What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-07-14 compared with 2021-06-14 · 149 added, 222 removed, 237 unchanged (61% of the section changed)

10 unchanged sentences

Because our microturbines can provide a reliable source of power and can operate on multiple fuel sources, management believes they offer a level of flexibility not currently offered by other technologies such as reciprocating engines.

In addition to our existing microturbine products, we offer additional energy conversion products in the form of Baker Hughes 5 MW, 12 MW, and 16 MW industrial gas turbines, where we will purchase and resell their product.

The Company is currently exploring energy conversion options for the smaller end of the power spectrum.

We will begin to manufacture modular hybrid energy stations and lithium-ion BESS to be sold either individually or combined as part of a custom microturbine-battery storage solution.

We added a new Energy Storage Products business line in Fiscal 2022 and thus there has been no revenue to date.

Our goals for Fiscal 2021 were to improve cash flow, working capital, and our balance sheet generally;

grow revenue through accelerating global product sales;

diversify into additional market verticals and geographies;

increase aftermarket sales absorption;

and continue to grow our rental fleet.

In addition to our existing microturbine products, since September 2020, we have offered additional energy conversion products in the form of Baker Hughes 5 MW, 12 MW, and 16 MW industrial gas turbines, where we will purchase and resell their product (although there was no revenue from sales of additional energy conversion products in the form of Baker Hughes industrial gas turbines for the year ended March 31, 2022 or 2021).

We are currently exploring energy conversion options for the smaller end of the power spectrum.

We intend to begin to manufacture modular hybrid energy stations and lithium-ion battery energy storage systems (“BESS”) to be sold either individually or combined as part of a custom microturbine-battery storage solution.

We consider our microturbines, Baker Hughes turbines, and hybrid energy stations to be a part of our Energy conversion products business line.

We also added a new Energy Storage Products business line in Fiscal 2022, and there has not yet been any revenue from this business line.

Our goals for Fiscal 2022 were to broaden our diverse energy products and service offerings;

focus on growing top line revenue through our new Direct Solutions Sales (DSS) team, growing the DSS subscription program, and expanding the rental fleet to 21.1 MW (a key component of growing our EaaS business);

increase aftermarket margins and escalate parts availability;

and focus on managing working capital and inventory turns.

During Fiscal 2022 our net loss was $20.2 million and our basic and diluted net loss per share was $1.37, compared to $18.4 million and $1.63, respectively, in the same period of the previous fiscal year.

Our net loss improved during Fiscal 2021 primarily because of lower overhead and operating expenses incurred as a result of implementing our COVID-19 Business Continuity Plan, as well as lower FPP costs as our reliability improved due to the reduced impact of the part defect from a supplier first identified during the first quarter of Fiscal 2019, partially offset by lower overall gross margins from lower revenue levels and increased discounting driven by the COVID-19 pandemic and loss on extinguishment of debt of $4.3 million.

The $1.8 million increase in the net loss during Fiscal 2022 was primarily attributable to increases in selling, general and administrative expense primarily driven by lower expense in Fiscal 2021 from the enactment of our Business Continuity Plan in response to the Covid-19 pandemic, as well as additional expense related to the growth of the DSS team during Fiscal 2022.

This increase was partially offset by the loss on extinguishment of debt accounting resulting from entering into the A&R Note Purchase Agreement with Goldman Sachs during the third quarter of Fiscal 2021 and the gain on extinguishment of debt resulting from the forgiveness of the PPP Loan during the first quarter of Fiscal 2022.

On October 1, 2020, the Company entered into an Amended & Restated Note Purchase Agreement (the “A&R Note Purchase Agreement”), and issued $20.0 million in additional Notes.

See Note 11—Term Note Payable, in the Notes to Consolidated Financial Statements for discussion with respect to this A&R Note Purchase Agreement.

On July 15, 2020, we entered into an amended Sales Agreement with H.C.

Wainwright & Co., LLC with respect to an at-the-market offering program (the “ATM Program”) pursuant to which we may offer and sell, from time to time at our sole discretion, shares of our common stock.

On March 19, 2021, we entered into a second amendment to the Sales Agreement, which modified the Sales Agreement to, among other things, reflect the Company’s filing of a new Registration Statement on Form S-3 with the SEC on March 22, 2021 and set the maximum number of shares of our Common Stock that we may offer and sell through or to H.C.

Wainwright at $50,000,000, subject to certain limitations set forth in the amendment.

See Note 9—Stockholders’ Equity, in the Notes to Consolidated Financial Statements for discussion with respect to the Sales Agreement.

Our products continue to gain interest in all our major vertical markets (energy efficiency, renewable energy, natural resources, critical power supply, microgrid and transportation).

We continue to focus on developing all our major vertical markets (energy efficiency, renewable energy, natural resources, critical power supply, and microgrids).

In the energy efficiency market, we continue to expand our market presence in hotels, office buildings, hospitals, retail, and industrial applications globally.

The renewable energy market is fueled by landfill gas, biodiesel, and biogas from sources such as food processing, agricultural waste and

livestock manure.

Our product sales in the oil and gas and other natural resources market is driven by our microturbines’ reliability, emissions profile and ease of installation.

Given the volatility of the oil and gas market, our business strategy is to target projects within the energy efficiency and renewable energy markets.

The renewable energy market is fueled by landfill gas, biodiesel, and biogas from sources such as food processing, agricultural waste and livestock manure.

Our product sales in the oil and gas and other natural resources market are driven by our microturbines’ reliability,

emissions profile and ease of installation.

Given the volatility of the oil and gas market, our business strategy is to ensure diversification by also targeting projects within the energy efficiency and renewable energy markets.

We continue to focus on improving our products based on customer input, building brand awareness and new channels to market by developing a diversified network of strategic distribution partners.

2 unchanged sentences

The key drivers to our success are revenue growth, higher average selling prices, lower direct material costs, positive new order flow and reduced cash usage.

An overview of our direction, targets and key initiatives follows:

1) Our Energy Conversion Products business line is driven by the Company’s industry-leading, highly efficient, low-emission, resilient microturbine energy systems offering scalable solutions in addition to a broad range of customer-tailored solutions.

An overview of our direction, targets and key initiatives are as follows:

1) Our Energy Conversion Products business line is driven by our industry-leading, highly efficient, low-emission, resilient microturbine energy systems offering scalable solutions in addition to a broad range of customer-tailored solutions.

We target specific market verticals for these products.

3 unchanged sentences

Given the volatility of the oil and gas market, we have refocused our business strategy to target projects within the energy efficiency and renewable energy markets.

The following table summarizes our product shipments by vertical markets:

The following table summarizes our percentage of product revenues by vertical markets for which we had product revenues for the periods presented:

Energy efficiency

1 unchanged sentence

Renewable energy

Critical Power Supply

Transportation

Energy Efficiency—CHP/CCHP

6 unchanged sentences

In some cases, these oil and gas or mining operations have no electric utility grid and rely solely on power generated onsite.

There are numerous locations, on a global scale, where the drilling, production, compression and transportation of natural resources and

other extraction and production processes create fuel byproducts, which are traditionally burned or released into the atmosphere.

There are numerous locations, on a global scale, where the drilling, production, compression and transportation of natural resources and other extraction and production processes create fuel byproducts, which are traditionally burned or

released into the atmosphere.

Our microturbines can turn these fuel byproducts - flare gas, or associated gas, into a useable fuel to provide prime power to these sites.

3 unchanged sentences

They also run efficiently on other small biogas applications like food processing plants, livestock farms and agricultural green waste operations.

Microturbines can burn these renewable fuels with minimal emissions, thereby, and in some cases, avoiding the imposition of penalties incurred for pollution while simultaneously producing electricity from this “free” renewable fuel source for use at the site or in the surrounding areas.

