CPST (CPST) 2020-07-10 Earnings Call Transcript

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. All lines have been placed in a listen-only and there will be a question-and-session following today's presentation. 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 we 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 two 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 three 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 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 four of the presentation. Slide four remind investors of the Capstone positive adjusted EBITDA initiatives of the past two years that are now coming to fruition despite the challenges external headwinds we have faced in the last six months. Those headwinds included vendor parts quality issue, dropping oil prices and the economic slowdown caused by the current COVID-19 pandemic. Let's go and look now at slide five 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 2021. 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 plan. 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 two 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 profitable and more sustainable future. As happy as I am about the projected positive adjusted EBITDA result of Q1, I have to say that I am especially pleased that our total cash and cash equivalents increased $1.1 million during the quarter despite the ongoing significant impact from COVID-19 global pandemic on our business and on our distributors and on our vendors. These results were no accident, as slide six highlights our top four 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 am impressed with our team and the organization and 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 three separate difficult challenges, we achieved our employee health and safety objectives. We continue 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 two 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, we would 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 seven. This is 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 facemasks, gloves, hand sanitizer stations throughout the building. In parallel with these steps, we were also able to continue servicing our essential 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 program. This helped us substantially conserve our cash at a critical time and give us the capability 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 highlighted on slide eight in 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 as you already know we are in Europe and some other areas. With unprecedented global restrictions on travel and business operations, emissions data 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 nine. Slide nine 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 read 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 of projects in the pipeline of our description network. As you can see, this is broken down by geography and Capstone regional sales resource. You can also see our traditional markets like United States and Europe are still strong and we are also beginning to see increased opportunities Latin America, APAC and the Middle East. The global pandemic has delayed many of these project's decision-making processes, but to-date is not causing significant project cancellations, which is encouraging. We continue to expand, nurture and develop our global channel of the market, as you can see on slide 11 which highlights the 559 distributor dedicated employees working in the 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 toward 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 two separate organizations. The first standalone organization, we remain 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 enhance our global branding. The second standalone organization is led by Jim Crouse, our longtime key executive of 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 cost but we will be providing even more resources towards growing our revenue on top of this new extremely low cost structure. Now I would like 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 slide 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 $2.5 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 at close of third quarter of fiscal 2020 and the fourth quarter of fiscal 2019. Please keep in mind that $0.5 million of bad debt reserves were included in the fourth quarter expense related to uncertainty of collections from certain distributors due to the COVID-19 pandemic. Adjusting 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 adjusting EBITDA loss of $2.2 million in the fourth quarter of last year. Lastly, slide 16 highlights the changes in our balance sheet account. And you can see that cash and cash equivalents were $15.1 million as of the March 31, 2020 compared to $16.7 million 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 will turn the call back to Darren.

Thank you Eric. It was 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 two 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 impact of the ongoing pandemic. So what we are 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 what drives gross margin rates, the 22% from last year's 13% with our improvements in the service business, we are looking to drive 15% of our new product revenue from our new Capstone direct sales team, we are looking to continue to expand our rental fleet to a target of 10 megawatts and increase our inventory churns from approximately two currently to six times a year to further improve our liquidity and cash. Obviously, the most important elements of this fiscal 2021 goal 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 are doing against that $10 million target, which we will update on a quarterly basis. Lastly, let's talk about how we are 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 have previously highlighted. These include new non-distributor 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 are not underpricing or overpricing our solutions relative to the value proposition they 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 to our potential customers as they explore distributed energy generation solutions and lastly, sales bundling through our higher attachment rates with our products to include products, product installation and support, aftermarket service and accessories. One of the key is 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 other projects utilizing 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 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 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 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 is 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 would like to the call up for questions from our analysts. Operator?

