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 in our Annual Report on Form 10-K for Fiscal 2021. All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are approximate. Special Note Regarding Forward-Looking Statements This Form 10-Q includes certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). These statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “expect,” “anticipate,” “should,” “believe,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend” and variations of these terms and similar expressions are intended to identify these forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among others, statements relating to our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those expressed in, or implied by, the forward-looking statements included in this Form 10-Q as a result of various factors, including, among others: ● the additional covenants imposed by our most recent amendment to the A&R Note Purchase Agreement with Goldman Sachs and our ability to refinance the outstanding indebtedness thereunder; ● the availability of credit and compliance with the agreements governing our indebtedness; ● risks related to our history of net losses and ability to raise additional capital and fund future operating requirements; ● the worldwide supply chain issues that affect our ability get direct material products on a timely and cost-effective basis; ● the development of the market for and customer uses of our microturbines, including our EaaS; ● our ability to develop new products and enhance existing products; ● our ability to produce products on a timely basis in a high quality manner; ● availability of sources for and costs of component parts; ● competition in the markets in which we operate; ● operational interruption by fire, earthquake and other events beyond our control; ● federal, state and local regulations of our markets and products; ● usage of our federal and state net operating loss carryforwards; ● the financial performance of the oil and natural gas industry and other general business, industry and economic conditions applicable to us; ● changes to international trade regulation, quotas, duties or tariffs, and sanctions caused by the changing U.S. and geopolitical environment, including the ongoing conflict between Russia and the Ukraine; ● security and cybersecurity risks related to our electronic processing of sensitive and confidential business and product data; ● the impact of the recent departure of several key management and other employees; ● our ability to adequately protect our intellectual property rights; ● the COVID -19 pandemic, which may cyclically continue to adversely affect our business, financial condition and results of operations; 25 Table of Contents ● the potential that our use of cash for operations and expansion of our rental fleet could result in our cash falling below the minimum balance required by the A&R Note Purchase Agreement with Goldman Sachs, therefore violating a covenant in that agreement; ● the risk that our inventory balances continue to rise due to purchases of long lead time inventory, and the consequences of a backlog of obsolete or excess inventory; ● the impact of pending or threatened litigation; and ● other risks and uncertainties discussed in “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for Fiscal 2022 and in ‘Item 1A. Risk Factors” included in this Quarterly Report on Form 10-Q. Furthermore, new risks may emerge from time to time 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 are the market leader in microturbines based on the number of microturbines sold. Generally, power purchased from the electric utility grid is less costly than power produced by distributed generation technologies. Utilities may also charge fees to interconnect to their power grids. However, we can provide economic benefits to end users in instances where the waste heat from our microturbine has value (CHP and CCHP), where fuel costs are low (renewable energy/renewable fuels), where the costs of connecting to the grid may be high or impractical (such as remote power applications), where reliability and power quality are of critical importance, or in situations where peak shaving could be economically advantageous because of highly variable electricity prices. Our microturbines can be interconnected to other distributed energy resources to form “microgrids” (also called “distribution networks”) located within a specific geographic area and provide power to a group of buildings. 