Microturbines can burn these renewable fuels with minimal emissions, thereby, in some cases, avoiding the imposition of penalties incurred for pollution while simultaneously producing electricity from this “free” renewable fuel source for use at the site or in the surrounding areas.

Our microturbines have demonstrated effectiveness in these smaller applications and may outperform conventional combustion engines in some situations, including when the gas contains a high amount of sulfur, as the sulfur can contaminate combustion engines lube oil leading to equipment breakdowns and higher lifecycle costs.

10 unchanged sentences

We have seen continued development in the microgrid market segment.

Transportation

Our technology is also used in Hybrid Electric Vehicle (“HEV”) applications.

Our customers have applied our products in HEV applications such as transit buses and Class 7 and 8 work trucks.

In these applications, the microturbine acts as an onboard battery charger to recharge the battery system as needed.

The benefits of microturbine-powered HEV hybrids include extended range, fuel economy gains, quieter operation, reduced emissions, and higher reliability when compared with traditional internal combustion engines.

Additionally, our technology is used in marine applications.

Our customers have applied our products in the commercial vessel and luxury yacht market segments.

The application for our marine products is for use as a ship auxiliary engine.

In this application, the microturbines provide power to the vessel’s electrical loads and, in some cases, the vessel can utilize the exhaust energy to increase the overall efficiency of the application, thereby reducing overall fuel consumption and emissions.

Another feasible

application is similar to our HEV application where the vessel is driven by an electric propulsion system and the microturbine serves as an on board range extender.

Transportation is a developing market segment for us.

In Fiscal 2020 and Fiscal 2021, transportation products were only for customer demonstrations.

We have experienced continued development in these vertical markets and remain focused on the development of these applications.

Net product orders were approximately $31.8 million and $25.9 million for Fiscal 2022 and Fiscal 2021, respectively.

Ending backlog was approximately $25.3 million at March 31, 2022 compared to $29.4 million at March 31, 2021.

Book-to-bill ratio was 1.1:1 and 1.4:1 for Fiscal 2021 and 2020, respectively.

Book-to-bill ratio was 1.1:1 for both Fiscal 2022 and 2021.

Book-to-bill ratio is the ratio of new orders we received to units shipped and billed during a period.

4 unchanged sentences

As a result, management believes the book-to-bill ratio demonstrates the current demand for our products in the given period.

2) Sales and Distribution Channels We seek out distributors that have business experience and capabilities to support our growth plans in our targeted markets.

2) Sales and Distribution Channel s We seek out distributors that have business experience and capabilities to support our growth plans in our targeted markets.

A significant portion of our revenue is derived from sales to distributors that resell our products to end users.

3 unchanged sentences

We continue to refine our distribution channels to address our specific targeted markets.

Effective January 1, 2018, we launched our Distributor Support System (“DSS program”) to provide additional support for distributor business development activities, customer lead generation, brand awareness and tailored marketing services for each of our major geography and market verticals.

This program is funded by our distributors and was developed to provide improved worldwide distributor training, sales efficiency, website development and company branding and provide funding for increased strategic marketing activities.

Our DSS program provides additional support for distributor business development activities, customer lead generation, brand awareness and tailored marketing services for each of our major geography and market verticals.

This program is funded by our distributors and was developed to provide improved worldwide distributor training, sales efficiency, website development, company branding and provide funding for increased strategic marketing activities.

See Note 2—Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements for additional discussion of revenue recognition for this program.

9 unchanged sentences

5) New Product Development Our new product development is targeted specifically to meet the needs of our selected vertical markets.

We expect that our existing product platforms, the C30, C65, C200 and C1000 Series microturbines, will be our foundational product lines for the foreseeable future.

We expect that our existing product platforms, the C65, C200 and C1000 Series microturbines, will be our foundational product lines for the foreseeable future.

Our research and development project portfolio is centered on enhancing the features of these base products.

During Fiscal 2020, we introduced and expanded our PowerSync family of controllers, easily customizable for our microturbine systems.

Additionally, we delivered our first production self-cleanable severe environment air filtration system for our Signature Series line of microturbine products.

We continue to modernize electronics to today’s standards, providing common functionality and enabling long term support.

To support our global fleet during Fiscal 2020, we achieved Australian AS4777 certification for our C200 product line, and UK G99 Grid Interconnect type approval for our C65 and C200 product lines.

In addition, Germany released VDE 4110 for Medium Voltage Grid Interconnection, to augment the BDEW certification.

We achieved “Prototype Confirmation” for this new specification that enables continued operability in Germany.

In partnership with one of our long-term EMEA distributors, we developed a marine C65 for a private yacht manufacturer and in Fiscal 2020 we delivered the product and also received certification from Lloyd’s Register EMEA for Lloyd’s Register Rules and Regulations for the Classification of Special Service Craft 2018 - Part 6.

We are also developing a more efficient microturbine CHP system with the support of the DOE, which awarded us a grant of $5.0 million in support of this development program, of which $4.2 million was allocated to us and was used through September 30, 2015.

We successfully completed the first phase of the development program on September 30, 2015 and achieved 270 kW with a prototype C250 microturbine in our development test lab.

Management intends to continue with the next phase of development and commercialization after we achieve profitability.

The next phase will be to continue development of the C250 product architecture, as well as the associated power electronics and software controls required for successful commercialization.

During Fiscal 2022, we continued to expand and develop our new hydrogen products.

We released our first commercially available hydrogen-based combined heat and power (CHP) product, which can safely run on a 10% hydrogen-90% natural gas mix, and we are targeting a commercial release of a product that will run on a 30% hydrogen-70% natural gas mix product by March 31, 2022.

In furtherance of those efforts, we are testing a 70% hydrogen-30% natural gas configuration through our research and development partnership with Argonne National Laboratory.

In March 2022, we released a commercially available hydrogen-based combined heat and power (CHP) product, which can safely run on a 30% hydrogen-70% natural gas mix.

In continuing these efforts, we are testing a 100% hydrogen gas combustion system through our research and development partnership with Argonne National Laboratory.

6) Cost and Core Competencies We believe that the core competencies of our products are air-bearing technology, advanced combustion technology and sophisticated power electronics to form efficient and ultra-low emission electricity and cooling and heat production systems.

12 unchanged sentences

We currently occupy warehouse and office space in Van Nuys, California with a production capacity of approximately 2,000 units per year, depending on product mix.

We believe we will be able to support this production capacity level by adding additional shifts, which would increase working capital requirements, and making some additional capital expenditures when necessary.

Reverse Stock Split At the annual meeting of stockholders of the Company held on August 29, 2019, the Company’s stockholders approved an amendment to our Second Amended and Restated Certificate of Incorporation (the “Amendment”) to effect a reverse stock split of our common stock at a ratio in the range of one-for-five (1:5) to one-for-ten (1:10).

Pursuant to such authority granted by the stockholders, the Company’s board of directors approved a one-for-ten (1:10) reverse stock split (the “Reverse Stock Split”) of the common stock and the filing of the Amendment.

The Certificate of Amendment was filed with the Secretary of State of Delaware, effective on October 21, 2019 and the Reverse Stock Split became effective as of that date.

Accordingly, all references to numbers of shares of common stock, including the number of shares of common stock on an as-if-converted basis, per-share data and share prices and exercise prices in the accompanying condensed consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis.

Critical Accounting Policies

1 unchanged sentence

The preparation of these 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 on-going basis, we evaluate our estimates, including but not limited to those related to long-lived assets, including finite-lived intangible assets and fixed assets, bad debts, inventories, warranty obligations, stock-based compensation, income taxes and contingencies.

On an on-going basis, we evaluate our estimates, including but not limited to those related to bad debts, inventories, warranty obligations, 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 which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

15 unchanged sentences

Inventories identified as impaired are evaluated to determine if write-downs are required.

