Capstone Energy Plus, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation s The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Form 10-Q and the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for our fiscal year ended March 31, 2026 (“Fiscal 2026”). All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are approximate. All references in this Quarterly Report on Form 10-Q to “the Company,” “we,” “us,” “our,” or “Capstone” are to Capstone Energy+, Inc. and its consolidated subsidiaries as of June 30, 2026, and March 31, 2026, and for the three months ended June 30, 2026 and 2025. Special Note Regarding Forward-Looking Statements This Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended, (the “Securities Act”) and the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). All statements other than statements of historical facts are forward-looking statements. These include statements that are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “strives,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend,” “assumes” and variations of such words and similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict, including, among others: ● our ability to execute on our evolving business model and strategy, including our ability to diversify and expand into the market for artificial intelligence (“AI”) solutions and data centers; ● our limited experience with respect to new markets we are entering, including the market for data centers; ● the significant risks related to our substantial indebtedness and our long-term liquidity requirements; ● risks related to our history of net losses and ability to raise additional capital and fund future operating requirements and expansion opportunities into the AI market; ● our ability to retain key personnel; and ● other risks and uncertainties discussed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for Fiscal 2026. Furthermore, new risks may emerge in the future and it is not possible for us to predict all risks, nor can we assess the impact of all factors on the business or the extent to which any factor, or combination of factors, may cause actual results, performance or achievement to differ materially from those contained in any forward-looking statements. Forward-looking statements speak only as of the date of this Form 10-Q. Except as expressly required under federal securities laws and the rules and regulations of the Securities and Exchange Commission (the “SEC”), we do not have any obligation, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-Q, whether as a result of new information or future events or otherwise. Readers should not place undue reliance on the forward-looking statements included in this Form 10-Q or that may be made elsewhere from time to time by us, or on our behalf. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Overview We believe demand for resilient, on-site power generation is accelerating, driven in large part by the energy needs of AI infrastructure and data centers. Our microturbine-based energy solutions are designed to help commercial, industrial, and utility customers meet this demand while balancing resiliency, affordability, and sustainability which are the "Energy Trilemma" facing the market today. Our offerings include stationary distributed power generation systems and distribution networks, including cogeneration applications such as combined heat and power (“CHP”), integrated combined heat and power (“ICHP”), and combined cooling, heat and power (“CCHP”), as well as solutions for renewable energy, natural resources, and critical power supply applications, including data centers, station power, and ports. 28 Table of Contents We remain a market leader in microturbine energy systems based on the number of microturbines sold annually and our total installed base. While power purchased from the electric utility grid is generally less costly than power produced by distributed generation technologies operating in simple-cycle mode, utilities may also impose interconnection costs and other fees. When waste heat recovery is incorporated through CHP or CCHP configurations, the overall economic benefits of microturbine systems improve significantly. In addition, our microturbines provide highly efficient, low-emission, and resilient power generation, producing thermal energy with a lower carbon footprint. These benefits may be enhanced when fuel costs are favorable, when grid interconnection is costly or impractical, such as in remote locations or where new grid services are required, where reliability and power quality are critical, including data center, station power, and port operations, or in situations where peak shaving may be economically advantageous due to highly variable electricity prices. Our microturbines are inverter-based technologies that can be integrated with other distributed energy resources to form microgrids, also referred to as distribution networks, within a defined geographic area, providing power to one or more facilities. Because microturbines are capable of operating on multiple fuel sources and delivering reliable on-site power, we believe they support customer objectives related to resiliency, sustainability, and affordability across data center, station power, and port applications. We also believe our products and services provide greater operational flexibility compared to certain alternative technologies, such as reciprocating engines. We