Good day, ladies and gentlemen, and welcome to your Capstone Green Energy earnings conference call and webcast for the financial results for the third quarter of fiscal year 2022 ended on December 31st, 2021. All lines have been placed in a listen-only mode, and there will be a question-and-answer session following the presentation. As a reminder, today's program will be recorded. At this time, it's my pleasure to turn the floor over to Mr. Colby Petersen, Corporate Counsel. Sir, the floor is yours.
Thank you very much. Good afternoon, and thank you for joining today's fiscal 2022 third quarter conference call. On the call with me today is Darren Jamison, Capstone Green Energy's President and Chief Executive Officer, and Eric Hencken, Chief Financial Officer. Today, Capstone Green Energy issued its earnings release and filed its quarterly 10-Q report with the Securities and Exchange Commission for its fiscal 2022 third quarter ended December 31st, 2021. During the call today, we will be referring to slides that can be found on our website under the investor relations section. I want to remind everyone that this conference call contains estimates and forward-looking statements that represent the company's views as of today, February 10, 2022. Capstone disclaims any obligations to update or revise these statements to reflect future events or circumstances.
You should not place undue reliance on these forward-looking statements as they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. Please refer to the safe harbor provisions set forth on slide two in today's earnings release and in Capstone's filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. Please note that as Darren and Eric go through the discussion today, when they mention EBITDA, they are referring to adjusted EBITDA and the reconciliations in the earnings release in the appendix to the presentation slides. I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.
Thank you, Colby. Good afternoon, everyone, and thank you for joining today for a review of our third quarter fiscal 2021 results ending December 31st, 2021. If you turn to slide four, I wanted to remind everyone of our fiscal 2022 goals and then give an update on our progress through our third quarter. Our strategic initiatives are built around driving growth and reaching profitability. As you know, we have been focused on increasing our recurring revenue as part of our Energy as a Service or EAAS strategy. In particular, we have highlighted our rental growth because of its high contribution margins. Achieving our goals here translates into better margins, improving our cash flow, and also the predictability of that cash flow. Our fiscal 2022 goals include the following. First is broadening our diverse energy products and service offerings.
I'll reinforce what we have been doing here on an upcoming slide. Second is our new Direct Solution sales team, which is focused on growing top-line revenue. I'm happy to announce that we received orders for our first non-microturbine energy generation technologies for both solar PV and battery energy storage solutions during the quarter. As discussed last quarter, we are continuing to invest in our Direct Solution sales team because we see that as growth driver for our business. The Direct Solution sales team continues to show a growing pipeline of traditional microturbine products, long-term rentals, and newer green energy product offerings like solar and battery storage. Third is expanding our long-term rental fleet to 21 MW.
We announced today that we grew the fleet to 17.7 MW during the third quarter, which was slightly ahead of our expectations and was up from 13.1 MW at the end of the second quarter. In January, we announced our largest rental contract to date, a 4 MW order with a two-year contract where the end use customer is a cryptocurrency miner. We fully expect to reach our 21 MW goal by March 31st, 2022. This high margin recurring revenue is expected to be a significant contributor to our EBITDA in fiscal 2023, and we'll discuss this on a slide later in the presentation. Fourth goal is increasing our aftermarket margins and escalating parts availability to drive customer satisfaction and repeat orders.
During the quarter ended March 31st, 2021, we set up a reserve of $4.9 million to replace affected spare parts by one of our suppliers that had a defect. As expected, this program was completed successfully during the third quarter, and we continue to see significantly reduced failure rates on our power heads, which has lowered warranty expense and should drive repeat orders. Next is focusing on managing working capital and inventory turns. In the third quarter, we generated cash from working capital, primarily due to an increase in collections of accounts receivable, while maintaining very tight management over inventory controls and payables.
