Jayme Brooks - Chief Financial Officer and Chief Accounting Officer Darren Jamison - President and Chief Executive Officer

Eric Stine - Craig-Hallum Capital Craig Irwin - ROTH Capital Partners Sameer Joshi - Rodman & Renshaw Colin Rusch - Oppenheimer

Thank you. Good afternoon, and thank you, for joining today’s fiscal 2018 first quarter conference call.

Today, Capstone issued its earnings release for the first quarter of fiscal 2018 and filed its quarterly report on Form 10-Q with the Securities and Exchange Commission. During the call, we will be referring to slides that can be found on our Web site under the Investor Relations tab.

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, August 9, 2017. 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. And because they involve known and unknown risks, uncertainties and other factors, they are in some cases, beyond our control.

Please refer to the Safe Harbor provisions set forth in the slides 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. I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.

Thank you, Jayme. Good afternoon.

And thank you, for joining today’s first quarter fiscal 2018 conference call. Today, I am going to shake things up a little bit, and I am not going to comment directly on the first quarter financial results.

Instead, I will talk about the overall business and what we are doing to reach adjusted EBITDA breakeven and profitability as quickly as possible. I feel that’s a much more relevant than financial results.

I think this is especially true with all the fundamental changes in the business and the current bettered share price. As I go through the discussion, please keep in mind, when I mention EBITDA, I am referring to adjusted EBITDA and the reconciliation can be found in appendix of our slide deck.

I will then turn the call over back over to Jayme who will briefly review the first quarter financial results. Jayme will then turn the call back over to me.

And we changed it up again a little bit, and I'm going to answer approximately 30 retail investor questions we recently received during a live AlphaDirect Virtual Conference Call series, posted by EnergyTech Investor on July 24th. Unfortunately, the management presentation ran a little longer than anticipated, so we were unable to answer all of the investor questions that haven't submitted at that time.

However, the virtual conference call was highly successful. So we plan on to conducting several more live webcasts in the future.

And going forward, we will ensure that there is more than enough time dedicated at the end of the webcast to answer as many questions as time allows. We believe this is a more efficient method and frankly, cheaper method of communication with the investment community than the old Capstone management platform that we are planning to do archive here shortly.

Please note the virtual conference webcast is still available for replay on both EnergyTech Invesors’ Web site and Capstone's Web site under Investor Relations section. As I have answered the 30 or so AlphaDirect webscast investor questions, Jayme and I will then take questions from the analyst community as we do on most calls, and then some closing remarks.

So if everybody has got their slides in front of them, we'll go ahead and get started. But then question is what are we doing to reach even upward even in profitability as quickly as possible.

Well they’re saying that business will be key to success is having a talented committed and motivated executive team. I'm proud to say that the current Capstone management team is the most talented and dedicated I’ve had the pleasure of working with over my years at Capstone.

In fact, the team is so confident in their ability to Capstone, even at breakeven, and reached profitability that they have voluntarily forfeited all investment stock options, forfeited new equity grants, forfeited future performance bonuses, all of this until we reach two quarters of consecutive adjusted EBITDA positive results. That's how much this management team believes they can get this done.

Once we’ve reached two quarters of adjusted EBITDA breakeven back-to-back, the team and I will receive the whole value of our executive bonus program and resume normal option and grants that we’ve had in the past. In business, you really have three fundamental ways to drive profitability; one, higher revenue; two, better margins or better business mix; and three is, lowering your operating expenses, pretty straight forward.

At Capstone, we've recently developed strategic initiatives to improve all three of these fundamental areas simultaneously and drive to deliver profitability as quickly as possible. It should be noted that the team is very close to becoming EBITDA breakeven, about three years ago, before we were set back with a trio of significant macroeconomic headwinds.

Obviously, the Russian geopolitical issues that continue to dodge us today, low crude oil prices and the very strong U.S. dollar.

So let's gets started and turn to slide three. I’ve said this in the past I'll continue to say, this slide is the most important slide in the slide deck and if you only at one slide today, spend time at this slides.

This slide highlights the tectonic shift in our business strategy that we were now executing on. As we diversify our business into an energy efficiency, or CHP market and lower our dependence in revenue from the oil and gas industry.

This shift is also driving our aftermarket long-term service contract revenue up, FPP business revenue up and businesses of CHP customers are signing FPP group agreements at a much higher rate than oil and gas customers did. Oil and gas customers adopt buy FPPs at the same rate because they've onsite trained and business personnel to maintain sophisticated equipment, such as our microturbines.

This shift to focus on the CHP market, which has driven our higher margin after market service business, has shown in the middle column when combined with our dramatically lower operating expenses has changed our business fundamentals substantially, and is making us much more stable and much more viable. However, EBITDA breakeven is not the final destination.

No, it's just a significant milestone or achievement. This new CHP balanced business model, you see in the center column when combined with rebounding product revenue, leads to a very robust long-term profit model as shown in the third column, all on slide three.

If you look at this slide, I think we can all agree that the middle column is the preferred business model, especially when you compare it to the first column. The middle column -- first column takes $20 million more in product revenue per quarter or $80 million more in product revenue per year to get to the same EBITDA breakeven levels.

That is a dramatic change. Obviously, product revenue is more challenging.

It's harder to predict and you’ve got timing with construction delays, construction issues, LCE lowers your credits, timing of shipments. We are making steady progress as we execute against our new business model, and are highly focused on achieving the results outlined in the middle CHP balance column of slide three as quickly as possible.

So let's go ahead and turn to slide four. Slide four is where you compare our new CHP balance profitability model with our recent Q1 results.

Slide four shows where we need to improve in order to reach EBITDA breakeven. And spoiler alert, into three areas; it's revenue, margin and operating expense.

So let's take it from top of the revenue and turn to slide five, which shows what we have been doing to drive future revenue growth. First, I want to remind everyone that Capstone has substantial fixed manufacturing and operating expenses.

And although, we’ve dramatically reduced them, our facilities personnel, equipment and building leases, are fixed on the quarter-to-quarter basis. Therefore, they don’t change much regardless of the amount of product we shipped.

Said another way, if we shift $15 million in product during the quarter or $25 million in products during the same quarter, our operating expenses hardly change. Therefore, we need renewed revenue growth in order to leverage those fixed costs and drive up our low product margins.

Make no mistake, continuing to grow revenue and gain market share, is very critical and we want to get back into the high double-digit growth mode we enjoyed for years prior to that trio of macroeconomic headwinds I mentioned. Although, it is important to point out that all revenue contribute to the bottom line, but not all in the same way.

Therefore, they should not all be treated equally. Therefore, improving the type of revenue is also very important; revenue growth with low gross margins with non-recurring customers with customers who don’t truly value your long-term FPP service contracts, is not the ideal revenue for Capstone and in some ways empty calories.

Ideally, we like to see revenue from Fortune 500 companies that are planning to become repeat customers and purchase additional microturbines from us when they believe the actual product delivers what they’re looking for and gives them a clean and green solution to reduce their operating expenses. I think it may be worthwhile mentioning that as our cash burn has come down over last three quarters dramatically, we are beginning to see early signs of large companies showing interest in our innovative products, because they now believe Capstone has a sustainable and viable business offering.

