CPST (CPST) 2019-02-08 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation Earnings Conference Call for the Third Quarter Fiscal Year 2019 Financial Results ended on December 31, 2018. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program maybe recorded. And now I would like to introduce your host for today’s program Jayme Brooks, Chief Financial Officer and Chief Accounting Officer. Please go ahead.

Thank you. Good afternoon and thank you for joining today's fiscal 2019 third quarter conference call. On the call with me today is Darren Jamison, President and Chief Executive Officer. Today, Capstone issued its earnings release for the third quarter of fiscal 2019 and filed its Quarterly 10-Q Report with the Securities and Exchange Commission. 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, February 7, 2019. 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 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 provision set forth on Slide 2 and in today's earnings release and 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 I go through the discussion today, keep in mind when we mention EBITDA, we are referring to adjusted EBITDA and the reconciliation can be located 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, Jayme. Good afternoon everyone and thank you for joining today's fiscal 2019 third quarter conference call. Before we discuss our financial results, I’d like to provide you with an overview of the financial highlights for the third quarter as well as a substantial subsequent event. I will then go into our broader business conditions, followed by an update on our four key strategic initiatives. In the third quarter of fiscal 2019, Capstone experienced positive trends from increased revenue diversity, expanded revenue from its new distributor support system program, and launched a newly expanded factory rental program. Capstone shipped 10.3 megawatts across a diverse set of market verticals and geographies. In addition, its highlighted on Slide 5. We shipped 3.6 megawatts to the premium basin in Texas as part of our newly expanded Capstone factory's long-term rental program. And the units can be pictured there on Slide 5 that I mentioned. Therefore, the grant total of deployed microturbines in the quarter was 13.9 megawatts. In addition, we finished the quarter with a solid book-to-bill ratio of 1.3 to 1 compared to .7 to 1 in a year-ago third quarter, which we believe is a good indication of future products revenue growth. Capstone received $1.4 million or 99.5% of the expected funds from its new DSS program and today we announced the potential for approximately 2.4 million in new funding from the second year of this innovative program. However, most importantly, subsequent to the end of the quarter, Capstone entered into a $30 million 3-year term note with Goldman Sachs to replace the company's existing $15 million asset based revolving credit facility to provide further funding necessary for our multiple ongoing growth initiatives. I would now like to provide you with some color on the broader market conditions that Capstone is currently operating in. During the quarter, I had a chance to meet with large number of our customers in U.S., Canada, Europe, Mexico, South America, and the Middle East. In my view, despite macroeconomic and geopolitical issues, our distribution partners and end use customers are all in agreement that they’re bullish on the future of Capstone's opportunities. We are bullish on clean energy adaption, the continued rise of microgrids and the continued rise of behind the meter distributor generation assets. Brent crude oil prices decreased from over $70 a barrel to below $50 a barrel during the quarter, but had minimal impact on our business in the natural resource oil and gas market. Turning to Slide 6. Slide 6 shows our multiple market verticals and some sample Capstone customers. The oil and gas market vertical accounted for 44% of our product shipments in the quarter compared to just 15% in the same period last year and nine months to date the oil and gas business makes up 51% of our product shipments compared to just 27% last year. I believe as long as oil and gas stays above $50 a barrel, we will continue to see strong results from this key vertical. Overall, in oil and gas we're somewhat insulated against the full impact of oil price volatility as our clean and green energy systems provide a clear long-term return on investment or ROI to our customers as they burn associated flare gas which is a way fuel that enables our oil and gas customers to be compliant with tightening emission standards, while simultaneously lowering their energy costs. Nonetheless, overall sentiments and conditions can impact how aggressively our customers spend capital dollars and definitely the timing of new equipment purchases. Despite the continued oil price volatility, we still delivered good results from the sector during the quarter and year-to-date. Specific wins during the quarter, we received a repeat order from a customer in the Utica Shale region. We shipped 3.6 megawatts of rental unit to the customer in the Permian basin in Texas that I mentioned, and received orders from customers in Southern California, the mid-Atlantic region as well as some nice wins offshore in both Malaysia and Brunei. A continued rise of the company in our energy efficiency vertical application spanning across numerous industries and applications, from the new Hudson Yards Manhattan West Insulation New York City which is pictured on the front of our presentation today to multiple low-cost industrial manufacturing plants in Mexico. The energy efficiency protocol accounted for 53% of our product shipped in the quarter compared to 66% in the same quarter last year. As a reminder, this application is driven by solid ROIs for our customers as well as the ability to reduce the carbon footprint and provide energy resiliency or backup power in case of a severe weather event. Let's turn our focus to Slide 7. As you can see from Slide 7, the focus on this vertical with our signature series product is paying off. As we’ve increased our U.S combined heat and power CHP market share, in the 100 kilowatt to 5 megawatt range from 17% to 25%. And we continue to receive high profile wins in key U.S markets like New York, Philadelphia, San Francisco, Los Angeles among many others. In addition, our CHP growth in key international markets such as Australia, Germany. Italy, the United Kingdom, Mexico, Columbia and the Caribbean are all very exciting. This continued strength is evidenced during the quarter as we see CHP orders from our global pharmaceutical company, in California in order from optical polymer manufacturer in Florida, a new order from a luxury resort in Jamaica, and also our distribution partner in Mexico show strong signs of regaining momentum after the country's recent presidential election as received orders for global leader in contract manufacturing, orders for pet food manufacturer, and a plastic glove manufacturer. On the renewable energy vertical side, it's a little light for the quarter. It's like 3% of shipment as the only shipment was a microturbine to parallel landfill in Northern France. Although we do not have any microgrid shipments during the quarter, we did receive several new orders for microgrid applications including nine integrated microturbine for China, utilizing combined heating power systems with board gas compression also during the quarter. Let's turn our focus to business highlights for the quarter. Let's go to Slide 8 and 9. You can see from Slide 8 and 9 the improvements in our operating margins and the continued growth of our aftermarket service business. We closed three new large Factory Protection