For the year-to-date period, cash used in operating activities and specifically for working capital and inventory, it has been somewhat heavier than expected, partially due to the ramping up of parts to build the rental fleet and also to ensure we can continue to manufacture product in this extremely challenging COVID-19 supply chain environment. Collections have also been slower than expected due to extended cash cycles with our distributors, primarily resulting from COVID-19 related pandemic impacts, but we are encouraged by the collections we had from our distributors in the third quarter. Now let's turn to slide five. There is no doubt that the world is moving toward decarbonization and greener energy solutions, and that's why we transformed into Capstone Green Energy Corporation.
This slide highlights the types of solutions we can now provide to address end customers' needs as the world moves towards these greener solutions. First, we can provide complete microgrid solution that can run standalone or connected to the grid. In addition to our traditional microturbine, we're now offering solar and battery storage solutions in partnership with our network partners. Combining these products with our Capstone microturbine technology can create a complete custom-tailored on and off grid microgrid solution. In January, we announced a new partnership with Global RAIS Energy and Storage Solutions for the supply of modular low voltage DC- to- DC solar update kits for use in Capstone's commercial and industrial, or C&I focused microgrid solutions. This is another great example of how we are leveraging strategic partnerships to increase our total addressable market or TAM. We continue to develop our offerings in the hydrogen space.
We still expect to offer 30% hydrogen, 70% natural gas blend commercial microturbine system by March 31st, 2022. Currently, our microturbine-based systems can commercially run on 10% hydrogen, 90% natural gas blend. As previously stated, we intend to spend money on development towards 100% hydrogen as the market dictates. We want our products we offer to be fuel flexible and not just meet the needs of where the market is today, but where it will be in the future when it comes to decarbonization solutions.
We also offer solutions that help commercial industrial customers with efficiency and resiliency, saving them money and providing energy security, whether it's with a combined heat and power solution of our C65 all the way up to multiple megawatt microturbine systems, or our Baker Hughes 5-MW to 16-MW large scale turbines, or our custom heat recovery solutions through Alfa Laval or food waste management and recycling solutions through Waste2ES. Now let's turn our attention to slide six. On Earth Day 2021, we expanded our portfolio of products and services and transformed from Capstone Turbine Corporation to Capstone Green Energy. We now view our business as four key strategic business lines. This is important because it goes hand in hand with our strategic goal of growing our offerings to expand our revenue opportunity with each end customer and meaningfully accelerate top line growth and recurring revenue.
Let's begin with Energy as a Service or EAAS. This line is built on the base of recurring revenue and includes long-term rental contracts, long-term service contracts or FPP, installation services, service, spare parts, leasing, PPAs, project financing, and last but not least, our DSS distributor subscription fees. The common elements on all these business lines are steadier cash flows, predictability, higher margin rates, and all of them are critical to continuing our transition to a more predictable cash flow and a higher margin business. Next is Energy Generation Technologies or EGT. This is the foundation on which Capstone was built and is based on Capstone's core microturbine technology that you're all familiar with, that we can operate on a wide range of fuels, from natural gas to biogas to blended hydrogen. These products produce high efficiency CHP or CCHP, generating electricity and multiple forms of thermal energy.
The EGT line includes our small hybrid DC microgrid product and our larger Baker Hughes industrial turbine solution for both CHP and CCHP applications. Moving on to the Energy Storage Solutions or ESS line. As mentioned earlier in January, we entered into an agreement with Global RAIS to provide solar modules and also have agreements in place for energy storage, which are both essential additions to microgrid. We'll be using a custom-tailored combination of multiple technologies, energy storage, and monitoring software that maximize energy efficiency for emissions and create resilient systems that meets customers' specific requirements and energy needs. Next is Hydrogen & Sustainable Products business line, or H2S. Fuel flexibility has always been critical to Capstone, and so hydrogen is the next big fuel source we need to address.
Our new hydrogen solution business line is leveraging the recently released second commercially available hydrogen-based combined heat and power microturbine, which can safely run on, as I said, 10% hydrogen, 90% natural gas mix. Now let's turn our attention to the most recent quarterly results. Let's go ahead and turn over to slide eight. I'll give you a quick overview of our third quarter financial highlights, and we'll focus on top line revenue here and let Eric provide a complete financial overview in just a minute. Total revenue for the quarter was $20.6 million, which was essentially flat compared to $20.7 million in the third quarter last year. We are happy with this result as there was an unusually large 4 MW order in the prior year quarter, and without that order, we are still showing overall solid growth over the prior quarter.
