Capstone Green Energy Corp (CGRN) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation Earnings Conference Call for First Quarter Fiscal 2018 Financial Results ended on June 30, 2017. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Ms. Jayme Brooks, Chief Financial Officer and Chief Accounting Officer. Ma'am?

Thank you. Good afternoon, and thank you for joining today's fiscal 2018 first quarter conference call. Today, Capstone issued its earnings release for the first quarter of fiscal 2018 and filed its quarterly report on Form 10-Q with the Securities and Exchange Commission.

During the call, we will be referring to slides that can be found on the website under the Investor Relationships tab. I would like to remind everyone that this conference call contains estimates and forward-looking statements that represent the company's views as of today, August 9, 2017. Capstone 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. And because they involve known and unknown risks, uncertainties and other factors, they are, in some cases, beyond our control. Please refer to the safe harbor provisions set forth in the slides and in today's earnings release and in Capstone's filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements.

I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.

Thank you, Jayme. Good afternoon, and thank you for joining today's first quarter fiscal 2018 conference call. Today, I am going to shake things up a little bit. I'm not going to comment directly on the first quarter financial results. Instead, I will talk about the overall business and what we're doing to reach adjusted EBITDA breakeven and profitability as quickly as possible. I feel that's a much more relevant than short-term financial results.

I think this is especially true with all the fundamental changes in the business and the current battered share price. As I go through the discussion, please keep in mind when I mention EBITDA, I'm referring to adjusted EBITDA, and the reconciliation can be found in the appendix of our Slide deck.

I will then turn the call back over to Jayme, who will briefly review the first quarter financial results. Jayme will then turn the call back over to me, and I'm going to change it up again a little bit and I'm going to answer approximately 30 retail investor questions we recently received during a live AlphaDirect Virtual Conference Call Series, hosted by EnergyTech Investor on July, 24.

Unfortunately, the management presentation ran a little longer than anticipated, so we were unable to answer all of the investor questions that have been submitted at that time. However, the virtual conference call was highly successful, so we plan on conducting several more live webcasts in the future. And going forward, we will ensure that there is more than enough time dedicated at the end of the webcast to answer as many questions as time allows. We believe this is a more efficient method and, frankly, cheaper method of communication with the investment community than the old Capstone management platform that we are planning to archive here shortly.

Please note the virtual conference webcast is still available for replay on both Energy Tech Investors' website and Capstone's website under Investor Relations section.

After I've answered the 30 or so Alpha Direct webcast investor questions, Jayme and I will then take questions from the analyst community like we do on most calls and then some closing remarks.

So if everybody's got their slides in front of them, we'll go ahead and get started. The big question is what are we doing to reach EBITDA breakeven and profitability as quickly as possible? Well, there's a saying in business that the key to success is having a talented, committed and motivated executive team. And I'm proud to say that the current Capstone management team is the most talented and dedicated I've had the pleasure of working with over my years at Capstone.

In fact, the team is so confident in their ability to get Capstone EBITDA breakeven and reach profitability that they have voluntarily forfeited all invested stock options, forfeited new equity grants, forfeited future performance bonuses, all of this until we reach 2 quarters of consecutive adjusted EBITDA positive results. That's how much this management team believes they can get this done. Once we reach 2 quarters of adjusted EBITDA breakeven back-to-back, the team and I will receive the full value of our executive bonus program and resume normal option in RSU grants like we've had in the past.

In business, you really have 3 fundamental ways to drive profitability: one, higher revenue; two, better margins or better business mix; and three is lowering your operating expenses, pretty straightforward.

At Capstone, we've recently developed strategic initiatives to improve all 3 of these fundamental areas simultaneously and drive to deliver profitability as quickly as possible. It should be noted that the team was very close to becoming EBITDA breakeven about 3 years ago before we were set back with a trio of significant macroeconomic headwinds, obviously, the Russian geopolitical issue that continues at August today, low crude oil prices and the very strong U.S. dollar.

So let's get started and turn to Slide 3. I've said this in the past and I'll continue to say it, this slide is the most important slide in the slide deck. And if you only look at one slide today, spend time with this slide. This slide highlights the tectonic shift in our business strategy that we are now executing on as we diversify our business into an energy efficiency, or CHP market, and lower our dependence in revenue from the oil and gas industry. This shift is also driving our aftermarket long-term service contract revenue up, FPP business revenue up, and the business with CHP customers are signing FPP agreements at a much higher rate than oil and gas customers did.

Oil and gas customers adopt -- buy FPPs at the same rate because they have on-site trained indigenous personnel to maintain sophisticated equipment such as our microturbines. This shift to focus on the CHP market, which has driven our higher-margin aftermarket service business, as shown in the middle column, when combined with our dramatically lower operating expenses, has changed our business fundamentals substantially, and is making us much more stable and much more viable.

However, EBITDA breakeven is not the final destination. No, it's just a significant milestone or achievement. This new CHP balance business model you see in the center column, when combined with a rebounding product revenue, leads to a very robust long-term profitability model, as shown in the third column all on Slide 3.

If you look at this slide, I think we can all agree that the middle column is the preferred business model, especially when you compare it to the first column. The middle column is -- the first column takes $20 million more in product revenue per quarter or $80 million more in product revenue per year to get to the same EBITDA breakeven levels. That is a dramatic change. Obviously, product revenue is more challenging. It's harder to predict. Then you got timing with construction delays, construction issues; LCs, letters of credits; timing of shipment.

We are making steady progress as we execute against our new business model and are highly focused on achieving the results outlined in the middle CHP balance column on Slide 3 as quickly as possible.

So let's go ahead and turn to Slide 4. Slide 4 is where you compare our new CHP balance profitability model with our recent Q1 results. Slide 4 shows where we need to improve in order to reach EBITDA breakeven. And spoiler alert, it's the 3 areas; it's revenue, margin and operating expense.

So let's take it from the top with revenue and turn to Slide 5, which shows what we have been doing to drive future revenue growth.

First, I want to remind everyone that Capstone has substantial fixed manufacturing and operating expenses. And although we've dramatically reduced them, our facilities, personnel, equipment and building leases are fixed on a quarter-to-quarter basis. Therefore, they don't change much regardless of the amount of product we ship. Said another way, if we ship $15 million in product during the quarter or $25 million in product during the same quarter, our operating expenses hardly change. Therefore, we need renewed revenue growth in order to leverage those fixed costs and drive up our low product margins. Make no mistake, continuing to grow revenue and gain market share is very critical, and we want to get back into the high double-digit growth mode we enjoyed for years, prior to that trio of macroeconomic headwinds I mentioned.

Also, it's important to point out that all revenue contributes to the bottom line but not all in the same way. Therefore, they should not all be treated equally. Therefore, improving the type of revenue is also very important. Revenue growth with low gross margins with nonrecurring customers, with customers who don't truly value our long-term FPP service contracts, is not the ideal revenue for Capstone. And in some ways, it's empty calories.

Ideally, we like to see revenue from Fortune 500 companies that are planning to become repeat customers and purchase additional microturbines from us when they believe that the actual product delivers what they're looking for and gives them a clean and green solution to reduce their operating expenses.

I think it may be worthwhile mentioning that as our cash burn has come down over the last three quarters dramatically, we are beginning to see early signs of large companies showing interest in our innovative products because they now believe Capstone has a sustainable and viable business offering.