Included in this assessment is a review for obsolescence as a result of engineering changes in our product.

Included in this assessment is a review for obsolescence as a result of engineering

changes in our product.

Future product enhancement and development may render certain inventories obsolete, resulting in additional write-downs of inventories.

14 unchanged sentences

If the financial condition of our customers deteriorates or if other conditions arise that result in an impairment of their ability or intention to make payments, additional allowances may be required.

● We have a history of unprofitable operations.

These losses generated significant federal and state net operating loss (“NOL”) carryforwards.

We record a valuation allowance against the net deferred income tax assets associated with these NOLs if it is “more likely than not” that we will not be able to utilize them to offset future income taxes.

Because of the uncertainty surrounding the timing of realizing the benefits of our favorable tax attributes in future income tax returns, a valuation allowance has been provided against all of our net deferred income tax assets.

We currently provide for income taxes only to the extent that we expect to pay cash taxes, primarily foreign and state taxes.

It is possible, however, that we could be profitable in the future at levels, which could cause management to determine that it is more likely than not that we will realize all or a portion of the NOL carryforwards.

Upon reaching such a conclusion, we would record the amount of net deferred tax assets that are expected to be realized.

Such adjustment would increase income in the period that the determination was made.

● We evaluate the carrying value of long-lived assets, including intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

Factors that are considered important that could trigger an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that demonstrates continuing losses or insufficient income associated with the use of a long-lived asset or asset group.

Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend.

This evaluation is performed based on undiscounted estimated future cash flows compared with the carrying value of the related assets.

If the undiscounted estimated future cash flows are less than the carrying value, an impairment loss is recognized and the loss is measured by the difference between the carrying value and the estimated fair value of the asset

The estimated fair value of the assets is determined using the best information available.

On a quarterly basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable.

Intangible assets include a manufacturing license, technology, backlog, and customer relationships.

We reevaluate the useful life determinations for these intangible assets each reporting period to determine whether events and circumstances warrant a revision in their remaining useful lives.

We performed an analysis as of March 31, 2021 and determined that there was no impairment.

See Note 5—Intangible Assets in the Notes to Consolidated Financial Statements.

● We recognize stock-based compensation expense associated with stock options in the statement of operations.

9 unchanged sentences

Year Ended March 31, 2022 Compared to Year Ended March 31, 2021

Certain reclassifications have been made to the prior year’s financial statements to enhance comparability with the current year’s financial statements.

As a result, certain line items have been amended in the Consolidated Statements of Operations and the related notes to the consolidated financial statements.

Comparative figures have been adjusted to conform to the current year’s presentation.

The items were reclassified as follows (in thousands):

Previously Reported

After Reclassification

March 31, 2020

Product, accessories and parts

Product and accessories

Parts and service

Total revenue

The following table summarizes our revenue by geographic markets (amounts in millions):

5 unchanged sentences

Middle East and Africa

Revenue for Fiscal 2021 decreased $1.3 million, or 2%, to $67.6 million from $68.9 million for Fiscal 2020.

The change in revenue for Fiscal 2021 compared to Fiscal 2020 included decreases in revenue of $1.9 million from the Latin American markets and $1.4 million from the Middle East and African markets.

These overall decreases in revenue were offset by increases in revenue of $0.7 million from the European and Russian markets, $0.7 million from the Asian and Australian markets, and $0.6 million from the United States and Canadian markets.

The slight decrease in revenue in all geographic markets during Fiscal 2021 compared to the same period the previous year was primarily because of (i) lower parts revenue due to the COVID-19 pandemic, which affected the timing of customer demand for our products;

(ii) as well as weakness in the oil and gas market as a result of a decline in oil prices and (iii) continued movement towards clean energy and away from fossil fuels, which impacted capital expenditures in the natural resources market during Fiscal 2021.

Revenue for Fiscal 2022 increased $2.0 million, or 3%, to $69.6 million from $67.6 million for Fiscal 2021.

The change in revenue for Fiscal 2022 compared to Fiscal 2021 included increases in revenue of $2.0 million from the Latin American markets, $1.9 million from the United States and Canadian markets, and $1.8 million from the Middle East and African markets.

These overall increases in revenue were offset by decreases in revenue of $2.4 million from the European and Russian markets and $1.3 million from the Asian and Australian markets.

The decrease in the Europe and Russia markets was primarily due to business impacts from the ongoing conflict between Russia and Ukraine, which has not only impacted Russia but also the European economy.

The slight increase in revenue in the Latin American, United States and Canadian and Middle East and African geographic markets was primarily due to increases in product shipments into the energy efficiency and renewable energy vertical markets, as well as an increase in parts shipments.

The following table summarizes our revenue (revenue amounts in millions):

4 unchanged sentences

For Fiscal 2022, revenue from microturbine products and accessories increased $0.7 million, or 2%, to $37.2 million from $36.5 million for Fiscal 2021.

The increase in revenue was primarily because of an increase in product volume and a strengthening of the United States and Canadian markets compared to the same period last year.

Megawatts shipped during Fiscal 2021 increased 0.3 megawatts, or 1%, to 33.5 megawatts from 33.2 megawatts during Fiscal 2020.

Average revenue per megawatt shipped was approximately $1.0 million in both Fiscal 2021 and 2020.

The increase in revenue was primarily due to the mix of products sold during Fiscal 2022 compared to the same period last year.

Megawatts shipped during Fiscal 2022 decreased 0.9 megawatts, or 3%, to 32.6 megawatts from 33.5 megawatts during Fiscal 2021.

Average revenue per megawatt shipped was approximately $1.1 million and $1.0 million in Fiscal 2022 and 2021, respectively.

The timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and delivery schedule changes), most of which are not within our control and can affect the timing of our revenue.

Parts and service revenue for Fiscal 2021 decreased $2.5 million, or 7%, to $31.1 million from $33.6 million for Fiscal 2020.

The decrease in revenue was primarily a result of lower parts revenue due to COVID-19 shutdowns and movement restrictions in all of our global markets, partially offset by higher service revenue due to increases in our Energy as a Service business line, which includes revenue from our FPP contracts and other service revenue.

Sales to CAL and E-Finity accounted for 15% and 12%, respectively, of our revenue for the fiscal year ended March 31, 2021.

Accessories revenue decreased $1.1 million, or 46%, to $1.3 million from $2.4 million for Fiscal 2021, primarily due to the types of projects that required accessories in Fiscal 2022 compared to Fiscal 2021.

Parts and service revenue for Fiscal 2022 increased $1.3 million, or 4%, to $32.4 million from $31.1 million for Fiscal 2021.

The increase in revenue was primarily driven by an increase in rentals, FPP revenue, and spare parts, partially offset by lower engineering service revenue.

Sales to E-Finity accounted for 18% of our revenue for the year ended March 31, 2022.

Sales to CAL and E-Finity accounted for 15% and 12%, respectively, of our revenue for the fiscal year ended March 31, 2021.

Sales to CAL were below 10% of our revenues for the year ended March 31, 2022.

Gross Margin Cost of goods sold includes direct material costs, production and service center labor and overhead, inventory charges and provision for estimated product warranty expenses.

Gross margin was approximately $8.5 million, or 12% of revenue, for Fiscal 2022, compared to gross margin of $6.9 million, or 10% of revenue, for Fiscal 2021.

The decrease in gross margin of $2.2 million during Fiscal 2021 compared to Fiscal 2020 was primarily because of an incremental increase of $5.3 million in warranty expense, partially offset by a $1.0 million increase in our direct material costs margin, a decrease in production and service center labor and overhead expense of $1.7 million, and lower inventory charges of $0.4 million.

