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 fiscal year 2023 that ended on December 31, 2022. All lines have been placed on 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. Don Ayers, Vice President of Technology. Sir, the floor is yours.
Thank you very much. Good afternoon, and thank you for joining today's fiscal 2023 3rd quarter conference call. On the call with me today are Darren Jamison, Capstone Green Energy's President and Chief Executive Officer, and Scott Robinson, Interim Chief Financial Officer. Today, Capstone Green Energy issued its earnings release for its fiscal 2023 3rd quarter ended December 31st, 2022. We will be referring to slides that can be found on our website under the Investor Relations section during the call today. This conference call contains estimates and forward-looking statements representing the company's views as of today, February 13th, 2023. 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 because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control.
Please refer to Safe Harbor provisions set forth on slide two of the slides accompanying this presentation 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 Scott go through the discussion today, when they mention EBITDA, they're referring to adjusted EBITDA and the reconciliations in the earnings release and the appendix to the presentation slides. I would like to now turn the call over to Darren Jamison, President and Chief Executive Officer.
Thank you, Don. Good afternoon, everyone. Thank you for joining today for a review of our third quarter fiscal 2023 results ending December 31, 2022. If you go ahead and now turn to slide three, I'd like to run through today's agenda. I will start with a brief business environment discussion and then update you on our strategic Energy as a Service rental fleet growth. As a reminder, our Energy as a Service or EAS business remains the foundation upon which we are building a stronger Capstone. Next, Scott will provide more details on the third quarter financial results, and then I will dive deeper into the electric vehicle charging market, where we're seeing very exciting opportunities for us. We will conclude with questions from our analysts.
I also want to remind you that there is an appendix of today's presentation providing more details and additional information on our products and the new IRA bill. Let's go ahead and jump to slide five. Slide five shows our current business environment that we're in today. Third quarter revenue was off $1 million compared to the same period last year, to date, revenue is up 9.5%. This revenue growth can be attributed to our Energy as a Service or EAS business, which has grown approximately 18% and continues to outperform the rest of the business. As you know, the Energy as a Service business, which is our FPP long-term service contracts, our spare parts, and long-term rentals, is our critical foundation.
What I am happy to say, the revenues are up 18% for the first nine months of fiscal 2023, mainly due to higher rental revenues of almost $4 million at $3.9 and an FPP maintenance contracts of approximately $900,000. In addition, we have navigated a very tough supply chain environment, and we are expecting to see significant improvements in the area this year. Looking ahead, I'm excited about what we've seen to start our fiscal fourth quarter and what I expect for the rest of calendar 2023. For the first nine months of fiscal 2023, gross margins expanded to 16% from 14% for the first nine months of fiscal 2022. However, I'll note that this was less than anticipated as ongoing supply chain expenses, freight costs, and expediting charges continued to plague us more than we anticipated.
Now let's move on to slide six. On slide six, you can see that on December 31st, 2022, there was about 40 MW of Energy as a Service long-term rentals under contract and re-rental units under contract, which is a substantial increase from 17.7 MW on December 31st, 2021, which represents a 126% increase year-over-year. I'm proud to say that we're still on schedule to meet the company's target of 50 MW under contract by March 31st, 2023. I'll now turn the call over to Scott, our Interim CFO, to go through some of the specific financial results. Scott?
Thank you, Darren. Good afternoon, everyone. I will now review in more detail our financial results for the third quarter of fiscal 2023. Moving to slide eight, you can see our Q3 2023 results compared to Q2 2023. Financial results for the third quarter of fiscal 2023 had revenue of $19.6 million compared to $20.8 million in the second quarter of fiscal 2023. Product and accessory revenues were $10 million, down from $10.6 million in the second quarter of fiscal 2023. Parts, services, and rental revenue, which includes the rental, FPP long-term service contracts, and distributor support subscription fees, were $9.6 million, down from $10.2 million in the second quarter of fiscal 2023.
This was primarily due to a decrease in our spare parts revenue due to Russian sanctions. Gross margin as a percentage of revenue was 14% in Q3 2023, up from 11% in Q2 2023, primarily due to the easing of supply chain challenges. Total operating expenses increased slightly to $2.6 million from $5.7 million in the previous quarter. Net loss was $5.2 million for the quarter compared to a net loss of $4.9 million in the second quarter of fiscal 2023. Adjusted EBITDA was a negative $1.7 million compared to adjusted EBITDA of a negative $2.2 million in the second quarter of fiscal 2023.