Because we want to see more revenue and sales of our microturbines and our accessories and our long-term factory protection plans, we are today moving to a more of a bundled solution sales approach. By pursuing customers to the fully wrapped solution that includes the Capstone microturbine, the Capstone accessories and the Capstone factory protection plan as one single bundled solution. It is definitely a win-win opportunity for both the customer and for us. By providing a bundled solution, we are able to offer customers more attractive economics, thus saving them money in the end and giving them shorter paybacks on their projects.

Furthermore, we also benefit greatly with this bundled sales approach as we receive all the money upfront, including the 5- and 9-year FPP and securing the associated product accessories and the long-term service business, thus increasing revenue received and cash received from each microturbine project we sell on a quarterly basis.

I hope that investors can see that this is a much more robust revenue stream than what we have had traditionally with our oil and gas-centric business. Oil and gas customers want discounts but don't purchase accessories typically or long-term FPP service contracts. The key to driving our future revenue growth is outlined in Slide 5 as it's anchored by our new Signature Series CHP product lineup and our new sell-to-win bundled solutions program. Both of these are heavily concentrated toward the energy efficiency market.

Furthermore, we expect to drive future revenue growth through our Capstone Energy Finance business as it starts to produce projects and, over time, start to see CEF contribute to the overall top line.

In addition, we are offering Signature Series retrofit kits, raising spare parts pricing, pushing our distributors to meet their contractual minimum spare parts stocking guidelines and much more.

So I'm thinking right about now, most of you are sitting there saying, "Well, DJ, revenue is flat year-over-year, buddy. So you're revenue initiatives must not be working." Understandably, you feel that way. But really, the answer is it's important to remember that we have a very long sales cycle. Microturbines are a capital purchase. Our typical sales cycle is over a year, and it often takes 6 to 9 months from receiving the distributor's order to Capstone actually building and shipping the subsequent product and revenue recognition.

Therefore, that lag associated with this can be as long as 18 months to 24 months to show results of any new initiative. But more specifically, I would say when addressing that concern, I'd point to Slide 6.

Slide 6 shows that Capstone has an 82% increase in new orders. To look at it 6 quarters-over-6 quarters, we booked $37.1 million in new product orders for the 6-month period ended June 30, 2017, compared to only $20.4 million in the preceding 6 months. So it's an 82% increase 6 months-over-6 months.

I believe these orders show that the new revenue initiatives are delivering the desired results, and we are working toward improving them even more. The next persuasive piece of evidence I can offer can be seen on the same slide.

This pie chart highlights Capstone distribution partners' new project opportunity pipeline, which has grown an astounding $467 million or approximately 43% over the last 2 quarters. So again, sales pipeline top of the funnel has grown 43% or $467 million, and new orders has gone up 82% over a 6-month period from $37.1 million over $20.4 million.

And my final point would be to remind investors that we have yet to close any of our pending Capstone Energy Finance highly qualified project leads, which now total almost $60 million in potential product revenue as highlighted in Slide 13 in our appendix.

Although, the desired results are more delayed than I would like them to be, the Capstone management team fully believes that we will close several Capstone Energy Finance projects before the end of the fiscal year. And yes, all these projects will utilize our bundled solution. They'll have Capstone accessories, and utilize long-term FPP service contracts.

So that being said, let's turn our attention to margin and business mix. Let's go to Slide 7.

Slide 7 highlights what we're doing to improve overall margins, which are really anchored by our growing margins in our accessories, parts and service business. That business throws off today about a 30% margin, and it's growing to 50% in the next year. As the business matures, and to close out field reliability retrofit programs and install more of the robust Signature Series product.

In addition we're working to sell more higher-margin accessories, and we have a direct material cost reduction program well underway for the new Signature Series product to lower the direct material cost on this new product. We also have a program to get 80% of our annual material spend, or about 21 suppliers, under a long-term purchase agreement by March 31, 2018.

These initiatives, when combined with renewed revenue growth, are projected to move our margins from today's 11% to our targeted 22%. It should also be noted that these initiatives are specifically designed to both improve margins and generate positive working capital like we did last quarter as working capital management is critical, especially at today's low price per share.

Now let's talk about the last item on our profitability checklist: expenses or costs. Let's go to Slide 8. Slide 8 highlights what we're doing to further reduce our quarterly operating expenses. As a result of the trio of macroeconomic headwinds and a slowdown in product revenue, management set a goal to cut operating expenses 35% to approximately $7 million per quarter.

In the third quarter of fiscal last year, we met and exceeded that goal by cutting our operating expenses by 42%. However, we're not done. And we have yet to realize all the cost savings identified. Therefore, management has set a new goal of lowering operating expenses down to $5.5 million per quarter or approximately 47%, which is a massive reduction compared to historic levels and is 1/3 of what most of our competitors are at.

If you look at the fiscal first quarter, expenses on the slide -- on top of Slide 8, we're at about $6.1 million in operating expenses. However, that included about approximately $100,000 of one-time expenses in the quarter, the bulk of which was the amortization of fees stemming from the change in our bank line from Wells Fargo to our new bank line with Bridge Bank, a $12 million asset-based credit facility. In reality, the number should be about $6 million going forward without any one-time quarterly expenses.

And we sit at -- and we still have the savings from reductions in our cost yet to be fully realized from changing some of our outside service providers, such as our [SCC] counsel, our outside auditing firm which, going forward, will take us down another a couple hundred thousand per quarter. That will bring us down to $5.8 million. And most importantly, there is the consolidation of our 2 facilities which, as I've mentioned earlier, as we are in the process of completing by the end of the calendar year.

To date, we have already moved the C30 and C65 manufacturing line floor from our headquarters in Chatsworth over to the [Van Nuys or Stag] facility, and we are now in the process of substantial tenant improvements in order to move sales, marketing, engineering, aftermarket service, IT, finance and the balance of the Capstone employees by approximately November 15. This move will save us about $1.5 million annually in rent and utilities, after we sublet the [Nordhoff] facility. We believe this consolidation will get us to that new $5.5 million target in our new CHP balance business model.

Again, if you compare that $5.5 million quarterly operating expense with other public companies that are in the clean tech space, whether they're fuel cell companies, ultra caps or other technologies, all of their quarterly operating expenses are north of $10 million, and some that are closer to $15 million per quarter. Capstone is hands-down the industry leader in lower operating expenses within our space, even before we finish the consolidation of the 2 facilities.

I encourage you to look at Slide 12 in the appendix, which shows how favorable Capstone compares to other public clean tech companies that also report quarterly. You'll notice that Capstone beats the collective average in almost every performance aspect, including revenue per [employee], with the one exception of market cap, which we'll talk more about later.

So for our financial highlights for the quarter, I'll now turn the call over to Jayme to discuss the specific first quarter fiscal 2018 financial results. Jayme?

Thanks, Darren. I will now review in more detail our financial results for the first quarter of fiscal 2018. The highlights can be found on Slide 9.

Net loss for the first quarter of fiscal 2018 improved to $4.1 million compared to a net loss of $4.5 million for last year's first quarter, on similar revenue levels of $19.2 million for the first quarter of fiscal 2018 compared to $19.1 million for the first quarter of 2017.

Net loss per share is $0.10 per share for Q1 of fiscal 2018 compared with a net loss of $0.17 per share in Q1 of fiscal 2017. The decrease in the net loss during the first quarter of fiscal 2018 was primarily because of the reduction of operating expenses of approximately 18% from the same period last year. This decrease was primarily the result of our continued cost reduction initiatives, discussed earlier by Darren, to lower operating expenses throughout the organization and to align with our goal of achieving profitability as quickly as possible.

Product revenue for the first quarter of fiscal 2018 was $12.6 million compared to $12.1 million in the first quarter of fiscal 2017, an increase of $0.5 million or 4%. We shipped 12.1 megawatts during the first quarter of fiscal 2018 compared with 11.6 megawatts in the last year's first quarter, an increase of 0.5 megawatts or 4%.