continue to evaluate energy conversion technologies at the lower end of the distributed power spectrum. We serve customers across energy efficiency, natural resources, renewable energy, critical power, microgrid power, data centers, station power, and port applications. The microgrid market is driven by electrification demand and the need for resilient, on-site power solutions. The renewable energy market is fueled by landfill gas, biodiesel and biogas from sources such as food processing, agricultural waste and livestock manure. Product sales in the oil and gas and other natural resources markets are driven by our microturbines’ reliability, emissions profile and ease of installation. Data center, station power, and port customers require highly reliable, low-emission, and scalable power solutions to support continuous operations, grid constraints, and critical infrastructure requirements. Given the continued volatility of the oil and gas market, our business strategy is to continue diversification across the microgrid energy efficiency, critical power, including data centers, station power, and ports, and renewable energy markets. As part of our diversification strategy, we have begun to utilize our microgrid solutions in a reference design package for AI and Data Center infrastructure. On October 21, 2025, we released a press release announcing that we have developed a new 800-volt direct-current (“VDC”) microturbine to support NVIDIA’s new AI Infrastructure requirements. We plan to provide power and cooling solutions as an engineered “behind-the-meter” equipment package for the next generation of AI factories. This initiative is in the early stages of commercialization, and there can be no assurance regarding market adoption, customer demand, or revenue generation. Refer to Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended March 31, 2026 for further discussion of the risks and uncertainties associated with this emerging market opportunity. We continue to focus on product development informed by customer requirements, increasing brand awareness, and expanding distribution channels through a diversified network of strategic partners. We prioritize products and solutions designed to support repeatable revenue opportunities and larger transaction sizes, rather than discrete projects for niche markets. We also closely monitor operating expenses and seek to improve manufacturing efficiency, reduce direct material costs, and increase average selling prices. Key factors that we believe influence operating performance include average selling prices, direct material costs, order flow, cash utilization, and growth in the EaaS business. We believe that effective execution in each of these key areas will be necessary to leverage our promising technology and early market leadership into achieving positive cash flow with growing market presence and improving financial performance. We currently occupy warehouse and office space in Costa Mesa, California and office space and a production facility in Van Nuys, California with a production capacity of approximately 2,000 units per year, depending on product mix. During the three months ended June 30, 2026, we had a net income of $0.04 million, paid-in-kind dividends accrued on the Series A Convertible Preferred Stock of $1.0 million, basic and diluted net loss per share of $0.03, compared to net loss of $0.7 million, no change in Preferred Units and basic and diluted net loss per share of $0.04 during the three months ended June 30, 2025. The $0.7 million improvement in net income was primarily due to a $1.2 million increase in gross profit, driven by the higher-margin microturbine system sales, and the impact of revenue from distributor distribution services partially offset by $0.1 million of higher total operating expenses and a $0.6 million decrease in other income, 29 Table of Contents partially offset by a $0.1 million increase in interest income and a $0.2 million decrease in interest expense as compared to the three months ended June 30, 2025. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosures of contingent liabilities. On an ongoing basis, we evaluate our estimates, including but not limited to those related to credit losses, inventories, warranty obligations, redeemable noncontrolling interest valuation and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2026 describes the significant accounting estimates used in the preparation of our Condensed Consolidated Financial Statements. Results of Operations Three Months Ended June 30, 2026 and 2025 Revenue The following table summarizes our revenue by geographic markets (in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ ​ ​ 2026 ​ ​ 2025 United States and Canada ​ $ 17.6 ​ $ 23.1 Europe ​ ​ 1.7 ​ ​ 2.0 Latin America ​ ​ 4.0 ​ ​ 1.6 Asia and Australia ​ ​ 1.4 ​ ​ 1.1 Middle East and Africa ​ ​ 0.2 ​ ​ 0.1 Total Revenue ​ $ 24.9 ​ $ 27.9 Revenue for the three months ended June 30, 2026 decreased $3.0 million to $24.9 million, from $27.9 million for the three months ended June 30, 2025. The decrease was primarily driven by decreases in revenue in the United States and Canada of $5.5 million and $0.3 million in Europe, partially offset by increases in revenue of $2.4 million in Latin America, $0.3 million across Asia and Australia, and $0.1 million in the Middle East and Africa. The increases in Latin America, Asia and Australia were driven by higher demand for