Plan contracts, totaling 3.1 megawatts with our key distributor infinity during the quarter, and our total FPP long-term service contract backlog now stands at 72.8 million at the end of the quarter. We also had several large FPP contracts pending, that we anticipate closing in the fourth quarter. The current quarter we're in, which could add an additional estimate of 14 megawatts to our growing FPP long-term contract backlog. The upcoming fourth quarter very well to be the first time in the company's 30 plus year history that our service backlog eclipses our product backlog, which illustrates the direction of our business and the aftermarket business continues to grow to improve both our viability and our profitability. In addition, I mentioned our new DSS program which was launched in early 2018, generated 1.4 million of revenue during 2018 calendar year. And this new reoccurring source of revenue could generate an estimated 2.4 million in the upcoming calendar year. However, the biggest takeaway shareholders should get from this three -- Q3 earnings call is a fact that company's management team has been extremely focused on improving the business in areas that we have full direct control, areas that are not subject to or impacted by outsize market forces, or macroeconomic conditions. As highlighted in Slide 10, management has been in focus on reducing direct material costs, increasing aftermarket spare parts margins, expanding long-term FPP contract attachment rates, and developing new creative sources of reoccurring revenue streams by DSS program, a newly expanded factory rental program. These beneficial changes are on top of recent improvements in our operating expenses, consolidation of our two manufacturing facilities and stream improvements at our Lean manufacturing, both Capstone and our supply chain, successful negotiation and elimination of the perpetual carrier royalty, remanufacturing capability addition to our U.K hub. And the ongoing collection of the fully reserved Russian BPC receivable, which was 400,000 in the third quarter. All these internal improvements when added together to drive millions of dollars of improved performance in our business and improve our overall viability despite the ongoing outside macroeconomic factors and geopolitical events. Because the management's focus on what we can control, the business should see improved margins, lower operating expenses, stronger operating leverage and improved cash flow liquidity in future quarters. Now I would like to discuss the quarterly progress on our previously outlined key strategic objectives. Let's go and turn to Slide 11. If you look at our four key strategic objectives: number one is to improve our quarterly working capital, quarterly cash flow and strengthen our balance sheet. The second objective is a double-digit revenue growth through acceleration of our growth global product sales. The third objective is to diversify the company into new markets, new verticals and new geographies. And lastly number four, is increase our service OpEx absorption percentage while driving toward 100% absorption or covering all our operating expenses with our reoccurring aftermarket revenue. Specifically, let's turn to Slide 12. As highlights that during this quarter we continue to improve our quarterly working capital, quarterly cash flow and strengthen our balance sheet. We're proud to report we generated cash of approximately $2.2 million from working capital and net cash used in operating activities was only $2,000. This is the lowest cash used in operating activities in the last three quarters. This included approximately $675,000 of revenue recognized in the quarter from our new DSS program. As I mentioned, collecting schedule payment of 4.000 from Turbine International, as part of the BPC bad debt recovery. Turning to Slide 13. Slide 13 highlights our second strategic objective to achieve double-digit revenue growth. And as previously announced product revenue for the quarter did not meet our long-term goal as it fell short primarily as a result of our rental units. If you recall, we build a fixed number of production slots for our microturbines each quarter, and early in the third quarter we made a decision to allocate four C1000 signature series system production slots to our expanding new factory rental program. The rental units accounted for 3.6 megawatts valued at approximately $4 million in revenue. Additionally, as noted earlier, overall market conditions were challenged by a number of macro issues and created headwinds during the quarter. However, we believe that the conditions improved towards the end of the quarter, as demonstrated by our solid book-to-bill ratio. Despite now reaching our long-term revenue growth target in this quarter, management expects to see both products and aftermarket service revenue, grow and expand in the coming quarters. Let's turn to Slide 14. Slide 14 highlights our third objective. So further diversify Capstone as a new market, new verticals and new geographies, and I believe we did a great job in the quarter on this front. During this quarter, we secured orders from 20 distributors representing 14 countries. Over the last two quarters, I spend time. We are working with our new distribution partners in Peru and Chili and Jamaica, Oman and UAE. As a direct result to these hands on initiatives, we’ve already generate positive results with new product orders, received from Chili and Jamaica and some large pending flare gas opportunities in the Middle East. Lastly, turn to Slide 15. Slide 15 highlights the improvement in our gross margin from a aftermarket service business. The sequential improvement as a direct result of the FPP launch of service contracts. The new expanded DSS program, the new expanded factory rental program. Example of this , its three separate long-term FPP multiyear service contracts I mentioned earlier. representing 3.1 megawatts, these new contracts were up to 15 years of scheduled and unscheduled maintenance coverage and will generate predictable long-term reoccurring revenue, with good margins. The high margin reoccurring revenue at Capstone in their aftermarket business is key to reaching the company's long-term profitability goals. Growth in these areas are the underlying drivers to Capstone's path to achieving a 100% absorption which means the gross margin from the service business covers the operating expenses of the entire organization. For third quarter, the combined gross margin for aftermarket service business which include accessories, parts and service was 36% versus our future target goal of 50%. As highlighted on Slide 16, Capstone is a service driven business with 39% of last year's revenue coming from our aftermarket service business, which turned in 81% of our gross margins. Today I’m proud to announce that we’re expanding our industry leading FPP service offering from the current five and nine year agreements. This new significant expansion of coverage will truly be industry leading and help Capstone become very long-term energy partners with our end customers, as we guarantee lifecycle cost levels other than before. So look for press release on that shortly. Additionally, the recent $30 million Goldman Sachs funding, will allow us to continue to execute our growth initiatives and deliver on the factors that we can control to significantly improve our near-term performance of the business and we look forward to improve results in the quarter ahead. As we again push to reach EBITDA breakeven and beyond. In summary, we experience a number of pushes and pulls in the quarter which we believe we managed quite well, and we’re looking forward to the fourth quarter. Jayme, go ahead with specific financials for the quarter.