Excellent. Well, thank you and I appreciate everybody's time today. I know it's been very challenging for everybody during the COVID-19 pandemic and hopefully everybody is safe. We are proud that we have kept our employees safe and continue to do so. We have had that 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 childcare issues. And so it's has 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 have achieved this quarter. I am excited to show folks the final numbers in August when we can go head and present those. But anyway you look at it, year-over-year or quarter-over-quarter, you are going to see dramatic improvements on an EBITDA basis despite lower revenues, which really underpins the improvements we have 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 oil crisis to diversify our business. Oil used to be 80% of our revenue. Today CHP is 54% of our revenue. We have diversified our revenue. We have diversified our geographies. We have improved our reoccurring revenue. You are now seeing the work we have 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 the service contracts for our product that 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. I am excited with what the company has achieved. I am more excited though to see the rest of this year as we continue to see recoveries in our markets. We continue to get our product 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 are hearing a lot about hydrogen. We are 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 a 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 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 realized that almost 40% of the people on 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 are going to vote on green with green. And so we see the future for technology like ours as bright and that we are going to be part of that solution to help people make money with the green products, right. 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 are excited about the future. We are excited to reduce our EBITDA loss by over $10 million coming up. We are excited to get the rental fleet up to 10 megawatts which has been our plan. We are excited to get our inventory churns up and start generating cash on a quarterly basis, especially from working capital and reduce EBITDA. And then the direct sales organization, like I said, if we get 15% of additional business, it will be excellent especially at our higher margin rates. So as I said, we developed a very simple tool. Going forward, we will 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 products will be shipped and customers will accept product during the quarter. So with that, we will go ahead sign off and look forward to talking to everybody in early August. Thank you.

[Operator Instructions]. We will hear first from Eric Stine with Craig-Hallum. Hi Eric, go ahead.

Yes. So it's Aaron for Eric.

Hi Aaron.

Maybe first, you know you have that slide on the distribution project pipeline of $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 moving that forward here?

Yes. No, absolutely. Definitely there is probably two gating factors depending on the vertical it's in. Obviously oil prices drives investment in oil infrastructure. So we said previously, we like the oil prices around $50 a barrel. We are currently at about $40 a barrel. So we would like to 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 are seeing decarbonization of the oilfield. We are seeing folks wanting to reduce flaring of associated gas. So those trends and ESG trends in the oil and gas sector, all that drives to our Capstone products. 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. It 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 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 are expecting more good things through the year there. As I mentioned before, COVID-19, a lot of Europe is trying to rebuild in a greener infrastructure going forward and a cleaner economy. So that's helpful for us. The other areas are a little more challenging. I would say, Latin America right now is in bad shape. Colombia and Brazil have COVID issues that are fairly significant, slowing down business. Mexico, we are expecting a really nice year and they have been hampered by COVID as well. Especially with Mexican industrial manufacturers that manufacture for the U.S. market, they are just unsure on what the economy is going to look like and if there is going to be a second closure in the U.S. or a slowdown. And so we are monitoring that. And so I think revenue growth is really key to us this year. I think we will 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 normal looks like and as oil and gas prices increase, we should see acceleration. We do expect our direct sales group to contribute 15% additional revenue on the product side this year and they have got a pretty good pipeline. You can see here, it's fairly small at the moment. But their pipeline is made of existing customers that already have Capstone product and trying to get them to take on more products and 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. Understood. Thanks for the color. And then maybe second just on the accessories, parts and service line. Margins fell this quarter. Can you just kind of talk about the outlook and kind confidence and maybe just some of the drivers to get that back towards a 40% goal that you have?

Yes. So I think our FPP goal is 40%, our parts goal is north of 50%. 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 are 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 parts reliability vendor quality issue that we had, that has been set aside. So I have spent a lot of time looking at curves, whether it's the COVID-19 curves or the parts quality issue that we had. We are in the backside 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 are projecting 22% this year. So there is going to be 10 basis points improvement in our gross margins. Virtually all that is coming from our FPP in our aftermarket service business. And so we have forecasted this. We have 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 the fiscal year.

All right. Thanks for taking the questions.

No problem. Thank you Aaron.

[Operator Instructions]. Next, we will hear from Colin Rusch at Oppenheimer. Hi Colin.

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

Colin, we haven't closed the quarter yet. But I would say, we are 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 are just working on closing June. So definitely, we are in that $4 million range. And so that would be the lowest OpEx in the 13 years I have 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. We then 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 in terms of availability of components, know timing on things? Any sort of inefficiencies there that you might be able to comment on?