The long-term microturbine rental fleet, as I said, increased 4.6 MW to 17.7 MW, up from 13.1 MW during the quarter as the company continues to execute against its plan to increase the microturbine rental fleet to 21.1 MW by the end of our fiscal year, which is coming up here in March 31st, 2022. The book-to-bill ratio was 0.5x to 1x for the quarter, and new gross product orders was $5.8 million, down from $10.8 million in the second quarter. Orders were down partially due to the timing of some expected orders in December that were delayed due to COVID-19 Omicron variant.
If we turn to slide nine, we had a similar slide last quarter that shows the last four quarters of revenue, but updated it for the current quarter because it still highlights our revenue growth trends. I'll point out two things on this slide. First, that each quarter of fiscal 2022 has been better sequentially improving. The third quarter was flat year-over-year. However, as mentioned, there's an unusually large 4 MW shipment in the prior year, third quarter. Second, if you look at our last 12 months of revenue, we are still showing strong growth, being up 17% compared to the same period the previous year. I'll now turn the call over to Eric to discuss the details of our financial results for the most recent quarter.
Thanks, Darren. I'll now review in more detail our financial results for the third quarter of fiscal 2022. Turning to slide 11, you'll see the financial results for the third quarter of fiscal 2022, which had revenue at $20.6 million compared to $20.7 million in the third quarter of fiscal 2021. Product and accessories revenue was $12.3 million, down 4% from $12.8 million in the third quarter of fiscal 2021. Parts and service revenue, which includes our FPP long-term service contracts, rentals, and distributor support subscription fee, was $8.3 million, up 5% from $7.9 million in the third quarter of fiscal 2021, primarily due to an increase in rental revenue.
Gross margin as a percentage of revenue was 11%, down from 17% in the year ago period, primarily due to overhead expenses being lower in the prior year due to our COVID-19 business continuity plan, where we implemented cost savings measures such as furloughs, pay cuts, and travel restrictions, among other things. While most cost saving measures were removed as of September 28, 2020, cost savings were still maintained during the third quarter of the prior year. Additionally, we have started to see cost pressures on our component parts as well as from the supply chain, including freight costs. Total operating expenses increased $0.5 million to $6.1 million from $5.6 million in the year ago period.
Selling costs were higher by $0.3 million as we continue to build the Direct Solution sales team, and we had a bad debt recovery of $0.2 million in the prior year quarter. Net loss was $5.1 million for the quarter compared to a net loss of $7.6 million in the third quarter of fiscal 2021. Adjusted EBITDA was -$3 million compared to adjusted EBITDA of -$1.3 million in the third quarter of fiscal 2021. Again, the third quarter of fiscal 2021 benefited from the COVID-19 business continuity plan expense reductions.
Turning to slide 12, you will see the financial results for the nine months ended December 31st, 2021, which had revenue at $53.9 million, up 8% compared to $49.8 million in the first nine months of fiscal 2021, as the prior year period was more heavily impacted by COVID-19 project delays. Product and accessories revenue was $29.2 million, up 10% from $26.6 million in the first nine months of fiscal 2021, while parts and service revenue was $24.7 million, up 6% from $23.2 million in the first nine months of fiscal 2021. Gross margin as a percentage of revenue was 14%, down from 19% in the year ago period, primarily due to lower expenses in the prior year due to our COVID-19 business continuity plan.
Total operating expenses increased $4.8 million to $19.7 million from $14.9 million in the year ago period. Costs were lower in the prior year due to our COVID-19 business continuity plan. We had a $0.8 million employment related legal settlement in the second quarter of fiscal 2022. Net loss was $13.3 million for the nine months ended December 31st, 2021, compared to a net loss of $13.6 million in the prior year period. The decrease in net loss was primarily due to a $4.3 million loss on debt extinguishment related to the refinancing of our term note in the prior year, and $2.6 million of income related to the forgiveness of our PPP loan this year, partially offset by the increase in expenses just discussed.