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, 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 three and nine months ended December 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 2023 are to: ● expand our EaaS business by growing the long-term rental fleet, ● focus on growing top line revenue through our new Direct Solutions Sales team and growing the DSS subscription program, ● broaden our diverse energy products and service offerings, ● increase aftermarket margins and escalate parts availability, and ● focus on managing working capital and inventory turns. During the nine months ended December 31, 2022 our net loss decreased by 8% to $12.3 million and our basic and diluted loss per share improved by 21% to $0.73 compared to $13.3 million and $0.92, respectively, in the same period of the previous fiscal year. The improvement in the net loss during the nine months ended December 31, 2022 was 26 Table of Contents primarily the result of a greater contribution from the higher margin rental business, a reduction of operating expenses, partially offset by higher direct material costs and higher interest expense. The improvement in the net loss per share was primarily the result of the $1.1 million improvement noted above and an increase in weighted average shares outstanding to 16.8 million for the nine months ended December 31, 2022 from 14.5 million for the same period of the previous fiscal year. Our products continue to gain interest in 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 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. Our focus is on products and solutions that provide near term opportunities to drive repeatable business rather than discrete projects for niche markets. In addition, management closely monitors operating expenses and strives to improve manufacturing efficiencies while simultaneously lowering direct material costs and increasing average selling prices. The key drivers to our success are revenue growth, higher average selling prices, lower direct material costs, positive new order flow, reduced cash usage and expansion of the EaaS business. 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. Focus on Vertical Markets Within the distributed generation markets that we serve, we focus on vertical markets that we identify as having the greatest near-term potential. In our primary products and applications (energy efficiency, renewable energy, natural resources, critical power supply, and microgrid products), we identify specific targeted vertical market segments. Within each of these segments, we identify what we believe to be the critical factors to success and base our plans on those factors. 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 percentage or product revenues by vertical markets for which we had product revenues for the periods presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended December 31, ​ ​ Nine Months Ended December31, ​ 2022 2021 2022 ​ 2021 Energy efficiency 79 % ​ 83 % ​ 58 % ​ 66 % ​ Natural resources ​ 19 % ​ 4 % ​ 28 % ​ 16 % ​ Renewable energy ​ 2 % ​ 7 % ​ 14 % ​ 16 % ​ Microgrid ​ — % ​ 6 % ​ — % ​ 2 % ​ Energy Efficiency—CHP/CCHP Energy efficiency refers to the proper utilization of both electrical and thermal energies in the power production process. In such applications, our microturbines are able to maximize the availability of usable energy to provide a significant economic advantage to customers while reducing their onsite emissions. CHP and CCHP can improve site economics by capturing the waste heat created from a single combustion process to increase the efficiency of the total system, from approximately 30 percent to 80 percent or more. Compared with more traditional, independent generation sources, the increase in operational efficiency also reduces greenhouse gas emissions through the displacement of other separate systems, which can also reduce operating costs. 27 Table of Contents Natural Resources—Crude Oil, Natural Gas, Shale Gas & Mining Our microturbines are installed in the natural resource market for use in both onshore and offshore applications, including oil and gas exploration, production, and at compression and transmission sites as a highly efficient and reliable source of power. 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. Our microturbines can turn these fuel byproducts - flare gas, or associated gas, into a useable fuel to provide prime power to these sites. Renewable Energy There is a growing transition to renewable energy sources and technologies on a global scale. Our microturbines run efficiently on renewable fuels such as methane and other biogases from landfills, wastewater treatment facilities and renewable natural gas. 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, 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. Microgrid Microgrid is a group of interconnected loads and distributed energy resources that acts as a single controllable energy entity with respect to the grid. Distributed energy resources typically include other dual-mode microturbines, reciprocating engines, solar photovoltaic (PV), wind turbine, fuel cells and battery storage. Microgrids can be connected to larger electricity grids; however, in the event of a widespread outage, the microgrid will disconnect from the main grid and continue to operate independently to maintain the electricity supply to the homes and businesses that are connected to the microgrid’s electricity network. Our microturbines have the ability to meet the needs of microgrid end-users by lowering their overall cost to operate and by providing a versatile dispatchable technology that is fuel flexible and scalable enough to fit a wide variety of applications. We have seen continued development in the microgrid market segment. There was no revenue in the Microgrid market vertical for the three and nine months ended December 31, 2022. Backlog