Capstone Green Energy Corp (CGRN) 2020 Q4 法說會逐字稿

Ladies and gentlemen, good day to you all, and welcome to your Capstone Turbine Corporation Third Earnings conference call and webcast for the financial results for the fourth quarter and full fiscal year 2020 ended on March 31, 2020. (Operator Instructions) As a reminder, our session is being recorded.

At this time, it is my pleasure to turn the floor over to Mr. Colby Petersen, Corporate Counsel. Mr. Petersen, the floor is yours. Welcome.

Thank you very much. Good afternoon and thank you for joining today's fiscal 2020 fourth quarter and full-year conference call as well as a review of our preliminary fiscal Q1 results. On the call with me today is Darren Jamison, Capstone's President and Chief Executive Officer; and Eric Hencken, Capstone's Chief Financial Officer and Chief Accounting Officer. Today, Capstone issued its preliminary first quarter fiscal 2021 select financial results and will discuss the full year and Q4 2020 results from the 10-K which was filed on June 29 with the Securities and Exchange Commission. As a reminder, we reported preliminary fiscal Q4 2020 results on April 3, 2020.

During the call today, we will be referring to slides that can be found on our website under the Investor Relations section. 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, July 9, 2020. Capstone disclaims any obligations to update or revise these statements to reflect future events or circumstances. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. Please refer to the safe harbor provisions set forth on Slide 2 and in Capstone's filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements.

Please note that as Darren and Eric go through the discussion today, when they mention EBITDA, they are referring to adjusted EBITDA and the reconciliations that are in the appendix of our presentation. I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.

Thank you, Colby. Good afternoon, everyone. Thank you for joining today for a preliminary review of our first quarter of fiscal 2021 ending June 30 and fourth quarter of fiscal 2020 ended March 31, 2020.

First and foremost, as you can see from Slide 3 in today's presentation, our preliminary financial results show us on track to achieve our goal of positive adjusted EBITDA for the June quarter, which is extremely exciting news. While we will not have the final results until our books are closed in early August and our financial review and external audit is completed, the preliminary results indicate an extremely significant improvement when compared to the fourth quarter that ended March 31, 2020, and last year's first quarter ended on June 30, 2019. The significant financial improvements are being driven by the work we have put into lowering our operating expenses in combination with improving aftermarket business margins and a modest rebound in product shipments versus the fourth quarter of fiscal 2020.

Now let's go ahead and turn to Slide 4 of the presentation. Slide 4 reminds investors of the Capstone positive adjusted EBITDA initiatives of the past 2 years that are now coming to fruition, despite the challenging external headwinds we have faced in the last 6 months. Those headwinds include a vendor parts quality issue, dropping oil prices and the economic slowdown caused by the current COVID-19 pandemic.

Let's go ahead and look now at Slide 5, and let me give you some of the highlights from the most recent quarter ended June 30, 2020. Total preliminary revenue for the first quarter of fiscal 2021 was approximately $14.1 million compared to $11.6 million in the fourth quarter of fiscal 2020. This is an increase of 22% as we started to see some improvement in new product acceptances as the global economy slowly started to come back online during the latter part of this last quarter. Preliminary accessories, parts, aftermarket service, FPP long-term service contracts, rentals and distributor support system or DSS revenue is approximately $8 million for the quarter, up 3% from $7.8 million in the fourth quarter of fiscal 2020.

Most importantly, inventory receipts decreased by $2.9 million or 36% to $5.2 million in the first quarter compared to $8 million in the fourth quarter of fiscal 2020 and decreased $9 million or 63% compared to $14.1 million in the first quarter of fiscal 2020. This supports improved liquidity and positions the company for positive working capital in the upcoming quarter.

Also of importance, total cash and cash equivalents as of June 30, 2020, are estimated to be $16.2 million, an increase of $1.1 million compared to $15.1 million as of March 31, 2020, despite the ongoing impacts of the COVID-19 pandemic.

New gross product orders were approximately $5.5 million, and the book-to-bill ratio was 0.9:1 for the first quarter of fiscal '21.