The increase in product revenue and megawatts shipped in the first quarter of fiscal 2018 over the prior year fiscal first quarter was the result of a shift in product mix as we sold a higher number of our C1000 series systems during the first quarter of fiscal 2018 compared to Q1 of fiscal 2017.

Revenue from accessories and parts decreased $0.8 million or 22% to $2.9 million for the first quarter of fiscal 2018 compared to $3.7 million for last year's first quarter. This decrease is primarily the result of the timing of our parts sales promotions. However, service revenue increased $0.4 million or 12% for the first quarter of fiscal 2018 to $3.7 million compared to $3.3 million in the first quarter of fiscal 2017.

Service revenue increased primarily because of our growing install base and continued market acceptance of our FPP offering. As a percentage of revenue, service revenue was 19% in the first quarter of fiscal 2018 compared with 17% in the first quarter of fiscal 2017.

Gross margin for the first quarter of fiscal 2018 was $2.2 million or 11% of revenue compared to a gross margin of $3 million or 16% of revenue for last year's first quarter. The decline in gross margin was primarily the result of a shift in product mix and incremental warranty expense, offset by a decrease in our production and service center overhead expenses.

In addition to consolidating our manufacturing processes into our [Van Nuys] location, management continues to implement initiatives to improve gross margin in fiscal 2018 by further reducing manufacturing overhead and fixed and direct material cost and improving product performance as we work to achieve profitability.

R&D expenses for the first quarter of fiscal 2018 decreased $0.5 million or 31% to $1.1 million from $1.6 million in the year-ago first quarter. The reduction in R&D expense resulted primarily from lower salaries expense, which was a result of the reduction of the number of active research projects due to our initiatives to reduce operating expenses and achieve profitability. Management expects R&D expenses in fiscal 2018 to be lower than in fiscal 2017 as a result of the continued cost reduction initiatives.

SG&A expense in the first quarter of fiscal 2018 decreased $0.7 million or 12% to $5 million from $5.7 million in the year-ago first quarter. The SG&A decrease consisted of decreases in professional services, salaries, facilities, consulting and marketing expenses. These reductions and expenses were primarily the result of our cost reduction initiatives to lower

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the organization. These decreases were offset by lower bad debt recovery in the first quarter of fiscal 2018 compared to the same period last year.

Total operating expenses for the first quarter of fiscal 2018 decreased 18% to $6.1 million from $7.4 million in the year-ago quarter. Operating expenses, excluding bad debt recovery, decreased 27% for the first quarter of fiscal 2018 to $6.1 million from $8.3 million for the first quarter of fiscal 2017.

Bad debt recovery for the first quarter of fiscal 2017 was $0.9 million compared to $13,000 for the first quarter of fiscal 2018. Excluding bad debt recovery, management expects SG&A expenses in fiscal 2018 to be lower than in fiscal 2017, primarily as a result of our continued initiatives to reduce operating expenses and achieve profitability. The loss from operations for the first quarter of 2018 improved to $3.9 million from $4.4 million in the year-ago first quarter.

The adjusted EBITDA for the first quarter of fiscal 2018 was negative $3.4 million or a loss of $0.08 per share compared to adjusted EBITDA of negative $3.7 million or a loss of $0.14 per share for the first quarter of fiscal 2017.

The adjusted EBITDA is a non-GAAP financial metric that is defined as net income before interest, provision for income taxes, depreciation and amortization expense, stock-based compensation expense and change in fair value of warrant liability.

Please refer to Slide 14 in the appendix titled Reconciliation of Non-GAAP Financial Measure for more information regarding this non-GAAP financial metric.

Now I'll turn to Slide 10 as I will provide some comments on our balance sheet and cash flows. Cash used in operating activity for Q1 of fiscal 2018 decreased 76% to $0.7 million as compared to cash used of $2.9 million in the fourth quarter of fiscal 2017.

As such, Q1 of fiscal 2018 had the lowest cash usage in operating activities in the past 6 quarters.

Working capital change for the first quarter of fiscal 2018 was positive $1.9 million as compared to a negative $0.5 million working capital change during the fourth quarter of fiscal 2017.

At June 30, 2017, we had cash, cash equivalents, and restricted cash of $19.1 million, which includes $2.5 million in net proceeds from the aftermarket offering program, compared to cash, cash equivalents and restricted cash of $19.7 million as of March 30, 2017.

Our accounts receivables balance as of June 30, 2017, net of allowances, was $12.2 million compared to $17 million at March 31, 2017, a decrease of $4.8 million or 28%.

Our day sales outstanding, or DSO, improved to 58 days compared with 68 days as of March 31, 2017. The change in DSO was largely the result of higher collection of accounts receivable for the first quarter of 2018 compared to the fourth quarter of fiscal 2017.

Inventories increased to $16.3 million or 5% from $15.5 million as of March 31, 2017, as a result of an increase in finished goods.

Our accounts payable and accrued expenses were $13.6 million as of June 30, 2017, a decrease compared to $14.7 million as of March 31, 2017.

Additionally, during the quarter, we early-adopted FASB accounting standards update number 2017-1 on a retrospective basis. As a result, you will see that we reclassified the warrant liability to additional paid in capital and accumulated deficit on the consolidated balance sheets in the Form 10-Q. Please refer to our Form 10-Q filing for reconciliations.

I am very pleased with the significant reduction in our cash usage from operations and the improvements in our balance sheet, which is an overall indicator of the improving health of our company. A solid balance sheet is critical to our business as vendors, customers, lenders and employees are all monitoring the strength of our balance sheet.

Our total backlog as of June 30, 2017, was $117.3 million compared with $108.4 million as of June 30, 2016. The year-over-year increase demonstrates the current demand for our products, indicating a rebound in the business.

The book-to-bill ratio for the quarter improved to 1.3:1 from 0.9:1 in the year-ago first quarter.

Our FPP service contract backlog at June 30, 2017, was $76.7 million compared to $77.1 million at March 31, 2017, and $71.4 million at June 30, 2016. The year-over-year increase reflects our growing install base of microturbines as well as the ongoing efforts of distributors to sell our FPP service contracts in the CHP market, which enables the end users to achieve a lower total cost of ownership and increases our recurring revenue. At this point, I will turn the call back to Darren.

Thank you, Jayme. As I mentioned before, I want to spend some time going over the July 24 webcast investor questions. These are questions received mostly from retail shareholders.

Let me start with the first question here. Why doesn't the Board of Directors and management buy more shares? Obviously, it's a question that we get quite a bit and typically every year at the annual shareholder meeting that has pretty much a similar answer. First thing, it's important to note that the trading window only opens for Directors and management a maximum 3 times per year, and that's only after quarterly earnings and for a very short period of time. So the amount of opportunities and days in which we can trade is very, very limited. Over the last 12 months, the window opened twice out of a possible 3 times. I would like to say though that the 2 times it opened was November 2016 and August 2016. In November, I purchased shares as well as Holly Van Deursen. Together, we purchased over 27,000 shares. In August, the other time the window was open in the past year, myself, Jayme, Paul DeWeese, and Holly purchased shares. Together, we purchased about 41,000. So if you look at last 2 open windows, we had open window purchases with people's own income for Directors and Executives, seven total purchases of 68,000 shares. So definitely, we are purchasing shares when the windows is open, though it's open infrequently. I do expect the window hopefully to open up after this quarter. And if it does open up, I'd expect some more directors and management, myself included, to buy more shares. So I think we are buying. We are putting our money where our mouth is. Hopefully, we'll get more opportunities to do that. And hopefully, the share price won't be such a bargain each time we do it.