Net product orders were approximately $1.7 million and $4.5 million for the three months ended December 31, 2022 and 2021, respectively. Ending backlog was approximately $21.8 million at December 31, 2022 compared to $25.3 million at March 31, 2022. The gross book-to-bill ratio was 0.8:1 and 0.5:1 for the three months ended December 31, 2022 and 2021, respectively. Book-to-bill ratio is the ratio of new orders we received to units shipped and billed during a period. A portion of our backlog is concentrated in the oil and gas market, which may impact the overall timing of shipments or the conversion of backlog to revenue. The timing of the backlog is based on the requirement date indicated by our customers. However, based on historical experience, management expects that a significant portion of our backlog may not be shipped within the next 18 months. Additionally, the timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and customer delivery schedule changes), most of which are not in our control and can affect the timing of our revenue. 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. A significant portion of our revenue is derived from sales to distributors that resell our products to end users. We have a total of 66 distributors, OEMs and national accounts. In the United States and Canada, we currently have 10 distributors, OEMs and national accounts. Outside of the United States and Canada, we currently have 56 distributors, OEMs and national accounts. We continue to refine our distribution channels to address our specific targeted markets. 28 Table of Contents Our Distributor Support System (“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 and company branding and to provide funding for increased strategic marketing activities. See Note 12 – Revenue Recognition for additional discussion of revenue recognition for this program. 3. Service As part of our Energy as a Service business line, we provide service primarily through our global distribution network. Together with our global distribution network, we offer a comprehensive factory protection plan for a fixed fee to perform regularly scheduled and unscheduled maintenance as needed. We provide factory and on-site training to certify all personnel that are allowed to perform service on our microturbines. Factory protection plans are generally paid quarterly in advance. Our FPP backlog as of December 31, 2022 was approximately $71.5 million, which represents the value of the contractual agreement for FPP services that had not been earned and extends through Fiscal 2042. Our FPP backlog as of March 31, 2022 was approximately $79.1 million, which represents the value of the contractual agreement for FPP services that then had not been earned and extends through Fiscal 2042. Additionally, we offer new and remanufactured parts through our global distribution network. Service revenue in the third quarter of Fiscal 2023 was approximately 39% of total revenue. 4. Product Robustness and Life Cycle Maintenance Costs We continue to invest in enhancements that relate to high performance and high reliability. An important element of our continued innovation and product strategy is to focus on the engineering of our product hardware and electronics to make them work together more effectively and deliver improved microturbine performance, reliability and low maintenance cost to our customers. 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 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 2022, we continued to expand and develop our new hydrogen products. 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. Our core intellectual property is contained within our air-bearing technology. We continue to review avenues for cost reduction by sourcing from the best value supply chain option. In order to utilize manufacturing facilities and technology more effectively, we are focused on continuous improvements in manufacturing processes. Additionally, considerable effort is being directed to manufacturing cost reduction through process improvement, product design, advanced manufacturing technology, supply management and logistics. Management expects to be able to leverage our costs as product volumes increase. Our manufacturing designs include the use of conventional technology, which has been proven in high- volume automotive and turbocharger production for many years. Many components used in the manufacture of our products are readily fabricated from commonly available raw materials or off-the-shelf items available from multiple supply sources; however, certain items are custom made to meet our specifications and require longer lead time. We believe that in most cases, adequate capacity exists at our suppliers and that alternative sources of supply are available or could be developed within a reasonable period of time; however, single source suppliers with long lead times may be more challenging to transition to another supplier. We regularly reassess the adequacy and abilities of our suppliers to meet our future needs. We believe that effective execution in each of these key areas will be necessary to leverage Capstone’s promising technology and early market leadership into achieving positive cash flow with growing market presence and improving financial performance. 29 Table of Contents 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. Critical Accounting Policies and Estimates The preparation of our condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Management believes the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from management’s estimates. Management believes the critical accounting policies listed below affect our more significant accounting judgments and estimates used in the preparation of the condensed consolidated financial statements. These policies are described in greater detail in our Annual Report on Form 10-K for Fiscal 2022 and continue to include the following areas: ● Revenue recognition; ● Inventory write-downs and classification of inventories; ● Estimates of warranty obligations; ● Accounts receivable allowances; ● Sales return allowances; ● Deferred tax assets and valuation allowance; ● Impairment of long-lived assets, including intangible assets with finite lives; and ● Stock-based compensation expense. Results of Operations Three Months Ended December 31, 2022 and 2021 The following table summarizes our revenue by geographic markets (amounts in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended December 31, ​ ​ ​ 2022 ​ 2021 ​ United States and Canada ​ $ 13.2 ​ $ 10.9 ​ Europe and Russia ​ ​ 3.4 ​ ​ 4.2 ​ Latin America ​ ​ 2.0 ​ ​ 1.8 ​ Asia and Australia ​ ​ 1.0 ​ ​ 1.5 ​ Middle East and Africa ​ ​ — ​ ​ 2.2 ​ Total ​ $ 19.6 ​ $ 20.6 ​ Revenue for the three months ended December 31, 2022 decreased $1.0 million to $19.6 million from $20.6 million for the three months ended December 31, 2021. The $1.0 million decrease was primarily driven by a $2.2 million decrease in the Middle East and Africa, $0.8 million in Europe and Russia and $0.5 million in Asia and Australia, partially offset by increases of $2.3 million in United States and Canada and $0.2 million in Latin America. The decreases in Middle East and Africa, Europe and Russia, and Asia and Australia were primarily due to decreases in product shipments into the energy efficiency and renewable energy vertical markets in those regions compared to the same period last year. The increase in the United States and Canada was primarily attributable to an increase in our EaaS long-term rental services and product shipments into the natural resources vertical markets compared to the same period last year. 30 Table of Contents The following table summarizes our revenue (revenue amounts in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended December 31, ​ ​ 2022 ​ 2021 ​ Revenue Megawatts Units Revenue Megawatts Units Microturbine Product ​ $ 8.9 7.6 50 ​ $ 11.6 10.3 54 Accessories ​ 1.1 ​ ​ ​ ​ 0.7 ​ ​ ​ Total Product and Accessories ​ 10.0 ​ ​ ​ ​ 12.3 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Parts, Service and Rentals ​ ​ 9.6 ​ ​ ​ ​ ​ ​ 8.3 ​ ​ ​ ​ Total ​ $ 19.6 ​ ​ ​ ​ $ 20.6 ​ ​ ​ For the three months ended December 31, 2022, revenue from microturbine products and accessories decreased $2.3 million, or 19%, to $10.0 million from $12.3 million for the three months ended December 31, 2021. The $2.3 million decrease was primarily driven by a decrease in megawatts and units shipped during the three months ended December 31, 2022 compared to the same period last year. Megawatts shipped were 7.6 megawatts and 10.3 megawatts during the three months ended December 31, 2022 and 2021, respectively. Average revenue per megawatt shipped was approximately $1.2 million and $1.1 million during the three months ended December 31, 2022 and 2021, respectively. The timing of shipments is variable and based on several factors (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 revenue recognition. Parts, service and rentals revenue (which are part of our EaaS business line and includes revenue from our parts shipments, FPP contracts, rentals, Distributor Support Subscription fees, and other service revenue) increased $1.3 million, or 16%, to $9.6 million for three months ended December 31, 2022 from $8.3 million for the three months ended December 31, 2021. The $1.3 million increase was primarily driven by an increase in rental revenue as a result of our EaaS business plan during the three months ended December 31, 2022 compared to the same period last year. Sales to RSP Systems and Cal Microturbine accounted for 21% and 14% of our revenue for the three months ended December 31, 2022, respectively. Sales to E-Finity, RSP Systems, and Radian Oil & Gas Services Co, accounted for 13%, 10%, and 10% of our revenue for the three months ended December 31, 2021, respectively. Gross Profit 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 profit was $2.7 million, or 14% of revenue, for the three months ended December 31, 2022 compared to a gross profit of $2.2 million, or 11% of revenue, for the three months ended December 31, 2021. The increase of $0.5 million was primarily the result of current year product price increases and an increase in higher margin rental revenue. The increase was also due to higher direct material profit of $0.8 million and lower warranty expense of $0.2 million, partially offset by higher production and service center labor and overhead expense of $0.3 million, and inventory charges of $0.2 million. Direct material profit, calculated as total revenue less our direct material costs, increased $0.8 million during the third quarter of Fiscal 2023 compared to the third quarter of Fiscal 2022. The increase was due to higher margin rental business, partially offset by higher direct material costs due to vendor price increases and supply chain shortages. We increased our sales prices effective January 2023 and are negotiating with vendors to reduce these costs. Warranty expense is a combination of a standard warranty provision recorded at the time revenue is recognized and changes, if any, in estimates for reliability repair programs. Reliability repair programs are based upon estimates that are recorded in the period that new information becomes available, including design changes, cost of repair and product enhancements, which can include both in-warranty and out-of-warranty systems. The decrease in warranty expense of $0.2 million is primarily due to declining failure and repair rates. During the three months ended December 31, 2021, we shipped approximately $0.4 million of parts to replace high risk failure parts in some of our fielded units due to a previously identified supplier defect and recorded it against the $4.9 million reserve established during the three months ended March 31, 2021. Production and service center labor and overhead expense increased by $0.3 million primarily because of an increase of $0.8 million in depreciation and rent expense related to our rental business, partially offset by decreases of $0.3 million in labor costs and $0.2 million in supplies expense, primarily as a result of higher margin rental revenue in the three months ended December 31, 2022. 31 Table of Contents The following table summarizes our gross profit (in millions except percentages): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended December 31, ​ ​ 2022 2021 ​ Gross Profit ​ ​ ​ ​ ​ ​ ​ Product and accessories ​ $ (1.6) ​ $ (0.4) ​ As a percentage of product and accessories revenue ​ (16) % (3) % ​ ​ ​ ​ ​ ​ Parts, service and rentals ​ $ 4.3 ​ $ 2.6 ​ As a percentage of parts, service and rentals revenue ​ 45 % 31 % ​ ​ ​ ​ ​ ​ Total Gross Profit ​ $ 2.7 $ 2.2 ​ As a percentage of total revenue ​ ​ 14 % ​ 11 % The $1.2 million decrease in product and accessories gross profit was primarily the result of higher material costs and lower product sales in the three months ended December 31, 2022. Product and accessories gross margin as a percentage of product and accessories revenue decreased to (16)% during the three months ended December 31, 2022, from (3)% during the three months ended December 31, 2021, primarily driven by higher direct material costs related to supply chain shortages from key vendors in the three months ended December 31, 2022. Parts, service and rentals gross margin as a percentage of parts and service revenue increased to 45% during the three months ended December 31, 2022, compared to 31% during the three months ended December 31, 2021 primarily as a result of higher margin rental revenue in the three months ended December 31, 2022. Research and Development (“R&D”) Expenses decreased $0.2 million, or 25%, to $0.6 million from $0.8 million as a result of lower costs from actions taken in our cost reduction plan during the three months ended December 31, 2022. Selling, General, and Administrative (“SG&A”) Expenses increased $0.1 million, or 2%, to $5.4 million from $5.3 million primarily as a result of increases of approximately $0.3 million in marketing related costs and $0.3 million in consulting expense, partially offset by a decrease of $0.5 million in labor costs during the three months ended December 31, 2022 compared to the same period last year. Interest Expense for the three months ended December 31, 2022 and 2021 was $1.9 million and $1.3 million, respectively, due to an increase in interest rates. See Liquidity and Capital Resources below for additional discussion on our interest expense. Nine Months Ended December 31, 2022 and 2021 The following table summarizes our revenue by geographic markets (amounts in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended December 31, ​ ​ ​ 2022 ​ 2021 ​ United States and Canada ​ $ 40.2 ​ $ 26.5 ​ Europe and Russia ​ ​ 10.5 ​ ​ 12.0 ​ Latin America ​ ​ 3.8 ​ ​ 6.9 ​ Asia and Australia ​ ​ 4.2 ​ ​ 5.7 ​ Middle East and Africa ​ ​ 0.3 ​ ​ 2.8 ​ Total ​ $ 59.0 ​ $ 53.9 ​ Revenue for the nine months ended December 31, 2022 increased $5.1 million, or 9%, to $59.0 million from $53.9 million for the nine months ended December 31, 2021. The $5.1 million increase was primarily driven by the $13.7 million increase in United States and Canada, offset by decreases of $3.1 million in Latin America, $2.5 million in Middle East and Africa, $1.5 million in Asia and Australia and $1.5 million in Europe and Russia. The increase in the United States and Canada was primarily attributable to an increase in our EaaS long-term rental services and product shipments into the natural resources vertical markets compared to the same period last year. The decreases