Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the second quarter of fiscal year 2016 ended September 30, 2015.

Capstone filed its Quarterly Report on Form 10-Q with the Securities and Exchange Commission today, November 5, 2015. If you do not have access to this document and would like one, please contact us by email at [email protected], or you can view all of our public filings on the SEC website at www.sec.gov or on our website at www.capstoneturbine.com.

During the course of this conference call, management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to among other things, collection of reserved accounts receivables, shipment of finished goods, benefits from our cost-reduction initiatives, improved operating profits leverage and organizational efficiency, strengthened distribution channels, new product development, implementation of new capital finance business, product reliability, product price increases, growth and diversification of our end markets, performance in light of macroeconomic headwinds and attaining profitability.

Forward-looking statements may be identified by words such as believe, expect, objective, intend, targeted, plan and similar phrases. These forward-looking statements are subject to numerous assumptions, risks and uncertainties described in Capstone's Form 10-K, Form 10-Q and other recent filings with the Securities and Exchange Commission that may cause Capstone's actual results to be materially different from any future results expressed or implied in such statements.

Because of the risks and uncertainties, Capstone cautions you not to place undue reliance on these statements, which speak only as of today. We undertake no obligation and specifically disclaim any obligation to release any revisions to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events.

I will now turn the call over to Capstone's President and Chief Executive Officer, Darren Jamison.

Thank you, Clarice. Good afternoon, and welcome everyone to Capstone's second quarter earnings call.

Joining me today besides Clarice is also Jayme Brooks, our Chief Financial Officer and Chief Accounting Officer. Today we're going to mix things up a little bit.

As we've already pre-announced the second quarter results, I think for this quarter it's more important to focus on the future rather than to dwell in the past. Therefore, I will skip my normal remarks about the quarter and go straight to Jamie and she'll be giving you a brief overview of the second quarter financial results.

And I'll be spending all my time with you today talking about our future strategy and how we intend to get back on track to achieve our revenue growth and improve our bottom line results as quickly as possible. I will then take some questions from our analysts.

But in addition, as you will notice as Clarice said, we will not be referring to any presentation materials in today’s call but please feel free to review our second quarter press release and associated 10-Q as they have many additional details. With that done, I will go ahead and turn the call over to Jamie to discuss our Q2 financial results.

Jayme?

Thanks Darren. Good afternoon everyone.

As Darren mentioned, the second quarter of fiscal 2016 was a challenging quarter for us as revenue came in below our expectations due to continued macroeconomic headwinds, continued softness of the global oil and gas market, related customer shipment of orders from finished goods, and the strengthening of the U.S. dollar which makes our products more expensive overseas.

Revenue for the second quarter fiscal 2016 was $17.9 million, a decrease of 44% or $14.3 million from last year's second quarter revenue of $32.2 million. Product revenue was $11.6 million for the second quarter of fiscal 2016 compared to $26.7 million in the second quarter of fiscal 2015.

We shipped 11.6 megawatts during the second quarter of fiscal 2016 compared with 28.5 megawatts in the second quarter of fiscal 2015. The decrease in product revenue and megawatts shipped in the second quarter of fiscal 2016 over the prior quarter was the result of reduced volume of micro turbines shipped and we had no product shipments to be PC, one of our Russian distributors, continued challenges in the oil and gas market and a shift in customer projects timeline.

Revenue from accessories, parts and service increased 15% or $800,000 to $6.3 million for the second quarter of fiscal 2016 compared to $5.5 million for last year's second quarter. This increase is primarily the result of higher FPP contracts enrollment and micro turbine service work.

Gross margin for the second quarter decreased $1.9 million or 11% of sales compared with gross margin of $5.2 million or 16% of sales for last year's second quarter. This decrease was the result of lower volumes micro turbines shipped and a shift in product mix totaling $5.4 million.

R&D expenses for the second quarter increase $0.8 million to $2.9 million compared to $2.1 million in the second quarter a year ago. SG&A in the second quarter fiscal 2016 decreased $2.8 million or 29% to $6.7 million from $9.5 million in the second quarter of fiscal 2015.

The net decrease in SG&A over the second quarter last year included a decrease of $3.1 million in bad debt expense offset by an increase of $0.2 million in marketing expense and $0.1 million in consulting expense. The operating loss for the second quarter of fiscal 2016 was $7.6 million compared to $6.4 million for the second quarter of fiscal 2015.

Net loss for the quarter was $7.9 million compared with $6.5 million for the second quarter year ago. Net loss per share was unchanged from the prior year $0.02 per share.

Now I'll provide some comments on our backlog accounts receivable and cash flow. Our product backlog as of September 30, 2015 was $104.8 million compared with $172.3 million as a September 30, 2014.

The year-over-year decrease was $67.5 million or 39%. The decrease in backlog includes our decision to remove $52.4 million or 200 units totaling 64.5 megawatts in backlog from BPC to align our backlog with management expectation because of the current macroeconomic climate in Russia and the oil and gas market.