Turning to slide nine, you will see the financial results for the third quarter of fiscal year 2023 compared to the prior year period, which were revenue at $19.6 million compared to $20.6 million in the third quarter of fiscal 2022. Product and accessory revenue was $10 million, down from $12.3 million last year. Parts, services and rental revenue was $9.6 million, up from $8.3 million in the same period last year. Gross margin as a percentage of revenue was 14%, up from 11% in the year-ago period, primarily due to greater contribution from a higher margin rental business. Total operating expenses were stagnant at $6 million from $6 million in the year-ago period. The current year expenses include costs for investment banking and other fees relating to our debt refinancing activities.
Net loss was $5.2 million for the three months ended December 31st, compared to a net loss of $5.1 million in the prior period. Adjusted EBITDA was a loss of $1.7 million compared to Adjusted EBITDA of a negative $3 million in the prior year period. Slide 10 shows the year-to-date fiscal 2023 versus the year-to-date fiscal year 2022 financial results. Top line revenue increased from $53.9 million to $59 million due to growth in our Energy as a Service business. Gross margin increased from 14% to 16% due to contributions from the Energy as a Service product line, offset by the direct material price increases previously mentioned.
Operating expenses decreased from $19.7 million to $17.2 million due to cost reduction efforts, and adjusted EBITDA improved from $8.1 million loss to a $3.4 million loss. Turning to slide 11, you will see selected balance sheet and cash flow items. Cash decreased to $16.6 million from $23.8 million at September 30, 2022, driven primarily by net loss funding, investments in our rental fleet, and purchase of long lead time inventory. Cash used in operating activities in the December quarter was $4.9 million compared to cash provided of $900,000 in the September quarter. The variation was largely due to net loss funding and inventory purchases.
Accounts receivable declined nearly from $19.3 million to $15.2 million as our DSO dropped from 85 days to 66 days during the quarter. This reduction was due to collection efforts and also benefited from offsetting certain accounts receivable accounts against the purchase price of rental units that were additions to our rental fleet. Total inventory levels increased by $4.5 million due to the previously mentioned price increases from vendors and due to the necessity to purchase inventory in advance of forecasted demand due to continued shortages and other supply chain challenges. We do need more inventory as we ramp production of both new products and focus on growing the rental fleet to 5 MW-50 MW by March 31st. I will turn it back over to you, Darren.
Thank you, Scott. As part of our quarterly update, I'd like to take a few minutes to remind investors of our overall strategy and how we're working to achieve our profitability goals. Let's go ahead and turn to slide 13. Slide 13 is the technology and markets we are now concentrating on and are showing on this slide. I include this because I want to remind our investors of the various diversified industries and applications in which our solutions are currently being deployed. I won't go over every detail in each category, but I do want to draw your attention to smart microgrids, renewable energy, and especially EV charging, where we're seeing new demand for both stationary and portable EV charging solutions. Let's go ahead and move on to slide 14.
Slide 14 displays the projected revenues for the global EV infrastructure market. Our plan is to be there to take advantage of as much of that market as we can. This market will generate opportunity for DERs and for smart microgrids. There is demand for EV charging solutions in both the United States and Europe right now. We look forward to providing energy to customers who cannot readily get a charging solution from their local utility. Slide 15 shows you a key new solution we are developing to meet the needs and we are starting to see from EV charging opportunities around the industry. This solution can substantially reduce stress on the grid and the environment when coupled with intelligent EV charging solutions using natural gas, renewable natural gas, or renewable biogas to power the EV charging infrastructure.
This gives users the option to charge a bus or a truck fleet without the need for extra grid infrastructure, grid payments, and enables fleets to provide electric vehicles and deploy them much quicker. Some key points are that it's scalable and transportable and avoids high utility demand fees. Most places have access to natural gas pipelines, or users can use a virtual natural gas pipeline, not to mention Capstone EaaS allows for the rental of these units so that costly capital expenditures can be avoided. Before turning it over for questions from our analysts, I want to leave you with some thoughts. Even though our bottom line was essentially unchanged, we were able to survive an extremely challenging supply chain climate.
I am enthusiastic about what I have observed in the beginning of our fiscal fourth quarter and what I anticipate for the remainder of the calendar year 2023 as we look ahead. We are still dealing with supply chain problems and rising prices, but I anticipate that our pricing hikes from January will start to balance this out. As input costs stabilize, we continue to anticipate the adjusted EBITDA results return to more normal levels that we saw in Q1, hopefully in the fourth quarter and the first quarter and beyond. We anticipate over the next 12 months, there will be a convergence of favorable developments, including our price hikes taking effect, the implementation of the new Inflation Reduction Act, and the growth of new markets like EV charging.