The company received $3.3 million in various financing activities during the quarter as the company focused on liquidity as part of the COVID-19 business-continuity plans.

Overall, I am proud of the Capstone leadership team with all the long hours and the hard work it took to achieve positive adjusted EBITDA milestone that we set forth 2 years ago. But make no mistake, we are not done as this is an ongoing effort and through it all, we still expect volatility from quarter to quarter, but I think we can all agree we can now see a clear path, a clear trajectory for more a profitable and a more sustainable future.

As happy as I am about the projected positive adjusted EBITDA result in Q1, I have to say that I'm especially pleased that our total cash and cash equivalents increased $1.1 million during the quarter despite the ongoing significant impacts from COVID-19 global pandemic on our business and on our distributors and on our vendors. These results were no accident as Slide 6 highlights our top 4 critical short-term goals, which we were successful in achieving all of these goals in the most recent quarter.

Based on our current results, I'm impressed with our team and the organization in how we navigated through a variety of challenges over the last 24 months, including the vendor part quality issue, a very difficult oil and gas environment with low oil prices; and finally, managing through the unprecedented development with COVID-19 pandemic. Despite these 3 separate difficult challenges, we achieved our employee health and safety objectives. We continued to operate our core business. We increased our liquidity during the quarter. We maintained our ability to still execute against our stated adjusted positive EBITDA goal we set 2 years ago.

Adjusted positive EBITDA results remain an ongoing focus and goal in the new fiscal year, but we will now be doing it with a more context of reaccelerating our revenue growth and still maintaining today's extremely tight cost controls.

In order to properly discuss our fourth quarter and the first quarter of 2020 (sic - 2021), we'd be remiss without addressing the global COVID-19 pandemic in a little more detail. Back in mid-March, our first objective was to develop an emergency business continuity plan or BCP as shown on Slide 7. This was a rapid response to both the COVID-19 global pandemic and the ensuing shutdown of the worldwide economy, a plan which we accomplished in approximately 48 hours. We created a safe working environment with fewer employees in our facilities by developing remote working capabilities; proper social distancing procedures; providing face masks, gloves, hand sanitizer stations throughout the building. In parallel with these steps, we were also able to continue servicing our central critical infrastructure customers worldwide at the highest standards, which they require.

In subsequent weeks, we were able to apply for and receive a loan under the Paycheck Protection Program or PPP, pursuant to the Coronavirus Aid Relief and Economic Security or CARES Act. The loan was funded on April 24, 2020, with the proceeds used to support necessarily fixed costs such as payroll, rent, utilities, all in accordance with the relevant terms and conditions of the CARES Act's program. This helped us substantially conserve our cash at a critical time and gave us the capability to reopen as conditions improved. By executing a careful and staggered approach, we expect to have our reopening completed by September 28, 2020.

The pandemic did have some unintended benefits, one of which was to bring more focus and attention on climate issues and on the carbon disaster the world faces if we do nothing to take action. As I highlighted on Slide 8 of the presentation, the global energy markets are changing with many regions and countries around the world using COVID-19 as a rebuilding opportunity to make a green recovery, and it is already noteworthy in Europe and some other areas. With unprecedented global restrictions on travel and business operations, emissions data has shown cleaner air and water over nearly every major metropolitan area of the world.

We need to keep this momentum going by including comprehensive carbon reduction strategies as we rebuild our global economy and critical infrastructure. Capstone is and will be part of that global solution. Achieving our adjusted positive EBITDA goal is exciting, but we now need to build on that foundation of success with renewed focus on our revenue growth strategy based on the continued expansion and maturation of our global distribution channel, and future success for our new Capstone direct sales organization.

If you look at Slide 9, Slide 9 highlights the multiple growth catalysts that support the Capstone business. Despite the current global economic conditions, the majority of these catalysts are still green and not red and support a double-digit growth strategy.

As we shift to Slide 10, you can see that despite the pandemic, Capstone currently has $2.4 billion in projects in the pipeline of our distribution network. As you can see, this is broken down by geography and Capstone's regional sales resource. You can also see our traditional markets like the United States and Europe are still strong, and we're also beginning to see increased opportunities in Latin America, APAC and the Middle East. The global pandemic has delayed many of these projects' decision-making processes, but to date it is not causing significant project cancellations, which is encouraging.