Because we want to see more revenue and sales of our microturbines and our accessories and our long-term Factory Protection plans, we are today moving to a more of a bundled solution sales approach by pursuing customer with a fully wrapped solutions that includes the Capstone microturbine, the Capstone accessories and the Capstone Factory Protection plan as one single bundled solutions. It is definitely win-win opportunity for both the customer and for us.

By providing a bundled solution, we are able to offer customers more attractive economics thus saving them money in the end and giving them shorter paybacks on our projects. However, we also benefit greatly with this bundled sales approach as we receive all the money upfront, including the five and nine year FPP, and securing the associated product accessories and the long-term service business.

Thus, increasing revenue received and cash received from each microturbine project we sale on a quarterly basis. I hope that investors can see that this is a much more robust revenue stream where we’ve had traditionally with our oil and gas centric business.

Oil and gas customers want discounts but don't purchase accessories typically or long-term FPP service contracts. The key to driving our future revenue growth is outlined in slide five as its anchored by our new Signature service CHP product line-up and our new Sell-to-Win bundled solutions program.

Both of these are heavily concentrated towards the energy efficiency market. Furthermore, we expect to drive future revenue growth through our Capstone energy finance business as it starts to produce projects and overtime, start CCEF contributed to the overall top-line.

In addition, we are offering Signature series retrofit kits, raising spare parts pricing, pushing our distributors and meet their contractual minimum spare parts stocking guidelines and much more. So I'm thinking right about now most of you're sitting there saying well DJ, revenue is flat year-over-year buddy, so your revenue initiatives must not working.

Understandably, we feel that way. But really the answer is it's important to remember that we have a very long sales cycle, microturbines are a capital purchase, our typical sales cycle is over a year and it often takes six to nine months from receiving the distributors order to Capstone actually building and shipping the subsequent product and revenue recognition.

Therefore, that lag associated with this can be as long as 18 to 24 months to show results updating new initiatives. But more specifically I would say when addressing that concern, I point to slide six.

Slide six shows that Capstone has an 82% increase in new orders, if you look at it six quarters over six quarters, we booked $37.1 million in new product orders for the six month period ended June 30, 2017 compared to only $20.4 million in the preceding six months. So it's an 82% increase six months over six months.

I believe these orders show that the new revenue initiatives are delivering the desired results and we are working toward improving there’ll be more. The next persuasive piece of evidence I can offer can be seen on the same side.

This pie-chart highlights Capstone distribution partners new project opportunity pipeline, which has grown an outstanding $467 million or approximately 43% over the last two quarters. So again, sales pipeline top of the funnel has grown 43% or $467 million and new orders have grown up 82% over six month period, and $37.1 million over $20.4 million.

And my final point would be to remind investors that we have yet to close any of our pending Capstone Energy Finance highly qualified project leads, which now total almost $60 million in potential product revenue as highlighted in slide 13 in our appendix. Although, the desired results are more delayed than I would like them to be, the Capstone management team fully believes that we will close several Capstone Energy Finance projects before the end of the fiscal year.

And yes, all these projects will utilize our bundled solution that will have Capstone accessories and utilize long-term FPP service contracts. So that being said, let's our attention to margin and business mix, let’s go to slide seven.

Slide seven highlights what we’re doing to improve overall margins, which are really anchored by growing margins in our accessories, parts and service business. That business throws up today about 30% margin and is growing to 50% in the next year as the business matures and we close out field liability retrofit programs and install more of the robust Signature series product.

In addition, we’re working to sell more higher margin accessories and we have a direct material cost reduction program well underway for the new Signature series product to lower the direct material cost on this new product. We also have a program to get 80% of our annual material spend or about 21 suppliers under long-term purchase agreement by March 31, 2018.

These initiatives, when combined with renewed revenue growth, are projected to move our margins from today’s 11% to our targeted 22%. It should also be noted that these initiatives are specifically designed to both improve margins and generate positive working capital, like we did last quarter, as working capital management is critical, especially in today’s low price per share.

Now, let’s talk about the last item on our profitability checklist, expenses or costs. Let's go to slide eight.

Slide eight highlights what we’re doing to further reduce our quarterly operating expenses. As a result of the trio of macroeconomic headwinds and the slowdown in product revenue, management set a goal to cut operating expenses 35% to approximately $7 million per quarter.

In the third quarter of fiscal last year, we met and exceeded that goal by cutting our operating expenses by 42%. However, we’re not done and we have yet to realize all the cost savings we’ve identified.

Therefore, management has set a new goal of lowering operating expenses down to $5.5 million per quarter or approximately 47%, which is a massive reduction compared to historic levels and is a third of what most of our competitors were asked. If you look into fiscal first quarter, expenses on top of slide eight were at about $6.1 million in operating expenses.

However, that included about approximately $100,000 of one-time expenses in the quarter that both of which was the amortization of fees stemming from the change in our bank line from Wells Fargo to our new bank line with Bridge Bank and the $12 million asset based credit facility. In reality, the number should be about $6 million, going forward, without any one-time quarterly expenses.

And we still have the savings from reductions in our cost yet to be fully realized from changing some of our outside service providers, such as our SEC counsel, our outside firm, which going forward, will take us down another couple of hundred thousand per quarter. That would bring us down to $5.8 million, and most importantly, there would be consolidation of our two facilities, which as I mentioned earlier as we are in the process of completing by the end of the calendar year.

To-date, we’ve already moved to C30 and C65 manufacturing line floor from our headquarters in Chatsworth over to the Van Nuys or Stagg facility and we’re now in the process of substantial tenant improvements in order to move sales, marketing, engineering, aftermarket, service, IT, finance and the balance of the Capstone employees by approximately November 15th. This move will save us about $1.5 million annually in rent and utilities after we sublet the Nora facility.

We believe this consolidation will get us to that new $5.5 million target and our new CHP balance business model. Again, if you compare that $5.5 million quarterly operating expense with other public companies that are in the Cleantech space, where there are fuel cell companies, ultra caps or other technologies, all of their quarterly operating expenses are north of $10 million and some that are close to $15 million per quarter.

Capstone is hand down the industry leader and lower operating expenses within our space, even before we finish the consolidation of the two facilities. I encourage you to look at the slide 12 in the appendix, which shows how favorable Capstone compares to other public Cleantech companies, but also report quarterly.

You'll notice the Capstone beat the collective average in almost every performance aspect, including revenue term with the one exception of market cap, which we’ll talk more about later. So for financial highlights for the quarter, I'll now turn the call over to Jayme to discuss specific first quarter fiscal 2018 financial results.

Jayme?

Thanks Darren. I will now review in more detail our financial results for the first quarter of fiscal 2018.

The highlights can be found on slide nine. Net loss for the first quarter of fiscal 2018 improved to $4.1 million compared to a net loss of $4.5 million for last year's first quarter on similar revenue level of $19.2 million for the first quarter of fiscal 2018 compared to $19.1 million for the first quarter of fiscal 2017.

Net loss per share was $0.10 per share for Q1 of fiscal 2018 compared with the net loss of $0.17 per share in Q1 of fiscal 2017. The decrease in the net loss during the first quarter of fiscal 2018 was primarily because of the reduction of operating expenses of approximately 18% from the same period last year.