Thanks, Darren. I will now review in detail our finance results for the third quarter of fiscal '19. The highlights can be found on Slide 17. Product revenue for the third quarter of fiscal 2019 was $10.1 million, compared to $14.6 million in the third quarter of fiscal '2018, a decrease of $4.5 million or 31%. Our accessories parts and service revenue decreased $0.3 million or 4% for the third quarter of fiscal 2019 to $7.9 million compared to $8.2 million in the third quarter of fiscal 2018. Total revenue for the third quarter of fiscal 2019 was 18 million compared to 22.8 million in the year of third quarter. Gross margin for the third quarter of fiscal 2019 with $2.2 million or 12% of revenue compared to $5 million or 22% of revenue in the year-ago third quarter, a decrease in gross margin of $2.8 million during the third quarter compared to last year was primarily because of lower product revenue and higher unscheduled maintenance activities for FPP contracts and warranty expense. R&D expenses to the third quarter of fiscal 2019 decreased $0.1 million or 10% to $0.9 1 million in the year is the third quarter. SG&A expense in the third quarter of fiscal 2019 increased $0.5 million to $4.6 million from $4 million in the year ago third quarter. Total operating expenses in the third quarter of fiscal 2019 were $5.5 million compared to $5 million in the year-ago third quarter. Net loss for the third quarter of fiscal 2019 was $3.5 million compared with the net loss of $0.3 million in last year's third quarter. Net loss per share was $0.05 compared to last year's third quarter loss per share of $0.01. Weighted average shares outstanding at the end of the third quarter of fiscal 2019 were $69.5 million as compared with $46.8 million in the year-ago quarter. Adjusted EBITDA loss was $2.3 million compared to adjusted EBITDA of $0.4 million in the year-ago third quarter. Adjusted EBITDA loss per share was $0.03 compared to last year's third quarter adjusted EBITDA per share of $0.01. As a reminder, EBITDA and adjusted EBITDA, are non-GAAP financial metrics. Please refer to Slide 25 in the appendix titled reconciliation of non-GAAP financial measures for more information regarding the non-GAAP-financial metrics. Now please turn to Slide 18, as I provide some comments on our balance sheet and cash flow. Cash, cash equivalent and restricted cash were $16.7 million as of December 31, 2018 compared to cash, cash equivalents and restricted cash of $19.4 million as of March 31, 2018 and $18.3 million as of September 30, 2018. Cash used by operating activities for the third quarter of fiscal 2019 was only $2,000 as compared to cash used of $6.6 million for the second quarter of 2019. Accounts receivable balance as of December 31, 2018 net of allowances was $13.3 million compared to $15.9 million as of March 31, 2018 and $16.5 million as of September 30, 2018. Inventories as of December 31, 2018 were $19.5 million compared to $16.7 million as of March 31, 2018 and $16.6 million as of September 30, 2018. Inventories increased primarily as a result of forecast miss [ph] on configurations, vendor transitions, resulted to the safety stock. Accounts payable and accrued expenses were $15.7 million as of December 31, 2018 compared to $13.5 million as of March 31, 2018 and $14.1 million as of September 30, 2018. At this point, I will turn the call back to Darren.