Our FPP service contract backlog at September 30, 2015 was $65.3 million compared to $61.2 million as of March 31, 2015 and $60.9 million at September 30, 2014. These increases reflect our growing installed base of micro turbines, as well as the ongoing efforts of our more mature distributors to sell or FPP service contracts which enable the end customer to achieve a lower total cost of ownership.

Our accounts receivable as of September 30, 2015, net of allowances were $16.2 million compared to $13.1 million at March 31, 2015. Our day sales outstanding or DSO was 82 days during the second quarter of fiscal 2016 compared with 65 days in the second quarter of fiscal 2015.

The 17-day increase in DSO was due to the lower than expected revenue and slower collection of accounts receivable. There was no bad debt expense during the second quarter of fiscal 2016 and the six months ended September 30, 2015.

We recorded bad debt expense of approximately $3.1 million, primarily for EMI, one of our distributors for the Middle East and Africa during the six months ended September 30, 2014. Inventories were $31 million as of September 30, 2015, up from $25.4 million at March 31, 2015.

Inventories increased primarily as a result of finished goods not being shipped. Our cash used in operating activities for the second quarter of fiscal 2016 was $11.6 million as compared to $5.6 million in the second quarter of fiscal 2015.

At September 30, 2015 we had cash and cash equivalents of $10.6 million and $5 million of restricted cash related to our Wells Fargo credit facility for a total of $15.6 million compared to cash and cash equivalents of $32.2 million as of March 31, 2015. Next I'll provide you with an update on the recovery of our two main bad debt reserves.

EMI has indicated it signed a contract to sell the three C1000 they have from their cancelled project in Africa. We expect to disallow them to clear the $2.6 million pass balance in Q4 of fiscal 2015 which has been fully reserved.

This will give us a substantial cash recovery coupled with a large credit to SG&A when the payment is received. BPC made payments of approximately $150,000 during the quarter for spare parts, and a portion of the product that was shipped to them in March.

The portion of this payment related to the product shipped to them in March was recognized as revenue in the second quarter of fiscal 2016. As you may recall, BPC has agreed to payment terms of cash on delivery, has a 50% premium to pay down their past few balance which isn't fully reserved.

With that I will like to turn the call back to Darren to discuss our forward business strategy.

Thank you, Jayme. Jayme said this quarter has been exceptionally challenging, one for our company, our vendors, our employees and our shareholders.

It's particularly disappointing coming out as a strong first quarter that was the second best first quarter in company history. Revenue for the second quarter was substantially below our internal expectations, because of that we ended the quarter with 72 micro turbines or 12.7 megawatts, roughly $13 million of units in finished goods that were not shipped to customers for varying reasons.

The simple answer is though, we had a variety of customer projects that are taking longer to execute than we expected. Today we shipped approximately a quarter of the $13 million from last quarter's finished goods with approximately another one-third expected to ship in November.

I anticipate the balance of the finished goods will be reconfigured to fill other customers planned orders, and is expected to ship in December. In addition, we have pushed out the timing of new raw material deliveries with receipts to make sure that in turn to substantially reduce our overall inventory levels by the end of the fiscal year.

However, accelerating the shipment of finished goods and pushing out of our incoming inventory receipts are not the only corrective actions that we are undertaking to quickly improve our business situation, and help us achieve our goal of reaching EBITDA breakeven despite these challenging macroeconomic headwinds. I want to review with you some of our actions that we have taken recently and plan to take moving forward to lower our operating expenses and regain their revenue momentum despite these headwinds.

Looking back to April, we started at the top. We started at the top by consolidating responsibilities and eliminating three top level executives from the company; all three of these executives were member of my leadership team.

In July with followed our global distributor conference with our distribution partners committing to add over 100 new sales people by Christmas. I'm pleased to announce that we're well on the way to making that a reality.

Over the past couple of months we eliminated total 29 positions here at Capstone which included some full-time and some temporary workers, we seized all hourly overtime wherever possible, we suspended the annual company-wide merit increase, and we converted all cash commissions and cash bonuses to cast on-stock. In late October we cancelled most of the planned CapEx spend for the remainder of the year and the majority of next year.

In late October the management team agreed to voluntarily suspend the executive bonus program and forfeit any unvested executive stock options. Today we're suspending the commercialization of the C250, C270 program so that we can reduce our R&D spend and focus solely on our core Capstone products.

In mid-November, we'll continue to monitor expenses and we'll be finalizing a comprehensive spending reduction plan that will even further reduce our targeted G&A and R&D sales and service spending, and will continue to drive deeper cost savings in the travel, marketing, advertising etcetera. In late November, we expect to finalize Capstone Finance JV business that will finally allow us survive third-party ownership for U.S.

oil and gas customers that do not have the capital budgets but want the product today. On December 8 at PowerGen International we will proudly unveil our new enhanced C1000 products series with new reliability and design improvements targeted specifically at the growing CHP market.

In January we'll affect the product price increase for the U.S. markets only, while continuing our aggressive direct material cost reduction efforts in the next year.

Taking in aggregate, these actions are expected to lower our total operating expenses approximately 25%. Therefore lowering our quarterly EBITDA breakeven level for approximately $40 million per quarter at a 25% gross margin to $30 million per quarter at a 25% gross margin.

The 100 new sales people we added to our distributors, the new Capstone Finance JV, the new C1000 Series product with features focused on the CHP market and improved reliability will all help drive future topline revenue growth, and they will complement our robust and growing aftermarket service business. In addition, our renewed focus on Latin America, Africa, Middle East and Australia is driving new opportunities.

These new opportunities reflected in our second quarter results, specifically in Australia which made up 30% of our overall revenue. To put that in perspective, during the second quarter we shipped nearly as many megawatts of product to Australia as we did during an entire previous fiscal year.

In addition, we recently received orders from Latin America with strong growing business opportunities in Brazil, Colombia, Chile and Ecuador. I recently returned from U.S.

Department of Commerce Trade Winds Trade Mission to Africa and I'm happy to report we're making good headway in Nigeria, Angola and South Africa. The opportunities in Africa are enormous with heavy demands for distributor generation in oil and gas, CHP, and bio gas.

The headwinds we are facing are real and have impacted our largest customer, our largest vertical market, and has also made our already premium priced product that much more expensive overseas. While some companies of our size may have weltered under such heavy economic pressure, I can assure you as I sit here today, we are more dedicated than ever and more unwavering than ever to make this company and its clean and green micro turbine end solutions not only survive but thrive.

The good news is these headwinds we face are cyclical and they will add eventually. However, in the interim we are actively working on new areas of growth, we're also making hard decisions to structure the company, to be sustainable at much lower revenue levels.

The key element in a situation like this is determining the right revenue level. So in doing so we looked all the way back to fiscal 2012 to today.

The average revenue for the company over the last 18 quarters is approximately $30 million per quarter with revenue exceeding $30 million nine times and reaching at least $27 million 13 times. So said in another way, based upon our cost structure with reduced expenses by 25%, we would have been breakeven or close to breakeven 13 of the last 18 quarters when revenue at least hit $27 million or beyond.

Therefore I'm very confident that we can again quickly get back to these revenue levels and reach even our breakeven with our new cost structure. At this point operator, I think I'm ready to go ahead and take some questions from our analysts.

Great, well thank you guys, great participation, I know there is a lot of other earnings call going on, so I appreciate you guys taking the time to be on the call and as usual, very good questions. I guess in conclusion as I look at it.

I really believe that this new cost structure that we can get ourselves into in the next 60 to 90 days, is really going to put us in a great place. I believe that the price increase that we're going to be able to put in place on the new product in April, the 100 sales people we're going to add globally, the new Capstone Finance, the JV we've been talking about, and also the new products.

All these things are going to help us perform and have a more robust revenue and hopefully get that revenue growth back. I look back recently doing a little soul searching, I think last year and this year are the only two years of my career I didn't have year-over-year top line revenue growth, so not a neighborhood I want to live in when we get back to growing the business.

The opportunity is definitely there, we seem to execute better and make sure our products are as good as they can be. I'm very excited about Latin America, very sad about Africa, it was my first trip to Africa, some of our folks go, that's first time I've been there.

We've got some great distributors that are doing a lot of work and the opportunities are huge. We've already got product down there but I think there is a lot more that we can do.

Middle East, Australia we had a great quarter. I think definitely we're going to see some growth and really diversification, so more importantly, we've gone from a business that was very dependent on U.S., Europe and Russia; and we're going to move toward a business that's - Canada, U.S, Mexico, Latin America, Africa and Middle East, Europe, less dependent on Russia, Australia is doing great.

So having lower exposure to high risk countries like Russia but also better diversification in our portfolio customer base will make us more immune to some of these headwinds going forward, and I think they diversifying more to CHP which is actually a bigger market for us than oil and gas, it will be very good. So I think going forward, we can drive higher revenue growth, but more importantly, better quality revenue, more diversified, lower exposure to certain markets.

You're always going to have exposure as a global company but again, I think the more diversified we can be, the more those macroeconomic headwinds will least impact us. Our goal has now changed, we need to get to EBITDA breakeven as fast as possible, it's been long enough.

I know other people in our space maybe have been doing it longer than us but I feel like the time is now. Despite the headwinds we need to cut our expenses, right size the business and get to EBITDA breakeven as fast as possible despite the headwinds.

And then when the headwinds come back, we'll grow even better and headwinds will come back, it's not a matter of which but when, they are cyclical. So I don't think our employees and our distributors because I know they are all in, they are all in both financially and to heart and soul and the technology, it's been a challenging quarter for everybody but I want to thank our shareholders and everybody who participated in today's call.

Again, not great having great news but I think looking forward, we've got the right plan, and the right partners and the right product and we're going to have some good quarters coming up. So with that I'm look forward to talking to everybody after the third quarter.