Management continues to implement initiatives to improve gross margin in Fiscal 2022 by further reducing manufacturing overhead and direct material costs and improving product performance as we work to achieve profitability.

Direct material costs margin, calculated as total revenue less our direct material costs, increased $1.0 million during Fiscal 2021 compared to Fiscal 2020 primarily because of higher product margin due to higher volume.

The increase in warranty expense of $5.3 million during Fiscal 2021 compared to Fiscal 2020 was primarily due to the establishment of a reserve related to reliability programs to account for the replacement of remaining high risk failure parts in some of our fielded units due to a supplier defect.

Production and service center labor and overhead expense decreased $1.7 million during Fiscal 2021 compared to Fiscal 2020 primarily because of decreases of approximately $1.1 million in labor costs from our COVID-19 Business Continuity Plan actions, $0.7 million in facilities costs, $0.3 million in consulting expense, $0.3 million in supplies expense and $0.1 million in import tax costs, partially offset by $0.8 million in overhead allocated to finished goods inventory.

Inventory charges decreased $0.4 million during Fiscal 2021 compared to Fiscal 2020 primarily as the result of a decrease in the provision for excess and obsolete inventory.

The increase in gross margin of $1.6 million during Fiscal 2022 compared to Fiscal 2021 was primarily because of an incremental decrease of $5.3 million in warranty expense, partially offset by an increase in production and service center labor and overhead expense of $2.9 million and higher inventory charges of $0.8 million.

The decrease in warranty expense of $5.3 million during Fiscal 2022 compared to Fiscal 2021 was primarily due to the establishment of a reserve in Fiscal 2021 related to reliability programs to account for the replacement of remaining high risk failure parts in some of our fielded units due to a supplier defect, with no such reserve in Fiscal 2022.

Production and service center labor and overhead expense increased $2.9 million during Fiscal 2022 compared to Fiscal 2021 primarily because of increases of approximately $1.6 million in facilities costs, $0.8 million in supplies expense, $0.6 million in consulting expense and $0.6 million in labor costs, partially offset by $0.7 million in overhead allocated to finished goods inventory.

Inventory charges increased $0.8 million during Fiscal 2022 compared to Fiscal 2021 primarily as the result of an increase in the provision for excess and obsolete inventory.

The following table summarizes our gross margin (in millions except percentages):

6 unchanged sentences

As a percentage of total revenue

Product and accessories gross margin decreased $5.5 million during Fiscal 2021 compared to Fiscal 2020 primarily due to:

(i) the establishment of a warranty reserve to replace high-risk parts in fielded units affected by sub-optimal parts initially provided by a former strategic parts supplier;

(ii) a decrease in volume of product shipments from weakness in the oil and gas market due to a decline in oil price;

(iii) the continued movement towards clean energy and away from fossil fuels, which impacted capital expenditures in the natural resources market during Fiscal 2021;

and (iv) the COVID-19 pandemic, which has affected the timing of customer demand for our products compared to the same period last year.

Parts and service gross margin improved $2.5 million during Fiscal 2021 compared to Fiscal 2020 primarily due to lower FPP costs as our reliability improves as we work through the part defect from a supplier first identified during the first quarter of Fiscal 2019.

Product and accessories gross margin as a percentage of product and accessories revenue decreased to (15)% during Fiscal 2021 from 0% during Fiscal 2020, primarily driven by the warranty reserve mentioned above.

Parts and service gross margin as a percentage of parts and service revenue improved to 40% for Fiscal 2021 compared to 27% for Fiscal 2020 primarily due to Fiscal 2020 being burdened by higher FPP costs as we worked through the part defect from a supplier identified during the first quarter of Fiscal 2019.

Research and Development Expenses (“R&D”) R&D expenses for Fiscal 2021 decreased $1.2 million, or 34%, to $2.4 million from $3.6 million for Fiscal 2020, as a result of lower costs from our COVID-19 Business Continuity Plan.

Selling, General and Administrative (“SG&A”) Expenses SG&A expenses for Fiscal 2021 decreased $3.8 million, or 17%, to $18.4 million from $22.2 million for Fiscal 2020.

The net decrease in SG&A expenses was primarily due to cost savings from our COVID-19 Business Continuity Plan which comprised of decreases of approximately $1.5 million in labor costs, $1.1 million in travel and entertainment expense, $0.1 million in consulting expense and $0.1 million in supplies expense, additionally there was a $1.0 million decrease in facilities costs driven by our consolidation of facilities.

Interest Expense Interest expense for Fiscal 2021 and 2020 were each $5.2 million.

Product and accessories gross margin improved by $2.2 million during Fiscal 2022 compared to Fiscal 2021 primarily due to the establishment of a warranty reserve to replace high-risk parts in fielded units affected by sub-optimal parts initially provided by a former strategic parts supplier in Fiscal 2021, a decrease in volume of product shipments from weakness in the oil and gas market due to a decline in oil price in Fiscal 2021, partially offset by higher overhead costs in Fiscal 2022, primarily due to the cost savings from the COVID-19 Business Continuity Plan in Fiscal 2021.

Parts and service gross margin decreased $0.6 million during Fiscal 2022 compared to Fiscal 2021 primarily due to higher FPP costs in Fiscal 2022 driven by higher scheduled and unscheduled maintenance.

Product and accessories gross margin as a percentage of product and accessories revenue improved to (9)% during Fiscal 2022 from (15)% during Fiscal 2021, primarily driven by the warranty reserve for high-risk parts, partially offset by lower overhead costs in Fiscal 2021 due to the enactment of the Business Continuity Plan.

Parts and service gross margin as a percentage of parts and service revenue decreased to 36% for Fiscal 2022 compared to 40% for Fiscal 2021 primarily driven by lower overhead costs in Fiscal 2021 due to the enactment of the Business Continuity Plan, as well as lower FPP costs in Fiscal 2021.

Research and Development Expenses (“R&D”) R&D expenses for Fiscal 2022 increased $1.0 million, or 42%, to $3.4 million from $2.4 million for Fiscal 2021, as a result of lower costs from our COVID-19 Business Continuity Plan during Fiscal 2021.

Selling, General and Administrative (“SG&A”) Expenses SG&A expenses for Fiscal 2022 increased $4.6 million, or 25%, to $23.0 million from $18.4 million for Fiscal 2021.

The net increase in SG&A expenses was primarily as a result of increases of approximately $1.3 million of net bad debt expense, $1.2 million in labor costs, $0.6 million in marketing related costs, $0.6 million in consulting expense, $0.5 million in business travel expense, $0.2 million in

facilities costs, and $0.2 million in shareholder costs.

These increases in Fiscal 2022 compared to Fiscal 2021, except for the higher net bad debt expense of $1.3 million, were primarily a result of the actions taken in our Business Continuity Plan in Fiscal 2021.

Interest Expense Interest expense for Fiscal 2022 and 2021 were $5.0 million and $5.2 million, respectively.

See Liquidity and Capital Resources below for additional discussion on our interest expense.

Loss on Extinguishment of Debt We recognized a loss on extinguishment of debt of approximately $4.3 million during Fiscal 2021.

Gain and Loss on Extinguishment of Debt We recognized a gain on extinguishment of debt of approximately $1.9 million during Fiscal 2022, as the result of the forgiveness of the PPP Loan.

See Note 11 – Term Note Payable.

We recognized a loss on extinguishment of debt of approximately $4.3 million during Fiscal 2021.

The loss on extinguishment of debt comprised of the write-off of approximately $1.5 million of unamortized debt issuance costs, a facility fee in the amount of $1.0 million paid to the lender, an accrual of $1.0 million for anticipated exit fees due upon repayment of the principal balance to the lender, and the fair value of common stock warrants issued to the warrant holder in connection with Amendment No.

3 to the Purchase Warrant of $0.8 million.