Thank you, Jayme. Before I opened to questions for analysts, I guess, let me go ahead and answer a question I think from everybody's mind. And that’s why Capstone select Goldman Sachs in the new 30 year -- $30 million 3-year debt facility. I will see that something that we’ve never done in the 12 years I’ve been at Capstone, and we spend a lot of time looking at different options and selected Goldman for a multitude of reasons. But the reason we wanted to put some debt on the balance sheet beyond what we’ve already as Capstone need additional capital to support our growing initiatives, including expanding our new higher margin reoccurring revenue rental fleet, putting 3.6 megawatts on the books for rental fleet was obviously challenging for our balance sheet where we were paying off the UTC royalty was challenging facility consolidation. We’ve had a lot of uses of capital that have been good use of the capital and good investments, but have been challenging with our small balance sheet as we definitely want to do something to increase the size of the balance sheet and give us additional liquidity. We evaluated multiple options everything from traditional equity transaction actions to traditional debt and convertible debt. We looked at the aftermarket that we’ve done in the past, the ATM. We found that the Goldman know with a better way to go with a lower dilution solution. And at the end of the day, we think it's a lower cost of capital for the company. After talking to multiple investors, analysts, bankers and our Board of Directors,. the company really believe the Goldman note was not only the lower dilution solution, but at the end of the day lowest cost of capital and gives the cash now that we need to grow the business and avoid any future issues from macroeconomic condition or what’s going on in the market or the politics of geopolitical events. So I think getting the cash now to fund our business and pushes through to profitability made all the sense in the world. Also the $30 million in our balance sheet will help us with larger customers as they look to achieve our goal of double-digit revenue growth. Fortune 100 customers have been challenging for Capstone with our limited balance sheet to allow them to be comfortable doing business with us. Also, new vendors, as Kirk and his team look to achieve significant direct material cost reductions, having a balance sheet helps us most conversations to lower the DMC with our vendors. Obviously, the current ATM that we had has invaluable to Capstone, but at this time we felt it was best to go with the Goldman transactions and frankly put the ATM tool back in the toolbox. So I think debt is always challenging for a non-profitable company. Putting debt on our balance sheet says that we feel very good about the future profitability. Otherwise, we wouldn’t have done it. So we are very confident that all these changes we’ve made and are going to make the company are going to get us back to cash flow positive very, very quickly. So with that, let me open up to questions.