As we move away from being solely a manufacturing firm, our Energy-as-a-Service rental business will continue to be our main focus and should deliver us benefits like profitability, predictable revenues, and strong cash flows. As we get closer to our target, 50 MW under contract, our results show that we have made progress since making this significant strategy shift. The facts demonstrate that our customers need the solution and that we can deliver it, meeting their needs and generating profits for our shareholders. Now, with that, I'd like to open the call up for questions from our analysts. Operator?
Certainly. At this time, we'll be conducting a question-and-answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone. Please hold while we poll for questions. Your first question is coming from Rob Brown from Lake Street Capital Markets. Your line is live.
Hi, Darren and Scott.
Hi.
Just wanted to talk a little bit about your confidence in your rental trajectory there to the 50 MW. How does the pipeline look at this point? I think you've had some announcements recently that get you close, but just an update on how you get from the 40 MW at the end of the year to the 50 MW in your goal.
Yeah, no, it's a great question. We've got a 100+ MW pipeline of projects. Obviously, we're trying to fill, you know, a 10 MW gap between 40 MW and 50 MW. We're in negotiation with several projects right now, mostly in the U.S. oil and gas space. I would expect that we'll be at 45 MW under contract by the end of this month, and then we'll need to fill 5 MW between end of February and into March. Highly confident on the trajectory that we're on. You should expect to see more press releases, you know, between now and the end of the quarter. I think that's, you know, definitely we've seen a softening, I would say, of the crypto market, but I would say oil and gas has more than made up for that.
Most of the opportunities we're seeing right now are in the oil and gas space, especially since January.
Okay, great. Have you seen any of the IRA driven demand yet? I assume it's still coming. If you haven't seen it yet, how does that play out in the next few months?
We had great bookings in January. In fact, we actually booked more product sales in January than we did the entire third quarter in one month. I would say we're starting to see the leading indicator of some of those opportunities. I think that, you know, we've got to rerun numbers for customers, and people need to get, you know, comfortable with the new bill, but I think it's gonna be very significant. If you look at, you know, the U.S. market is well more than half of our business, and the biggest piece of that has been CHP, renewables. That's definitely hitting our biggest market with a huge incentive. Taking that, you know, IRA tax incentive from 10% to 40% is very significant.
Again, I'd say oil and gas is very strong. I just got back from Europe. We're seeing actually oil and gas activity in Europe for the first time in years, as well as the U.S. market also being strong. We've also got projects going on in Latin America, Australia, and parts of Asia.
Okay, great. My last question is on, the pricing, that you took at the end of January. What's sort of the magnitude of that? Did that happen pretty quickly, or does that take time to roll out?
No, it definitely happens. I mean, we implement it quickly and we update Salesforce, there is a lag, obviously, 'cause we, you know, typically book products one quarter and ship them a couple quarters later. There's gonna be a lag between, you know, new orders at higher pricing and when those will go through our P&L. January 31st was the new price increase. In the U.S. market, it was 10%. Overseas, it was more like 7% just because the IRA bill being the U.S., you know, influence, obviously the dollar's been fairly strong as well. Fairly significant price increase. We did 1 last year as well. We're still working on the other side of the equation, which is getting costs down from our vendors.
We are seeing freight costs and freight shipping times come down nicely. We still got some work to do though on some of the other commodities, you know, especially, you know, printed circuit boards, IGBTs, fans, some, you know, high-grade, wiring and things like that, the costs need to come back down. I would say, you know, we're on the backside of the bell curve when it comes to supply chain issues, but we still have some work to do to get there.
Okay, thank you. I'll turn it over.
Thanks, Rob. Great questions.
Thank you. Your next question is coming from Shawn Severson from Water Tower Research. Your line is live.
Hey, Shawn.
Hi, Shawn.
Once again, Shawn, your line is live.
Thank you. Just a couple questions, Darren. I wanted to follow up on Rob's question a little bit about the pathway you're seeing from the IRA and how it's been showing up in the orders. I mean, I know you said you started a strong calendar year, but I'm trying to understand when I look out and modeling the year, where do you see the bulk of this coming in? Do we have any big, you know, sort of big surges that we would look for later in the year as this really starts to develop?