Income Tax Provision Income tax expense increased $6,000, or 50%, to $19,000 during Fiscal 2021 from $12,000 during Fiscal 2020.

Other Income for Fiscal 2022 includes the payment to the Company of $0.6 million of PPP Loan proceeds previously repaid in accordance with the Fourth Amendment to the Note Purchase Agreement between the Company and Goldman Sachs Specialty Lending Group, L.P.

See Note 11 – Term Note Payable.

Income Tax Provision Income tax expense was $19,000 for Fiscal 2022 and Fiscal 2021.

Income tax expense incurred was related to state and foreign taxes.

3 unchanged sentences

Similarly, at March 31, 2021, the net deferred tax asset was fully reserved.

Quarterly Results of Operations

The following table presents unaudited quarterly financial information.

This information was prepared in accordance with GAAP, and, in the opinion of management, contains all adjustments necessary for a fair presentation of such quarterly information when read in conjunction with the financial statements included elsewhere herein.

Our operating results for any prior quarters may not necessarily indicate the results for any future periods.

(In thousands, except per share data)

Year Ended March 31, 2021

Year Ended March 31, 2020

Cost of goods sold

Operating expenses:

Loss from operations

Net loss per common share—basic and diluted (1)

(1) Loss per-share amounts for all periods has been retroactively adjusted to reflect the Company’s 1-for-10 reverse stock split, which was effective October 21, 2019.

Liquidity and Capital Resources

Our cash requirements depend on many factors, including the execution of our business strategy and plan.

Our cash and cash equivalents balances increased $34.4 million during Fiscal 2021, compared to a decrease of $14.6 million during Fiscal 2020.

The increase in cash and cash equivalents during Fiscal 2021 compared to the decrease in cash and cash equivalents during Fiscal 2020 was primarily the result of net cash of $19.0 million received from the issuance of $20.0 million in additional senior secured notes under the A&R Note Purchase Agreement with Goldman Sachs Specialty Lending Group, L.P.

(“Goldman Sachs”) entered into during the third quarter of Fiscal 2021, net cash proceeds from the sale of our common stock of approximately $15.9 million after deducting commissions paid of approximately $0.5 million and approximately $2.0 million net cash received from the PPP Loan after deducting amounts subsequently repaid, entered into in the first quarter of Fiscal 2021, as described below.

Additionally, during the fourth quarter of Fiscal 2021, we received a financial settlement in the amount of $5.0 million arising out of claims pursued in confidential arbitration with such former strategic parts supplier.

During Fiscal 2022, in addition to funding our operations and sustaining capital expenditures, our significant cash requirements include approximately $8.0 million to build our long-term rental fleet to 21.1 MW in accordance with covenants in our Note Purchase Agreement with Goldman Sachs, approximately $5.0 million in interest payments to service the Goldman Sachs Notes, and approximately $5.0 million to replace high-risk parts in fielded units affected by the sub-optimal parts initially provided by the former strategic parts supplier.

On October 1, 2020, we entered into an Amended & Restated Note Purchase Agreement (the “A&R Note Purchase Agreement”) with respect to our existing $30.0 million in outstanding Notes (as defined below) issued to Goldman Sachs.

The A&R Note Purchase Agreement amended and restated that certain Note Purchase Agreement, as amended, dated February 4, 2019, by and among the Company, the Collateral Agent and the other parties party thereto.

Under the A&R Note Purchase Agreement, we issued $20.0 million in additional Notes.

We received net cash proceeds of $19.0 million after deducting a $1.0 million facility fee paid to the lender.

The entire principal amount of the Notes is due and payable on October 1, 2023.

As of March 31, 2021, $51.0 million in borrowing were outstanding under the Notes, which includes the accrual for an exit fee to be paid at maturity or upon pre-payment.

On April 24, 2020, we received an unsecured loan in the principal amount of $2,610,200 from Western Alliance Bank, an Arizona corporation under the Small Business Administration Paycheck Protection Program enabled by the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “PPP Loan”) and on May 13, 2020, we repaid $660,200 of the PPP Loan in accordance with the Fourth Amendment to the Note Purchase Agreement between the Company and Goldman Sachs.

On March 23, 2020 the Company enacted the Business Continuity Plan in response to COVID-19.

Beginning March 30, 2020, the Company furloughed approximately 52 employees, leaving behind only staff deemed essential for day-to-day administrative operations for a minimum period of 45 days.

Our Leadership Team volunteered to take a 25% temporary salary cut.

In addition, approximately 25 other top Company managers volunteered to take a similar 15% reduction in salary and the Board voted to take a temporary 25% reduction in base cash retainer.

As a result of the continued global economic slowdown due to COVID-19 and the associated decline in global crude oil prices, we eliminated 26 positions on June 1, 2020.

During the period of March 30, 2020 to June 1, 2020, we had a limited production capability of new microturbine products but had pre-built approximately 5.9 MW of microturbine finished goods during March 2020, for shipment during this period of suspended production.

On September 28, 2020 salaries were returned to 100% and remaining furloughed employees returned to work.

Our vendor supply chain has been impacted by the pandemic;

however, we have been able to maintain sufficient supply flow to continue operations of the date hereof.

We believe these programs will supplement our current and future available capital resources.

Operating Activities During Fiscal 2021, net cash provided by operating activities was $1.7 million, consisting of a net loss for the period of $18.4 million, offset by cash provided from working capital of $6.4 million and non-cash adjustments (primarily warranty provision, accounts receivable allowances, depreciation and amortization, stock based compensation and inventory provision) of $13.7 million.

During Fiscal 2020, net cash used in operating activities was $19.7 million, consisting of a net loss for the period of $21.9 million and cash used for working capital of $4.0 million, offset by non-cash adjustments of $6.2 million.

Our cash and cash equivalents balances decreased $27.0 million during Fiscal 2022, compared to an increase of $34.4 million during Fiscal 2021.

The decrease in cash and cash equivalents during Fiscal 2022 compared to the increase in cash and cash equivalents during Fiscal 2021 was due to an increase in cash used in operating activities, as well as an increase in inventory to continue to produce product despite supply chain challenges and the intentional slowdown of incoming material in Fiscal 2021 due to the COVID-19 pandemic and delays in accounts receivable collections primarily related to the COVID-19 pandemic in the current period.

Cash used in investing activities was primarily to continue the expansion of the rental fleet, which was partially offset by cash provided by financing activities from the issuance of Common Stock through our June 2021 Common Stock offering and our at-the-market offering program.

Operating Activities During Fiscal 2022, net cash used by operating activities was $27.5 million, consisting of a net loss for the period of $20.2 million, offset by cash used for working capital of $11.8 million and non-cash adjustments (primarily warranty provision, accounts receivable allowances, depreciation and amortization, stock based compensation and inventory provision) of $4.5 million.

During Fiscal 2021, net cash provided by operating activities was $1.7 million, consisting of a net loss for the period of $18.4 million, offset by cash provided from working capital of $6.4 million and non-cash adjustments (primarily warranty provision, accounts receivable allowances, depreciation and amortization, stock based compensation and inventory provision) of $13.7 million.

The following is a summary of the significant sources (uses) of cash from operating activities (amounts in thousands):

8 unchanged sentences

(1) Represents warranty provision, change in fair value of warrant liability, depreciation and amortization, stock-based compensation expense, inventory provision and accounts receivable allowances.

The change in non-cash operating activities during Fiscal 2021 compared to Fiscal 2020 was primarily driven by the loss on extinguishment of debt accounting resulting from entering into the A&R Note Purchase Agreement with Goldman Sachs during Fiscal 2021.

Additionally, contributing to the change was warranty expense during Fiscal 2021 as a result of the warranty reserve established related to reliability programs to account for the replacement of remaining high risk failure parts in some of our fielded units due to a supplier defect.