Okay, great. Thank you. I will turn it over.

Okay. Thanks a lot.

Thank you. And this does conclude the question-and-answer session of today's program. I would like to hand the program back to Darren Jamison for any further remarks.

Well, thank you. No, hopefully it was a good session today. I think we have a lot of good questions. Very excited about the business and then where we’re going. I know the quarter from a top line perspective, it looks little disappointing, because the product revenue to get shifted to rentals, but that's actually an extremely important and valuable development. Very excited about where we’re with the business and getting back to EBITDA breakeven as quickly as possible. But beyond that, generating cash to further fund our growth initiative, continue our operating expense coverage heading towards 100%, and all the different things we’ve talked about in the call today. So very excited about talking to folks again in the fourth quarter. Thank you.

Thank you ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Certainly. [Operator Instructions] Our first question comes from the line of Colin Rusch from Oppenheimer & Company. Your question please.

Can you talk a little bit about pricing dynamics as you’ve moved into these new distributors and what's going on with select discounts that you’re making with folks, just in terms of general trajectory on the overall portfolio?

Yes, I think pricing is always challenging. Pricing elasticity in the market is interesting. Obviously, as we move into Asia, it's a very cost sensitive market. I’ve been a little surprised and then Jim can jump in here that the Middle East is a cost sensitive as they are and obviously they’ve got a lot of cash and a lot of resources, but they’re very cost sensitive. I think the U.S., we have more ability to leverage our pricing and to hold our pricing more than in the market. Europe is okay, but we still discount a little bit and Latin America also pushes for discount. So that’s an area though that we’re going to look to work on in the future. I think as our product matures, as our service business shows that it's that much more valuable and beyond anything else in the market, we can demand higher rates. I think you look at fuel cells and other technology, they’re getting a lot higher prices for their technology. So we want to make sure that we try to hold pricing as much as possible.

Okay. Thanks so much. And then in terms of some of the gross initiatives, obviously you’ve got the rental and some of the financing aspects. Are there other areas where you’re investing in terms of CapEx, OpEx, some additional sales resources that we might think about as you look to deploy some capital to enable growth here?

Yes, definitely we are looking to add some more sales resources. We are looking to spend more money in marketing, more B2B events. But our biggest cash outlay will be growing that rental business. We are at about 3.6 megawatts today. We like to expand that to closer to 10. That's going to give us several million dollars a year of high margin reoccurring revenue. I think the other thing we're doing is obviously the distributor support fees are very important to us for cash flow purposes. We’re going to do the largest spare parts price increase in company history, which will help in two ways. Frankly, it will help improve our parts margins, but more importantly, it will make the FPP which we have now raised the price on for years with that much more viable to customers. And so we really want to influence the behavior of our customers and sign long-term FPP agreements. And like I said, we will be announcing shortly new FPP program that we are very proud of.

Great. Thanks so much guys.

Thank you.

Our next question comes from the line of Rob Brown from Lake Street Capital. Your question please.

Good afternoon.

Hi, Rob.

Hi, Rob.

On your FPP contract pipeline that you were sort of alluding to, what’s -- is it multiple customers, is it larger terms or time terms, but -- some color on the FPP pipeline.