I think you definitely have to look at our normal project life cycle, which for, you know, product sales where it's capital purchase, you know, these projects can be 12-18 months, in some cases, even longer. It's definitely a longer sales cycle, but we're seeing an uptick in inquiries. We're seeing projects move through, you know, Salesforce at a, at a better clip. I think, you know, we're starting to see the leading indicator of it, but it should really strengthen this summer into the fall, and that's exciting for us. As Scott mentioned, we're trying to, you know, build inventory for what we see as a growing product sales pipeline, especially in the U.S. this year, as well as trying to get to 50 MW.
We're, you know, pulling pretty hard on our supply chain. And in defense of our supply chain, you know, our purchases are up dramatically year-over-year, much more than our revenue because of the build on the EaaS side. Definitely I look though for the back half of the year to be very strong. The first half of this year, we're really focused on getting to that 50 MW under contract and then getting, you know, all 50 MW deployed. I think that's another important point is that there is a lag between signing a rental contract and actually getting the product, you know, built, shipped and commissioned, and that can be anywhere from, you know, 45-60 days typically.
My last question is just, has there been any bias towards the types of customers that are responding to this? I know obviously the push towards the large global, inter- global customers and national customers with the internal Salesforce specifically. Are you seeing any differences in appetite between the types of customers that are engaging on this? I'll step back in queue.
No, Shawn, it's an interesting question. I don't think we have enough data to make a statement. I mean, most of the folks we're talking to right now are people that had projects that didn't go forward because of, you know, paybacks being too long. We're reaching back out to those folks. Those are people who, you know, touched in the last couple of years rerunning the economics. In general, the IRA bill, you know, drops the simple payback by two years. It was a six-year payback, it's now a four-year payback, or seven years now a five. You know, we've got to reach out to those customers, rerun the economics and see if we can get them interested in moving forward in the project.
If they're not interested in a capital purchase, are they interested in looking at an EaaS solution? I think what's also interesting, I just returned from Europe and they're pretty stunned by the IRA bill. I think it puts the U.S. ahead of Europe as far as developing green energy and energy transformation. I think that's a place that they're not used to being. I do think you're gonna see more come out of Europe as they try to catch up to the U.S. and hopefully, you know, try to get ahead of the U.S. I think there's more opportunities there.
As also mentioned, because of the war in Ukraine, we're seeing oil and gas activity pick back up in Europe as they realize they can't get all their, you know, natural gas, you know, from Russia, and that the cost of other natural gas and supply is very challenging to find other locations. Interesting times in Europe and interesting times in the U.S., I think, between the IRA bill and then the impacts of the Ukraine war.
Thank you. Your next question is coming from Sameer Joshi from H.C. Wainwright. Your line is live.
Hey, Darren, Scott. Thanks for taking my question. Just following up on the EaaS discussion, you are on track to get to your target for of 50 megawatts. Does the IRA and the increased incentives for upfront benefit change your strategy long term and like, are you increasing your targeted EaaS deployment next year in the fiscal 2024 year?
No, it's a great question. I think right now we're really focused on getting to 50 MW. If you look at, you know, the numbers in the queue, if we were just kind of neutral on margins for our products, we'd be kind of EBITDA neutral for the year. The negative gross margin on our products because of supply chain issues has dragged down our ability to be, you know, EBITDA positive or adjusted EBITDA positive. If we get back to just zero gross margin or just slightly positive and we get to 50 MW deployed, you know, we're solidly EBITDA positive. That's really the short-term growth and the short-term goal.
We need to really see cost of capital going forward. How we work on refinancing Goldman and what that looks like, I think will drive, you know, what we do going forward beyond 50 MW. I think, you know, when we talk again, you know, after the fourth quarter, I hope to have a solid plan in place to say we're already at 50 MW deployed. We're, you know, back into positive EBITDA territory like we were in Q1 of this year. Hopefully have a rollout strategy on where we go next beyond the 50 MW. Today, we're fairly focused on executing on that 50 MW. And it's not insignificant when you think about it as a business we started three years ago, and really had trouble getting lift off because of COVID.
This is accelerating very quickly. You know, deploying 50 MW, which is closer to 75 or 80 machines around the U.S. and now moving internationally, you know, that's a lot of activity to undertake for us in a short period of time.
for that. Moving to the EV initiative, are you, well, the first question is, what is the status of the development of the product? And is this development being done with certain customers in mind and target audiences in mind? Or are you independently developing and then will present it to any potential customers
No, we're working with one of the largest commercial REITs in the U.S. as kind of our partner right now. They're providing the chargers, we're providing the microturbines. We've also generated, you saw a picture in the presentation, a portable version of that. It's a 180 kW charger with a C200S microturbine. We've got a little bit of a battery on board for black starting and some solar PV. The goal is to be able to deploy these around the country as people bring in electric fleets. We're finding a lot of folks getting buses and trucks, and then they turn to their utility and they can't get the additional utility feed and power that they need.