This decrease was primarily the result of our continued cost reduction initiatives discussed earlier by Darren, to lower operating expenses throughout the organization and to in line with our goal of achieving profitability as quickly as possible. Product revenue for the first quarter of fiscal 2018 was $12.6 million compared to $12.1 million in the first quarter of fiscal 2017, an increase of $0.5 million or 4%.

We shipped 12.1 megawatts during the first quarter of fiscal 2018 compared with 11.6 megawatts in last year's first quarter, an increase of 0.5 megawatts or 4%. The increase in product revenue in megawatt shipped in the first quarter of fiscal 2018 over the prior year fiscal first quarter was the result of a shift in product mix as we sold a higher number of our C1000 series systems during the first quarter of fiscal 2018 compared to Q1 of fiscal 2017.

Revenue from accessories and parts decreased $0.8 million or 22% to $2.9 million for the first quarter of fiscal 2018 compared to $3.7 million for last year's first quarter. This decrease is primarily the result of the timing of our part sales promotions.

However, service revenue increased $0.4 million or 12% for the first quarter of fiscal 2018 to $3.7 million compared to $3.3 million in the first quarter of fiscal 2017. Service revenue increased primarily because of our growing installed base and continued market acceptance of our FPP offering.

As a percentage of revenue, service revenue was 19% in the first quarter of fiscal 2018 compared with 17% in the first quarter of fiscal 2017. Gross margin for the first quarter of fiscal 2018 was $2.2 million or 11% of revenue compared to a gross margin of $3 million or 16% of revenue for last year's first quarter.

The decline in the gross margin was primarily the result of a shift in product mix and incremental warranty expense, offset by a decrease in our production and service center overhead expenses. In addition to consolidating our manufacturing processes into our [indiscernible] location, management continues to implement initiatives to improve gross margin in fiscal 2018 by further reducing manufacturing overhead and fixed and direct material costs, and improving product performance as we work to achieve profitability.

R&D expenses for the first quarter of fiscal 2018 decreased $0.5 million or 31% to $1.1 million from $1.6 million in the year ago first quarter. The reduction in R&D expense resulted primarily from lower salaries expense, which was result of a reduction of the number of active research projects due to our initiatives to reduce operating expenses and achieve profitability.

Management expects R&D to continue in fiscal 2018 to be lower than in fiscal 2017 as a result of the continued costs reduction initiatives. SG&A expense in the first quarter of fiscal 2018 decreased $0.7 million or 12% to $5 million from $5.7 million in the year ago first quarter.

The SG&A decrease consisted of decreases in professional services, salaries, facilities, consulting and marketing expenses. These reductions in expenses were primarily result of our cost reduction initiatives to lower out the organization.

These decreases were offset by lower bad debt recovery in the first quarter of fiscal 2018 compared to the same period last year. Total operating expenses for the first quarter of fiscal 2018 decreased 18% to $6.1 million from $7.4 million in the year ago quarter.

Operating expenses, excluding bad debt recovery, decreased 27% for the first quarter of fiscal 2018 to $6.1 million from $8.3 million for the first quarter of fiscal 2017. Bad debt recovery for the first quarter of fiscal 2017 was $0.9 million compared to $13,000 for the first quarter of fiscal 2018.

Excluding bad debt recovery, management expects SG&A expenses in fiscal 2018 to be lower than in fiscal 2017, primarily as a result of our continued initiatives to reduce operating expenses and achieve profitability. The loss from operations for the first quarter of fiscal 2018 improved to $3.9 million from $4.4 million in the year ago first quarter.

The adjusted EBITDA for the first quarter of fiscal 2018 was negative $3.4 million or a loss of $0.08 per share compared to adjusted EBITDA of negative $3.7 million or a loss of $0.14 per share for the first quarter of fiscal 2017. The adjusted EBITDA is a non-GAAP financial metric that is defined as net income before interest, provision for income taxes, depreciation and amortization expense, stock-based compensation expense and change in fair value of warrant liability.

Please refer to slide 14 in the appendix, titled reconciliation of non-GAAP financial measure, for more information regarding this non-GAAP financial metric. Now turn to slide 10, as I will provide some comments on our balance sheet and cash flows.

Cash used in operating activities for Q1 of fiscal 2018 decreased 76% to $0.7 million as compared to cash use of $2.9 million in the fourth quarter of fiscal 2017. As such, Q1 of fiscal 2018 had the lowest cash usage in operating activities in the past six quarters.

Working capital change for the first quarter of fiscal 2018 was positive $1.9 million as compared to a negative $0.5 million working capital change during the fourth quarter of fiscal 2017. At June 30, 2017, we had cash, cash equivalents and restricted cash of $19.1 million, which includes $2.5 million in net proceeds from the aftermarket offering program compared to cash, cash equivalents and restricted cash of $19.7 million as of March 31, 2017.

Our cash receivable balance as of June 30, 2017, net of allowances, was $12.2 million compared to $17 million at March 31, 2017, a decrease of $4.8 million or 28%. Our day sales outstanding or DSO improved to 58 days compared with 68 days as of March 31, 2017.

The change in DSO is largely the result of higher collections of cash receivable for the first quarter of 2018 compared to the fourth quarter of fiscal 2017. Inventories increased to $16.3 million or 5% from $15.5 million as of March 31, 2017 as a result of an increase in finished goods.

Our accounts payable and accrued expenses were $13.6 million as of June 30, 2017, a decrease compared to $14.7 million as of March 31, 2017. Additionally, during the quarter, we early adopted accounting standards update number 2017-1 on a retrospective basis.

As a result, you will see that we reclassified the warrant liability to additional paid in capital and the cumulative deficit on a consolidated balance sheet in the Form 10-Q. Please refer to our Form 10-Q filing for reconciliation.

I'm very pleased with the significant reduction in our cash usage from operations and the improvements in our balance sheet, which is an overall indicator of improving health of our company. A solid balance sheet is critical to our business and vendors, customers, lenders, and employees, are all monitoring the strength of our balance sheet.

Our total backlog as of June 30, 2017 was $117.3 million compared with $108.4 million as of June 30, 2016. The year-over-year increase demonstrates the current demand for our products indicating a rebound in the business.

The book-to-bill ratio for the quarter improved to 1.3:1 from 0.9:1 in the year ago first quarter. Our FPP service contract backlog at June 30, 2017 was $76.7 million compared to $77.1 million at March 31, 2017 and $71.1 million at June 30, 2016.

The year-over-year increase reflects our growing installed base in microturbines, as well as the ongoing efforts of distributors to sell our FPP service contracts in the CHP market, which enables the end users to achieve a lower total cost of ownership, and increases our recruiting revenue. At this point, I will turn the call back to Darren.

Thank you, Jayme. As I mentioned before, I want to spend some time going over the July 24th webscast investor questions.

These are questions received mostly from retail shareholders. Let's start with the first question here.

Why doesn't the Board of Directors and management buy more shares? Obviously, it's a question we get quite a bit and typically every year at Annual Shareholder Meeting.

And I have pretty much similar answer. First thing that is important to note, the trading window only opens for directors and management a maximum three times per year, and that's only after quarterly earnings and for very short period of time.