Yes, obviously we saw an FPPs from a single C65 up to multiple megawatts highlight the bigger ones, because I think we’ve three large pending projects or contracts that are about almost 14 megawatts. So that allows to drive north of $15 million in future revenue. But no, it's all sizes. I think what you’re seeing is we’re seeing the business has shifted over the years from oil and gas centric to CHP as of CHP units come off warrantee, they’re higher attachment rates than our oil and gas customers. And so the shift in the last couple of years in CHP is now delivering itself or manifesting itself in higher attachment rates and -- than faster growth in the FPP, which is all very positive. That being said, we are also getting more traction in the oil and gas markets as we continue to raise spare parts pricing. I had some oil and gas customers already unhappy with me that our spare parts pricing, this newest price increase will make me more unhappy and I don’t think it's fair, but fair is a weather condition not a business condition. So we really want to push as many of our customers as possible to join FPP and really become our partners.

Okay. And then in the rental market, is that -- how is that developing? Is it primarily -- you talked about the Permian energy and Permian market or do you see kind of other opportunities out there and what kind of drives that growth?

Yes, I think definitely we are seeing oil and gas is being the primary market for the -- I’ve Jim and let him jump in here.

Yes, I agree. Oil and gas, Permian, Bakken, Marcellus, those are three areas where we get a lot of requests and or interest from rental. Also areas where we’ve good distributors that can help deploy and support the product once it's there.

Thanks, Rob.

Thank you. Our next question comes from the line of Amit Dayal from H.C. Wainwright. Your question please.

Thank you. Hi, Jayme. Hi, Darren.

How are you doing, Amit?

This FPP contract that you’re expecting, the 14 megawatts is this a shift out from the prior quarter. I think there were expectations of around 25 million being added in the previous quarter. Just want to make sure you’re talking about the same thing over here or if things have changed on this front?

Yes, let me let Jeff Foster answer that one, so that I can put him on the spot.

Yes, sure. So to answer the question directly, a number of these FPP opportunities are opportunities we’ve been working for the last three to four months. Some of them we expected earlier. They’ve been delayed for a number of reasons. I think there's been a bit of a slowdown in the oil and gas market that’s caused people to delay these awards, but they’re now starting to come in. So these are the ones that we refer to previously.

Understood. And then in relation to the new Goldman note etcetera, primarily potentially being used to support the rental business. If this accelerates for you in terms of how you are thinking it will, will you need to go back to the capital markets in some fashion to support this growth like how do you -- how does it grow from here. I just wanted to see if it's going to be organic or you’re going to have to rely on outside funding?

No, it's a great question. I think if you look at the things we've done recently the new increase in the service payment, the new spare parts price increase, we’ve got some recoveries and turnaround in the California market from our distributor change out we did recently. We will see margin improvements in our FPP business plus expansion of that business. The new [indiscernible] facility rolls off with Jayme in September, so we will get that released. Obviously, new rental units that we have in place are generating several hundred thousand dollars per quarter. And then we have the relief from the UTC royalty. So if you take kind of all that basket of opportunities together that’s going to take a huge cut out of our negative operating losses. So that’s going to get us very close to breakeven. And so as we add additional rental assets and as we lower our direct material costs, that’s going to push us over into profitability and that will help us to organically fund some of this growth. And so long answer to a short question, but I do believe that if kind of weighed into the water and not go too quickly, we can cash flow using the Goldman Sachs money plus our own organic cash, I think we can grow the business at a reasonable pace without too much additional equity.

Understood. Just one final one for me. You commented you work towards like sort of a fixed number of production slots. So the sequential drop in revenue was it because of this? How do you plan to sort of work around this and potentially overcome this issue going forward?

Yes. I mean we definitely have a fixed number of production slot, so when I take four C1000 slots and turn those into four rental slots, that goes from being cash up front to cash over the next year in monthly rental payments. So there's definitely a timing difference and a revenue difference, but from the business it's the right thing to do because it's giving us higher returns, better revenue. In this case of 3.6 megawatts went into a new customer, there was a very large oil and gas customer globally. We haven't penetrated it before, so getting a new customer into our technology is worth it. And so short-term it's challenging, because it impacts our product revenue for the quarter. Frankly, it pretty much cost the leadership team their bonus for the year, because we’ve a bonus tied to revenue, but it’s the right thing for the business. And so we made the right choice going forward that’s what we’re going to do. So there maybe quarters that if we do a large amount of new rental equipment that will impact our products revenue, but again overall from a profitability standpoint its absolutely the right decision.

And we are looking to deploy those [indiscernible] this last quarter in a sense that it won't be large of an impact in any one particular quarter that we are trying to spread that out.