The change in accounts receivable during Fiscal 2021 was primarily the result of lower collections from certain customers, compared to Fiscal 2020.

The change in inventory was primarily the result of a decrease in both raw materials and finished goods during Fiscal 2021, as we continued to manage inventory alongside the decreases in revenue as a result of the COVID-19 pandemic.

The change in non-cash operating activities during Fiscal 2022 compared to Fiscal 2021 was primarily driven by the loss on extinguishment of debt accounting resulting from entering into the A&R Note Purchase Agreement with Goldman Sachs during Fiscal 2021 and the gain on extinguishment of debt resulting from the forgiveness of the PPP Loan during the first quarter of Fiscal 2022.

Also contributing to the change was warranty expense during Fiscal 2021 as a result of the warranty reserve established related to reliability programs to account for the replacement of remaining high risk failure parts in some of our fielded units due to a supplier defect.

The change in accounts receivable was primarily the result of slower collections in Fiscal 2022 due to continued delays from the COVID-19 pandemic, as well as from impacts from the ongoing conflict between Russia and Ukraine, compared to Fiscal 2021.

The change in inventory was primarily to continue to produce product despite supply chain challenges and the intentional slowdown of incoming material in Fiscal 2021 due to the COVID-19 pandemic.

The change in accounts payable and accrued expenses was primarily the result of the level of inventory receipts and timing of payments made by us during Fiscal 2022 compared to Fiscal 2021.

The change in other operating assets and liabilities during the Fiscal 2021 compared to Fiscal 2020, was primarily the result of decreases in deferred revenue attributable to FPP contracts, customer deposits and our DSS program.

Investing Activities Net cash used in investing activities of $3.2 million and $4.2 million during Fiscal 2021 and 2020, respectively, related primarily to the additions of our rental fleet of approximately $2.4 million and $3.2 million, respectively.

The change in other operating assets and liabilities during the Fiscal 2022 compared to Fiscal 2021, was primarily the result of additional expenditures for the reliability repair program.

Investing Activities Net cash used in investing activities of $9.9 million and $3.2 million during Fiscal 2022 and 2021, respectively, related primarily to the additions to our rental fleet of approximately $8.7 million and $2.4 million, respectively.

The remaining amounts were primarily for sustaining our production and facilities.

Financing Activities During Fiscal 2022, we generated approximately $10.4 million in cash from financing activities compared to cash generated during Fiscal 2021 of approximately $36.0 million.

The funds generated from financing activities during the fiscal year ended March 31, 2021 were primarily the result of $19.0 million in net proceeds from our A&R Note Purchase Agreement with Goldman Sachs, net borrowings under the PPP Loan, as well as $15.9 million in proceeds from the at-the-market offering program described below.

The funds generated from financing activities during Fiscal 2020 were primarily the result of proceeds from the September 2019 registered direct offering and proceeds from the at-the-market offering program described below.

The funds generated from financing activities during the fiscal year ended March 31, 2022 were primarily the result of net proceeds from our June 2021 Common Stock offering and proceeds from the at-the-market offering program described below.

The funds generated from financing activities during the fiscal year ended March 31, 2021 were primarily the result of $19.0 million in net proceeds from our A&R Note Purchase Agreement with Goldman Sachs, as amended, net borrowings under the PPP Loan, as well as $15.9 million in proceeds from the at-the-market offering program described below.

At-the-market offerings

2 unchanged sentences

We will set the parameters for sales of the shares, including the number to be sold, the time period during which sales are requested to be made, any limitation on the number that may be sold in one trading day and any minimum price below which sales may not be made.

During Fiscal 2021, we issued approximately 2.0 million shares of our common stock under the ATM program and the net proceeds to us from the sale of our common stock were approximately $15.9 million after deducting commissions paid of approximately $0.5 million.

During our fourth fiscal quarter ended March 31, 2021, we issued 1,242,253 shares of our common stock under the ATM program and the net proceeds to us were approximately $14.5 million after deducting commissions paid of approximately $0.5 million.

On July 15, 2020, we entered into an

amendment to the Sales Agreement, which modified the Sales Agreement to, among other things, amend the termination provisions of the Agreement and amend the maximum amount of shares of our common stock that we may offer and sell through or to H.C.

Wainwright & Co., LLC from time to time under the ATM Program On March 19, 2021, we entered into a second amendment to the Sales Agreement, which modified the Sales Agreement to, among other things, reflect the Company’s filing of a new Registration Statement on Form S-3 with the SEC on March 22, 2021 and set the maximum amount of shares of our common stock that we may offer and sell through or to H.C.

Wainwright at $50.0 million, subject to certain limitations set forth in the amendment.

As of March 31, 2021, approximately $3.9 million remained available for issuance with respect to this ATM Program.

As of April 14, 2021, upon the effectiveness of the Registration Statement on Form S-3, approximately $50.0 Million remained available for issuance with respect to this ATM Program.

Series A Warrants

As of March 31, 2021, there were 271,875 Series A warrants outstanding.

217,875 Series A warrants were issued with an exercise price of $25.50 per share of common stock, are exercisable into an aggregate amount of up to 217,875 shares of our common stock, and have an expiration date of October 25, 2021.

54,000 Series A warrants with anti-dilution provisions were issued with an initial exercise price of $13.40 per share of common stock, are exercisable into an aggregate amount of up to 54,000 shares of our common stock, and have an expiration date of April 22, 2021.

As of March 31, 2021, because of the anti-dilution provisions, these warrants had an adjusted exercise price of $1.15 per share of common stock.

On July 15, 2020, we entered into an amendment to the Sales Agreement, which modified the Sales Agreement to, among other things, amend the termination provisions of the Agreement and amend the maximum amount of shares of our Common Stock that we may offer and sell through or to H.C.

Wainwright & Co., LLC from time to time under the ATM Program.

On March 19, 2021, we entered into a second amendment to the Sales Agreement, which

modified the Sales Agreement to, among other things, reflect our filing of a new Registration Statement on Form S-3 with the SEC on March 22, 2021 and set the maximum amount of shares of our Common Stock that we may offer and sell through or to H.C.

Wainwright at $50 million from the date of the amendment to the Sales Agreement, subject to certain limitations set forth in the amendment.

During Fiscal 2022, we issued approximately 0.1 million shares of our Common Stock under the ATM program and the net proceeds to us from the sale of our Common Stock were approximately $0.7 million after deducting commissions paid of approximately $26,000.

As of March 31, 2022, approximately $49.3 million remained available for issuance under this ATM Program.

Common Stock Offering

On June 17, 2021, we entered into an amended and restated underwriting agreement (the “Underwriting Agreement”) with H.C.

Wainwright & Co., LLC (the “Underwriter”) whereby we agreed to sell to the Underwriter, and the Underwriter agreed to purchase, in a firm commitment underwritten public offering 1,904,763 shares (the “Shares”) of our common stock, $0.001 par value per share (the “Offering”).

The offering price to the public in the Offering was $5.25 per share of Common Stock, and the Underwriter agreed to purchase the Shares from the Company pursuant to the Underwriting Agreement at a price of $4.91 per share, representing an underwriting discount of 6.5%.

Pursuant to the Underwriting Agreement, we also granted the Underwriter an option to purchase, for a period of 30 days from the date of the Underwriting Agreement, up to an additional 285,714 shares of Common Stock (the “Option Shares”).

On June 21, 2021, the Underwriter exercised the option in full.

The Offering closed on June 22, 2021, and we received net proceeds of $10.5 million after deducting $1.0 million underwriting discounts, commissions and offering expenses paid by the Company.

Goldman Warrant

On February 4, 2019, we sold to Goldman Sachs & Co.