microturbine product and parts, including higher product sales via our international distributors to customers in Chile and Mexico. The decreases in the United States, Canada, and Europe were due to fewer microturbine deliveries for projects in those regions and lower rental utilization during the three months ended June 30, 2026. The following table summarizes our revenue by category (only revenue amount in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ ​ 2026 ​ 2025 ​ ​ ​ ​ Revenue ​ ​ ​ Megawatts ​ ​ ​ Units ​ ​ ​ Revenue ​ ​ ​ Megawatts ​ ​ ​ Units Microturbine Product ​ $ 12.8 ​ 11.2 ​ 26 ​ $ 15.4 ​ 8.5 ​ 32 Accessories ​ 0.2 ​ ​ ​ ​ ​ 0.3 ​ ​ ​ ​ Total Product and Accessories ​ 13.0 ​ ​ ​ ​ ​ 15.7 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Parts and services ​ 9.7 ​ ​ ​ ​ ​ 8.0 ​ ​ ​ ​ Rentals ​ 2.2 ​ ​ ​ ​ ​ 4.2 ​ ​ ​ ​ Total Revenue ​ $ 24.9 ​ ​ ​ ​ ​ $ 27.9 ​ ​ ​ ​ 30 Table of Contents Revenue from microturbine products and accessories is inherently variable from period to period, as it is driven by the timing of large customer orders, project milestones, and shipment schedules. For the three months ended June 30, 2026 revenue decreased $2.7 million, or 17%, to $13.0 million from $15.7 million for the three months ended June 30, 2025, driven primarily by this order-timing variability. Average revenue per unit shipped was approximately $0.5 million during each of the three months ended June 30, 2026 and 2025. Revenue per unit is driven by the mix of microturbine configurations sold. Parts and services revenue, which is part of our EaaS business line and includes revenue from our spare parts shipments, FPP contracts, and other service revenue, was $9.7 million for the three months ended June 30, 2026, improved from $8.0 million for the three months ended June 30, 2025, driven by continued growth in our customer base. Rentals revenue for three months ended June 30, 2026 decreased $2.0 million, or 48%, to $2.2 million from $4.2 million for the three months ended June 30, 2025. The decrease was mainly driven by lower rental utilization due to uncertainty around oil prices from geopolitical events in the Middle East. Sales to Horizon Power Systems (“Horizon”), one of our distributors, accounted for 41% of revenue for the three months ended June 30, 2026 driven primarily by their sale of 8 megawatts of rental units. Sales to E -Finity Distributed Generation (“E-Finity”) , one of our distributors, accounted for 12% of revenue for the three months ended June 30, 2026. Gross Profit Gross profit was $8.8 million, or 35% of revenue, for the three months ended June 30, 2026, compared to a gross profit of $7.6 million, or 27% of revenue, for the three months ended June 30, 2025. The increase was primarily the result of sales of microturbine systems at higher margins reflecting a favorable product mix, along with a contribution from distributor distribution services revenue . The following table summarizes our gross profit (in millions except percentages): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ ​ ​ ​ ​ 2026 ​ ​ ​ ​ 2025 ​ Gross Profit ​ ​ ​ ​ ​ ​ ​ ​ Product and accessories ​ $ 4.0 ​ ​ $ 1.2 ​ As a percentage of product and accessories revenue ​ 31 % ​ 8 % ​ ​ ​ ​ ​ ​ ​ Parts and services ​ $ 4.0 ​ ​ $ 4.2 ​ As a percentage of parts and services revenue ​ 41 % ​ 53 % ​ ​ ​ ​ ​ ​ ​ ​ ​ Rentals ​ $ 0.8 ​ ​ $ 2.2 ​ As a percentage of rentals revenue ​ 36 % ​ 52 % ​ ​ ​ ​ ​ ​ ​ Total gross profit ​ $ 8.8 ​ ​ $ 7.6 ​ As a percentage of total revenue ​ ​ 35 % ​ ​ 27 % Product and accessories gross margin improved to 31% during the three months ended June 30, 2026, from a gross margin of 8% during the three months ended June 30, 2025, primarily due to the sale of previously rented units, and the continued impact of cost reduction programs. Parts and services gross margin decreased to 41% during the three months ended June 30, 2026, compared to 53% during the three months ended June 30, 2025, primarily as a result of higher claims under our FPP contracts and increases in shipments of higher-cost parts for warranty claims during the three months ended June 30, 2026 relative to the prior period. Rental gross margin decreased to 36% for the three months ended June 30, 2026, compared to 52% for the three months ended June 30, 2025, due to lower rental utilization. Research and Development (“R&D”) Expenses R&D expenses were $1.2 million and $0.8 million during the three months ended June 30, 2026 and 2025, respectively, and were 5% and 3% of revenue for the three months ended June 30, 2026, and 2025, respectively. Higher spend during the three months ended June 30, 2026, was driven by R&D programs for new product development and product enhancements supporting future growth and expansion into new markets. Selling, General, and Administrative (“SG&A”) Expenses SG&A expenses were $6.6 million and $6.9 million during the three months ended June 30, 2026 and 2025, respectively, and were 26% and 25% of revenue for the three months ended June 30, 2026, and 2025, respectively. Lower SG&A expenses relative to the prior year were driven by reductions in legal services, outside consulting, rent and bad debt, partially offset by increases in our salesforce to support our shift to direct sales and subcontracting services. 