Yes, absolutely. This is an opportunity that we have for four units in one quarter as Jayme said, that’s not normal. We would like to do one a quarter, would be a much more sustainable pace. But again, telling customers know especially of that size is not always easy to do.

And I guess this is sort of a new development in the story where we just might have to attract rental production capacity versus sales production capacity and then utilization levels, I guess, for each of these units.

Yes, at the end of the day though you don’t take revenue to the bank, you take cash and earnings. And so we’re really focused on generating cash and earnings. And so as much as revenue from product sales are sexy, I think at the end of the day we want to be profitable, not to get to [indiscernible] but our vendors are making money, making our parts for us. Our distributors are making money installing our world class products and our customers are saving money operating them. And the only person in this chain does not making money is Capstone and so that they needs to end and we need to make money, so that’s our primary focus.

Understood. Thank you, guys. That’s all I have.

Thank you.

Thank you. Our next question comes from the line of James Jang from Maxim. Your question please.

Hey, good afternoon, guys.

Hi.

So just going back to the, I guess the oil and gas sector, oil prices are coming down. What’s plan B or what’s the pivot if the oil and gas like it doesn’t -- the oil and gas didn’t pick up as you guys expected?

Yes, I will let Jim jump in here as well, but I think first of all, I would say our products, as I said in our prepared remarks, we really lower the operating expenses of oil and gas customers. So in -- logically intuitively you would think that they still buy our products in a low oil price market. I think flare gas is a big key. There is more pressure to take that flare gas and to burn it in the microturbine, not add to global warming. I think you all have been watching in the news lately. I think it's fourth year in a row that we’ve seen temperatures in the planet go up. Flare gas is a big piece of that. And so as oil and gas customers are pushing for new ways to lower their emission standards, we hope they keep buying our microturbines even in lower oil and gas markets. That being said, though, the diversification is key and we learned our lesson a few years ago when we were very heavy oil and gas. So today, it's one of our biggest segments where we are very big in CHP or expanding in renewables, we are expanding in our microgrid space and in other areas. And so we look to diversify the business both by geographies and verticals. Look at some of our brothers in the fuel cell industry and most of them have three or four markets. One vertical, and I think that's very dangerous. So if you lose one market, you lose 25% of your business. So I think we are very proud of what we have done to diversify all the [indiscernible] oil and gas is something we continue to watch, but I think we are in pretty good shape there. I don’t know Jim, if you want to say a couple of comments about flare gas?

Yes. I think a lot of our oil and gas business is non-drilling. It's more production, gas transmission, and in flare gas as Darren mentioned, it's got -- its a growing segment and one that we’re seeing interest globally, not just in the Permian or the Bakken, but Middle East, Africa, and we are starting to see some additional life in our markets in Russia. Even though it's unpopular as they may be, there is no activity around the business there.

So -- but -- like is there a plan B, though? Like, I know you guys are expanding to CHP, but is there another sector or segment we should be keying on if, let's say, oil prices do collapse further and let's say additional pipelines for transport the associated gases come through, what is like plan B that you guys have?

No, I think again, CHP, microgrids, renewables are plan B, C and D. I think that's part of it. I think that rental market also helps, I think a lot of customers and lower oil times when they’re less sure, the rent product into the buying product, so I think be able to play in that market that also helps a little bit as well. So I think it's -- there is no simple answer. It's really a approach of a diversified portfolio.

Okay. And final thing is just to go back to the note, so it seems -- fiscal Q1 of '22 you have a $30 million payment due, right? So you think you will be able to cash flow that out instead of going to the markets?

No, so I think with -- we started working with Goldman back in June, I believe, Jayme. We talked to probably 15 other banks that are interested in Capstone and our business. Most of them were not comfortable with where we were as a business and or we like the Goldman terms better. And so I think as we move forward, we will continue conversations with those other 15 banks that either we couldn't qualify or we didn't select. As we get cash flow positive, the real goal would be to kind of refinance Goldman out with some of the lower cost of capital, more traditional lender. That being said, Goldman is told to [indiscernible] continuing relationship as our business grows and they like our business, and so I think that's obviously opportunity there as well.

And we can do that within 24 months as well.