We continue to expand, nurture and develop our global channel to market, as you can see in Slide 11, which highlights the 559 distributor-dedicated employees working in 191 different locations around the world to advance the global adoption of Capstone's innovative green microturbine technology. In addition to our 62 global distributors, we recently announced the formation of a new Capstone direct sales team. If you look at Slide 12, slide 12 highlights the strategy the Capstone direct sales team is using to optimize what we view as a global trend towards low-emission microgrids and highly efficient distributed energy-generation solutions.

The scope of this new Capstone direct sales team is to bring into focus large, global and domestic customer targets that could and should use our energy solutions to roll out across their entire organizations and expand from just a few sites here and there to deployment throughout their entire network. Our strategy is to keep making this happen and not increase operating expenses. To do that, we divided our existing sales and marketing teams into 2 separate organizations.

The first stand-alone organization remains focused on developing and managing the existing worldwide distribution channel, led by Jen Derstine, recently promoted to Vice President of Marketing and Distribution as well as leading all marketing advertising activities to continue to enhance our global branding. The second stand-alone organization is led by Jim Crouse, our longtime key executive at Capstone, who was promoted to Chief Revenue Officer with a laser focus on growing our national account business and long-term rental fleet. Jim is also responsible for focusing on business development, licensing, new product partnerships including the use of new fuels such as hydrogen and methanol to generate carbon-free power as highlighted on Slide 13.

As noted previously, we have a significant opportunity to capture national and international deployment across our worldwide customer base. In our view, success in the sales enterprise will be aided greatly by the focused sales efforts as well as achieving and sustaining breakeven EBITDA, as we need our customers to know Capstone is healthy and stable for long-term relationships. Also, the value of our long-term Factory Protection Plan or FPP service program needs to be backed by a strong balance sheet.

In the new fiscal year, Capstone is not losing sight of tightly managing costs, but we will be providing even more resources toward growing our revenue on the top line for this new -- on top of this new, extremely low-cost structure.

Now I'd like to hand the call over to Eric to discuss the detailed fourth-quarter financial results. Eric?

Thanks, Darren. I will now review in detail our financial results for the fourth quarter of fiscal 2020, which as discussed was negatively impacted by the global slowdown from the COVID-19 pandemic.

Turning to Slides 14 and 15, you can see that the total revenue for the fourth quarter of fiscal 2020 ending March 31, 2020, decreased $5.8 million to $11.6 million compared with $17.4 million in the third quarter, and decreased $10.4 million compared to $22 million in the fourth quarter of fiscal 2019. The decrease in total revenue was primarily due to lower microturbine sales, because of the drop in crude oil prices, and project delays due to the COVID-19 pandemic.

Accessories, parts and service revenue decreased $1.7 million to $7.8 million in the fourth quarter compared to $9.5 million in the third quarter. On a year-over-year basis, accessories, parts and service revenue decreased $1.4 million compared to $9.2 million for the fourth quarter of fiscal 2019. These decreases were primarily due to decreases in parts and accessories, which were also impacted by the decline in oil prices and the COVID-19 pandemic.

Gross margin percentage was 4% in the fourth quarter compared to 15% in both the third quarter of fiscal 2020 and the fourth quarter of fiscal 2019. Gross margin dollars in the fourth quarter decreased to $0.5 million compared to $2.6 million in the third quarter and decreased $2.9 million compared to $3.4 million in the fourth quarter of fiscal 2019. The decreases were primarily due to lower volumes and higher FPP unplanned maintenance costs.

Operating expenses in the fourth quarter were $6 million, a decrease of $0.3 million when compared to $6.3 million in both the third quarter of fiscal 2020 and the fourth quarter of fiscal 2019. Please keep in mind that $0.5 million of bad-debt reserve is included in the fourth quarter expense related to uncertainty of collections from certain distributors due to the COVID-19 pandemic.