So the amount of opportunities and days in which we can trade is very, very limited. Over the last 12 months, the window opened twice out of the possible three times.

I would like to say though that the two times it opened was November 2016 and August 2016. In November, I purchased shares as well as Holly Van Deursen, together we purchased over 27,000 shares.

In August, the other time the window was open in the past year, myself, Jayme, Paul DeWeese, and Holly purchased shares together we purchased about 41,000. So if you look at the last two open windows, we had open window purchases with people’s owned income for directors and executives, seven total purchases of 68,000 shares.

So definitely we are purchasing share when the window is open, though its opened infrequently, I do expect the window hopefully to open up after this quarter. And if it does open up, I’d expect some more directors and management, myself included, to buy more shares.

So I think we are buying we’re putting our money where our mouth is, hopefully we’ll get more opportunities to do that and hopefully the share price won’t be such a bargain each time we do it. Question number two.

What happened to the truck that was being tested? I am not sure which truck we’re talking about, we have multiple trucks that we’re doing demonstration vehicles with.

But the last news we have from the Fedex box trucks is that they were both in revenue service. The Peterbilt, Walmart Wave truck of the future concept vehicle is just that as being used mostly as a concept vehicle today for tradeshows and other Wallmart events.

The freight liner Class-7 truck that’s being fitted with the air-conditioned trailer is still in process, but hopefully will go into some testing probably with Costco before the end of the year. Most of these are still demonstration vehicles though.

If you look at management presentations, we do show 99% of the revenue is coming from energy efficiency market or CHP, oil and gas, as well as renewable market. We still plant seeds though in the automotive market as well as the marine market and hope for a future revenue growth of those markets mature and open up to us.

Question number three is, what is the status of the Ecuador deal? I’d remember Ecuador was a large megawatt opportunity for us it was related to associated gas down in that country, that deal has been put on hold for now.

There is another wave of corruption that unfortunately hit the Ecuadorean government. We’re hopeful that one thing settle down, new folks put in place that that opportunity will come back up.

But right now I’d say that that opportunity is on hold. And I will say the Capstone takes Foreign Corrupt Practices Act, or FCPA, very serious and we do have a zero tolerance policy.

So we do get into areas where there is potential corruption or graph that we have to separate ourselves from those opportunities. Question number four.

What are you going to introduce the C250? Tony Lorentz, our engineering manager ask me that question almost every day.

The C250 development was put on hold as a result of our initial cost reduction and our effort to get our operating expenses from over $10 million down to the target of $5.5 million. It is still on our product development roadmap if you see by the times in our management presentation, you’ll see that product is on roadmap and it is on that roadmap.

We will not likely be committing significant resources though until we’re actually reach profitability. So the sooner we can reach profitability, the sooner we can start developing that 250 program, which obviously moving from the 200 platform to 250 will definitely help us from the cost standpoint and give us a larger scale megawatt package.

Question number five. Is reverse split guaranteed to occur?

Obviously not. The reverse split is not guaranteed to occur, it is something that we have on the proxy for voting, and is a tool used only if necessary.

So we have till December 11th to get the current share price above $1. We are doing everything possible as a leadership team, management team and Board of Directors to get that share price up above the dollar before that time.

Do you think reverse but it does go forward? It’ll be very different than our last reverse splits.

Our last reverse split happened at a very challenging time for the Company where we had the collapsing Russian market or Russian distributor owing us $8 million that business was going away very quickly. We got challenges in oil and gas with oil dropping from $130 a barrel to $30 a barrel.

The dollar is strengthening. Lots, very challenging time and we have to do that reverse split with very declining performance of the Company.

The company performance today is all heading the right direction, which Jayme has highlighted and we've heighted in this presentation. We are closing in on EBITDA breakeven.

So even if we have to do reverse split, I think we'll be EBITDA breakeven right around the same time, so that should be very helpful for holding that split that occur. But our goal is to not do reverse split, if at all, possible.

Question number six. What happened to the Pump Jack project that you've started in the past?

Well as talked about it, the oil dropped from $130 a barrel to $30 a barrels, that's what happened with the Pump Jack project. So we redeployed our engineering resources on CHP applications.

We’ve pivoted business away from oil and gas. Now that that is not a good market, it comes back and we love our oil and gas customers.

But we needed to get a Signature series product in the market to address the CHP market and increase our penetration. As oil moves to $50 a barrel, we're seeing more activity in the oil and gas market because some nice order recently and a lot of pending orders.

So we will get back to that application whether we do it with hardware, we do with software or with larger battery packs. But that is a market we'll eventually get back after Question number seven.

When you're going to be breakeven? Obviously, that's the question we get all the time.

I think I've hit pretty hard in the prepared remarks today. The short answer and the clean answer is when we get to $15 million in product revenue, $10 million in service revenue and $5.5 million in operating expenses.

But more importantly, I would say we're working in all three of those things. And if you take it one-by-one, we’ve been north of $15 million in product revenue many, many times that’s not a number that's very hard for us to get when business is growing and we're getting good order flow from our distributors.

Obviously, you've seen a big uptick in our pipeline, big uptick I our recent orders. So moving from last quarter's $12 million product to $15 million is not a long path, so that to be something we feel to do.

Getting our operating expenses down to $5.5 million. Well, if you saw us go from over $10 million to $6 million, getting from $6 million to $5.5 million shouldn't be that challenging.

We know where it's coming from we've highlighted it and outlined it in the presentation. The facility move is obviously the biggest piece that we have left and we are well underway of getting that done.

So other three things we have to do is the biggest challenge will be service revenue. But I would argue, service revenue has been growing despite our headwinds.

So the shift to CHP is moving our service levels up. Our FPP contracts are going on to it much faster than they’re coming up.

We're selling more accessories in that business. So inherently the service revenue is growing virtually almost every quarter, we keep having new records for FPP revenue and total service revenue.

So we will get to $10 million, the question is just when. And so that’s probably the third one we'll get to our cost target and our product revenue target first, but the service one will may take a little bit longer.

So I said publicly everything from two to six quarters, I think the reality it won't be the current quarter we’re in, Q3 and Q4 is probably our nearest term opportunity. If we don't get there, we'll be very, very close.

And so if you look back a few quarters, well, no long ago we were throwing off $4 million in gross margin on $21 million to $22 million in revenue, we get back to those levels again on $5.5 million cost basis, we’ll be within $2 million of EBITDA breakeven. If you look at slide 12, our $3.6 million of adjusted EBITDA is better EBITDA from space.

So we have the closest EBITDA breakeven if anybody in this group, and that's with depressed sales. As our sales come back as our service business matures and improves our margin.

Getting our service business from 30% margin to 50% margin is a huge-huge uptick. If you just think about that even at $8 million of revenue in the service business at 50% goes up $4 million.

Again, that puts us very close to our breakeven on product. So we’re getting close, we can see it.

The leadership team is very motivated and we plan to get there as quickly as possible. This is my favorite.

How about a salary cut for management? Well, if you look back, it's my compensation over the years.

It's been as high as close to million dollars today plus 500,000, that’s very similar to the rest of the leadership team. Management has not had raises bonuses on new equity in almost three years.