Yes, correct. Yes, so I guess maybe, Jayme talk a little bit about this specific note or so.

Yes, I mean, as we had in the press release, we have -- its a 13% interest note, firm note that’s due in 3-year. So with that we have -- we can pay early up to 24 months.

And then the -- as far as the covenants kick in, in 18 months?

Yes, covenants kick in 18 months and we have a certain minimum cash balance now that we will drop in a year.

So I think it's really designed to help us get through what we need to right now from a capital standpoint to grow our business.

Okay. And the $6 million restricted cash, that gets released, correct?

Say it again.

The restricted cash, that’s released now?

Absolutely, yes.

Yes.

Okay.

Yes, we paid off that facility.

Yes, so that’s [indiscernible]. Okay, great. Thanks, guys.

Thank you. [Operator Instructions] Our next question comes from the line of Eric Stine from Craig Hallum. Your question please.

Hi, everyone. Just a few from me. Just on the supply chain I know you’ve had some things underway here for some time, trying to get suppliers under long-term agreements. And I also know over the last couple of quarters you have had some disruption there trying to find second sources for keyboards. So maybe just an update on all of that and how we should think about some of this going forward?

Yes, absolutely that’s been a major area of focus and Kirk has done a great job at lean manufacturing, consolidating our facilities and doing all the wonderful things he has done in the last 18 months, but his number one goal going forward is DMC reduction and improving our supply chain, so I will throw him the ball, let him talk about a little bit.

Yes. As Darren alluded to it a little bit earlier in the call, but Goldman Sachs situation definitely helps with that with supplier negotiation being able to consolidate and integrate. A lot of the value stream into a few select suppliers that want to be partners with us and do away with some of the suppliers that necessarily haven't been the best partners with us. But it's mainly focusing on the big cost items, the parts that are going to get us margins in aftermarket that we are really focused on right now.

I think if you look at it, we have got a couple trouble suppliers, we got some suppliers with quality issues, and suppliers that have leveraged as in the aerospace industry is heated up and hit us a big price increases and they’ve given up change this year to exit all those suppliers that have been bad actors as well as attract some new suppliers that were currently qualifying. And so I think there is a lot of good work we are going to do there. Kirk's being shy on how much he can generate in DMC reduction, but I think it will be very significant this year.

Okay, got it. And maybe just one last one for me, just more a big picture. I mean, you had a fair amount of distributor turn over in the last couple of years, but the diversification that you are seeing right now I mean its greater than I can remember over many years. Just wondering what you attribute that to? I mean, do you think that this is a case of those distributors really maturing, is a product capability that maybe you didn't have in the past, I mean just some thoughts there, because it is notable.

Actually keep going. You sounded great. I think it's all those things. It's -- Jim has a model distributor program, trying to work 70 distributors worldwide and getting all of them to do -- sell all of your products in all of the verticals, in all the applications is very challenging. We continue to improve our processes. I think part of our distributor support system program is to make training free and so kind of like the all-you-can-eat bar now distributors instead of skimping on training are overeating on training, which is what we want. We want to get them up to curve as fast as possible. And so it's really been a focus, I mean, again its [indiscernible] around this a long time, it's been a lot of effort. But if you said its most diversified it's ever been. I mean, Caterpillar, GE, comments, their distributor network is third-generation and 100 years old. And it just takes time to develop them, but I think we are seeing an acceleration in the maturation of our distributors and getting distributors to pay us money to help them, shows that the distribution network is maturing and frankly that they value our business. And as I said it in our prepared remarks, we got 99.5% of what we built collected on the DSS program. What does that tell you? That tell you the distributors value of the business and they’re willing to pay us to stay in the business. So I think that’s all very -- bodes very well for the future.

Thank you.

Thank you. And our next question is a follow-up from the line of James Jang from Maxim. Your question please.

One last one, guys. So the -- can you give us any insights into the book-to-bill ratio as of today?

For the quarter?

Yes, so far. Is it a --is this still trending above one?

Yes, we don't look at it on the interim quarter. I don’t know, Jim, if you have anything -- you want to say anything about the fourth quarter, but I think, yes, we typically don't run those kind of numbers, so it will be real hard for us to give you any kind of meaningful answer.

Okay. All right. Thank you.