Question number two, what happened to the truck that was being tested? Not sure which truck we're talking about. We have multiple trucks that we're doing demonstration vehicles with. But the last news we have from the FedEx box trucks is that they were both in revenue service. The Peterbilt-Walmart WAVE truck of the future concept vehicle is just that, it's being used mostly as a concept vehicle today for trade shows and other Walmart events. The Freightliner Class 7 Truck that's being fitted with the air-conditioned trailer is still in process but, hopefully, will go into some sort of testing preferably with Costco before the end of the year. Most of these are still demonstration vehicles though. If you look at our management presentations, we do show 99% of the revenue is coming from energy efficiency market, or CHP, oil and gas as well as renewable market. We still plant seeds though in the automotive market as well as the marine market and hope for a future revenue growth as those markets mature and open up to us.

Question number three is what is the status of the Ecuador deal? If you remember, Ecuador was a large megawatt opportunity for us. It was related to associated gas down in that country. That deal has been put on hold for now. There's another wave of corruption that unfortunately hit the Ecuadorian government. We're hopeful that once things settle down, new folks will be put in place that, that opportunity will come back. But right now, I'd say that, that opportunity is on hold. And I will say that Capstone takes Foreign Corrupt Practices Act, or FCPA, very seriously. And we do have a zero-tolerance policy. So we do get into areas where there is potential corruption or graft, we have to separate ourselves from those opportunities.

Question number four, when are you going to introduce the C250? Tony Lorentz, our Engineering Manager asked me that question almost every day. The C250 development was put on hold as a result of our initial cost reduction, our effort to get our operating expenses from over $10 million down to the target of $5.5 million. It is still on our product development roadmap. If you see -- a lot of times in our management presentations, you'll see that product development roadmap, and it is on that road map. We will not likely be committing significant resources though until we actually reach profitability. So the sooner we can reach profitability, the sooner we can start developing that 250 program which, obviously, moving from the 200 platform to the 250 will definitely help us from a cost standpoint and give us a larger scale megawatt package.

Question number five, is the reverse split guaranteed to occur? Obviously not. The reverse split is not guaranteed to occur. It is something that we have on a proxy for voting, and it's a tool used only if necessary. So we till December 11 to get the current share price above $1 dollar. We are doing everything possible as a leadership team, management team and Board of Directors to get that share price up above $1 before that time. I do think if the reverse split does go forward, it'll be very different than our last reverse split. Our last reverse split happened at a very challenging time for the company where we had the collapsing Russian market; our Russian distributor owing us $8 million. That business was going away very quickly. We had challenges to the oil and gas, with oil dropping from $130 a barrel to $30 a barrel. The dollar was strengthening. Lots -- very challenging time when we had to do that reverse split with very declining performance of the company. The company performance today is all heading in the right direction, which Jayme's highlighted, and we've highlighted in this presentation. We are closing in on EBITDA breakeven. So even if we have to do a reverse split, I think we'll be EBITDA breakeven right around the same time. So that should be very helpful for holding that split if it does occur. But our goal is to not do a reverse split if at all possible.

Question number six, what happened to the pump jack project that you touted in the past? Well, I think I just kind of talked about it. The oil dropped form $130 a barrel to $30 a barrel. That's what happened to the pump jack project. So we redeployed our engineering resources on CHP applications. We pivoted the business away from oil and gas. Not that, that is not a good market as it comes back, and we love our oil and gas customers. But we needed to get a Signature Series product in the market to address the CHP market and increase our penetration. As oil moves to $50 a barrel, we're seeing more activity in the oil and gas market. We've had some nice orders recently and a lot of pending orders. So we will get back to that application, whether we do it with hardware or we do it with software or with larger battery packs, but that is a market we'll eventually get back after.

Question number seven, when are you going to be breakeven? Obviously, that's the question we get all the time. I think I've hit that pretty hard in the prepared remarks today. The short answer and the clean answer is when we get to $15 million in product revenue, $10 million in service revenue and $5.5 million in operating expenses. But more importantly, I would say we're working in all 3 of those things. If you take them one by one, I mean we've been north of $15 million in product revenue many, many times. That's not a number that's very hard for us to get to when the business is growing and we're getting good orders, order flows from our distributors. Obviously, you've seen a big uptick in our pipeline, a big uptick in our recent orders. So moving from last quarter's $12 million in product to a $15 million level is not a long putt. So that should be something we should be able to do. Getting our operating expense down to $5.5 million. Well, if you saw us go from over $10 million to $6 million, getting from $6 million to $5.5 million shouldn't be that challenging. We know where it's coming from. We've highlighted it and outlined it in the presentation. The facility move is obviously the biggest piece that we have left. And we're well underway of getting that done. So of the 3 things we have to do, the biggest challenge will be service revenue. But I would argue service revenue has been growing despite our headwinds. So the shift to CHP is moving our service levels up. Our FPP contracts are going on to the books much faster than they're coming off. We're selling more accessories in that business. So inherently, the service revenue is growing virtually almost every quarter. We keep having new records for FPP revenue and total service revenue. So we will get to $10 million, the question is just when. And so that's probably the third one. We'll get to our cost target and our product revenue target first, but the service one will -- may take a little bit longer. So I said publicly everything from probably 2 to 6 quarters, I think the reality, it won't be the current quarter we're in. Q3 and Q4 is probably our nearest term opportunity. If we don't get there, we'll be very, very close. And so if you look back a few quarters, it wasn't that long ago we were throwing off $4 million in gross margin on $21 million, $22 million in revenue. We'll get back to those levels again. On a $5.5 million cost basis, we'll be within $2 million of EBITDA breakeven. If you look at Slide 12, our $3.6 million of adjusted EBITDA was better than anybody else in the space. So we are the closest to EBITDA breakeven of anybody in this group. And that's with depressed sales. As our sales come back, as our service business matures and improves, margin -- getting our service business from a 30% margin to a 50% margin is a huge, huge uptake. We just think about that. Even at $8 million of revenue in the service business, a 50% margin throws off $4 million. Again, that puts us very close to our breakeven, not counting product. So we're getting close. We can see it. The leadership team is very motivated, and we plan to get there as quickly as possible.

This is my favorite, how about a salary cut for management? Well, if you look back at my compensation over the years, it's been as high as close to $1 million. Today, it's less than $500,000. That's very similar to the rest of the leadership team. Management has not had raises, bonuses or new equity in almost 3 years. In addition, we voluntarily forfeited all of our invested stock options. The team still remains extremely motivated and will not get any executive bonus or any more RSUs and options until we reach EBITDA breakeven for 2 consecutive quarters. So I think if giving up half of your compensation and not getting any more bonuses until you're profitable for 2 quarters in a row isn't motivation enough, I'm not sure what else we can do. We could cut further. But you'd be at risk of losing a leadership team. And so I think, it's my goal and my job to keep this team together and keep them executing. We all know unemployment is down to record levels. And California employment's also very, very tight. So in order to keep this team motivated, we can't cut base salaries beyond where we're already at.

Question nine, why doesn't Capstone team up with utility companies? Well, we routinely team up with gas utilities, they're some of our best customers. Rural utilities are also coming to us. We're seeing some ESCOs, I think we have a couple of projects going with [Amesco] right now. However, most electric utilities around the world view Capstone as a threat and have worked hard to kind of impede our adoption through a multitude of strategies they've used. But I think that's starting to change. The utility model is broken. People want to have the ability to shop their energy, buy cleaner energy and be more thoughtful on how they spend their energy dollar. So as the utility model evolves, Capstone stands ready to be a partner and make a win-win relationship with any utility that wants to work with us.