In addition, we voluntarily forfeited all of our unvested stock options. The team still remains extremely motivate, and we’ll not get any executive bonus or any more season options until we reach EBITDA breakeven for two consecutive quarters.

So I think if giving up half year compensation and not getting any more bonuses until you’re profitable for two quarters in a row, is a motivation enough much else we can do. We could cut further.

But you’d be at a risk of losing the leadership team. And so I think as my goal and my job to keep this team together and keep them executing, we all know unemployment is down to record levels and California employment is also very, very tight.

So in order to keep this team motivated, we can’t cut base salaries beyond what we already get. Question nine.

Why doesn’t Capstone team up with utility companies? Well, we routinely team up with gas utilities to some of our best customers.

Rural utilities are also coming to us. We’re seeing some escrows.

I think their total project going [indiscernible] right now. However, most electric utilities around the world view Capstone as a threat and have worked hard to impede our adoption through multitude of strategies have used.

But I think that started to change and the utility model is broken, people want to have the ability to shop their energy, buy cleaner energy and be more thoughtful on how they spend their energy dollar. So as the utility model evolves, Capstone stands ready to be a partner and make a win-win relationship with any utility that wants to work with us.

How the weak dollar helping sales in Europe? Weak dollar helps us everywhere.

It doesn’t matter if it's Europe or if it's the Peso, or if it’s the Ruble. Any place in the globe where we do business, the strong dollar has impacted us over the last couple of years.

So weakening dollar is definitely good news for our business as is returning oil prices, or higher oil prices. So typically in Europe, we’re seeing strong pipeline in UK.

We’ve got some new distributors in the UK that are putting up some nice business. We’ve got Pure World who is doing leisure centers.

We had a nice order for 50 units out of them recently and they are doing great deal, I think there is 1,200 leisure centers in Europe and/or in the UK in surrounding area. Germany is slow, but picking up; Italy, I’d say about the same, hard to tell right now because August is slow time of year, but we’re seeing September what they look like as far as getting some of those pending orders across the goal line.

Question 11. Does Capstone have any product with Tesla, Amazon, Fedex or Apple, et cetera?

We know, as I mentioned earlier, we’ve got two units running Fedex. We’ve had some discussions with Apple about our projects but haven’t got anything across the goal line yet.

I am sure we’ve talked with Amazon and Tesla with our distributors, its one point or another. I think more importantly, our conversations with Fortune 500 companies or Fortune 100 companies are increasing.

I think it's important that as our business strengthens our balance sheet strengthens. We’re seeing those customers come to us and be more comfortable doing business with us, because we’re more viable long-term business, epecially because our value prop is really driven around not first cost but life cycle cost.

And so our life cycle guarantee is -- that value preposition is our FPP program, guarantying lifecycle costs of the product is very powerful tool. But if you don’t have the balance sheet to back it up, that tool loses some of its leverage.

I think the other important thing is, is our business model is not to use our customers as marketing propaganda? You will not see customer names in our press releases.

We're doing great projects with great customers and a lot of those folks we love to talk about, but that's not our business model and that's not -- they don’t appreciate it, frankly. We also have plan to be giving our customers shares of our stock to buy the product.

They should buy the product on its own merits, and take that forward. Moving to slide 12.

Why doesn’t the Board of Directors solicit a sales/merger instead of reverse split? I think there’s lot of confusion around this.

First, let me say, strategic M&A is not related to reverse split. The reverse split is activity we may or not undertake to say listed on the NASDAQ, and it's not something that has anything to do with the value of the business, or whether we should sale it or do some sort of merger.

We are focused on increasing the share price and avoiding that reverse split, as I said earlier. And hopefully that split is executed we'll do much better job at holding on to the math that happens to do that.

The Company always has and always will continue to evaluate every viable strategic opportunity. We've done a lot of strategic work with folks in the past whether it's right speed or UTC.

We’ve had relationships with Samsung Core over the years. I think even Cummins.

So we will talk to anybody in the industry who has got an interest to talking to us, whether that's M&A activity, licensing and technology, whatever maybe teaming up marketing efforts or opening new markets. So we are very open to that stuff.

But we do have a company policy that we don't talk about any strategic opportunities term sheets. We know press release MOUs.

We don't discuss ongoing M&A opportunities or discussions. That's just our policy and that's the way we'll proceed going forward.

Question 13. Why does Capstone only have 15% institutional investors?

I think that’s pretty self-explanatory. We are 80% 85% institutionally held before the macroeconomic headwinds.

Our market cap was $400 million roughly, it was spiking to 700, and maybe 200 to 300 on low end. So we had a much better market cap before the trio of macroeconomic headwinds for Russia, oil, the strong U.S.

dollar. And so we're working hard to get those institutional owners back, a lot of them sold at very nice returns.

And so we’re trying to get them instant going back into the stock. Today, we're 85% retail unfortunately.

What hotel teams utilize Capstone, I don’t have enough time to go through and look up all of them but I would say I almost virtually hotel and chain in the U.S. and most of the world of any sizes has tried a Capstone or using Capstone today, it's one of our better verticals and our distributors doing a great job of penetrating those markets, whether it's U.S., Europe, the Caribbean, Hawaii seeing lots of lots of applications for hotels and larger properties.

However, if I post Marriot, is probably our biggest customer today, just because they own the Ritz-Carlton, Fairmont, Four Seasons, Saint Regis, obviously the Marriot, Hayyat Western We are trying to improve our relationship with them at a corporate level and get looks at lots of properties. And so again, we're trying to do like most of our Fortune 100, 500 customers are trying to improve our leverage and deepen our relationship with them.

Question number 15. With the current sales levels and gross margins, I'm assuming the number of employees is below 100.

How many employees currently? I'm assuming more reduction needed.

That 100 is a pretty small number. If you look at it, Capstone has conducted three reduction enforces over the last two years.

We’ve taken headcount down from about 250 as a high. We're about 170 today plus or minus with couple of folks.

This level that gives us approximately annual revenue per employee of about $460,000 per employee; again, you compare that with other folks in our space, and we're two to one or three to one of the most folks; we are global; we are public; we are a manufacturer, industrial manufacturer; we do have to support the product in the actual market; do training; being the company below the 170 employee level; and I think it's pretty challenging. I think what’s more important is as revenues coming back and you’re seeing leading edge of it, we’re going to need those folks and probably add a couple of people back as we get the revenue growth engine going again.

Question 16. The distributor system is suitable given the current low volumes or lower volumes with the necessity high discount distributors?

And I think there is another area that people don’t understand. I think our distribution model is one of our biggest assets, and I think at the end of the day, it can improve to be something that other companies in our space will be very jealous of.

We’ve done a lot of work to develop it. And it's just now starting to really pay the dividend that we can see.

So yes, we’re going to see our distributor model. We will work to develop deeper relationships directly with large Fortune 100 customers but that will always be with our distributor table to side us because they’re our partners and our team mates.

Our distributors get 25% discount, which is very customary and standard in our industry. Caterpillar, GE, Walk Show, other folks in the industry has very similar discounts.

And there is a lot that they do for that, right. They do all the sales, the marketing, application engineering, installation support, aftermarket service, spare parts, replacements, warranty, judification, there is a lot they do for that.