Adjusted EBITDA loss was $5 million in the fourth quarter compared to an adjusted EBITDA loss of $2.7 million in the third quarter and an adjusted EBITDA loss of $2.2 million in the fourth quarter of last year.

Lastly, Slide 16 highlights the changes in our balance-sheet accounts. And you can see that cash and cash equivalents were $15.1 million as of March 31, 2020, compared to $16.7 million as of December 31, 2019. And as Darren mentioned earlier, preliminary cash and cash equivalents are $16.2 million at the end of June.

At this point, I'll turn the call back to Darren.

Thank you, Eric. With a challenging and eventful fiscal 2020 in the books and behind us, let's turn our focus to the new fiscal year 2021. As I said earlier, reaching adjusted positive EBITDA in June has long been our goal for almost 2 years, and it looks like we may have actually achieved it despite the pandemic. That said, we still have a lot to do to improve the business and reach our long-term profitability goals.

Because of the ongoing impact of COVID-19, Capstone cannot specifically guide to a positive adjusted EBITDA outcome for each subsequent quarter in the new fiscal year. That being said, as outlined on Slide 17, management has set a more moderate COVID goal of a considerably improved adjusted EBITDA of $10 million year-over-year despite the impacts of the ongoing pandemic. So what we're saying is adjusted EBITDA positive every quarter is difficult to see, but we do see a $10 million improvement year-over-year of adjusted EBITDA.

Additional goals for the new year are highlighted on Slide 18. As you look at the -- at what drives gross margin rates to 22% from last year's 13% with our improvements in the service business, we're looking to derive 15% of our new product revenue from our new Capstone direct sales team. We're looking to continue to expand our rental fleet to a target of 10 megawatts, and increase our inventory turns from approximately 2 currently to 6x a year to further improve our liquidity and cash.

Obviously, the most important element of these fiscal 2021 goals is improving our adjusted EBITDA results by $10 million. Or to put that into perspective, that is a 75% improvement year-over-year despite the pandemic.

Therefore, in order to help investors keep track of our progress, we have developed Slide 19, which we will update quarterly to monitor our progress against this key goal. This is a simple illustration of how we're doing against that $10 million target, which we'll update on a quarterly basis.

Lastly, let's talk about how we're going to grow future revenues. Let's take a look at Slide 20. On Slide 20, I want to point out some of the key factors we see driving revenue growth going forward and which remain key strategic initiatives as we've previously highlighted. These include new nondistributor business opportunities; additional OEM direct sales; new national accounts; expanded product portfolio; continued distribution improvements; and expanded distribution in new geographies like Eastern Europe, the Middle East and Africa; improved customer satisfaction to retain existing customers and expand our business as well; customized products by market and matched marketing campaigns, which we expect will help strengthen the presence in the California market specifically as the upcoming forced power outages caused by the pending wildfires; targeted pricing programs for special national accounts or new national accounts and key customers to make sure we're not underpricing or overpricing our solutions relative to the value proposition we bring; and drive widespread adoption within each major customer.

Turning to Slide 21, slide 21 highlights the improved targeted marketing and branding approach to build awareness of our -- to our potential customers as they explore distributed energy generation solutions. And lastly, sales bundling to our higher attachment rates with our products to include product, product installation support, aftermarket, service and accessories.

One of the keys to growing and diversifying our global microturbine business is the continued growth of our energy efficiency or combined heat and power business or CHP. And these projects utilize -- and other projects utilize renewable fuels. As you can see on Slide 22, our energy efficiency business has now grown to 54% of total revenues compared to 50% of revenues last year. And if you look at the renewable projects, we essentially doubled our business year-over-year. Renewable projects for Capstone are landfill gas, digester gas, animal waste, green waste, renewable natural gas, and biogas from some of the world's largest breweries like Ambev.

As you can see on Slide 23, Capstone is focused on a new, low-carbon renewable future. And as part of our efforts, we currently announced a new 100% renewable project with 247Solar, which should be commissioned later this year. Capstone's microturbines will be used to generate 100% renewable power using concentrated solar energy to expand superheated air across the microturbine. After the completion of this test project or pilot project, we expect additional opportunities from 247Solar.