How is the weak dollar helping sales in Europe? A weak dollar helps us everywhere. It doesn't matter if it's Europe or if it's the peso or if it's the ruble, any place in the globe where we do business, the strong dollar has impacted us over the couple of years. So a weakening dollar is definitely good news for our business as is returning oil prices -- or higher oil prices. Specifically in Europe, we're seeing a strong pipeline in the U.K. We've got some new distributors in the U.K. that are putting up some nice business. We've got pure world whose doing leisure centers. We had a nice order for 50 units out of them recently, and they're doing a great deal. I think there's 1,200 leisure centers in Europe and -- or in the U.K. and the surrounding area. Germany is slow but picking up. Italy, I'd say, about the same. Hard to tell right now because August is a slow time of the year, but we'll see in September what they look like as far as getting some of those pending orders across the goal line.

Question 11, does Capstone have any product with Tesla, Amazon, FedEx or Apple, or et cetera? We know -- as I mentioned earlier, we got 2 units running with FedEx. We've had some discussions with Apple about projects but haven't got anything across the goal line yet. I'm sure we've talked with Amazon and Tesla with our distributors at one point or another. I think, more importantly, our conversations with Fortune 500 companies or Fortune 100 companies are increasing. I think it's important that as our business strengthens, our balance sheet strengthens, we're seeing those customers come to us and be more comfortable doing business with us because we're a more viable long-term business, especially because our value prop is really driven around not first cost but life-cycle costs. And so our life-cycle guarantee, the value proposition is our FPP program. Guaranteeing the life-cycle cost of the product is a very powerful tool. But if you don't have a balance sheet to back it up, that tool loses some of its leverage. I think the other important thing is, is our business model is not to use our customers as marketing propaganda. You will not see customer names in our press releases. We're doing great projects with great customers. And a lot of those folks, we'd love to talk about. But that's not our business model, and that's not -- they don't appreciate it, frankly. We also plan to be giving our customers shares of our stock to buy the product. They should buy the product on its own merits and take cash for it.

Moving to Slide 12 (sic) [question 12], why did the Board of Directors solicit a sale, a merger instead of a reverse split? I think there's a lot of confusion around this. First, let me say a strategic M&A is not related to a reverse split. The reverse split is an activity we may or may not undertake to stay listed on the NASDAQ. It's not something that has anything to do with the value of the business or whether we should sell it or do some sort of a merger. We are focused on increasing the share price and avoiding a reverse split as I said earlier. And hopefully, if that split is executed, we'll do a much better job at holding onto to the math that happens when we do that. The company always has and always will continue to evaluate every viable strategic opportunity. You know we've done a lot of strategic work with folks in the past, whether it's right speed or UTC. We've had relationships with Samsung, [Core] over the years, I think, even Cummins. So we will talk to anybody in the industry who's got an interest in talking to us. Whether it's M&A activity, licensing the technology, whatever may be, teaming up marketing efforts or opening new markets. So we are very open to that stuff. But we do have a company policy that we don't talk about any strategic opportunities, term sheets, we don't press release, MOUs. We don't discuss ongoing M&A opportunities or discussions. That's just our policy, and that's the way we'll proceed going forward.

Question 13, why does Capstone only have 15% institutional investors? I think that's pretty self-explanatory. We were 80%, 85% institutionally held before the macroeconomic headwinds. Our market cap was $400 million roughly, was spiking to $700 million, maybe $200 million or $300 million on the low end. So we had a much better market cap before the trio of macroeconomic headwinds, before Russia, oil and the strong U.S. dollar. And so we're working hard to get those institutional owners back. A lot of them sold at very nice returns. And so we're trying to get them interested in coming back into the stock. Today, we're 85% retail unfortunately.

What hotel chains utilize Capstone? I don't have time to go through and look up all of them. But I would say almost virtually every hotel chain in the U.S. and most of the world, of any size, has tried a Capstone or is using Capstone today. It's one of our better verticals. And our distributors are doing a great job of penetrating those markets whether it's U.S., Europe, the Caribbean, Hawaii, seeing lots and lots of applications for hotels and larger properties. However, I'd say post Marriot's probably our biggest customer today just because they own the Ritz-Carlton, Fairmont, Four Seasons, St. Regis, obviously, the Marriott, Hyatt, Westin. We are trying to improve our relationship with them at a corporate level and get looks at lots of properties. And so again, we're trying to do like -- most of our Fortune 100 and 500 customers, we're trying to improve our leverage and deepen our relationship with them.

Slide -- question number 15, with the current sales levels and gross margins, I'm assuming the number of employees is below 100. How many employees currently? I'm assuming more reduction needed.

That's a -- that 100 is a pretty small number. If you look at it, Capstone has conducted 3 reduction in forces over the last 2 years. We'd taken headcount down from about 250 as a high. We're about 170 today, plus or minus a couple of folks. At this level, that gives us approximately annual revenue per employee of about $460,000 per employee. Again, compare that with other folks in our space, and we're 2:1 or 3:1 over most folks. We are global. We are public. We are a manufacturer, an industrial manufacture. We do have to support the product in the aftermarket, do training, getting the company below the 170 employee level, and I think it's pretty challenging. I think what's more important is, as revenue is coming back, and you're seeing the leading edge of it, we're going to need those folks and probably add a couple of people back as we get the revenue growth engine going again.

Question 16, the distributor system, is it suitable given the current low volumes or lower volumes with the necessity high discount to distributors? I think there's another area that people don't understand. I think our distribution model is one of our biggest assets. And I think at the end of the day, it's going to improve to be something that other companies in our space will be very jealous of. We've done a lot of work to develop it. And it's just now starting to really pay the dividends that we can see. So yes, we're going to continue our distributor model. We will work to develop deeper relationships directly with large Fortune 100 customers, but that will always be with our distributor table beside us because they're our partners and our teammates. Our distributors get a 25% discount, which is very customary and standard in our industry. Caterpillar, GE, Waukesha, other folks in the industry have very similar discounts. And there's a lot that they do for that, right? They do all the sales, the marketing, application engineering and solution support, aftermarket service, spare parts, replacements, warranty adjudication. There's a lot they do for that. In fact, if you think about it, we've got about 800 people in the distribution channel or the Capstone family, these are all dedicated Capstone employees that are not on our payroll. So if you take that and think, okay, call us an $80 million business right now. So we're paying roughly $20 million in discounts to our distributors. If you do that quick math, that's about $25,000 per head that's in our distribution channel that doesn't include marketing and trade show expense, facility expense, spare parts, logistics, vehicles, tooling. So when you think about that, that's a pretty good deal. And so we're getting our money's worth out of our distribution channel. And more importantly, to get our operating expenses down, we shifted a lot of our service cost and our marketing expense over to them, and they picked that up and are continuing to carry the ball forward. So that's it. The distribution channel is not going away, they're only growing. And I expect to see that 800 people closer to 1,000 people before too long.