31 Table of Contents Other Income (expense), net Other income (expense) was an expense of $0.2 million for the three months ended June 30, 2026, compared to income of $0.4 million during the three months ended June 30, 2025. This $0.6 million unfavorable change was primarily attributable to the absence of service income from the Reorganized PrivateCo Services Agreement, which was terminated in connection with the March 2026 PIPE transaction (see Note 15), and a settlement recorded in the current-year period related to a matter with a third-party vendor. Interest Income. Interest income was $0.2 million for the three months ended June 30, 2026, $0.1 million higher than during the three months ended June 30, 2025, driven by higher money market rates and our higher cash balance during the three months ended June 30, 2026 relative to the prior year. Interest income is mainly derived from our money market investment and interest on our sales-type leases. Interest Expense Interest expense was $0.9 million and $1.0 million for the three months ended June 30, 2026 and 2025, respectively. Interest expense is mainly attributable to our notes payable. Liquidity and Capital Resources Cash Flows Our cash requirements depend on many factors, including the execution of our business strategy and plan. Our cash balance increased $3.4 million during the three months ended June 30, 2026, compared to a decrease in cash of $2.0 million during the three months ended June 30, 2025. The increase in cash during the three months ended June 30, 2026 was primarily driven by operating activities which generated $5.4 million of cash compared to a $1.6 million net use of cash in the three months ended June 30, 2025. Operating Activities During the three months ended June 30, 2026, net cash provided by operating activities was $5.4 million, consisting of net income for the period, and changes in operating assets and liabilities of $0.4 million, which included a $3.7 million customer deposit on an order for delivery later this fiscal year, and non-cash adjustments totaling $5.8 million, including depreciation and amortization of $1.2 million. During the three months ended June 30, 2025, net cash used in operating activities was $1.6 million, consisting of a net loss for the period of $0.7 million, changes in operating assets and liabilities of $4.0 million, partially offset by non-cash adjustments, primarily depreciation and amortization, non-cash lease expense, stock based compensation and paid-in-kind interest expense, totaling $3.1 million. The following is a summary of the significant sources (uses) of cash from operating activities (in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ ​ ​ ​ 2026 ​ ​ ​ 2025 Net income (loss) ​ $ 0.04 ​ $ (0.7) Non-cash operating activities (1) ​ 5.8 ​ 3.1 Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ — ​ (4.2) Inventories ​ (5.0) ​ 0.3 Accounts payable ​ 1.7 ​ 2.4 Accrued expenses ​ ​ (0.6) ​ ​ 0.1 Operating lease liability, net ​ ​ (0.3) ​ ​ (0.8) Prepaid expenses, other current assets and other assets ​ ​ — ​ ​ 0.3 Deposits ​ ​ 3.7 ​ ​ — Factory protection plan liability ​ ​ 0.2 ​ ​ 0.6 Other changes in operating assets and liabilities ​ (0.1) ​ (2.7) Net cash provided by (used in) operating activities ​ $ 5.4 ​ $ (1.6) ​ (1) Represents changes in depreciation and amortization, non-cash lease expenses, PIK interest, stock-based compensation expense, inventory, warranty and credit loss provisions. The $4.2 million increase in cash provided by accounts receivable reflects higher cash collected from customers and the increase in cash provided by deposits (driven by a $3.7 million customer deposit on an order for delivery later this fiscal year). The $5.3 million increase in cash used in inventory resulted from purchases of materials, accessories and parts to support sales during the quarter and purchases of long-lead time material to support future sales. The decrease in cash 32 Table of Contents provided by accounts payable and the increase in cash used in accrued expenses as compared to the three months ended June 30, 2025 was primarily due to the timing of payments to suppliers. Investing Activities Net cash used in investing activities was $1.4 million during the three months ended June 30, 2026 and was primarily due to payments of deferred acquisition costs, and higher spend on capex and fixed assets to support operations and future business growth. Net cash used in investing activities was $0.1 million during the three months ended June 30, 2025, and was primarily due to investments in operating assets. Financing Activities Net cash used in financing activities was $0.6 million and $0.3 million during the three months ended June 30, 2026 and 2025, respectively. Cash used in financing activities during the three months ended June 30, 2026 was driven by repayment of finance lease obligations of $0.4 million. Net cash used in the three months ended June 30, 2025 reflects the repayment of finance lease obligations of $0.2 million. Debt Refer to Note 11 – Debt in the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for information related to our existing indebtedness. Lease Commitments Refer to Note 10 – Leases in the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for information related to our leases. New Accounting Pronouncements Refer to Note 2 – Basis of Presentation and Significant Accounting Policies – Impact of Recently Issued Accounting Standards in the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for information regarding new accounting standards. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.