LLC (the “Holder”), a Purchase Warrant for shares of our common stock (the “Warrant”) pursuant to which the Holder may purchase shares of the Company’s common stock in an aggregate amount of up to 404,634 shares (the “Warrant Shares”).

LLC (the “Holder”), a Purchase Warrant for shares of our Common Stock (the “Warrant”) pursuant to which the Holder may purchase shares of our Common Stock in an aggregate amount of up to 404,634 shares (the “Warrant Shares”).

Our Common Stock and warrant transactions during Fiscal 2021 triggered certain anti-dilution provisions in the warrants outstanding.

As of March 31, 2021, the Holder may purchase shares of the Company’s common stock in an aggregate amount of up to 463,067 shares at an exercise price of $2.61.

As of March 31, 2022, the Holder may purchase shares of our Common Stock in an aggregate amount of up to 463,067 shares at an exercise price of $2.61 per share.

Goldman “2020 Warrant”

On October 1, 2020, the Company entered into an Amendment No.

On October 1, 2020, we entered into an Amendment No.

3 to the Purchase Warrant for shares of our Common Stock (the “Amendment No.

2 unchanged sentences

LLC, dated February 4, 2019, as amended (the “Original Warrant”).

As of March 31, 2021, the holder may purchase shares of the Company’s common stock in an aggregate amount of up to 291,295 shares at an exercise price of $4.76.

As of March 31, 2022, the holder may purchase shares of our Common Stock in an aggregate amount of up to 291,295 shares at an exercise price of $4.76 per share.

September 2019 Pre-Funded and Series D Warrants

1 unchanged sentence

In a concurrent private placement, we agreed to issue to the purchasers warrants to purchase 765,000 shares of Common Stock, which represent 75% of the number of shares of Common Stock and shares underlying the Pre-Funded Warrants purchased in the Registered Direct Offering, pursuant to the Securities Purchase Agreement.

The Common Warrants are exercisable for shares of common stock at an initial exercise price of $6.12 per share for a period of five years, starting on April 2, 2020 and expiring on April 2, 2025.

In January 2021, three warrant holders exercised their rights to the warrant agreement to exercise on a cashless basis 690,000 Series D warrants at an exercise price of $6.12 per share

under the warrant agreement.

Warrants are exercisable for shares of Common Stock at an initial exercise price of $6.12 per share for a period of five years, starting on April 2, 2020 and expiring on April 2, 2025.

In January 2021, three warrant holders exercised their rights to the warrant agreement to exercise on a cashless basis 690,000 Series D warrants at an exercise price of $6.12 per share under the warrant agreement.

In accordance with terms of the warrant agreement, after taking into account the shares withheld to satisfy the cashless exercise option, we issued 352,279 shares of Common Stock.

As of March 31, 2021, there were 75,000 Series D warrants outstanding at an exercise price of $6.12.

As of March 31, 2022, there were 75,000 Series D warrants outstanding at an exercise price of $6.12 per share.

There were no stock options exercised during Fiscal 2022 and 2021.

6 unchanged sentences

As of March 31, 2022, $51.0 million in borrowings were outstanding under the Notes, which includes the accrual for an exit fee to be paid at maturity or upon pre-payment.

Pursuant to the First Amendment to the A&R Note Purchase dated as of May 13, 2021, the minimum consolidated liquidity requirement increased from $9.0 million to $12.0 million.

As of March 31, 2021, we were in compliance with the covenants contained in the A&R Note Purchase Agreement.

Pursuant to the First Amendment to the A&R Note Purchase dated as of May 13, 2021, the minimum consolidated liquidity requirement increased from $9.0 million to $12.0 million for the period from the Amendment Date to March 31, 2022, and $9.0 million thereafter.

The financial covenants of the A&R Note Purchase Agreement require the Company not to exceed specified levels of Adjusted EBITDA losses relative to its financial model, beginning with the fiscal quarter ending September 30, 2021.

As of March 31, 2022, we were not in compliance with the Adjusted EBITDA covenant contained in the A&R Note Purchase Agreement and did not cure such non-compliance by prepaying the Notes.

As a result, we were in breach of the Adjusted EBITDA covenant as of May 27, 2022.

On July 13, 2022 we entered into the A&R NPA Second Amendment with the Purchaser and the Collateral Agent, pursuant to which (i) the Purchaser and the Collateral Agent waived our breach of the Adjusted EBITDA covenant and (ii) the A&R Note Purchase Agreement has been amended to, among other things, add certain new covenants, including requirements that we use our commercially reasonable best efforts to raise at least $10 million through a sale of our common stock by September 14, 2022 and refinance the Notes by October 1, 2022.

See Item 9B “Other Information” for a summary of the A&R NPA Second Amendment.

As of March 31, 2022, we are in compliance with the other covenants contained in the A&R Note Purchase Agreement.

Paycheck Protection Program Loan On April 15, 2020, we applied for an unsecured PPP Loan in the principal amount of $2,610,200 under the Small Business Administration Paycheck Protection Program enabled by the Coronavirus Aid, Relief and Economic Security Act of 2020.

1 unchanged sentence

The Company received the full amount of the PPP Loan on April 24, 2020.

In accordance with the requirements of the CARES Act, we intend to use proceeds from the PPP Loan to support fixed costs such as payroll costs, rent and utilities.

In accordance with the requirements of the CARES Act, we used the proceeds from the PPP Loan to support fixed costs such as payroll costs, rent and utilities.

On May 13, 2020, we repaid $660,200 of the PPP Loan in accordance with the Fourth Amendment to the Note Purchase Agreement between the Company and Goldman Sachs Specialty Lending Group, L.P.

The advance under the PPP Loan bears interest at a rate per annum of 1%.

The PPP Loan matures on April 24, 2022.

The PPP Loan may be forgiven partially or fully if the funding received is used for payroll costs, interest on mortgages, rent, and utilities, provided that at least 75% of the forgiven amount has been used for payroll costs.

Forgiveness is based on the Company maintaining, or quickly rehiring employees and maintaining applicable salary levels.

Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

Any forgiveness of the PPP Loan shall be subject to approval of the SBA and will require the Company and Western Alliance to apply to the SBA for such treatment in the future.

In January 2021, management applied for forgiveness on the PPP Loan.

Management will account for forgiveness on the PPP Loan in accordance with ASC 470 and record a gain on extinguishment of debt on its condensed consolidated financial statements and related footnote disclosures, provided forgiveness be approved by the SBA.

In February 2021, the Company applied for forgiveness of the original balance in full and is awaiting for review and approval.

No assurance can be provided that forgiveness of any portion of the PPP loan will be obtained.

Working Capital Cash provided from working capital was $6.4 million during Fiscal 2021, an improvement of $10.4 million from the cash used for working capital of $4.0 million during Fiscal 2020.

These decreases in cash used for working capital and other operating assets and liabilities were primarily due to reductions in inventory and accounts payable payments, partially offset by an increase in accounts receivable and changes in customer deposits.

Evaluation of Ability to Maintain Current Level of Operations In connection with preparing the consolidated financial statements for the fiscal year ended March 31, 2021, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about our ability to meet our obligations as they became

due for the next twelve months from the date of issuance of our Fiscal 2021 consolidated financial statements.

The advance under the PPP Loan bore interest at a rate per annum of 1%.

In February 2021, the Company applied for forgiveness in full of the original balance of the PPP loan and the loan was forgiven in full on June 30, 2021.

The Company received a refund of $660,200 and recorded these amounts within other income on the Company’s Condensed Consolidated Statements of Operations.

Management will accounted for forgiveness on the PPP Loan in accordance with ASC 470 and recorded a gain on extinguishment of debt on its condensed consolidated financial statements and related footnote disclosures, provided forgiveness be approved by the SBA.