Why are gross margins so low? I think Jayme and I could talked about this for a while. But quite simply, it's related to revenue. We need to get fixed overheads, we need to get our products revenue up at about $12 million in quarterly product revenue or at about breakeven from a margin standpoint. But everything beyond that with the fixed expenses start dropping to bottom line, we need to get our service margins up from the 30% today to the 50%. That's very powerful. Margins at 12%. We only need to get to 22%. And so a little bit of revenue growth, some service growth. We are working on some direct material cost reductions on the Signature Series. We did have a lot of pressure on our purchase materials, having your volume drop 40%, it's very challenging with your supply chain. Having troubles paying your bills is even more challenging. So we're through all that. We are working to get, as I said, our top 21 vendors, which are 80% of our spend, under LTA. And in each one of those LTAs, we're looking for some pricing concession. So we're working to get that cost down. More importantly, the weakening of the U.S. dollar will help. We've got about 7% of margins tied up in extraordinary discounts because of the weak dollar. So getting the 7% down will definitely help. So I think if you look across the board, we have multiple ways to get there, but it's direct material cost reduction, it's higher volumes, it's less discounting and it's leveraging our supply chain and getting some more costs out of the supply chain.

Slide 18 (sic) [question 18], when is the second manufacturing plant to be close or leased out to save money? As I said, we save about $1.5 million a year in both rent and utilities. That doesn't count other maintenance and other efficiencies. That is in process, as I said, mid-November is our goal to get everybody moved over. And it is a multiple-stage process. We have a lot of tenant improvements to do. We'll probably spend $400,000 in tenant improvements on the building. We're getting some of that offset from the landlord. But it's important that we get that done and get it done quickly. We have listed the facility here, you should see a sign in the yard shortly. The experts in the market tell us it will be 6 to 12 months on average to rent a space like ours in the current L.A. market. So it's another question, why I feel so -- why don't you know when you're going to be profitable, why I don't know when I'm going to sublease this facility? So that's one of the challenges that we have. And so when is it going to happen? We know we can move out, but how quickly we can get the sublease done and get that relief.

Question 19, why can't you get the China distributors to sell more turbines? I ask Jim that question once a week. China and India though are very first cost-sensitive markets. They're also very nationalistic. And as we all know, they don't respect IP protection or IP laws. So trying to find China partners that we can trust not to try to reverse engineer our product, finding partners that are more sophisticated not to sell first cost is challenging, but we've got several partners in China, a new partner in India, and we do think we're going to get some growth out of that market.

How are PPC sales coming? As you know, PPC is our Russian distributor, our main Russian distributor. We now have 4 or 5 distributors in Russia and the CIS. BPC sold $5.9 million in the trailing 12 months, and that makes them currently our third-largest distributor. So I'd say they're actually performing fairly good as far as revenue. That's still a shadow of their former selves but a lot better than they were a couple of years ago. The revenue was down in Q1, but we do not believe that's related to any new sanctions or the current geopolitical tensions between U.S. and Russia, but it would be nice to turn on CNN one day and not hear them talking about Russia for a change.

Why have we not sold more in our Capstone Energy Finance program, question 21. Slide 13 again talks about the $60 million highly-qualified leads. I'm obviously a little disappointed that we haven't got it done faster. I think at the end of the day, we you look back at it though, you've got a new business model for Capstone, a new business partner that is our joint venture partner in the Capstone Energy Finance, and then you also have Sky Solar, who's a new partner for us and then it's a new sales approach with customers. So when you put the 4 of those things together, the devil is in the details, as they say, and it's taken longer to get it done. But I still think it's a great sales tool. We're not using our Capstone balance sheet today. I think it's a great program that will deliver 10% to 15% top line growth on top of the other opportunities we're already seeing.

All right. Question 22, and I'll try to move through these as quickly as we can to get to analysts' questions. I know we're running a little bit long. What happened to Verdesis? Verdesis is our Belgian distributor. They're bought by Dalkia in France. They are still a Capstone customer, so operate a lot of Capstone products on landfills in France. They've generated about $1.1 million in revenue over the trailing 12 months. Most all that was in FPP revenue. Obviously, Jim and team are talking to Dalkia and looking for ways to expand the relationship. Dalkia is a $4 billion energy services company, so it would be nice to have a more strategic relationship. And then obviously, we'll push to get that to happen. But we are still getting revenue out of what was called Verdesis before.

Slide 23 (sic) [question 23], you spoke about moving away from the oil and gas-heavy model to the new CHP balance model. Capstone revenues and gross margins are not meeting the CHP balance model. It seems the bigger problem is just simply not getting enough sales. I'd say I agree 100%. But again, obviously, Slide 6 shows those sales are coming. We're doing a lot of hard work to get there. But getting the pipeline up $406 million to $407 million is step 1. Getting new product bookings up 82% is step 2. Taking those bookings and turning them into revenue is step 3. So we hopefully we'll be showing step 3 here very shortly.

Question 24, recent Time Magazine article, America's Energy Roadmap, documents what it calls a dramatic shift in thinking on the part of public utilities toward integrated and renewable energy and distributed generation into their business models. Does this represent an opportunity for you to recruit public utilities or the subsidiaries as Capstone distributors or CHP within their service areas? Yes, yes and yes. As I've said, over the years, historically, the utility model is broken. Utilities see us as a competitor. If they would see us as a business partner for distributed generation with a highly reliable low-cost solution that is great for the environment. We do see utilities as potential partners. I'm not sure we'll go as far as distributors, but they definitely could be strategic partners. And so I think that's something will learn more about in the coming days and months and years.

Question 25, what's the total value of the accumulated NOLs? Would the NOLs be available to an acquiring company? Federal NOLs are $668 million, state NOLs are $160 million, that's of March 31. We do monitor the NOLs very closely. We are seeking shareholder approval to preserve the NOLs. We'd appreciate shareholders vote to approve proposal #3 on the proxy in regards to the NOL [pills] to protect them. More importantly, we are not only just working to preserve the NOLs, we're working very hard to get profitable and start using those NOLs. As it relates to acquiring those NOLs or acquiring Capstone, that's very complicated accounting. It really depends on how similar the businesses are, and there's lots of rules around that. But our goal, job 1 is to get the company profitable and start using some of those NOLs.

Where are you manufacturing turbines? I think everybody knows, or most people know we manufacture them here in California. Our supply chain is almost 95% U.S. I'm proud to say, and about 75% of that is California and Arizona. So we try to be very short supply chains where possible. We do source overseas. But typically, we've been able to find U.S.-made product for similar prices and better quality.

Question 27, what are we doing to get the investment community back? I'm assuming that means non-retail shareholders or institutional holders. Obviously, better results is job 1. I think the more we can improve results, the more we'd get those folks to come back to a more strategic level. Although, I'd say we're maintaining a very good relationship with the analyst communities, we're maintaining relationships with the best of the banking community, we're doing investor roadshows in the; Europe and the U.S. with Oppenheimer, Rodman, Cowen, Roth, Craig-Hallum. We're presenting at 5 and sometimes 7 clean tech or high tech growth conferences every year. We've recently started working with Renmark Financial Communications to conduct lunch and learns. So that's retail, family office and high net worth individuals across the U.S., in Canada and Europe. We've done mostly U.S. and Canada so far. We're working with energy tech investors, I mentioned earlier, on company presentations, interviews and the recently completed AlphaDirect Conference Series where these questions are coming from. So that's really the strategy going forward. But again, job 1 is better results.

Question 28, we should be trading at least 2x sales, why is it your [organic] discount compared to others? We've actually done that in our past as well. I couldn't agree more. I mean typically, Capstone historically has traded 2 to 4x annual revenue. Some of the other companies in the clean tech space -- again, go back to Slide 12, look at the market caps versus performance. It's hard to say why the price of share is where it is. But I think again it's related to our exposure to Russia oil and gas. A lot of misconception on the institutionals on what our market is and what we're doing with the business. So I think time will tell. I believe the stock market is efficient, may not be timely, but it is efficient. And if we continue to perform, the markets will realize that we've diversified our business, we've got a better, more robust service business, we've got a better business model and we're on the cusp of profitability. So it should adjust.

Would you consider manufacturing in Roswell, New Mexico? I'm not sure why Roswell, maybe Area 51 and looking to sublet some space. Maybe we got some workers at low cost, but we have very low touch labor in the product. I get a lot of questions about manufacturing in California. The reality is we can make our $1 million box in 3 shifts of labor. So low-cost labor does not impact our cost of goods very much. More importantly, our product is very high tech, it's got very tight tolerances. We leveraged California labor market, which has a lot of ex-military, ex-aerospace. And I could argue we could move to a lower cost market and actually it might cost more because if we have quality issues, reliability issues or rework issues, that would outweigh any savings we'd have from lower cost labor. All right, 3 more.

Have you received the money associated with the Russian distributor, their inventory? Again, that's BPC on their $8.1 million receivable. We've got $1.7 million of that receivable recovered. Anytime they buy product or parts they have to pay 20% over, and we pay down that receivable. That receivable has been fully reserved. And as we collect it, it comes in as bad debt recovery. So if you see, a year-ago quarter, as Jayme mentioned, we got almost $1 million recovery that quarter which made the operating expenses look lower than they actually were and kind of masked some of the improvement we've had year-over-year.

Question 31, at what sales level do you think Capstone will be earnings-positive? I think we've covered that several times, $25 million with the right mix. Focus on Slide 3 and Slide 4, and that'll give you the answers on that. But again, we have a very good plan in place and a very clear path to that profitability metric.

What will it take to move the stock price? Again, I think that's something that we got to really just keep doing what we can control. If you can't control the share price, you can control your performance. You can get out of the market, you can market the company. We'll work hard to continue to do that through all the things I've said. But more importantly, we just need to be putting up good numbers. We're putting up, I think, better numbers than anybody else in our space. And we're not being rewarded for it, but eventually I think that will happen. And so we need to be patient and get to profitability as fast as possible. And as an old boss like to say, "Cream eventually rises to the top," and I think that will happen. So that's it for the retail shareholder questions we had.

Operator, I'd like to turn the call -- open to the analyst community.

(Operator Instructions) Our first question is from Eric Stine with Craig-Hallum.

I'll be brief. I just wanted to touch on Capstone Finance, and I can appreciate a new model and everything new about this, in long sales cycles. But I know that it's probably been 4- or 5-plus quarters that your expectation has been that there were things that were potentially imminent. So just wondering, I mean is there a -- has this caused you to rethink how it's structured? Is there something different in your approach to kind of get this process going? And then just to clarify, did you give what your expectation is for the contribution there in fiscal '18?

Yes, no, I think the business has definitely gone slower than we thought. I think it took longer to set the business up initially, all the paperwork and all the work to be done, then the power purchase agreement had to be written. Each state or potentially countries had different rules around being a self-generator and making sure you're not a utility. So I think the business is more complicated than we thought it was. Bringing in Sky Solar has been very helpful, but it also kind of added another cook to the kitchen. But they're still very motivated to do these projects and to help lend their balance sheet to it. I think some of our customers have struggled with the decision because if you can save $1 million a year by self-funding or $100,000 a year by using Capstone Energy Finance, that's a hard decision to make. But at the end of the day, I think the pipeline is filling up. We're very close on several projects, and I think we'll get them across the goal line. And if we don't get them across the goal line, I think they'll buy Capstone products straightaway. So again, if they use Capstone Energy Finance, great. But if they buy the product, that's great, too. So at the end of the day, we just want to get customers into our product and hopefully get them to buy more.

Our next question is from Craig Irwin of Roth Capital Partners.

Darren, that was really comprehensive, but there are 2 questions that I have that have not been addressed, 1 is the Factory Protection Plan. Can you talk about the uptake there, what the customer receptivity is since you've hit the ground, your sales function has been out there looking to sell this on the front end of your orders for the last few months?

Sure, no, I think the Factory Protection Plan has been selling well in the traditional format. We continue to put up record backlog, record revenue, the margins continue to expand and will expand more as the new Signature Series gets out there because it's more robust than the prior models. But more importantly, I think by bundling it together, we've got a way to leverage customers and say, "If you want a better economic return and a shorter return, buy the bundle. And if you buy the bundle, you have to prepay the FPP." And so we couldn't have done this before, we were close to breakeven in profitability, getting somebody to prepay a 9-year service agreement when you're losing $7 million a quarter, it would be a real challenge, but we've gone from losing $7 million a quarter to $3 million to nominally breakeven in the last couple of quarters from a cash standpoint. So as our balance sheet stabilizes and we move to our profitability, we can sell more of these bundled solutions which will help us on the cash flow side and the working capital side. And if customers want to not take advantage of the bundle, they can buy it à la carte, and pay roughly 10% more by buying each individual piece and paying for it when they consume it.

Great. A second question is about parts pricing. So if I heard you correctly, I think you mentioned price increases for your spare parts that you sell. Can you confirm that? And maybe discuss whether or not people have options as far as other suppliers? I mean these are your turbines, so I seriously doubt that the main components do have options. And the approach you're taking is as you set prices there, a lot of the other markets like HVAC equipment, for example, parts are a hefty part of the overall profitability for the different OEMs. And are you rightsizing the business to consider the way a lot of the other industrials approach their installed bases?

Yes, I think in any industrial, as your install base gets bigger, and we've 9,000 units shipped within the field, as that number gets bigger, will-fitters will eventually come in and start targeting your business. So that's something we need to be cognizant of. We haven't seen it yet, but it will happen eventually. So as we get a bigger and bigger install base, there'll be aftermarket will-fitters that will come in and try to steal that. That's why the Factory Protection Plan is such a great tool because if we sign them up to a 5-year, a 9-year or longer Factory Protection Plan, we've insulated ourselves from those will-fitters that try to come in. Obviously, we're -- being the only significant microturbine manufacturer in the world that helps us. All of our vendors signed NDAs and they know they can't sell that part to another third-party. So we protect ourselves there, even with things like air cleaners. And so we are protected contractually, but it's still something we're sensitive to. So we raise spare parts pricing virtually every year, and we've never raised the price on FPP. And in fact, we're lowering it as part of the bundle. So if distributors don't figure out or -- and customers don't figure out the better way to go, one commodity goes up every year, the other doesn't or even goes down. So taking the Capstone Factory Protection Plan long-term is the best solution and the lowest risk solution. So we think we got a unique model because of our one moving part that really allows us to be very aggressive in the aftermarket where other folks, Caterpillar, GE, anybody versus the reciprocating product can't be that aggressive because the performance varies widely.

Okay. So just to follow up there, can you talk about when the new pricing schedules take effect? And is there a possibility for a stocking effect in the channel as your distributors and dealers stock their [allocated] quotas for the next year?

Yes. It's a great point, Craig. Absolutely, the -- mid-May is when it goes into effect, so those are opportunities to see stocking levels go up before that, where also, we've added minimum stocking guidelines to our KPIs at our distributors, and so we're being a little more aggressive on analyzing their fleet and saying these are the parts you should have on your shelf, and that's required as part of your distributor agreement with Capstone. And so we're making sure -- and that's not just from a revenue standpoint for Capstone. Obviously, that's nice. But more importantly, we know that the performance of the product is better when there's local parts. And so if we can get parts on the ground locally, whether used in an FPP or warranty or just ad hoc, having those local spares near the customer is best for our end use customers. And so our distributors are doing a good job. I know E-Finity is a great example, one of the model distributors. I'm not sure they've had a unit down more than 24 hours in the last couple of years. They've got parts, they've got trained technicians. They do an amazing job at getting their sites up. We want to see that level of customer support globally with all of our distributors. So the aftermarket business is 30% of our revenue and growing. 30% margins heading to 50%. I think you'll see margins -- Q2 won't change much but Q3, Q4, you're going to start really seeing those aftermarket service margins pick up. And I think you're going to see it the same time that revenue is picking up. So really excited about Q3 and Q4.