Adjusted EBITDA was negative $8.1 million compared to adjusted EBITDA of - $3.1 million in the prior year. The prior year period benefited from expense reductions from the COVID-19 business continuity plan, which was partially offset by higher revenue. Turning to slide 13, you will see select balance sheet and cash flow items. Cash decreased $7 million to $31.3 million compared to $38.3 million at September 30th, 2021. Cash used in operating activities was $3.6 million for the quarter. The cash use was primarily driven by our net loss, which was partially offset by cash generated from working capital changes, driven by an increase in accounts receivable collections and continued management of both inventory and accounts payable. On slide 14, we wanna continue to highlight the impact of the rental fleet.
This slide shows both revenue and margin over a five-year period for a C1000 product sale with spare parts sales, a C1000 product sale with an FPP contract, and a C1000 rental. Over that five-year period, a C1000 product sale with spare parts can generate approximately $1 million of revenue with approximately $200,000 in margin with a 20% margin as a percentage of revenue. A C1000 product sale with an FPP contract can generate approximately $1.2 million of revenue with approximately $300,000 in margin with a 25% margin as a percentage of revenue. The C1000 rental can generate approximately $1.8 million of revenue and approximately $1.1 million of margin with a 60% margin as a percentage of revenue.
We think the numbers speak for themselves here to illustrate why we've been building our rental fleet and why it is one of our key strategic goals for the year. On slide 15. We wanted to show the impact of growing the rental fleet to 21.1 MW, which we expect to do by March 31st, 2022. While we have continued to sign rental contracts because of the timing of shipments, commissioning, payments, and revenue recognition, we have not yet seen a quarter with a full 21 MW of rental revenue. This slide highlights our actual last 12 months of rental revenue and margins. We created an as-if scenario where we assume we have a 21 MW rental fleet with a 90% utilization rate.
As a reminder, we have publicly stated we expect to be at 21 MW by the end of our fiscal year, which is in two months, March 31st, 2022. As you can see, at 21 MW with a 90% utilization rate, the as-if scenario is significantly higher than the last 12 months. We hope this chart helps illustrate the impact we expect the rental fleet to have on our future results. At this point, I'll turn the call back to Darren. Darren?
Thank you, Eric. I think you can see from Eric's presentation that top-line revenue growth and increased profitability from our Energy as a Service business model and recurring revenue is where our focus is. As we continue our transformation to Capstone Green Energy, we expect to realize higher growth levels and higher margin rates. Turn to slide 17. Slide 17 summarizes how we think about the parts of our business and their potential growth rates. The first image highlights our traditional global distributor business that is relatively mature at this juncture, and we expect to grow at a lower rate than the other newer portions of our business. We expect our Energy as a Service or EaaS business to expand rather quickly as we build out the long-term rental fleet, and as Eric pointed out, what we are targeting as a key driver to sustained profitability and positive cash flows.
Our new Capstone Direct Solution sales team that is focused on large customer rollouts and our new expanded microgrid product offerings we view as having high growth potential as well, as most countries are similar to the U.S. and want to build back greener after the pandemic. Lastly, we view our strategic M&A initiative as having high potential growth, and it could help us grow our portfolio of products and services and leverage our underutilized manufacturing facilities, both here in the U.S. and in the U.K. We are not just talking about M&A here. We're open to strategic partnerships, joint ventures, and other related strategic opportunities. Turning to slide 18. Slide 18 sets out some of the business catalysts I expect for Capstone Green Energy. I will not run through every line item on the page, but want to highlight some key points.
First of all, when we transformed to Capstone Green Energy and added the various new products discussed today in our portfolio, we significantly grew our total addressable market or our TAM. We essentially can talk to almost any customer worldwide and have a solution today. We are encouraged by the first solar and battery storage orders received in the quarter. We discussed the rental business in detail earlier, but once again, I want to stress the importance of the rental business and the rental business growth. We believe that because of their high margins and long-term nature, rentals are our fastest and most direct path to a consistent positive EBITDA. Getting to 21 MW is going to be a huge milestone for Capstone.