Our second renewable product is with B+ K, a German company focused on wood-to-waste energy superheated air products. B+ K has been successful in operating a Capstone C65-powered pilot project for more than a year, and is currently moving into commercial sales phase with several projects planned for sales and installation in the back half of 2020.

We are excited to be able to work together with these companies like 247Solar and B+ K to help create a greener tomorrow through a renewable future. We strongly believe in social responsibility and strive to build a sustainable business for ourselves and our customers. We are excited to be able to execute on our 100% renewable initiatives as we see great potential for both renewable fuels and products that can affordably utilize them.

Let's go ahead and turn to our last slide, Slide 24. On Slide 24, we discuss the increasing focus we are seeing on the environmental, social and governance or ESG. The rise in ESG principles, regulations, government policies are creating a strong tailwind for the renewable energy sector globally. There's growing investor interest in ESG investing, which is estimated to be over $20 trillion in assets under management as investors are demanding more corporate responsibility worldwide.

I know this slide has quite a bit of text on it. However, I thought it would be essential to include as it highlights just some of the ESG criteria which Capstone inherently meets as well as our own internal corporate focus on the culture that exemplifies these important principles.

With that, I'd like to open the call up for questions from our analysts. Operator?

(Operator Instructions) We'll hear first from Eric Stine of Craig-Hallum.

Yes, it's Aaron Spychalla on for Eric. Maybe first, you had that slide on the distribution project pipeline, $2.4 billion. Can you just maybe talk about how that compares to the recent past? And then just maybe the outlook for closing some of those here. I know you kind of called out COVID, but just any other gating factors to kind of moving that forward here?

Yes. No, absolutely. Definitely, there's probably 2 gating factors depending on the vertical it's in. Obviously, oil prices drive investment in oil infrastructure. So we said previously we like the oil prices around $50 a barrel. We're currently at about $40 a barrel, so we would like to see oil prices increase a little bit to see faster implementation in the oil and gas sector.

That being said, we are still getting projects. We're seeing decarbonization of the oilfield. We're seeing folks wanting to reduce flaring of associated gas. So those trends and ESG trends in the oil and gas sector, all that drives toward Capstone product. And so as we see oil prices return to more normal levels and stabilize as COVID hopefully improves in the back half of this year, we should see an acceleration of those projects.

CHP is now our biggest market, has been the last couple of years. It's up to 54% of our revenue. Those projects are really just dependent on CapEx cycles.

And so the U.S. is still fairly strong. Europe is coming back online. We had a nice Q1 in both Italy and in Germany and Austria. And so we're expecting more good things through the year there. As I mentioned before, with COVID-19, a lot of Europe is trying to rebuild in a greener infrastructure going forward and greener economy. So that's helpful for us.

The other areas are a little more challenging. I'd say Latin America right now is in bad shape. Colombia and Brazil have COVID issues that are fairly significant and slowing down business. Mexico, we were expecting a really nice year and they've been hampered by COVID as well, especially with Mexican industrial manufacturers. The manufacturing for the U.S. market, they're just unsure on what the economy is going to look like and if there's going to be a second closure in the U.S. or a slowdown. And so we're monitoring that.

And so I think revenue growth is really key to us this year. I think we'll see quarter-over-quarter revenue growth, but how fast that accelerates really depends on how these markets come back. So as the markets reopen post-COVID or whatever the new norm looks like and as oil and gas prices increase, we should see acceleration.

I do expect our direct sales group to contribute 15% additional revenue on the product side this year, and they've got a pretty good pipeline. You can see here it's fairly small at the moment, but their pipeline is made up of existing customers that already have Capstone product and trying to get them to take on more product on a larger rollout. So their hit rate should be a little higher.

Our traditional close rate has been between 10% to 12%, but that really depends on distributors. We have some distributors like our U.S. folks, Cal Microturbine, E-Finity, Lone Star, Horizon, their hit rates are probably higher, Vergent. Some of our newer distributors in other markets outside the U.S. have much lower close rates. So a lot of our effort has been the maturation of the distribution channel to get everybody's close rates north of 10% and closer to 15% to 20%.

