and the distributor needs some help to make the economics work, that's when we book at a discount.

So I would say we haven't discounted an abnormal amount lately. I'm watching that, though. As we go forward with the strong dollar, we may have to discount a little more going forward than we have historically but, again, I think that will be more than made up with the revenue growth we are expecting to see.

Great, thanks Darren. A quick follow-up here on margins. Historically, you've provided a waterfall chart that walked us through how to get to your target gross margins of 35%. Can you update us on what that chart might look like today and the potential timing of getting there?

Yes. The challenge of that chart is it's revenue-dependent. So, when we have lower revenue quarter over quarter, the chart gets a little misleading. But what you're going to see is I think, as we talked about in our prepared remarks, even though revenue was off 5% year-over-year, we are still 240 basis points better on margin. And so I think that's an excellent testimony of the fact we are continuing to take cost out of the product. So most of that is a cost reduction of the actual purchase material. Warranties have also been trending very nicely. We'll probably bring that chart back next quarter or maybe at the end of the year when we have a little better numbers. Obviously, the total revenue impacts the margin numbers. So, if we were doing a $37 million to $40 million quarter, we'd be north of 20%, probably in the low 20s%.

Great, Darren, that's helpful. Thank you. I'll jump back in queue.

JinMing Liu, Ardour Capital.

Firstly, just a question regarding the bad debt expense. I'm trying to understand the situation. So, if I understand correctly, there was an end customer that had problem but the distributor passed down the uncollectible bill to you. Was that the case or --?

So we -- obviously we sell the distribution. If the distributor doesn't get paid on a project or is paid late, by contract that should not impact us but the reality of the situation is it often does. This distributor is one we think very highly of. They took some other product recently. This actual order we believe will proceed in probably the December/January timeframe, so we fully expect to collect that money. In fact, they are looking at doubling the size of order from 3 megawatts to 6 megawatts. Because of the payment issue, though, we need to get an LC going forward with that distributor. So, it's one of the challenges using a distribution model. It happens very rarely. I think, if you look at the time I've been with the Company, we've done almost $650 million of revenue. And besides Green Environment, which went bankrupt on us, we had very little incidents like this. So, we think it's a speed bump. We think it will reverse itself in either Q3 or Q4 and we'll go on with our business.

But the $2.9 million will just be forgiven by you guys? (multiple speakers)

No. It will be paid. So, it's a reserve today. We did not write it off. It's a reserve for the product and when the product ships to the customer, they will obviously collect and pay their bill. So, it will not be forgiven. We will just see it reverse from a bad debt perspective. In today's accounting world, because the receivable was older, we didn't have a clear path to payment on it and went ahead and reserved it to be conservative.

Okay. So, the products are still the products, physical products, are still with the distributor.

Correct.

Okay, okay, got that. Regarding your booking for the quarter, if I calculate correctly, it looks like there were a cancellation of two C800 units during the quarter. What's going on there?

Yes, no, a lot of customers will change their orders after they are in, so they change a C800 into a C1000, so that's probably what happened in that case. I'd have to look at the specifics of it, but I believe that the customer decided before they took the product to upgrade it to a C1000, which is not uncommon.

Okay, okay, good. Regarding the Mexico market, the potential in there, do you have a distributor targeting that country, or you have to set something up?

No. DTC is our I think sixth the largest distributor today. They are in Mexico. IE is in Mexico. We've got several Mexico distributors, but IE and DTC are the two largest. So, they are very strong for us. PEMEX is one of the largest Capstone users in the world, especially from an oil and gas standpoint. So, again, we expect them to continue growing again after this new referendum is in place.

Okay, got that. Thanks a lot.

There are no further questions in queue at this time. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a good day.