In fact, if you think about it we’ve got about 800 people in the distribution channel of Capstone family. These are all dedicated Capstone employees that are not on our payroll.

So if you take that and think okay, call us at $80 million business right now, so we’re paying roughly $20 million in discounts to our distributors. If you do that quick math, that’s about $25,000 per head that’s in our distribution channel that doesn’t include marketing and trade shows expense, facility expense, spare parts, logistics, vehicles, tooling.

So when you think about that that’s pretty good deal. And so we’re getting our money worth out our distribution channel.

And more importantly, to get our operating expense down, we shifted a lot of our service cost and our marketing expense over to them and they picked that up and are continuing to carry the ball forward. So that said, the distribution channel is not going away.

They are only growing and I expect to see that 800 people closer to 1,000 people before too long. Why our gross margin so low.

I think Jayme and I talked about this for a while. But quite simply, it's related to revenue.

We need to get -- we get fixed overheads, we need to get our products revenue up at about $12 million in quarterly product revenue, or at about breakeven from a margin standpoint. But everything beyond that with fixed expenses start dropping to bottom line.

We need to get our service margins up from the 30% today to 50%, that’s very powerful. Margins at 12%, we only need to get to 22% and so a little bit of revenue growth, some service growth.

We are working on some direct material cost reductions on the Signature series. We did have a lot of pressure on our purchase materials.

Having your volume drop 40% is very challenging with your supply chain, having troubles paying your bills is even more challenging. So we’re through all that.

We are working to get the sets -- our top 21 vendors, which are 80% of our spend under LTA and each one of those LTAs we’re looking for some pricing concessions. So we’re working to get that cost down.

More importantly, the weakening of U.S. dollar will help.

We’ve got about 7% of margins tied up in extraordinary discounts because of the weak dollars of getting 7% down would definitely help. So I think you look across the board, we have multiple ways to get there.

But it's direct material cost reduction, that’s higher volumes, it's less discounting and it's leveraging our supply chain and getting some more cost out of the supply chain. Slide 18.

When is the second manufacturing plant to be closed or leased out to save money? As I said, we save about $1.5 million a year in both rent and utilities that doesn’t count other maintenance and other efficiencies.

That is in process. As I said, mid- November is our goal to get everybody moved over and it is a stage -- multiple-stage process.

We have a lot of tenant improvements to do. We'll probably spend $400 million.

We did tenant improvements on the building. We're getting some of that offset from the landlord.

But it's important that we get that done, and get it done quickly. We have listed the facility here, should see a sign in the hard shortly.

The experts in the market tell us it will be six to 12 months on average to rent the space like ours in the current LA market. So some other question, why you feel so -- why don't you know when we’ll be profitable, why don't know what I'm going to sub-lease this facility?

So that's one of the challenges that we have. And so when is it going to happen?

We know when we can move out, but how quickly we can sub-lease on to get that relief. Question 19.

Why can't you get the China distributors to sell more turbines? I asked that once question once a week.

China and India though are very first cost sensitive markets. They're also very nationalistic, and as we all know, they don't respect IP protection or IP laws.

So trying to find China partners that we can trust not to try reverse engineer our product, find partners that are more sophisticated, not just sale first costs, it's challenging. But we've got several partners in China new partner in India, and we do think we're going to get some growth out of that market.

How our BPC sales coming? BPC is our Russian distributor, our main Russia Distributor.

We now have four or five distributors in Russia in the CIF. BPC sold $5.9 million in the trailing 12 months and that makes them currently our third largest distributor.

So I'd say their action performing fairly good as far as revenue that’s still a shadow of their former selves. But lot better than they were a couple of years ago.

Their revenue was down in Q1, but we do believe that's related to any new sanctions or the current geopolitical tensions between U.S. and Russia.

But it would be nice to turn on CNN one day and not hear them talking about Russia for a change. Why we not sold more on our Capstone Energy Finance program?

Question 21. Slide 13 again talks about the $16 million highly qualified leads.

I'm obviously a little bit disappointed. We haven't got it done faster.

I think today when you look back at it though you've got a new business model for Capstone, new business partner that’s our joint venture partner, the Capstone Energy Finance. And then you also have Sky Solar, who is a new partner for us.

And then it's a new sales approach with customers. So when you put the four of those things together, the devils and details as they say and it's taken longer to get it done.

But I still think it’s a great sales tool. We're not using our caps on balance sheet today.

I think it's a great program that will deliver 10% to 15% top-line growth on top of the other opportunities we're already seeing. Question 22.

And I’ll try to move these as quickly as we can to get the analyst questions. I know we're running a little bit long.

What happened to release these? These are build-in distributors, they're bought by Nokia and France.

They are still a Capstone customer. So operate a lot of Capstone product on landfills in France.

And they've generated about $1.1 million in revenue over the trailing 12 months, most of all of that was in the FPP revenue. Obviously, Jim and team are talking to [indiscernible] and looking for ways to expand their relationship.

[indiscernible] is $4 billion energy services company, so it would be nice to have a more strategic relationship and obviously we’ll push to get that to happen. But we are still getting revenue out of what is called release these before.

Slide 23, you spoke about moving away from the oil and gas heavy model of the new CHP balance model. Capstone revenues and gross margins are not meeting with CHP balanced model, seems a bigger problem, it's simply not getting enough sales.

I’d say I agree 100%. But again, obviously, slide six shows those sales were coming.

We're doing a lot of hard work to get there, but getting the pipeline up 467 million in step one, getting new product bookings of 82% in step two, taking those bookings and turning them into revenue in step three. So we’re hopefully showing step three here very shortly.

Question 24. Recent Time magazine article America’s energy roadmap documents what it calls a dramatic shift in thinking on the part of public utilities toward integrated and renewable energy and distributor generation into their business models, because this represents an opportunity for you to recruit public utilities or the subsidiaries as Capstone distributors or CHP within their service areas.

Yes, yes and yes. As I said over the years, historically, utility model has broken, utility see us as a competitor, if they would see as a business partner, fiduciary generation with highly reliable low cost solution that is great for the environment.

We do see utilities as potential partners. I am not sure we’ll go as far as distributors, so they definitely could be strategic partners.

And so I think that something we’ll learn more about in the coming days and months and years. Question 25.

What’s total value of accumulated NOLs, would the NOLs be able available to an acquiring company? Federal NOLs are $668 million, state NOLs are $160 million that’s of March 31st.

We do monitor the NOLs very closely. But we are seeking shareholder approval to preserve the NOLs.

We’d appreciate shareholders’ vote to approve proposal number three on the proxy in regards to the NOL pill to protect them. More importantly, we are not only just working to preserve NOLs we’re working very hard to get profitable in fact using those NOLs.

As it relates to acquiring those NOLs or acquiring Capstone, that’s very complicated accounting. It really depends on how similar the businesses are and then there’s lots of rules around that but our goal job one is to get the Company profitable and start using some of those NOLs.

Where are you manufacturing turbines? I think everybody knows most of them know we manufacture in California.

Our supply chain is almost 95% U.S. I am proud to say and about 75% of that is California, Arizona.

So we try to keep very short supply chains where possible. We do source overseas but typically, we’ve been able to find U.S.

made products for similar prices and better quality. Question 27.

What we’re doing to get the investment community back? I am assuming that means non-retail shareholders or institutional holders.

Obviously, batter results is also job one. And I think the more we could improve results, the more we get those folks to come back.

The more strategic level though, I would say, we’re maintaining our very good relations with the analyst communities. We’re maintaining relationships with the best banking community.

We’re doing investor road shows in Europe and in U.S. with Oppenheimer, Rodman, Cowen, Ross, Craig Hallun, we’re presenting at five and sometimes seven Fintech or high tech growth conferences every year.

We’ve recently started working with Renmark Financial Communications, conduct bunch of learns, so that’s retail family office and high network individuals across the U.S., Canada and the Europe. We’ve done mostly U.S.

and Canada, so far. We’re working with Energy tech investors, I mentioned earlier, on company presentations, interviews and the recently completed AlphaDirect conference series where these questions are coming from.

So that’s really the strategy going forward. But again, job one is better results.

Question 28. We should be trading at least two times sales.

Why is the organic discount compared to others, and we’ve actually done that in our past as well. Could it be more?

I mean, typically, Capstone historically has created 2 to 4 times annual revenue similar to other companies in Fintech space again go back to slide 12 and what the market caps versus performance. It’s hard to say why the price of share is where it is.

But I think again it's related to our exposure to Russia oil and gas, a lot of misconception on the institutionals on what our market is and what we’re doing with the business. So I think time will well.

I believe the stock market is sufficient, maybe not be timely, but it is efficient. And if we continue to perform, the markets will realize that we’ve diversified our business, we’ve got a better more robust service business we’ll get a better business model.

And we're on the Capstone profitability. So it should adjust.

We do consider manufacturing Roswell, New Mexico. We’re not sure why Roswell, maybe Area 51 is looking to sublet some space, maybe got some workers at low cost.

But we have very low touch labor in the product. I get a lot of questions about manufacturing in California.

The reality is we can make our $1 million box in three shifts with labor, so low cost labor did not impact our cost-of-goods very much. More importantly, our product is very identically separate tight tolerances.

We leverage California labor market, which has a lot of ex-military, ex-aerospace. And I could argue we could move to a lower cost market and actually might cost more, because we have quality issues, liability issues or rework issues that outweigh in each savings we have for more cost labor.

Three more. Have you received the money associated with the Russian distributor or inventory?

Again, that's a BPC on their $8.1 million receivable. We've got $1.7 million of that receivable recovered.

Anytime they buy products or parts, they have to pay 20% over and we pay down that receivable. That receivable has been fully reserved.

And as we collect, it becomes an bad debt recovery. So if you see year ago quarter, as Jayme mentioned, we got almost $1 million recovery that quarter which made the operating expenses look lower than they actually were.

And kind of mask some of the improvements we've had year-over-year. Question 31.

At what sales levels Capstone will be earnings positive? I think we've covered that several times, it's $25 million with the right mix, focused on slide three and slide four and that'll give you the answers on that.

But again, I have a very good plan in place and have very clear path to that profitability metric. What will take to move stock price?

And again, that's something that we got to really just keep doing what we can control. You can't control the share price.

You can control your performance. You can get out of the market.

You can market the company. We'll work hard to continue to do that to all the things I’ve said.

But more importantly, we just seem to be putting up good numbers. We're putting up I think better numbers than anybody else in our space that we're not being reward for.

But eventually, I think that will happen. And so, we need to be patient and get the profitability as fast as possible.

And as old like to say, cream eventually rises to the top and I think that will happen. So that's it for the retail shareholder questions we had.

Operator, I’d now like to turn the call open up to the analyst community.

I just wanted to touch on Capstone Finance, and I can appreciate new model and everything new about this in long sales cycles. But I know that it's probably been four-five plus quarters that your expectation has been that there were things that were potential immanent.

So just wondering, I mean is there -- has this caused you to rethinking how it's structured? Is there something different in your approach to get this process going?

And then just to clarify, did you give what your expectation is for the contribution there in fiscal '18?

I think the benefit definitely gone slower than we thought. I think it took longer to set the business up, initially.

All the paperwork and all the work to be done and then the power purchase agreement had to be written. Each state or potentially countries got different rules around being a self generator and making sure you’re not a utility.

So I think that the business is more complicated than we thought it was. Bringing in Sky Solar has been very helpful, but it also added another cook to the kitchen.

But they’re still very motivated to do these projects and help learn their balance sheets to it. I think some of our customers have struggled with the decision, because if you can save $1 million a year by self-funding or $100,000 a year by using Capstone Energy Finance, that’s the hard decision to make.

But at the end of the day, I think the pipeline is filling up. We’re very close on several projects and I think we’ll get them across the goal line.

And if you don’t get them across the goal line, I think we’ll buy cap some products straight away. So again if they use capture new finance grade, but if they buy the product, that’s great too.

So at the end of the day, we just want to get customers into our product and hopefully get them to buy more.

Darren, that was some really comprehensive spectators, two questions that I have that have not been addressed. One is the Factory Protection plan.

Can you talk about the uptick there, what the customer receptivity is since you’ve hit the ground, your sales force has been out there looking to sell less on the front end of your orders for the last few months?

Sure. I think the Factory Protection plan has been filling well in the traditional format.

We continue to put up record backlog, record revenue, the margins continue to expand that will expand more as these industries gets out there, which is more robust than the prior models. But more importantly, I think by bundling it together, we’ve got a way to leverage customers to say if you want a better economic return and a shorter return buy the bundle.

And if you buy the bundle, you have to prepay the FPP. And so we couldn’t have done this before.

We were close to breakeven and profitability, getting some of the pre pay and nine year service agreement when you’re looking $7 million a quarter, would be a real challenge. But we’ve gone some losing $7 million quarter to $3 million to nominally breakeven last couple of quarters from a cash standpoint.

So as our balance sheet stabilizes then we move toward profitability and we can sell more of these bundled solutions, which will help us on the cash flow side and the working capital side. And if customers want to not take advantage of the bundle, they can, they can buy an al carte and pay roughly 10% more by buying each individual piece, and paying for when they consume it.

And second question is about parts pricing. So if I heard it correctly, I think you mentioned price increases for your spare parts that you sell.

Can you confirm that? And maybe discuss -- whether or not people have options as far as other suppliers?

I mean using your turbines, so I seriously doubt that the main components do have options. And the approach you’re taking, as you said, prices is a there lot of the other markets like HVAC equipment, for example.

The products are a hefty part of the overall profitability for the different OEMs. And are you rightsizing the business to consider the way a lot of the other industrials approach their installed basis?

Yes, I think any industrials, your installed base gets bigger and we’ve got 9,000 units shipped in the field as that number gets bigger, well fitter will eventually come in and start targeting your business. So that’s something we need to be cognizant of.

We haven’t seen it yet, but it will happen eventually. So as we get a bigger and bigger install base, there will be aftermarket well fitters that will come in and try to steam that.

That’s why the Factory Protection plan is such a great tool. Because if we sign them up to a five year, nine year or longer Factory Protection plan, we insulating ourselves from those well fitters that try to come in.