All right, that's understood. And then maybe second, just on the accessories, parts and service line, margins kind of fell this quarter. Can you just kind of talk about the outlook and kind of confidence and maybe just some of the drivers to get that back towards that 40-plus percent goal that you've had?

Yes. So I think our FPP goal's 40%. Our parts goal's north of 50%. We did -- we saw margin compression in Q4 as we shipped additional parts kind of in the last like 10 days of the quarter, not knowing whether we were going to be able to keep the plant open. And so we shipped out some FPP parts just to make sure we kept the key customers up and running. And so you should see that normalize in Q1. The impact of the part reliability vendor quality issue that we had, that is beginning to subside. So I spent a lot of time looking at curves whether it's COVID-19 curves or the parts quality issue that we had. We are on the back side of that bell curve on the parts quality, so you should see much better margin rates.

As I mentioned in my prepared remarks, our total margin for the year was 13% last year. We're projecting 22% this year, so that's going to be almost 10 basis points improvement in our gross margins. Virtually all of that is coming from our FPP and our aftermarket service business. And so we have forecasted this.

We've talked about being EBITDA positive in the June quarter and that was because of this quality issue being behind us and the vendor issue being behind us or substantially behind us to where we could start seeing more normal margin rates. So you will see better margins in Q1 in August when we announce them and throughout the rest of this fiscal year.

(Operator Instructions) Next, we'll hear from Colin Rusch at Oppenheimer.

In some of your previous communication, you talked about OpEx dipping down into the $4 million, $4.5 million range for the June quarter. Can we just get a sense of how close you guys came on that front?

Yes. Colin, we haven't closed the quarter yet, but I would say we're around that $4 million level. We may be slightly under, slightly over just depending on where the final numbers come out. But obviously with April and May books closed, we're just working at closing June. So definitely we're in that $4 million range. And so that would be the lowest OpEx in the 13 years I've been at Capstone.

Just to give you some perspective, when I joined the company, the OpEx on a quarterly basis was about $15 million. We then got that down to $12 million and then we got that down to $6 million by consolidating facilities and some other initiatives. And through COVID, we managed to get that down to $4 million.

Perfect. And then thinking about the supply chain and your suppliers coming back up, what are you seeing so far in terms of availability of components, timing on things? Any sort of inefficiencies there that you might be able to comment on?

Yes, we've had to -- because we're an essential business, we've had to provide letters for several of our suppliers who were being forced to close down and make sure that they remained open to manufacture our parts. Especially Mexico, that was a major issue for us with some of our Mexican suppliers. And so we have kept the supply chain going. Kirk and his team have done an amazing job. We've had no significant part shortages to date through COVID.

At the same time as, I mentioned in my prepared remarks, we've been dramatically slowing down incoming material to kind of flip the working capital and to compensate for delays in product shipments. So we will see positive working capital in the second quarter, which should lead to positive growth in our total cash balance next quarter. So that will be something we look forward to.

In inventory turns, we're projecting to go from about 2 in the low case in Q4, up to 6 by the end of the year, potentially a little higher if product revenue comes back faster.

Okay. That's super helpful. And then the final one, just in terms of financing availability for projects, obviously you guys have been involved in that market. But with interest rates down at historic lows, can you speak to availability of capital for folks that want to finance projects on a go-forward basis, and how interest rates are trending on those deals?

Yes, I think that's a great point and very well timed. We're seeing more folks looking to do lease options for us. We're in talks right now with a company to kind of do some private labeling for us for a leasing solution, more of a traditional on and off balance sheet leasing, dollar purchase options. We are also working on some additional Capstone Energy finance partnerships that will help bring some more dollars at a reasonable price. Until we're done with it, I won't mention the price. But to your point, money is very, very cheap. And as we move to EBITDA-positive, the amount of folks that are willing to take Capstone on as a partner and help fund our projects, either leasing or power purchase agreements, is growing.

We're also having talks with potential financial institutions that were interested in taking out the Goldman line, which if you remember, Colin, in February of next year is the first point where we can refinance that 3-year note without any pre-penalties. So we're about 207 days away from being able to do that, so we're starting to have those conversations as well. And I think that money will be sub 7%, and Goldman is currently at 13%, so that would be helpful for us from an interest perspective.

Next, we'll hear from Amit Dayal with H.C. Wainwright.

This 15% you're targeting in new product sales, Darren, from the direct sales team, should we view this as something that could be additional to what we may have been expecting from the product side? Or is this going to be sort of blended into sort of those expectations?

No, this should be above and beyond, right? So the goal in separating our sales organization into 2 groups was -- is that it was basically saying the ongoing work the distributor body is doing, they're mature enough now that we can dial back our support efforts on that side, and then bifurcate that into a second sales organization that can focus more on larger customers, the larger-scale rollouts. You noticed that the cover of our presentation today, that is the Mohawk tile installation down in Tennessee, the 5-megawatt direct drying application, CHP installation. So as we're getting into new customers like Mohawk, like Magna International, like Pepsi, like Marriott, because we're now getting to EBITDA-positive, because we're getting to a point as an organization we can talk about larger-scale rollouts, I think now is the appropriate time to set up that sales team.

So we're targeting 15% additional product sales the first year. I would expect that to grow at least 5% a year, if not more. So we should be seeing 15%, 20%, 25% as the team kind of matures. They are kind of starting from a little bit of a rolling stop and need to get going. Obviously, hard to go see customers when you can't get on an airplane. We've had to hire 3 new sales folks without being able to bring them into the plant. And so challenging times to grow a new sales organization, but Jim and his team have done a good job to get that going. So that 15% should help us drive toward double-digit revenue growth, which has been our initiative for a while, and we need to make sure we can achieve it.

That's great to hear. And on the recovery front from COVID post-4Q, has any backlog been canceled? How are you sort of seeing the pipeline that you were expecting to execute against this calendar year? Are you in a position to capture most of it? Or will we lose some of those opportunities?

I don't think we'll lose those opportunities. We are seeing projects move out, and that's part of the reason we've slowed down the incoming material to make sure we match our manufacturing build to customer acceptances. We've seen construction schedules in some places pushed to the right. I think that in some cases, we've seen municipal projects that have actually done well and continue to move forward. Other smaller projects haven't been impacted.

It depends on where the project is. If you're in the Boston City limits where all construction was halted because of COVID or New York, that's challenging. If you're in more rural areas, you tend to see construction ongoing. I will say during COVID, our growers and brewers are very active and continue to be active. So it just depends on what industry you're in. So I think it's really spotty, and we got to look at it on a case-by-case basis.

But we're happy to see revenue come back up from Q4 into Q1 with a 20-plus percent improvement. We expect to see revenue increase in Q2 over Q1 and really should grow through the year. Where our visibility is more challenging is, is that growth going to be 5% or 25%? It's just really hard to tell with COVID, and if there's a second shutdown or a slowdown in the business, what that recovery rate looks like and reacceleration of our revenue.

Right, understandable. Just maybe one last one from me, how much of the fleet is now covered by FPP, Darren, if there's an update to that number?

Yes. Today, we're up to 54% of the eligible fleet under FPP, and that continues to be record numbers for us. We continue to add more folks under FPP. We're getting more oil and gas customers under FPP, which has traditionally been a challenge for us. So I think Jeff and the service team and Jen and Jim in the sales side have done a good job at convincing customers on the value of the FPP.

One of the biggest pushbacks we get from selling the FPP is our balance sheet, because essentially we are life cycle guaranteeing a product up to 15 to 20 years, but that life cycle guarantee is only as good as the company behind it are guaranteeing it. So getting to EBITDA-positive, we think, and staying there and growing our balance sheet and being a more stable organization should drive higher close rates on those FPP service contracts. Because a lot of customers say, "Hey, it's an attractive offer, but if I sign a 15- or 20-year FPP and you're not solvent 2 years from now, what happens to that money? If I prepaid for repairs, do I get that money back? And how valuable is an insurance policy from an unprofitable insurance company?"

So getting to EBITDA-positive, I know for some people, may be a small step. For us, it's a very large step. This is probably the third-best quarter in our company's history in the middle of a pandemic and terrible oil and gas market and with a product-quality problem. So we're proud of where we got to. I think the next few quarters ahead though are going to be much easier for us as we move past the EBITDA-positive milestone and the parts-quality issue.

Good to see the execution coming through in such challenging times. I'll take you my questions off-line.

Thank you for your question today, Amit. And to our presenters today, we have no further questions waiting from the audience. I'll turn it back to you, Mr. Jamison, for any additional or closing remarks that you may have, sir.

Excellent. Well, thank you. I appreciate everybody's time today. I know that it's been very challenging for everybody during the COVID-19 pandemic. And hopefully everybody is safe. We're proud that we've kept our employees safe and continue to do so. We've had one positive case since our entire time here in California, which is one of the hotbeds. We have been very flexible as an organization with working remotely and folks having to make child-care issues.

And so it's been challenging for everybody. In other ways, it's helped galvanize a lot of the Capstone employees on our mission. And our mission is to be EBITDA-positive, which we believe we've achieved this quarter. I'm excited to show folks the final numbers in August when we can go ahead and present those. But any way you look at it, year-over-year or quarter-over-quarter, we're going to see dramatic improvements on an EBITDA basis despite lower revenues, which really underpins the improvements we've made to the organization on both the cost side of the organization as well as the margin especially in our service contracts and our service business.

We set out after 2015, the oil crisis, to diversify our business. Oil used to be 80% of our revenue. Today CHP is 54% of our revenue. We've diversified our revenue. We've diversified our geographies. We've improved our reoccurring revenue. You're now seeing the work we've done to improve our reoccurring revenue margin rates.

Our product sales are important to us, but mostly important because it grows our service business. If you look at it, between 80% to 100% of our contribution margin every quarter comes from our reoccurring revenue business. So we definitely make more money on these service contracts for our product than we do on selling the product upfront, just because of the inherent technology we have and the cost of our technology compared to lower-tech simpler solutions.

Excited with what the company has achieved. More excited though to see the rest of this year as we continue to see recoveries in our markets, continue to get our products out there in marquee customers, and grow our new direct sales organization as well as some different markets like 247Solar and B+ K as well as hydrogen.

We're hearing a lot about hydrogen. We're getting a lot of interest in hydrogen. Fortunately, we saw the hydrogen opportunity coming a couple of years ago, and we developed a hydrogen injector, which we have patented. We are in the lab now testing a hydrogen C65 running on 70% natural gas, 30% hydrogen with a goal of getting that to 100% here in the next 12 to 18 months. So we do see hydrogen as the fuel of the future.

We see renewable natural gas, which in a lot of cases can be natural gas and hydrogen blended together or natural gas and biogas blended together. We see that as a huge opportunity.

A lot of people don't realize that almost 40% of the people in the planet today have grown up with global warming. And as more of those folks become architects and engineers and consumers and voters and people spending money, they're going to vote on green with their green. And so we see the future for technologies like ours as bright and that we're going to be part of that solution to help people make money with a green product, right? And I think green products are great, but they have to be economically viable. They can't be all government handouts to make them work.

And so we're excited about the future. We're excited to reduce our EBITDA loss by over $10 million coming up. We're excited to get the rental fleet up to 10 megawatts, which has been our plan. We're excited to get our inventory turns up and start generating cash on a quarterly basis, especially from working capital and reduced EBITDA. And the direct sales organization, like I said, to get 15% of additional business will be excellent, especially at our higher-margin rates.

So as I said, we developed a very simple tool. Going forward, we'll show you in the first quarter how much year-over-year improvement our EBITDA is. But the goal of $10 million, we think, is very achievable. Obviously, we want to be EBITDA-positive every quarter that we can, and that will be our goal. But during COVID, it's just very challenging to see clearly how much product will be shipped and customers will accept product during the quarter.

But with that, we'll go ahead and sign off and look forward to talking to everybody in early August. Thank you.