Working Capital Cash used for working capital was $11.8 million during Fiscal 2022, an increase of $18.2 million from the cash provided from working capital of $6.4 million during Fiscal 2021.

These increases in cash used for

working capital and other operating assets and liabilities were primarily due to increases in inventory and accounts receivable, partially offset by decreases in accounts payable and accrued expenses.

Evaluation of Ability to Maintain Current Level of Operations In connection with preparing the consolidated financial statements for the fiscal year ended March 31, 2022, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about our ability to meet our obligations as they became due for the next twelve months from the date of issuance of our Fiscal 2022 consolidated financial statements.

Management assessed that there were such conditions and events, including a history of recurring operating losses, negative cash flows from operating activities, the continued negative impact by the volatility of the global oil and gas markets, a strong U.S.

dollar in certain markets making our products more expensive in such markets, the COVID-19 pandemic, and ongoing global geopolitical tensions.

We incurred a net loss of $18.4 million and provided cash from operating activities of $1.7 million during the Fiscal 2021.

Our working capital requirements during Fiscal 2021 were in-line with management’s expectations, which included reductions in inventory and accounts payable primarily due to our lower revenue levels.

Our net loss improved during Fiscal 2021 primarily due to reduced overhead and operating expenses resulting from our COVID-19 Business Continuity Plan, as well as reduced FPP costs as our reliability improved due to the reduced impact of the part defect from a supplier first identified during the first quarter of Fiscal 2019.

dollar in certain markets making our products more expensive in such markets, the COVID-19 pandemic, the Russian invasion of Ukraine, and ongoing global geopolitical tensions.

We incurred a net loss of $20.2 million and used cash from operating activities of $27.5 million during the Fiscal 2022.

Our working capital requirements during Fiscal 2022 were primarily for increases in inventory to continue to produce product despite supply chain challenges, as well as the delayed timing of accounts receivable collections due to the COVID-19 pandemic and impacts from the ongoing conflict between Russia and Ukraine.

Our net loss increased during Fiscal 2022 primarily due to lower overhead and operating expenses in Fiscal 2021 from our COVID-19 Business Continuity Plan.

As of March 31, 2022, we had cash and cash equivalents of $22.6 million, and outstanding debt of $51.0 million at fair value (see Note 11–Term Note Payable in the Notes to the Consolidated Financial Statements for further discussion of the outstanding debt).

Management evaluated these conditions in relation to our ability to meet our obligations as they become due.

Our ability to continue current operations and to execute on management’s plan is dependent on our ability to generate cash flows from operations.

Management believes that we will continue to make progress on our path to profitability through a cost reduction plan implemented in March 2022, expanding the Energy as a Service (“EaaS”) revenue streams, as well as price increases on our Factory Protection Plan and certain product offerings.

In March 2022, we implemented an expense reduction plan and announced our efforts to reduce operating costs and modify our operating model to better match our expanding EaaS business.

In order to implement the expense reduction plan, we undertook a holistic review of our operations, taking the growing EaaS business into account.

Beginning on February 28, 2022, we furloughed 17 employees for a period of 120 days, eliminated the position of Chief Revenue Officer, held by Jim Crouse, effective April 15, 2022, instituted 15% temporary pay cuts for approximately 36 employees and 25% temporary pay cuts for members of our senior leadership team, among other actions.

We believe that the implementation of the expense reduction plan will help better align our current cost structure to support our higher margin EaaS revenues.

In February 2022, we announced that we reached our goal of having 21.1 MW of rental units in our fleet and under contract.

The EaaS rental unit timeline includes a delay between the time of manufacture and the time revenue from that unit is realized.

The microturbine rental unit is built, allocated by a signed rental contract, and then commissioned at the customer site, at which point it begins to generate revenue.

We expect to have all rental units contracted, commissioned, and generating revenue by our second quarter of Fiscal 2023.

We expect rental revenue to more than double in Fiscal 2023 from the $2.8 million of rental revenue in Fiscal 2022.

Additionally in March 2022, we announced that we increased the Distributor Support System, or DSS, program fee to 5% of prior calendar year revenue, from 3%, to support the expanding EaaS business.

To help offset inflation and the rising cost of components, as well as improve our profitability, we implemented price increases on our Factory Protection Plan contracts effective April 1, 2022, and implemented price increases on certain of our product offerings including the C65 and C1000 products, effective May 1, 2022.

We may seek to raise funds by selling additional securities (through the at-the-market offering or otherwise) to the public or to selected investors or by obtaining additional debt financing.

There is no assurance that we will be able to obtain additional funds on commercially favorable terms or at all.

If we raise additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be reduced.

In addition, any equity or debt securities that we would issue may have rights, preferences or privileges senior to those of the holders of our common stock.

Based on our current operating plan, management anticipates that, given current working capital levels and current financial projections, including the cost reduction plan, expanding EaaS business, and price increases, we will be able to meet our financial obligations as they become due over the next twelve months from the date of issuance of our Fiscal 2022 financial statements.

Depending on the timing of our future sales and collection of related receivables, managing inventory costs and the timing of inventory purchases and deliveries required to fulfill the backlog, our future capital requirements may vary materially from those now planned.

The amount of capital that we will need in the future will require us to achieve significantly increased sales volume, which is dependent on many factors, including:

● the continuing impact of the COVID-19 pandemic on the global economy and specifically on oil and gas markets;

● the continuing impact of the COVID-19 pandemic on the global economy;

● the continuing impact from the ongoing conflict between Russia and Ukraine;

● the market acceptance of our products and services;

5 unchanged sentences

Our accounts receivable balance, net of allowances, was $24.7 million and $20.6 million as of March 31, 2022 and 2021, respectively.

Days sales outstanding in accounts receivable, (“DSO”), increased to 105 days as of March 31, 2021, compared to 85 days as of March 31, 2020 due to delayed collections in all markets due to the COVID-19 pandemic and the weakening oil and gas markets.

We recorded net bad debt recovery of approximately $0.2 million and net bad debt expense of approximately $0.4 million, for Fiscal 2021 and 2020, respectively.

Our allowance for doubtful accounts, was $0.3 million and $0.7 million as of March 31, 2021 and 2020, respectively.

Days sales outstanding in accounts receivable, (“DSO”), increased to 150 days as of March 31, 2022, compared to 111 days as of March 31, 2021 due to continued delayed collections in all markets due to the COVID-19 pandemic and impacts from the ongoing conflict between Russia and Ukraine.

In the Energy Efficiency market vertical we sell to end users that have been significantly, economically impacted by the pandemic, such as in the Hospitality and Health Care industries.

Additionally, the COVID-19 Pandemic heavily impacted our natural resources market vertical, where we primarily sell to Oil & Gas end users.

While oil prices have rebounded above $100 per barrel, we have not seen a corresponding rebound in capital expenditures or spending activity.

Additionally, the ongoing conflict between Russia and Ukraine has caused a widespread economic slowdown in the region, which has also impacts our collections.

We recorded net bad debt expense of approximately $1.1 million for Fiscal 2022 and a net bad debt recovery of approximately $0.2 million for Fiscal 2021.

Our allowance for doubtful accounts, was $0.8 million as of March 31, 2022 and $0.3 million as of March 31, 2021.

No assurances can be given that future bad debt expense will not increase above current operating levels.

2 unchanged sentences

Certain industries in which our customers do business and certain geographic areas have been and could continue to be adversely affected by the previously referenced economic and geopolitical considerations.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

In March 2022, we implemented an expense reduction plan, which included furloughs, employment terminations and pay cuts.

See “—Initiative to Shift Towards Energy as a Service and Reduce Operating Costs” “Risk Factors--Our recently implemented expenses reduction plan and organizational changes undertaken to align to our focus on our EaaS business and achieving profitability may not be successful.”

Impact of Recently Issued Accounting Standards

6 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis