Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the second quarter of fiscal year 2017 ended September 30, 2016.

Capstone filed its quarterly report on form 10-Q with the Securities and Exchange Commission today, November 09, 2016. 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 and Litigation Reform Act of 1995.

These statements relate to, among other things, a collection of reserved accounts receivable, shipment of finished goods, benefits from our cost reduction initiatives, improved operating leverage and organizational efficiency, strengthened distribution channels, new product development, and the success of signature series product, compliance with government regulations, increased sales in Russia, implementation of the Capstone Energy Finance business, growth of our aftermarket service, business 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, intends, targeted, planned, and similar phrases.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties described in Capstone's Form 10-K, and 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 revision 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. And welcome everyone, to Capstone's second quarter earnings call.

Joining me today besides Clarice is Jayme Brooks, our Chief Financial Officer and Chief Accounting Officer. As mentioned during the call, we continue to use our slide deck which has been recently put up on our website under Investor Relations.

During the quarter, we continue to focus and execute on our three-pronged business profitability plan and progress on many fronts, although the quarter is now without its challenges. Our three-pronged business plan is outlined on Slide 3, and consists of first reducing our breakeven from approximately $160 million in annual revenue at 25% gross margin to approximately $100 million in annual revenue at 25% gross margin.

The key to doing this is reducing our business expenses by 35%. Second, is developing new products and services to derive renewed revenue growth opportunities.

And last but not least is the launch of Capstone Energy Finance joint venture to capture lost orders because of lack of customer capital dollars for project financing. So, let’s start with the first initiative of the three-pronged plan, lowering breakeven levels by reducing business expenses 35%.

I’m proud to report we made significant progress again this quarter towards this goal, as we reduced our operating expenses by 33% to $6.4 million over last year’s levels, which improved our net loss over last year’s second quarter by 25% to $5.9 million despite significantly lower product revenue levels and lower gross margins compared to last year. I cannot over-emphasize how critical it is to lower our breakeven level by reducing our overall business expenses.

Slide 4, gives you a graphic illustration of our success in reducing our overall business expenses by 29% or $4.3 million since the starting point of the initiative back in Q1 fiscal 2016. As significant as these cost reductions have been, we will continue to look for new ways to further lower cost, improve business efficiencies and essentially lean out our business.

The next initiative on our three-pronged business strategy is developing and driving new product and service revenue growth opportunities. Obviously this is one of the initiatives where we did not show a lot of progress in the second quarter as product revenue for the quarter was well short of our internal expectations.

However disappointing as this may have been during the quarter, it does not mean we’re not making progress on this initiative. The product revenue shortfall was the result of a delay in three customers in CHP projects into our fiscal third quarter from our second quarter.

As you note on Slide 5, the energy efficiency or CHP market was a record 81% of our product revenue for the quarter and is up to 61% of product revenue for the fiscal year. This is positive news as it lowers our alliance on the natural resources on the gas market but negative news in other ways because energy efficiency market growth creates new challenges in our business.

The energy efficiency market is less predictable from a project timing standpoint than larger oil and gas projects, which tend to be more reliable and more predictable. Really a more preferred product mix near-term especially will be 40% energy efficiency or CHP, 40% natural resources or oil and gas and 20% renewable projects.

Whilst positive that we continue to diversify our business, and to be less dependent on oil and gas market, it’s going to add increased volatility and complexity to our business towards our additional management in the future. However, I do want to underscore that even with the increased unpredictability of our quarterly revenue, our pipeline of projects remains very strong, I remain very optimistic about our future growth.

In fact research and markets recently reported that expects global microturbine market to grow at a compounded annual growth rate or CAGR of 21.3% during the years between 2016 and 2020. And as the leader in that industry, we remain optimistic about our future and our growth strategy.

Really, if you look past the short-term product revenue mix for the quarter, you can really see all the other things we’re doing to improve our future product and service revenue growth as part of this three-pronged business strategy. As you may recall, we announced a new signature series C1000 product back in December with a major focus on energy efficiency or CHP market, with its integrated heat recovery module and several other CHP focused design features.

As shown on Slide 6, the C1000 signature series generates 1 megawatt of electrical output and 1.5 megawatts of CHP or heat recovery output, all in 8-foot by 30-foot power plant in the box, unmatched in the industry. Next, Capstone announced launched of the C200 signature series product.

The all-new signature series product which now includes the C200, the C600, the C800 and the C1000 configurations, all have the option for the integrated heat recovery module and also other features included in the two stage air filtration, improved enclosure designs, lower noise levels, 12-year marine grade paint, a new system control platform that easily integrates into customers’ building management systems for effective on-site CHP. Slide 7, outlines what we’re doing to produce new sources of revenue.

One key element of that initiative is rebuilding our business in Russia. We’re rebuilding the business for continuing to work with our Russian distributor BPC Engineering but also adding some additional distribution resources in the region.

Slide 8, highlights the substantial rebound in BPC’s business in both revenue and more importantly bad debt recovery which both are dramatic and positive. A significant part of the Russian market rebound was driven by several released orders from BPC and we expect several more to be released in the third quarter.

At this increased rate, I believe that BPC will again be a top-five distribution partner by the end of our fiscal year in March. Also it’s important to note that we received our first order from one of our new Russian distributors TB Energy for C800 signature series and we’re developing a very robust pipeline of projects with new partners in the Russian region and the CIS states.

Turning to Slide 9, slide 9 highlights the product shipments by both market and vertical, fueled by this rebound in Russia, almost 70% of our product revenue during the quarter was from Europe and Russia, with the U.S. and Canada 12% and Asia and Australia also at 12%.

The U.S. market I have to say was particularly soft as we experienced continued volatility in the global oil and gas market but additionally we think some of the softness can be attributed to the presidential elections and associated uncertainty about the U.S.

economy. Like everyone in the U.S.

we’re hopeful for a rebound over the next couple of quarters, now that the election is finally behind us. In addition, as part of this initiative, we continue to diversify our markets and verticals and our geographic presence.

As you can see, by turning to Slide 10, we’ve recently received orders from California, Mexico, Russia, China and the Republic of Uzbekistan. Turning to Slide 11, you can see the improving geographic diversification of our $923 million rolling 12-month opportunity pipeline from our sales force.

We are commissioning our first products in new territories like Saudi Arabia, Qatar, Libya, South Africa, India, Indonesia and Malaysia. I believe that once these new markets see our unique products in action, and our distributors can point to successful installations, the interest in our market turbulence will grow and these new markets will continue to add to our top-line revenue growth.

Additionally, we’re hopeful that new large customer opportunities that we’ve already identified previously in Colombia, Ecuador and Indonesia could substantially further accelerate revenue growth, above and beyond our traditional markets, previously mentioned as well as the U.S. and Mexico, Europe, Russia and Australia.

Growing our product revenue is very important, but it’s also critical that we continue to grow our aftermarket service business. If you now turn to Slide 12, slide 12 highlights the continued growth and success of our aftermarket service business which we anticipate will grow more than 5% this year, despite the product drop.

The heavy concentration of energy efficiency in CH business is actually good for our FPP service contract business as we tend to see higher attachment rates in the energy efficiency business compared to oil and gas. That drives additional FPP service revenue and contract backlogs despite the drop in product shipments that reach $72.7 million, almost $73 million at the end of the second quarter.

This trend should continue as we offer new FPP contracts, offer new extended warranty products and new signature series retrofit kits to all our series packages in the field. The third strategic initiative we have part of our three-pronged profitability plan is the successful launch of the Capstone Energy Finance joint venture, to capture lost order due lack of customer capital dollars or financing options.

Do you remember, we formed Capstone Energy Finance joint venture or CEF back in December to provide power purchase agreements or PPAs exclusively for projects that utilize Capstone’s proven microturbine technology to deliver low-cost clean reliable energy to customer’s facilities with zero upfront capital cost. This quarter, I’m extremely proud to announce a partnership with Sky Capital, a wholly owned subsidiary within Sky Solar Group, for $15 million in project capital and an option for an additional $100 million to support the second phase and third phase of Capstone Energy Finance joint venture growth.

CEF currently has a pipeline of $40 million in well qualified projects, and we expect it will grow quickly beyond our ability and C-capital. Slide 13, 14, shows the highlights and details of Capstone Energy Finance joint venture.

Next, in order to provide growth capital for our distributors, yesterday we took our financing pronged to a further step when we announced that we have partnered with Acresis to put together a product financing program for Capstone distribution partners to provide much needed working capital and growth capital for our well qualified distribution partners. Acresis is in the business that’s helping small business founders and owners achieve personal and professional goals from strategy deployment to fund raising, from detailed planning to sustainable acceleration growth for realizing a successful liquidity event to just overall wealth management.

RSP Systems and Capstone distributor in the greater New York area and Connecticut with the support of Acresis recently qualified for initial $3.5 million credit facility for Bridge Bank based on current sales of Capstone products to quality end-users in New York area. RSP Systems was selected by Capstone as the pilot distributor for this new product financing program with Acresis as their one of the largest and fastest growing CHP markets in the world with solid energy efficiency incentives, low-cost natural gas that’s available and high electric utility rates.

Lastly, in order to execute our three-pronged profitability strategy, we successfully completed a $7.5 million capital raise in October that netted a $6.8 million to working capital. This equity was needed to keep our balance sheet solid as we look to return the company to high growth and to better position us for some of our larger CHP and oil and gas sales opportunities while moving down the path to profitability as quickly as possible.

Slide 15, highlights these and some other recent developments of the quarter. During the quarter we continue to move ahead with our product development roadmap with new patented multi-stage lean vaporizing, premixing fuel injector providing ultra-low emissions to meet the United States environmental protection agency or EPA tier-4 requirements for power generation.

Under this new program, exhaust emissions will require to decrease by more than 90%. We developed new partnerships with the Department of Energy or DOE to provide funding in the amount of $335,000 for one year to Oregon National Laboratory to help Capstone conduct hydrogen and synthetic fuel or syngas testing on Capstone C65 and C200 microturbines, at a no out of pocket cost to Capstone.

In addition, we continued progress on our flexible fuels program with recent successful testing on butane at a facility here in California. With that, I’ll now turn the call over to Jayme Brooks, our CFO to go over the specific financial results for the quarter.

Jayme?

Thanks Darren, good afternoon everyone. I will now review in more detail our financial results for the second quarter of fiscal 2017.

As showed on Slide 16 and 17, the net loss for the second quarter of fiscal 2017 decreased 25% to $5.9 million compared with a net loss of $7.9 million for the same quarter last year. Net loss was $0.19 per share for Q2 of fiscal 2017 compared with a net loss of $0.48 per share in Q2 of fiscal 2016, which is a decrease of 60%.

The Q2 fiscal 2016 net loss takes into account the 1 for 20 reverse stock-split that was affected in November 2015. The decrease in net loss and net loss per share during the second quarter of fiscal 2017 is primarily because of our cost reduction initiatives, which resulted in a 33% decrease in operating expenses from the same period last year.

In addition, the net loss during the second quarter of fiscal 2017 included bad debt recoveries primarily from BPC Engineering, one of our Russian distributors which, was previously reserved during fiscal 2015. Revenues for the second quarter was $15 million compared with $17.9 million in the year ago second quarter which is a decrease of 16%.

Our revenue was again negatively impacted by the volatility of the global oil and gas market, a strong U.S. dollar and ongoing geopolitical tensions in Russia, North Africa and in the Middle East.

Our product revenue for the second quarter of fiscal 2017 was $8.2 million compared with $11.6 million in the year ago period, a decrease of $3.4 million or 29%. We shipped 8.2 megawatts during the second quarter of fiscal 2017 compared with 11.6 megawatts in last year’s second quarter, a decrease of 3.4 megawatts or 29%.

As we continue to make progress in diversifying our market verticals, the energy efficiency market grew to 81% of our product revenue for the second quarter of fiscal 2017, with renewable energy at 11% and oil and gas at 8%. This compares to last year’s second quarter when energy efficiency was 68% of our product revenue, oil and gas was 26% and renewable energy was 6% of product revenue.

Revenues from accessories and parts increased $0.2 million or 6% to $3.3 million from the second quarter of fiscal 2017. The increase in revenue from accessories and parts was primarily due to an increase in sales from microturbine parts.

Accessories and parts were 22% of our revenue this quarter, compared with 17% in last year’s second quarter. Service revenue for the second quarter of fiscal 2017 increased $0.3 million or 9% to $3.5 million from $3.2 million for the same period last year.

This increase in service revenue was primarily a result of our growing installed base and the market acceptance of our FPP offering. Service revenue was 23% at this quarter’s total revenues compared to 18% in last year’s second quarter.

Gross margins in the second quarter of fiscal 2017, was $0.7 million or 5% of revenue, compared with gross margin of $1.9 million or 11% of revenue in the year ago quarter. The declining gross margin was primarily the result of a shift in product mix, as well as an increase in warranty expense, due to accommodations in the period, timing of warranty claims and benefits in the quarter a year ago.

These reductions in gross margins were partially offset by variable production in service under manufacturing expenses. We continue to implement initiatives to improve gross margin.

To do this we have been reducing manufacturing overhead and fix the direct material cost as we continue to strive to achieve profitability. We also recently appointed a new VP of manufacturing, trusted with creating operational efficiencies and reducing costs.

And we look forward to his contributions to our organization. R&D expenses for the second quarter of fiscal 2017 decreased $1.5 million or 52% to $1.4 million from $2.9 million in the year ago second quarter.

The reduction in R&D expense was a result of decreases in salaries, supplies and consulting expenses that was offset by a decrease cost sharing benefits. As part of our initiatives to reduce operating expenses and achieve profitability, during the second quarter of fiscal 2017, we reduced the number of active research projects, which included the development of the C250 microturbine.

We expect R&D expenses in fiscal 2017 to be lower than in fiscal 2016 as a result of our cost reduction initiatives. We also reduced SG&A expenses for the quarter by $1.7 million or 25% to $5 million from $6.7 million in the year-ago quarter.

The decrease in SG&A expenses included decreases in salaries, marketing, business travel, consulting and professional services. In addition, we recorded bad debt recovery of $0.5 million from BPC in the second quarter of fiscal 2017.

Excluding bad debt recovery, we expect SG&A expenses in fiscal 2017 to be lower than fiscal 2016, primarily as a result of our initiatives to reduce operating expenses and achieve profitability. The loss from operations for the second quarter of fiscal 2017 improved to $5.7 million from $7.6 million in the year-ago second quarter.

Turning to Slide 18, I will provide some comments on our balance sheet, cash flow and backlog. Cash used in operating activities for the first six months of fiscal 2016 was $10 million as compared to cash used of $18.4 million for the first six months of fiscal 2016.

Cash and cash equivalents were $16.1 million as of September 30, 2016 compared to cash and cash equivalents of $16.7 million as of March 31, 2016 and $15.6 million as of March 30, 2015. Each of these balances includes $5 million of restricted cash related to our Wells Fargo credit facility.

Subsequent to the end of the quarter, on October 21, 2016, the close-in offering for combination of common stock and warrants for growth proceeds is $7.5 million and net proceeds is, $6.8 million. Our accounts receivable balance as of September 30, 2016 net of allowances was $12.8 million compared to $13.6 million at March 31, 2016 and $16.2 million at September 30, 2015.

Inventories were $19.2 million as of September 30, 2016 compared with $18.2 million as of March 31, 2016 and $31 million as of September 30, 2015. The increase in inventories from March to September resulted from increases in finished goods of $3.7 million offset by a reduction in raw materials.

Accounts payable and accrued expenses were $12.1 million as of September 30, 2016 compared to $13.2 million as of March 31, 2016 and $25 million as of September 30, 2015. As we can see, despite the lower revenue levels, in a year’s time, we have made significant improvements in our balance sheet and net loss.

Now turning to backlog. Our total product backlog as of September 30, 2016, was $109.1 million compared to $104.8 million as of September 30, 2015.

Backlog as of September 2016 includes the removal of a portion of the TA100 microturbine backlog of approximately $2.4 million for 17 units or 1.7 megawatts. This impairment which occurred during the three months ended March 31, 2016 aligns ourTA100 backlog with management’s decision to limit the production of TA100 systems on a case by case basis for key customers.

Our book-to-bill ratio for the quarter improved to 1.1 to 1 compared to 0.7 to 1 in the year ago second quarter. Our FEP service contract backlog as of September 30, 2016 was $72.7 million compared to $66.5 million at March 31, 2016 and $65.3 million at September 30, 2015.

This continuing increase reflected growing installed base in microturbines as well as the ongoing efforts of our distributors to sell our FEP service contracts, which enables the end-users to achieve a lower total cost of ownership. At this point, I will turn the call back to Darren to talk about the upcoming third quarter and the balance of the fiscal year.

Thank you, Jayme. As Jayme highlighted, you can see that despite the lower product shipments for the quarter, the company made significant progress in almost every other area of the business.

And our focus remains clearly set on executing our three-pronged profitability plan. Obviously revenue push-outs and project delays are temporary, the cost reductions, strategic relationships; new product offerings are all long-term benefits to our business.

In summary, during the second quarter we took further steps to successfully diversify our customer base, our geographic presence while increasing our business in the CHP energy efficiency market through record levels. We substantially reduced our operating expenses instituted cost reductions to further steps toward profitability and made solid balance sheet improvements.

We took steps to support our sales growth initiatives with new products and new services. We developed new strategic relationships with financing options for our distributors and our end-user customers.

We continue to grow our profitable lost market parts and service business and took - look forward to generating new revenue from our developing Capstone Energy Finance business. Overall, it’s not been a temporary push-out to 6 megawatts, which I don’t want to diminish, product shipments, the quarter was very successful.

Looking ahead, we believe we’re well positioned to take advantage of the market opportunities. We also have to realize we still have macroeconomic challenges that we face in ongoing oil and gas market struggles and the strength of U.S.

dollar. We need to continue to reduce our costs, and position our business for new revenue growth with a lower underlying cost structure.

And looking at the third quarter today, shipments for the quarter had thus far been strong, which is obviously very encouraging. In fact we’ve shipped nearly as many C1000 or signature series units since October 1, to be in your third quarter than we did in all of Q2.

Our geographic diversification is expected to continue to be in our favor. It’s excellent that the Russian market is finally growing again.

And we were receiving payments on our terms and continue to recover that reserve receivable. More importantly we expect BPC to take several more C1000s in the third quarter and we’re highly optimistic we will again be a top-5 distributor by the end of our fiscal year in March.

We’re shipping our first products to the Middle East and Africa, we believe that these new markets, once they see our products in our actions and our distributors can actually point to well successful installed applications that the interest in our microturbines will only grow in these new markets. We’re hopeful that new large potential customers in Colombia, Ecuador, Indonesia, will help to even further accelerate revenue growth in these key regions.

And we expect Mexico to pick-up again as highlighted with our recent C800 signature series order. Lastly, we expect the U.S.

business has strengthened after the election and into the New Year. As oil prices globally slowly continue to recover, we expect several stalled or delayed projects to restart late this fiscal year or more likely early next fiscal year.

We also expect continued growth in our aftermarket service business as we expect to realize the first of our Capstone Energy finance projects by the end of the fiscal year, with revenue to be realized in fiscal ‘18. Make no mistake, our entire company remains focused on our three-pronged path to profitability by working hard to lower our operating expenses, diversify our business globally, launch exciting new products, forge new strategic relationships, strengthen our balance sheet and increase our revenue with exciting new products and new services.

I’ll now turn the call over to our operator for questions from our analysts.

Good evening and thank you for taking my questions. So, Darren, first question is, a number of companies across industrial space were reporting that the election is something that had customers postponing capital projects, maybe delaying installations that were evaluated and planned but not yet certain.

Can you comment about whether or not this seems to have been a factor for you and if you’re hearing from your distributor base that maybe there is potential reacceleration into the December 31, end of your third fiscal quarter?

Yes, Craig, thank you, good question. Definitely the election has been on everybody’s mind.

It’s been a very distracting and interesting and challenging election for lot of folks. It’s hard to pin exactly how much of the slowdown we saw in the U.S.

and Canada, this last quarter on that. But I will say this is the first quarter we did not ship the C1000 to the U.S.

market in recent memory. Bookings have been slow in the U.S.

and so, I think it is fair to say that the U.S. election and really the overall angst over the economy, is what the economy in the U.S.

going to look like, what speed is it going to grow, is it going to grow, I think there is a lot of overhang that was created by the election. So, I’m hopeful that as the election gets behind us, and people get comfortable that what the Trump Presidency is going to look like, that we’ll see growth in the U.S.

market. And I think if you look at his policies and procedures, there are many things that he is in support of them actually put wins in our sales and our business, which is also helpful.

Great. Thank you for that.

So, just moving on to the Sky Capital partnership. So, congratulations on setting that up.

Previously you disclosed, I wouldn’t say a backlog an order book of potential orders that maybe didn’t get completed because of financing issues or the ability to finance with third parties. Can you maybe discuss with us where that potential scope of business stands today?

How active you are with Sky Capital and what the outlook is for them to finance projects in this quarter and over the next couple of quarters?

Yes, so, if you look back, we had salesforce.com so any time we lose an order anywhere in the world, our distributors and our customers tells why we lost the order. If you look back in FY16 we lost about $42 million because of a lack of acceptable financing.

In FY15 that number was over $50 million. So I think we’re losing between $40 million and $50 million a year with good projects that don’t have the capital dollars to go forward with the proper financing.

So, that was the genesis for launching Capstone Energy Finance JV last December. If you remember Craig we’re using a high net-worth individual.

They pledged an initial $3 million for to do projects with a path to get to $10 million. But we’re up over $40 million of potential work of those opportunities.

So, it became very apparent that we would outsell our internal capability of our high net-worth individual. And that’s why we looked for other sources of capital in Sky.

So, is in this space they understand the type of projects that we have, they do third party financing and PPAs all over the world. I know some of the folks there that have been around the industry for quite a while.

So it was a natural fit for us to bring them on board. Obviously they bring a wealth of experience, more importantly they bring us more capital that we can build out Capstone Energy Finance.

Timing has been challenging. If you look at our average close, it’s still about 11 months.

We launched Capstone Energy Finance a year ago in December. So I would say definitely by the end of our fiscal year we’ll have our first PPAs signed.

We got a couple that are well into contract negotiations and yes for the legal folks will get those done. And so I think we quickly need to tap some of that Sky Solar funding probably by the middle of next year.

Excellent, excellent. And then, after you passed the end of your quarter, we saw a distinct pick-up in the announced orders, some decent sized chunky orders in there.

Can you maybe discuss what the international order tempo looks like right now? Whether or not you’re seeing that play to a more normalized rate?

And I guess, as a part of the question, oil and gas is showing pretty bullish fundamentals - [indiscernible] obviously can’t afford to subsidize the world forever, pretty bullish for the U.S. production and the rest of global production.

Can you say whether or not you’re starting to see oil and gas come back as a probable market for you over the next few quarters?

Yes, let me say a couple of things. In my prepared remarks I mentioned that, also we had some project push-outs in Q2.

We shipped six C1000s in Q2, we’ve already shipped four in Q3 we’ve got two more that are done, one witness test and should be out the door shortly. So we’ll quickly surpass C1000 shipments in Q3 over Q2 so that’s very positive.

We’re seeing an increased recovery and speed recovery with BPC. We added a chart in there obviously it only went back six or seven quarters.

But you can see each quarter over the last year BPC has put quarter-over-quarter growth. And that’s going to happen again in Q3 and Q4.

So, very excited to see BPC come back on line, not only do they give us revenue growth, they used to 20% to 25% of our revenue. I think as we can continue to diversify, they probably would get back to those levels.

But even seeing in the 10% or 15% would be nice. Obviously everything they pay for on the older series is 15% over and starting January 1, they’re taking 20% over.

So we’re getting 20% on every million dollars as recovery against that receivable. And you see that in Slide 8, as you can see we had fairly significant bad debt recovery during the quarter.

So, that’s additional cash and capital. Europe is picking up nicely for us.

We’re expecting the U.K. probably Italy and Germany to lead that.

But I think we’re also seeing Slovenia, Poland, some other parts of Europe pick-up. So Russia and Europe look very strong.

We’re still very excited about Australia. The U.S., I think after the election will start to come back.

And Latin America is a bit chunky for us. We’ve got a couple of big projects out there but we’re not sure of the visibility that we’d like to see there.

From an oil and gas standpoint, you hit the nail on the head, as oil prices are getting back in the kind of mid-40s, close to 50, we’re starting to see the first signs of oil and gas users start to spend money. It’s mostly smaller oil and gas companies at this point, some of the smaller users are actually buying some assets from bigger users, redeploying new technologies and improving efficiencies, operating efficiencies in those sites.

We have seen one Chevron project that’s rumored to getting moving again in Malaysia for an offshore platform. But I’d say this is really the tip of the sphere, there is a lot of recovery that something has happened in oil and gas.

And the longer oil prices can remain steady and hopefully marginally increasing over the next couple of quarters then the business will come back. As I said in my prepared remarks, being 80% energy efficiency is not optimal for us.

We’d like to see energy efficiency about 40% of our business. We’d like to see oil and gas customers come back to be at another 40% and renewables be 20%.

So, we must like our investors, they want diversified portfolios, we want a diversified portfolio of both markets verticals as well as geographies.

Okay. And then, last question if I may.

I know you’re keeping very tight ranges on R&D spend right now really focused on getting the profitability. But over the last few years you’ve been really focused also on increasing the value you deliver to your customers.

And one component of that has been the target of increasing the hours, available hours on a turbine. Can you update us on the possibility of potential upgrading in the next few quarters?

And any other major developments that you think could add significant value for your customers that come out of the R&D program that you might expect this year or I should say in calendar ‘17? It would be great if you could describe that.

Thank you.

Yes, no, I think if you look at our, your point is well taken. Our engineering group is functionally half the size it was, both from spend and personnel standpoint about a year ago.

We’ve taken that spend down north of 50%. We’re very focused on what we work on today, we’re working on getting money from third party sources where we can.

But all that’s focused on product developments and making a more robust product for our customers. So if you look at the signature series we launched last December, that was really focused on the CHP market but it had some 82 other discreet improvements.

So, lots of things we did to product so either reliability improvements, performance improvements, made maintenance easier, quicker, extending maintenance intervals, better controls, lower noise, all that was great work by our engineering team to make that product that much more robust. We want that signature series product to be second to none, if anything else out there in the industry.

We want the up-time to be over 99% and we want to make sure that the product doesn’t deranges as much as the old product, it’s better performing, maintenance intervals are longer. And frankly, makes more money for our customers, which I like being green but making green is really the most important thing for our end-user customers.

And so, very happy with signature series and associated accessories and heat recovery modules and controls and other things, we go with it. That being said, we really focused on developing new fuels and new applications for our products.

There is, lots of synthetic fuels in Hawaii, there is lot of propane and butane down in the Caribbean or parts of Africa or even around Australia. Lots of areas where customers want to get off of diesel engines for environmental standpoint, cost and reliability standpoint and if we could run on alternative fuels that much better.

So, in the interim, our R&D focus is really focused on making our product as robust as possible and give the best customer experience as well as applying it as many different applications as possible. So spread that peanut butter across as much of the bread as we can.

And really get as many people into our technology as we possibly can and in as many, different geographies.

Great. Thanks again.

I’ll hop back in the queue.

Great questions, Craig. Thank you.

Yes, hi Darren, hi Jayme, it’s Aaron Spychalla on for Eric. Thank you for taking the questions.

Hi Aaron, no problem.

Maybe first on the large orders, you kind of mentioned in Colombia, Ecuador and Indonesia. Can you just talk, give us an update there and maybe when we can see some, those move forward and see some traction there, maybe what have been the gating factors and is that something that the recent financing solutions can help with?

I wound venture to say that my prognostication on those orders have been about as good as our U.S. Press and folks that called the election.

So I’m trying to figure out timing on these, have been very challenging. I’ve been down in Ecuador multiple times I’ve been down in Indonesia this last month in October.

I continue to meet with these customers. I’m very hopeful we’ll get traction on Ecuador in the next, hopefully the next quarter knock on wood.

Finance and government guarantees continue to be the biggest challenge but we think we have a pathway through to get some good partners and good folks we’re working with. In Indonesia, I was just recently there is October.

We’re commissioning right now our first site, there is another 9 megawatts behind the first megawatt with one key customer, several of the customers behind that. Indonesia, if you don’t know is a huge market for me, a population standpoint but very dispersed multiple Islands, lots of remote power, very poor power quality.

So it’s a huge opportunity for technology like ours. And so I think Indonesia, Malaysia is right for our type of technology and we’ve got a good distribution partner who is bringing in, propping that to take care of those customers.

So I think that’s a nice opportunity for us. In Colombia, we’ve got our first site going in, our first 5 megawatts with an end-user who looks to be doing about 20 megawatts a year or potential 20 megawatts a year both in Colombia and Panama.

And these are district tooling locations off-grid. So this is C1000 signature series running electrically to electrical chillers and thermally and absorption chiller.

So, they’re chilled water plants for industrial customers. So, those three customers alone could be 50 megawatts in the next 12 months if they are to hit.

So, obviously we’re building roughly one C1000 a week, so that would have a huge impact on our growth rate. That being said, our balance sheet is a concern with all the three of those customers.

So it’s critical that we manage our expenses and keep our cash levels at reasonable levels. And in fact we get this profitable as fast as possible because I hate to lose such big opportunities because of concerns about our viability.

But I think definitely in the next couple of quarters, we should see more visibility obviously to those customers who are already trying the product and the third one, we’re working on for quite a while.

Right, okay. Thanks for that color.

And then, maybe on the backlog, looking at that, I mean, how should we think about timing there, is it kind of 15 to 18 months perspective and I’m just trying to think of how the back half shapes up here? I think you were kind of a quarter or two ago you were thinking maybe mid-20s is potential in the back-half and trying to reconcile that with some of the shipments that have gone here in the third quarter now?

Yes, obviously we built 6 megawatts, didn’t ship last quarter. So, we’re anticipating $20 million to $21 million quarter.

And three projects moved out on us, so that gives a little bit of surprise. So I guess I would mute our expectations a little bit, things seem to be happening slow.

As Craig talked about, I think a lot of people in the U.S. are moving slow because of the election and just the economy in general.

I think ISIS and terrorism and other things aren’t helping either. So I think we’re seeing a general project slowdown or push-out across the board, just a higher sense of cautiousness, it’s not just the U.S.

it’s the rest of the world as well. So, I probably knew the expectations a little bit for the back half of the year, but definitely we want to get north of $20 million revenue as fast as possible.

And obviously get to that new breakeven point around $25 million as quickly as possible. So, I’m very confident that we’re going to get to our cost reduction target.

We may be able to even get beyond it. We’re not going to stop once we get there, just because we achieved we’ll keep looking for areas to reduce the costs and lean out manufacturing.

Bring Paul on board is going to help that as well, get us into one manufacturing plant and some other things we can do. But I think in general, we’re really focused on what we can control.

And that’s putting out cutting-edge great products, building our service business, getting our key partners in place, getting Capstone Energy stands off the ground. Making sure that we have the capital and the balance sheet to take care of customers and reduce expenses.

Everything else from an oil and gas price from the elections, strong dollar all those macroeconomic things is not obviously controlled. So we’re going to focus on what we can control.

Right, okay, sounds good. Thanks for taking the questions.

Thanks Aaron.

Thanks, hi, Darren, hi Jayme.

How are you doing?

Hi Sameer.

Good. Can you just briefly describe the mechanism by which Acresis and Bridge Capital are helping you?

Yes. So, Acresis came to us a while back and again, this is somebody we’ve been working with on and off in the industry part of 25 years I’ve known these gentlemen.

And a lot of our strategic relationships really grow out of previous relationships that I have or Jim has had, just it makes a lot easier to find strategic partners. And they really help small companies or founding companies turn their businesses into being more than just a sub-asset corporation and really help them mature and get financing.

So, what they’ve done is help RSP structure their business the right way and get their financials in such a sense that they can qualify for a nice product financing product that’s out there. So, essentially what happens when traditionally if they’d get an order, we would have to try to support them with some AR, and the cash flow would be challenging for them.

And as both, obviously their balance sheet is small but ours isn’t much bigger. What happens now is, as long as RSPs got a well-qualified customer like hospital or REITs, so if it’s Memorial Sloan Catering or its related properties, that’s very solid, class A customer.

Then they can get product financing from Bridge Bank. So, essentially they get the PO, they put the PO on us, we get paid as soon as it gets shipped and then they payback the financing once they get paid by their customers.

So, it really is a working capital line. It’s a growth mechanism.

Again it was an area we saw distributors, we’re struggling. Banking relationships are getting more challenging.

And so ways to help them grow their business and frankly deal more projects faster was the goal. So, that’s really kind of a front-end solution for our distributors to help them sell products.

And then we’ve got the Capstone Energy Financer, our PPA product for end-user customers. They don’t have the capital dollars, that’s another solution where we’ll put the product and we’ll sell them the thermal energy and electrical energy.

So, we really think we’ve got two very nice solutions out there with Sky Solar Banking and Capstone Energy Finance, and then Acresis and in this case Bridge Bank helping out our distributors. So not much more work to do there, just some execution, we’ll obviously roll it out to the rest of our distributors once we prove the model with RSP.

But for us right now, it’s really that execution, really focusing on our distribution channel and getting that as many of those $920 million of opportunities turned into cash on PO.

Great. Thanks for that.

You mentioned CEF JV, has there been any order generation from there of the $109 million backlog, is there any amount from that JV?

No, the Capstone refinance has not closed their first power purchase agreement yet. So we’ll press release that when it happens.

As you can see in the prepared deck we’ve got two power purchase agreements that are in negotiation with customers. They are in legal review.

We kind of agreed on commercial terms, so we’re hopeful to get one of those or if not both across the goal line soon. But no, the current backlog you’re seeing is all traditional backlog as well as the service or Factory Protection Plan backlog which is broken out separately.

So between the two, we’re up to $75 million to $80 million in total backlog, not counting anything from Capstone Energy Finance yet.

Okay, great. And one last question from me.

What is the level of bad debt that is still to be recovered from BPC and what is the timeline like this quarter that you recovered $0.5 million going forward how much should we expect?

Yes, the regional amount was little over $8 million they’re down to about $6.5 million. So, we still have quite a bit to recovery.

It’s really tied to how fast…

Hello.

You’ll see that bad debt recovery. But we don’t have a specific timeline on when that will be paid back.

Okay. I think I couldn’t hear it there was some disturbance in the middle.

But you said $6.5 million is the current outstanding?

$6.6 million is the current outstanding correct, we recovered approximately $0.5 million last quarter. So it’s going to take us several quarters, or maybe even take us couple of years.

But we’re supporting them as their business comes back. And it’s all been fully reserved, so that is found cash for us each quarter and obviously bad debt recovery each quarter as that money comes back in.

And one last one again, if I may. Can you just briefly give us an overview of the C1000 signature series reception as well as the competitions just facing when you’re since [indiscernible]?

Yes, I think the reception has been very good. The reality is by the time we started shipping it, we’re just now getting them commissioned.

And so, we’re seeing just our first signature series in the U.S. and Europe and in Russia being commissioned.

So I think your first one is AOTI in Minneapolis. That project is just now coming online.

So the performance of the product initially looks very good, customer are very happy. Obviously the noise levels, the controls, the output just, all the different regional features are well received.

We are starting to put some signature series components into our aftermarket business, through our re-man program. So our traditional customers will start seeing the benefit.

But unfortunately, because of the size of the megawatt project, it’s got a 6-month lag from building the signature series, seeing customers actually get that benefit. So that’s another reason where we’re fairly excited about future revenue growth as the signature series, we really have not had a lot of customer experience yet.

So, as our customer experience starts building in multiple geographies and markets as well as all the other initiatives we have, that should help give us reason to accelerate the business.

Great. Thanks a lot for taking my questions.

Thank you.

Thanks so much, guys. As you look at your supply chain and after the adjustments they’ve made over the last couple of quarters, are there other opportunities to keep reducing costs as you go forward and see a little bit of improvement on volumes?

Definitely it’s all about volume. Our biggest challenge has been, as you know the last couple of years, we’ve seen a decrease in our volume.

So we’ve been having the kind of hand-to-hand combat with our suppliers to kind of keep and hold our pricing. Some of the signature series design improvements drove some cost in our supply chain.

So, you’re seeing a little bit of margin erosion because of that, we’re working feverishly to handle both those things. As revenue comes back, especially we got from couple of these larger customers who start taking product, we will working the supply chain hard with Paul and his team and Jeff and his team and myself personally getting out there.

So, as our suppliers see higher revenue, see higher purchases that, gives us obviously the ability to go leverage them. We’ve outsourced where we can.

We may introduce some in-sourcing going forward, we’re evaluating that. But yes, we’re always looking at debt reductions.

I would say in the most revenue levels, increase, 10%, 20%, 30%, you’re not going to see a significant reduction in our material cost.

Perfect. That’s exactly what I needed.

And then, I think just about everything else that I’m curious about has been asked. But one question for you guys around CHP and any sort of acceleration in those projects or deceleration?

Certainly it seems to be a fantastic market potential, potentially for you guys. But what are you seeing in terms of the customer behavior in that end-market?

Yes, I mean, the challenge we had and I tried to allude to in my prepared remarks, and oil and gas projects, when they decide they’re going to develop a field or float a platform or put in a pipeline, those are very sophisticated projects, program managers and they’re coordinating all sorts of pieces of equipments. And they could have delays.

But they tend to be very predictable and you tend to know about the delays ahead of time. When you’re doing combined heating power projects for an industrial user or a hospital or hotel or just any kind of small customer who is doing a construction project, it can be very challenging.

So push out on the delivery of the chiller or a delay in the electric interconnect permit or some problem with rain on the side and come up with a whole different reasons. Or CFO gets cold feet or they come back with some more questions or whatever may be the higher consultants that wants to take a look at your designs or wants two more sites.

So there are, multitude of reasons that can make these CHP projects move around on us. And so I think that’s we’re going to have to deal with.

I think we’re going to we’ve always been challenged with lumpy revenue. But high levels of CHP, is going to make it even potentially more, lumpy.

So, we may have to oversell the airline seats a little more than we did in the past and get a little more creative on our production slots. But we’ll take that challenge.

As you say it’s a great market. People want to save money and they want to be more environmentally friendly.

So we need to continue to get people to be excited about that. I think the man of opportunities we’re seeing in New York and in California, Hawaii, and Alaska we’re seeing projects down into the Southeast and even in Texas.

You’re talking about OATI in Minnesota. You’ve told me a year ago we’re doing projects in Minneapolis, I told you were crazy.

So, I think stating centers are definitely picking up. I’m not that concerned about federal incentives we get the 10% interest on tax credit.

So if Mr. Trump wants to life out all, green centers for investment tax credits or wind solar fuel cells; that’s great.

I’ll take frankly the level of playing field and we’ll stack up very well. So, it’s a good market, it’s a big market.

But it definitely has some challenges and again as I said in my prepared remarks, I would like to be a little more diversified and see some rebound in our oil and gas market just to help us with some of the lumps.

All right, great. Thanks a lot guys.

Thank you.

So thank you Operator. Great questions, probably the most robust and interesting set of questions we’ve had in several quarters, so it’s great that the analysts are really paying attention and following the story.

I appreciate that very much as the whole Capstone team does. I’m very excited about what we’re doing, very disappointed with the revenue push-outs in the quarter.

Really just mostly disappointed because it will cloud some people’s view of our progress we’re making because I really believe we’ve got the right team, we’ve got the right technology. We’re working on all the right things.

And then the entire company is laser-focused on getting this thing profitable and building a great company. So, we’ll keep working our three-pronged business plan.

We’ll keep bringing in our operating expenses and leaning out the business and turning over every rock to save money. We’ll keep launching new creative products we’ll keep nurturing and fostering these new partnerships that we have.

And we’ll manage our balance sheet like it’s our own money. And right now I think that’s all we can do.

And the rest of the macroeconomic environment will be where it will be. But again, I like where we’re positioned.

I like our signature series product. I like our growing service business.

And I like our team. So, I’m very excited to talk to everybody after Q3 and end of Q4.

Thank you.