Direct Solution sales team has generated a very nice pipeline of projects, and we're excited to see some of those close in this last quarter of fiscal 2022. Lastly, we have discussed it on our prior calls, but I wanted to highlight again that we dedicated one of our senior executive team members strictly to strategic opportunities, obviously including M&A. With that, I'd love to take any questions from our analysts. Operator, let's open up the call.
Absolutely. Thank you. Ladies and gentlemen, the floor is open for questions. If you have any questions or comments, please press star one on your touchtone phone. Pressing star two will remove you from the queue should your question be answered. Lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. The first question is coming from Amit Dayal from H.C. Wainwright. Your line is live.
Thank you. Good afternoon, everyone. Darren. Good, good with you, Darren. On the gross margin front, I understand the year-over-year comps, you know, may not be as favorable because of the cost cuts that you undertook at that time, but sequentially were lower as well. Is there any other driver over here that is keeping margins lower? You know, what outlook can you provide on this front in terms of a potential bounce back or any improvements going forward?
Yeah, definitely. There's some other drivers. I'll let Eric jump on this question, especially when it comes to outlooks.
Hi, Amit. I won't give an outlook because I know we don't give guidance. I will, you know, speak to some of the drivers that are making a decrease over the first and second quarter. First is the cost pressures on parts I mentioned. We did see costs rise in Q1 and Q2, but not materially like we did in Q3. Year-over-year, we also had some less discounting this year that kind of offset that. The contribution margin percentage from product actually is the same this quarter versus last quarter or prior year. Then additionally, you see we sell numerous parts and accessories, and depending on which parts and accessories they are, you know, on the given mix, they also could drive margin lower.
First, cost pressures, second, mix, and then third is really, freight costs and other supply chain related costs.
Yeah, I guess I'd add, Amit, that, you know, definitely with COVID-related supply chain issues, we are seeing some challenges. We are instituting a price increase on product and on our service contracts, effective in May. This quarter was a little bit abnormal, though, as Eric said, so I would expect a rebound, but things could be choppy for a couple quarters on margin. I think as we get into the next fiscal year, we should see things normalize and margins should increase quarter- over- quarter as we continue to ship rentals. As Eric pointed out, rentals are our fastest, most direct path to profitability, 60% margin, recurring revenue. That is our, you know, number one focus.
Number two focus, obviously, is the direct sales force, as we wanna continue to get larger projects and larger rollouts with big customers, drive that top line and start seeing additional revenue from the new product lines like we started to see last quarter. So definitely I think a little bit of anomaly on the margin this quarter, but I would caution it's gonna be a little bit choppy just because some of the supply chain challenges which are real. You know, both freight and material costs have been very, you know, challenging the last couple quarters.
Understood. Thank you for that. In the press release, you highlighted some accounts receivable issues you might have been facing in November, December, when the pandemic was sort of surging again. Have those issues been resolved and were those tied mostly to at the distributor level or were they associated with the rentals business?
We haven't had any issues with the rental business. The good thing about rental business, if somebody doesn't pay for the unit, you come pick it up. We're pretty good in that case. What we found is when the initial pandemic hit, a lot of customers' projects stalled or even stopped. A lot of our distributors had stuck units that you know basically were going to a project where the construction effort had ceased because of the pandemic. They were not getting their you know their progress payments and the cash flow was interrupted. That got better. Omicron came and hit them again. I think that it's something that is improving. We think the next couple quarters will continue to improve.
If you look at our DSO over the last couple quarters, it's been coming down, but we're still not back to pre-pandemic levels, which is in the kind of mid-80 days on DSO. I do think that's something again that we'll see improve over the next couple quarters. We work it very hard, but obviously we wanna be, you know, sensitive to our distributors' challenges and everybody's dealing with COVID. Obviously, it's different depending on where you are in the world or even the United States, but it's still, you know, creating some headwinds. I'm hopeful that this summer we'll really get past this and start hitting on all cylinders.
Yeah. I guess I'll quickly add. You know, Q1 and Q2, we were roughly around 135 days DSO, and we brought that down to 119 days for the December quarter. We expect that to go down again in Q4.
Okay. Thank you for that. Just one last one from me. Darren, can you talk about sort of the opportunity pipeline? I know the book-to-bill was down a little bit compared to the prior periods, and that's probably also because of, you know, these pandemic-related issues. Has that started improving for you? You know, what is in the pipeline now that you have, you know, different drivers, including solar and storage and the Baker Hughes partnership? Can you just give us some color on what some of that looks like right now?
Yeah. No, definitely the book-to-bill is something I wanna talk to because I think normally we tout that as something that is, you know, an indicator of future quarters' revenue. This quarter, we had a couple big projects or big orders that literally didn't get in because the folks at our distributorships got COVID, and they came in early in January. I think one or both those projects have been press released in January. I think our bookings through the first five months of the quarter are about $4.6 million. We're close to equal to last quarter. I think that gives you an idea of what last quarter should look like. We got several nice orders pending.
Generally, I think most parts of the world are seeing a positive outlook to this new year. As you said, adding the new product lines definitely increases our you know total pipeline. Our distributor pipeline is approximately $1.3 billion, but our direct sales pipeline is now up to you know $300 million-$400 million. We're definitely adding to that top line pipeline and should see some more growth. Baker Hughes, we're very excited about that relationship. Unfortunately, we're going over to Florence in January, and that got canceled for strategic meetings with Baker Hughes. We've got about 15 projects pending. We're contemplating putting one of their NovaLT5 5 MW machines in our rental fleet.
Definitely that's a relationship we wanna continue to grow and think that there's a win-win relationship going forward with Baker Hughes.
Understood. Thank you. Thank you, guys. That's all I have. Thank you.
Thank you, Amit. Have a good afternoon.
Once again, if there are any remaining questions or comments, please indicate so by pressing star one. The next question is coming from Rob Brown from Lake Street Capital Markets. Your line is live.
Good afternoon.
Hey, Rob.
Just on the solar and battery product line, how is the demand curve you're seeing there and the market uptake, and I guess some of the drivers of that product line orders?
We saw in the quarter our first two orders. One was a dairy, and the other one was in the Caribbean. One was battery storage only, and one was battery storage and our new Global RAIS solar photovoltaic panels. We're generating a pipeline. Obviously, it's a bit of a new business for us, and we're having to, one, find the strategic partners, which we've now done, with Core Batteries, NRI, and Global RAIS. More importantly, we've got to train our sales folks. We've got to train our application engineers, we've got to train our distributors folks. We're in process of doing that. We're in process of updating all of our documentation, our product brochures, our specification sheets.
It's a little bit of a you know curve to get up, but I think definitely the first place we'll go is any customer that's got a CHP installation with a microturbine to see if we can add battery storage or solar or both. Then obviously there's opportunities for battery storage and solar in multiple markets that we'll kind of lead with battery storage and solar and then see if we can also sell them a microturbine along the way. Very excited about that. We got some interesting other ideas and some other ways we think we can go to market. I think in general with you know 10,000 microturbines shipped worldwide, starting with existing customer base is a great place to start.
There's some very unique markets, especially in the C&I market where, you know, the products we have, we think have a very unique competitive fit.
Okay. Great overview. In the rental business, you've made great progress and you're closing in on the goal, but you know, how is that pipeline kind of compared to the goal? You know, what's sort of the thoughts on going beyond that target?
Yeah, as we said, we got from 13 MW to over 17 MW in the quarter, which is great. We signed our biggest rental to date, which is 4 MW at a site in Pittsburgh, which is an oil and gas site where they're using the associated gas to run Bitcoin mining operations. That site should expand in the summer, probably by at least another megawatts, maybe 2 MW. We've got multiple other Bitcoin miners out there that we've got quoted. Our machines can be set up and running at different voltages and frequencies, and a lot of these Bitcoin miners are coming over from China, so that's a good fit for us.