Obviously, we're being the only significant microturbine manufacturer in the world that helps us all of our vendors sign NDAs and they know they can’t sale that part to another third-party. So we protect ourselves there even with things like air cleaners.

And so we are protected contractually but it's still something we're sensitive to. So we've raised spare parts pricing virtually every year and we've never raised the price on FPP.

And in fact, we’re lowering as part of its bundle. So if distributors don't figure out or if the customers don't figure out the better way to go, one commodity goes up every year the other one doesn’t or even goes down.

So taking the Capstone Factory Protection plan long-term is the best solution and the lowest risk solution. So we think we’ve got a unique model because of our one moving part, it really allows us to be very aggressive in the aftermarket where other folks Caterpillar, GE and anybody to receive or gain product can't be that aggressive because the performance varies widely.

So just to follow up Darren. Can you talk about when the new pricing schedules take effect, and is there a possibility for stocking effect in the channel as your distributors and dealers stock their obligated quarters for the next year?

I know that, but its great point Craig. Absolutely, the mid-May is when it goes into effect.

So there is opportunities to see stocking levels go up before that. We're also -- we've added minimum stocking guidelines to our KPIs or distributors.

And so we're being a little more aggressive on analyzing their fleet and saying these are the parts that should have under shelf, and that's required as part of your distributor agreement with Capstone. And so we're making sure -- and that's not just from a revenue standpoint for Capstone, obviously, that's nice.

But more importantly, we know that the performance of the product is better when there is local parts. And so if we can get parts on the ground locally whether use in an FPP or warranty, or just ad-hoc, having those local spares near the customer is best for our end use customers.

And so our distributors are do a good job. I know Infinity is a great example, one that model distributors.

I'm not sure they’ve had a unit down more than 24 hours in last couple of years; they've got parts; they've trained technicians; they're do amazing job at getting those sites up. We want to see that level of customer support globally with all of our distributors.

So the aftermarket business is 30% of our revenue and growing, 30% margin heading to 50%. I think you'll see margins, Q2 won't change much, but Q3, Q4 you're going to start really seeing those aftermarket service margins pick up.

And I think you're going to see at the same time that revenue is picking up, so really excited about Q3 and Q4.

I will keep it brief just a couple of questions. The product backlog that you have, what is the composition of that between the C-1000S the C-200S and C-65?

And how does it affect your gross margin outlook, looking forward?

Unfortunately, we don't break that backlog out anymore. I think the reality is, it's a mixture of all three.

The Signature series is lower margin than the C-65 today, but we're working to get that back up. That said, we've got a specific Signature series cost reduction initiative going on, as well as an overall material reduction going on.

The C-65 has slowed down -- we sold a lot of C-65s in oil and gas, especially in U.S. shale gas.

So as U.S. shale gas picks up, the 65s will pick up.

But if you look at it in the hay day of shale gas, we're probably selling 125 C-64s a quarter, today that number is closer to 50. But we come out with a new heat recovery module or HRM for the 65 to make it even more competition in CHP.

And so you should see increasing revenue in both. But our goal today is always been to have our product margins very similar across platforms.

So we’re working to get the Signatures series back to that level. And so at the end of the day, we want our customers to buy whatever product fits their application.

We don’t want to be trying to push them into a product that has higher margin for us.

And the second question is for account receivable. Was the reduction mainly due to better collection terms during the quarter, or was it that the historical or longer term conflicts that then was recovered?

We got Jamey, a Louisville slugger for her birthday, and so she has been taken that to most of distributors. And I think the reality is we’ve been working really hard to improve our cash flow.

And obviously, if we got cash needs with our current share price, it's very challenging and dilutive. So we’ve been working really hard to improve our cash cycle.

We’ve gone some 68 days DSO to 58 days, I think almost 40% of the people last quarter. We had on either LC or prepay and most all the rest of them I think out of all the units we shipped only one didn’t pay within payment terms.

And so our distributors are doing a good job at paying within terms. We’ve tightened up our terms and we’re making cash collection cash cycle inventory turns.

A lot of the balance sheet stuff that frankly other people in states don’t spend a lot of time worrying about, we do. There may be boring and not very exciting, but the reality is managing our balance sheet and our cash we’re very proud of how loads been the last three quarters.

Last quarter you mentioned some of the multi-megawatt projects in your opportunity pipeline. Just wondering if you could give us a sense of that opportunity set and how much of what you’ve mentioned in the final -- are these larger projects versus the typical single and doubles?

Thank you.

I think we’ve recently booked 5 megawatt order, which is being commissioned right now. There are some follow up orders that are even larger with that same customer.

So we’re very excite about that, that’s a foreign company in the south, so an area of the country we hadn’t done a lot in before. We’re seeing a lot of 3, 4, 5 megawatt opportunities [technical difficulty] doing some landfills as well as we started doing plans and renewable business.

But in general, if you look at the United States is very strong. We did about $10 million of revenue from United States this last quarter because there’ll be U.S.

and Canada combined and that’s almost half of revenue for the quarter, and that’s more per quarter than we’re doing last year. So I think the U.S.

is trending in the right direction; I think Europe is trading in the right direction, as well as Russia; Latin America has been slow, but I think it's going to pick up here in the back half of the year; Asia, especially Australia, Australia has been good and about to be great. We’ve announced several orders recently and they’re really getting some traction; again, mostly CHP though; Middle East and Africa, I think we’ve almost done as much in the first quarter in Middle East and Africa as we’ve done all of last year.

So whether it’s the Middle East; whether it's Kuwait or Qatar, or different Saudi Arabia different areas we're getting into; as well as Eastern Africa, Southern Africa, Northern Africa, those markets are all slow to develop but developing. And in fact Tim will be back in the Middle East here in a couple weeks.

And we've always done the last year I think we only did couple of million dollars in that market. So it wouldn't take much to get some nice growth there.

So I think the biggest challenge for us as I mentioned on the Q&A is really is Asia. So I think getting orders out of China and India have been our biggest challenge.

But the rest of the world, I think is definitely trending in the right direction.

Again, I know long call today but I wanted to -- it's important to get some of those retail shareholder questions. As I mentioned before, we will not be -- had doing our normal annual shareholder meeting since we’re in the middle of the move.

So we'll just do it at Goodwin office here in LA. So we’ll have the opportunity for shareholders to ask those questions, so that was important to answer them on today's call, so I appreciate everybody taking the time.

I'll be very brief in closing; again, very good quarter. We think this quarter we can build on for the year, very happy with the operating expenses, revenue could have been better.

But I think it's coming; as you’ve seen the pipeline up $467 million; the net product orders up 82% the last six months; operating expenses down 42%, still dropping lots from ops lowest in 15 quarters; cash used from ops, the best in six quarters; DSOs down; ARs down; FPP is at record levels; sales per employee going up. I mean I think if you look at every metric, we are trending in the right direction.

And so the question is now that we're going the direction is how fast we can get there. And so again help me to dance around that question we want to get there as fast as we can.

But there is other factors that impacted like subleasing the facility and how fast our distributors take product that they’ve recently ordered. But we are going to get there.

The team is dedicated and we look forward to the next couple earnings calls and showing you that positive performance. So with that, I'll go ahead and end the call for today.

Thank you.