Our next question is from Sameer Joshi of Rodman & Renshaw.

I will keep it brief, just a couple of questions. The backlog -- the product backlog that you have, what is the composition of that between the C1000S, the C200S and C65? And how does it affect your gross margin outlook looking forward?

Yes, we don't -- unfortunately, we don't break that backlog out anymore. I think the reality is it's a mixture of all 3. The Signature Series is lower margin than the C65 today, but we're working to get that back up. As I've said, we've got a specific Signature Series cost reduction initiative going on as well as an overall material reduction going on. The C65 has slowed down. We sold a lot of C65s in oil and gas, especially in U.S. shale gas. So as the U.S. shale gas picks up, the 65s will pick up. But if you look at it in the heyday of shale gas, we're probably selling 125 C65s a quarter. Today, that number is closer to 50. But we are -- we've come out with a new heat recovery module, or HRM, for the 65 to make it even more competitive than CHP. And so you should see increasing revenue in both. But our goal at the end of the day has always been to have our product margins very similar across platforms. So we're working to get the Signature Series back to that level. And so at the end of the day, we want customers to buy whatever product fits their application. We don't want to be trying to push them into a product because it's higher margin for us.

Okay. Got it. And the second question is

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accounts receivable. Was the reduction mainly due to better collection terms during the quarter? Or was it that some of the historical longer-term accounts receivable was recovered?

We got Jayme, a Louisville slugger, for her birthday. And so she's been taking a bat to most of our distributors. No, I think, the reality is we've been working really hard to improve our cash flow. And obviously, if we got cash needs, with our current share price, it's very challenging and dilutive. So we've been working really hard to improve our cash cycle. We've gone from 68 days DSO to 58 days. I think almost 40% of the people last quarter we had on either LC or prepay. And most all the rest of them, I think out of all the units we shipped, only one didn't pay within payment terms. And so our distributors are doing a good job at paying within the terms. We've tightened up our terms and we're making cash collection, cash cycle, inventory turns, a lot of the balance sheet stuff that, frankly, other people in our space don't spend a lot of time worrying about, we do. It may be kind of boring and not very exciting, but the reality is managing our balance sheet and our cash burn, I'm very proud of how low it's been the last 3 quarters.

Our next question's from Colin Rusch with Oppenheimer.

This is Kristen on for Colin. Just one from us. Last quarter, you mentioned some of the multi-megawatt projects in your opportunity pipeline. Just wondering if you could give us a sense of that opportunity set. And how much of what you've mentioned in that funnel -- are these larger projects versus the typical singles and doubles?

Yes, no, we -- I think we recently booked a 5-megawatt order which is being commissioned right now. There are some follow-up orders that are even larger with that same customer, so we're very excited about that. That's a flooring company in the south. So an area of the country we haven't been a lot in before. We're seeing a lot of 3-, 4-, 5-megawatt opportunities. We just sold 2 megawatts into Asia that's looking into that, into the couple -- 2-megawatt. So we are seeing a lot of customers that are adding on to sites and making sites larger or repeat customers. The 30-megawatt opportunities like Ecuador are pretty rare. But I would say we're seeing a lot more 3-, 4-, 5-megawatt opportunities. More importantly, to me, is we're seeing a lot of bigger customers that are repeat customers and, that between the performance of our products and the performance of our balance sheet, are getting more and more interested in converting to our technology quicker. So that's really important to me. Getting customers in long-term relationships that have big balance sheets and multiple opportunities is definitely the way to go. And I think we're -- we've seen some challenges with our Mexican distributor. He's coming back online, he's got some nice opportunities with the U.S. and European industrials. We see opportunities in lots of other areas with U.S. and European companies. So I think we are moving up to multiple megawatts, but I don't see very many 20-, 30-megawatt opportunities on the horizon.

Our next question is from Jeff Osborne of Cowen and Company.

Just had one question, Darren. I was wondering if you can just talk about the complexion of the pipeline of opportunities. Certainly, you give a lot of detail around regions. But in particular, I noticed Europe and Russia were up about 25% to 30% or so, I think versus the last update. Can you just talk about -- is that all oil and gas? Or are you seeing some success with the Signature Series and CHP and renewable projects in that region of the world?

Yes, if you look at it, Russia is both oil and gas and CHP. We've set up several new Russian distributors along with PPC in both Russia and the CIS state, so we're starting to see the pipeline flow there. Europe is primarily CHP. If you look at the U.K., Italy, Germany, that's all CHP business. There are some oil and gas up in the Netherlands and some other areas, but Europe is mostly all CHP. We're also doing some landfills as well as -- we're [restructuring] plants in kind of renewable business. But in general, if you look at it, the United States is very strong. We did about $10 million of revenue from the United States this last quarter, if you look at U.S. and Canada combined. And that's almost half of our revenue for the quarter. That's more per quarter than we're doing last year. So I think the U.S. is trending in the right direction. I think Europe is trending in the right direction as well as Russia. Latin America has been slow, but I think it's going to pick up here in the back half of the year. Asia, especially Australia, Australia has been good and about to be great. We've announced several orders recently, and we're really getting some traction. Again, mostly CHP though. Middle East and Africa, I think we've almost done as much in the first quarter in the Middle East and Africa as we've done all of last year. So whether it's the Middle East, whether it's Kuwait or Qatar or the different -- Saudi Arabia, different areas we're getting into as well as Eastern Africa, Southern Africa, Northern Africa, those markets are all slow to develop but developing. In fact, Jim will be back in the Middle East here in a couple of weeks. And we've only done (inaudible) over the last year, I think nearly did a couple million dollars in that market. So it wouldn't take much to get some nice growth there. So I think the biggest challenge for us, as I mentioned on the Q&A, is really Asia. So I think getting orders out of China and India had been our biggest challenge. But the rest of the world, I think, is definitely trending in the right direction.

At this time, I see no other questions in queue. I'll turn it to Mr. Jamison for closing remarks.

Great. Again, I know a long call today, but I wanted to -- it was important to get to some of those retail shareholder questions. As I've mentioned before we will not be doing our normal annual shareholder meeting since we're in the middle of the move, so we'll just do it at our Goodwin office here in LA. So won't have the opportunity for shareholders to ask those questions, so that was important to answer them on today's call. So I appreciate everybody taking the time. I'll be very brief in closing. Again, a very good quarter. We think it's a quarter we can build on for the year, very happy with the operating expenses; revenue could have been better, but I think it's coming, as you see in the pipeline, up $467 million; the net product orders, up 82% the last 6 months; operating expenses, down 42%, still dropping; loss from ops, lowest in 15 quarters; cash used from ops, the best in 6 quarters; DSOs down; ARs down; FPPs at record levels; sales per employee going up. I mean I think if you look at every metric, we're trending in the right direction. And so the question is not are we going in the right direction, it's how fast can we get there. And so I don't mean to dance around that question, we want to get there as fast as we can. But there are other factors that impact it like subleasing the facility and how fast our distributors take product that they've recently ordered. But we are going to get there. The team is dedicated, and we look forward to the next couple of earnings call and showing you that positive performance. So with that, I'll go ahead and end the call for today. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.