Obviously, if you can run on associated gas that you would just be flaring, that's a great cheap operation and cheap way to create that energy. That's very exciting. We see, you know, a lot of interest in the cannabis space as well. Oil and gas continues to be a good rental market for us. We're doing a hotel down in Jamaica, which has got 27 different properties, so we're looking to expand there. I think the Caribbean in general is a good rental opportunity market. So, we've got, you know, plenty of rentals. Everything we've done to date has been U.S. We just recently got an order in Mali.
We're looking at stuff down in Latin America and Colombia, some stuff in Europe, and Middle East as well. I think as we take the rental fleet international as well as continue to penetrate these markets, we'll get well beyond 21 MW. Obviously, you know, we don't want to stop at 21 MW. We wanna keep growing that business. We've got a board meeting next week, and that's probably the most important topic is, you know, continued funding of that global rental fleet.
Okay, great. Just a little bit on the back to the cost issues that you're seeing. Are you know, what's sort of your exposure to price, kind of, expense costs on parts? And I guess where's the freight issues come in at that. Do you bear sort of the freight costs, or can you negotiate that into the new contracts? I know you said it takes a couple of quarters. Just wanted to get some clarity on how.
Yeah. No, it's a great question. Freight has gone up substantially and times to ship have gone up as well, so that's leading to some higher inventory levels. We're having to adjust our lead times and bring more, you know, spare parts in or additional safety stock. We're seeing it across, you know, all types of metals, you know, from sheet metal to stainless steels, nickel, alloys. We're seeing it in wood. We're seeing it in copper. Virtually, you know, everything we look at is going the wrong direction right now from a commodity standpoint. We've got LTAs in place with most of our major vendors, which protect us, you know, a little bit. That's something that obviously, you know, we're gonna have to address.
Where we can, we're trying to bring, you know, extra vendors on, make sure we create competition. It's something we need to work through. I think, you know, the price increases we're putting in place May first on product is, you know, between 7%-10% in most cases, and then a 5% increase on service contracts. It's, you know, something that's gonna be here for a while. I think the big issue is just making sure we can manage it and that Kirk and his commodity team can keep parts flowing at a reasonable price. The good news is, as we develop more rentals at 60% margin, we can take a little bit of rental, you know, unit cost increase and still have very nice margins.
It's definitely, if you say what keeps you up at night right now, it would definitely be commodity, both pricing and availability, and then, you know, the additional growth of our rental fleet are, as you know, things we got to figure out and manage the next couple of quarters.
Okay, great. Thank you. I'll turn it over.
Thanks, Rob. Great questions.
Okay, if there are any final questions, please indicate so now by pressing star one on your touch-tone phone. All right. Looks like we have no further questions in queue. I'd like to turn the floor back to Darren Jamison for closing remarks.
Thank you, operator. Amit and Rob, great questions. Thank you. You covered most of the things I want to talk about in my closing remarks. I guess just most importantly, kind of a summary, what should investors be looking for in the upcoming, you know, March quarter? You should be looking for the new 30% hydrogen announcement. You should be looking for us to get to 21 MW on our rentals. You should hopefully see more of our battery storage and solar PV projects getting awarded. You should hopefully see some wins out of our direct sales organization, and then hopefully some bigger wins and some bigger customers. I think slide 15 that Eric showed today was key. It's just, you know, rentals.
If I was a shareholder, that would be my number one thing I'd be monitoring with Capstone: how fast can you deploy those rentals, how fast can you get to EBITDA positive, and how fast can you generate recurring revenue with high margins. To me, getting Capstone EBITDA positive and cash flow positive with solid margins has been our goal for years. To attain that and do it on a recurring basis is absolutely the goal, and we can't get there fast enough. Look forward to talking to everybody after the March quarter, which is our fiscal year-end, and hope everybody stays safe. Thank you.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.