Yes. We have had to, because we are an essential business, we have 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 in Mexico, that was a major issue for us for our Mexican suppliers. And so we have kept the supply chain going. Kirk and his team has done an amazing job. We had no significant part shortages to-date through COVID. At the same time, as I mentioned in my prepared remarks, we have been dramatically slowing down incoming material to just 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. And inventory turns, we are projecting to go from about two in the low case in Q4, up to six 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 flows, can you speak the availability of capital for folks that want to finance projects on a go-forward basis and how interest rates are coming on those deals?

Yes. I think that's a great point and very well-timed. We are seeing more folks looking to do lease options for us and we are 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 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 are 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 project, either leasing or power purchase agreements, is growing. We are also having talks with potential financial institutions that were interested in taking out the Goldman line, which as you remember, Colin, in February of next year is the first point where we can refinance that three-year note without any pre-penalties. So we are about 207 days away from being able to do that. So we are 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.

Perfect. That's incredibly helpful. Thanks guys.

Thanks Colin.

Thank you for your question, Colin: Next, we will hear from Amit Dayal with H.C. Wainwright. Please go ahead, sir.

Thank you. Hi Darren. Hi Eric. Thank you for taking my questions. Hope you are doing good. Thank you. This 15% your are targeting in new product sales, Darren, from the direct sales team, should we view this as something that would be additional to what we may have been expecting from the product side? Or is this going to be blended into sort of these expectations?

No. This should be above and beyond, right. So the goal in separating our sales organization in two groups was that it was basically saying the ongoing work the distributor body is doing, they are mature enough now that we can dial back our support efforts on that outside and then bifurcate that into a second sales organization that can focus more on larger customers, the larger scale rollouts. You notice the cover of our presentation today, that is the Mohawk tile installation down in Tennessee, the five megawatt direct drawing application, CHP installation. And so as we are getting into new customers like Mohawk, like Magna International, like Pepsi, like Marriott because we are now getting to EBITDA positive, because we are getting to a point as an organization we can talk about larger scale rollouts. I think now is the appropriate time to set up a sales team. So we are 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 your 15%, 20%, 25% as the team matures. They are 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 the airplane. We have had to hire three new sales folks without being able to bring them into the plant. And so a challenging time to grow a new sales organization. But the Jim and his team have done a good job to get that going. So that 15% should help drive towards double digit revenue growth, which has been our initiative for a while and we have to make sure we can achieve it.

That's great to hear. Thank you for that. And on the recovery front from COVID post-4Q, has any backlog been canceled? How are you sort of seeing the pipeline that you are 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 will lose those opportunities. We are seeing projects move out and that is part of the reason we have slowed down the incoming material to make sure we match our manufacturing build to customer acceptances. We have seen construction schedules in some places pushed to the right. I think that, some cases we have seen municipal projects that have actually done well and continue to move forward. Other smaller projects have been impacted. It depends on where the project is. If you in the Boston city limits where all construction was halted because the COVID or New York, that's challenging. If you are in more rural areas, you kind of 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 are in. So I think it's really spotty and we have got to look at it on a case-by-case basis. But we are happy to see revenue come back up from Q4 into Q1 with a 20%-plus 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 that growth going to be 5% or 25%? It's just really hard to tell with COVID and if there is a second shutdown or slowdown in the business, what that recovery rate looks like and reacceleration of our revenue.

Right. I understand. Just maybe one last one for me. How much of the fleet is now covered by FPP? Darren, if there is an update to that number?

Yes. Today, we are up to 54% of the eligible fleet under FPP and that continues to be record numbers for us. We continue to have more folks under FPP. We are getting more oil and gas customers under FPP, which has traditionally been a challenge for us. And so I think Jeff and the service team and Jen and Jim and the sales side have done a good job at convincing customers on the value of the FPP. One of the biggest push backs we get from selling the FPP is our balance sheet because essentially we are lifecycle guaranteeing a product up to 15 to 20 years. But that life cycle guarantee is only as good as the company behind it or 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 15or 20 year FPP and you are not solvent two 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 a unprofitable insurance company? So getting to EBITDA positive, I know for some people, maybe 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 the pandemic and terrible oil and gas market and with a product quality problem. So we are proud of where we have 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.

Thank you for that, Darren. Good to see the execution coming through in such challenging times. I will take the other questions offline.

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