They all of a sudden find themselves with a fleet, brand new, but they can't charge it. We've got, you know opportunities here in California, we're doing stuff in New Jersey. We got some stuff going on in Chicago right now. They're a big company. We're kind of riding their coattails a little bit. They've obviously got a pretty big, you know, indentured customer base, as large as they are, I think it's a good natural fit for us. It's early days, we'll see how this expands. Obviously, you know, portable is great. We'd rather do more permanent infrastructure.
I think as demand for EV charging increases and we electrify more buildings, the number of utilities that are unable to keep up with that demand is only gonna grow. I think that's a great opportunity for us. We'll look, you know, at the landscape as it adjusts and grows and figure out if we wanna partner with somebody or continue to just work with a few key clients.
Understood. Should we expect initial revenues during calendar year 2023 or 2024 from this?
Yeah, no, absolutely. We've got 7 MW or 8 MW out on rent right now, on trailers. We've got some permanent installations that we think will move forward here this quarter. We've done a couple installations in Europe for permanent EV charging solutions. This is something that's driving revenue, both, new product sales and, through our EAS business. I think the real exciting part is how this could grow over the next several years. If electric vehicle infrastructure is not put in place and EVs continue to grow, at the pace that they're projected to grow, this is gonna be a huge opportunity for us.
Understood. just a few on the parts revenues which were slightly impacted by these Russian sanctions. was that impact in like sub $1 million range, or was it like a couple million dollars? How should we think of the scale of this impact?
Yeah, no, you know, Russia, once upon a time, was one of our biggest markets. We've got 2,500 microturbines over there. The ability to not sell new product over there or, you know, the struggle to get spare parts and then make sure that we, you know, stay in line with all the U.S. sanctions is definitely impacting us, you know, a few million dollars a quarter, if not more. You know, I'd say some of the supply chain issues definitely impacted a couple megawatts shipments last quarter. There's probably another couple megawatt, couple million dollars there as well. Those two things are definitely challenging for us. On the supply chain side, we continue to meet with, you know, our various vendors.
Unfortunately, you know, when some vendors can't meet, you know, deliveries and others can, we get kind of the imbalance in our inventories that we're seeing today, where we've got too much of one part and not enough of the other, and inability to, you know, to hit our target production levels. That'll be a major focus for us. It has been the last quarter. Will continue to be a major focus for the next couple quarters until we get our, you know, supply chain, you know, more balanced and our inventory turns back to, you know, three and a half, four, where we wanna see them, not compared to where we are today. Very happy though on the receivables side. We've really focused on receivables coming out of COVID.
As you recall, we were, you know, 65 days going into COVID kind of DSO. We hit 156 days as a high during COVID. We're back down to 66 days today. That's been a lot of work by the finance team and myself to clean up the receivables and work with the distributors and the end use customers to make that happen. Good success story there. Now we need to focus, you know, on the supply chain side, the balance sheet side, and then, you know, continue to keep growing that energy service business.
Got it. Thanks for taking my questions, and good luck.
No, thank you. Thank you.
Thank you. That concludes our Q&A session. I will now hand the conference back to Darren Jamison for closing remarks. Please go ahead.
Great. Well, thank you. Great questions by the analysts. I think you touched on a lot of the things I wanted to touch on. I think, you know, the most important thing for me as I look at this quarter is that we're, you know, still hitting our target to be at 50 MW under contract by March 31st. That's the most important thing, the most transformational thing we can do for our business. As we grow that Energy-to-Service business, we need to keep hitting those target dates, make sure we get that product deployed and make sure the fleet is running well so we get more repeat customers. We are in process, as you know, of refinancing the Goldman note with Greenhill & Co.
We do need to drive that to conclusion here in the next, you know, two or three months at least, and then figure out what we're doing for, you know, long-term capital needs to keep growing the energy-to-service business. Inventory is a bit of out of whack, as we said, and supply chain issues have been challenging like many manufacturers around the world. That's not an excuse. We need to do a better job, and our vendors need to do a better job. Hopefully, the fourth quarter and the first quarter of this new year, we'll get that behind us as well. Be looking for more energy-to-service press releases, and we look forward to talking to everybody soon at the conclusion of our fourth quarter. Thank you.
Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.