in Europe and Russia, Latin America, Asia and Australia, and Middle East and Africa are primarily attributable to decreases in product shipments into the energy efficiency and natural resources vertical markets in those regions compared to the same period last year. 32 Table of Contents The following table summarizes our revenue (revenue amounts in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended December 31, ​ ​ 2022 ​ 2021 ​ Revenue Megawatts Units Revenue Megawatts Units Microturbine Product ​ $ 28.2 25.0 145 ​ $ 28.3 25.2 143 ​ Accessories ​ 1.6 ​ ​ ​ ​ 0.9 ​ ​ ​ ​ Total Product and Accessories ​ 29.8 ​ ​ ​ ​ 29.2 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Parts, Service and Rentals ​ ​ 29.2 ​ ​ ​ ​ ​ 24.7 ​ ​ ​ ​ Total ​ $ 59.0 ​ ​ ​ ​ $ 53.9 ​ ​ ​ ​ For the nine months ended December 31, 2022, revenue from microturbine products and accessories increased $0.6 million, or 2%, to $29.8 million from $29.2 million for the nine months ended December 31, 2021. The $0.6 million increase was primarily due to higher accessory sales during the nine months ended December 31, 2022 compared to the same period last year. Megawatts shipped were 25.0 megawatts and 25.2 megawatts during the nine months ended December 31, 2022 and 2021, respectively. Average revenue per megawatt shipped was approximately $1.1 million during the nine months ended December 31, 2022 and 2021. Parts, service and rentals revenue (which are part of our EaaS business line and includes revenue from our parts shipments, FPP contracts, rentals, Distributor Support Subscription fees, and other service revenue) increased $4.5 million, or 19%, to $29.2 million for nine months ended December 31, 2022 from $24.7 million for the nine months ended December 31, 2021. The $4.5 million increase was primarily driven by an increase in rental revenue as a result of our EaaS business plan, and an increase in revenue from our FPP contracts during the nine months ended December 31, 2022 compared to the same period last year. Sales to Cal Microturbine and RSP Systems accounted for 16% and 13% of our revenue for the nine months ended December 31, 2022, respectively. E-Finity accounted for 15% of our revenue for the nine months ended December 31, 2021. Gross Profit was approximately $9.6 million, or 16% of revenue, for the nine months ended December 31, 2022 compared to a gross profit of $7.6 million, or 14% of revenue, for the nine months ended December 31, 2021. The increase of $2.0 million was primarily a result of higher direct material profit of $4.1 million, partially offset by increases in our production and service labor and overhead expenses of $1.7 million, and higher inventory charges of $0.4 million. Direct material profit, calculated as total revenue less our direct material costs, increased $4.1 million during the nine months ended December 31, 2022 compared to the nine months ended December 31, 2021 primarily due to an increase in sales, partially offset by higher direct material costs due to vendor price increases and supply chain shortages. We increased our sales prices effective January 2023 and are negotiating with vendors to reduce these costs. Production and service center labor and overhead expense increased $1.7 million in the nine months ended December 31, 2022 compared to the nine months ended December 31, 2021 primarily due to an increase of approximately $2.5 million in facilities costs, offset by a decrease in labor costs of $0.8 million, primarily as a result of lower overhead costs and higher margin rental revenue in the nine months ended December 31, 2022. Inventory charges increased by $0.4 million during the nine months ended December 31, 2022 compared to the nine months ended December 31, 2021 primarily as the result of an increase in the provision for excess and obsolete inventory as we reserved for some older inventory parts. 33 Table of Contents The following table summarizes our gross profit (in millions except percentages): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended December 31, ​ ​ 2022 2021 ​ Gross Profit ​ ​ ​ ​ ​ ​ ​ Product and accessories ​ $ (3.2) ​ $ (1.3) ​ As a percentage of product and accessories revenue ​ (11) % (4) % ​ ​ ​ ​ ​ ​ Parts, service and rentals ​ $ 12.8 ​ $ 8.9 ​ As a percentage of parts, service and rentals revenue ​ 44 % 36 % ​ ​ ​ ​ ​ ​ Total Gross Profit ​ $ 9.6 $ 7.6 ​ As a percentage of total revenue ​ ​ 16 % ​ 14 % The $1.9 million decrease in product and accessories gross profit in the nine months ended December 31, 2022 was primarily due to high costs driven by material cost increases from key vendors. Product and accessories gross margin as a percentage of product and accessories revenue decreased to (11)% during the nine months ended December 31, 2022, from (4)% during the nine months ended December 31, 2021, primarily due to higher product material costs in the nine months ended December 31, 2022 driven by price increases from key vendors. Parts and service gross margin as a percentage of parts and service revenue increased to 44% during the nine months ended December 31, 2022, compared to 36% during the nine months ended December 31, 2021, primarily due to lower overhead costs and higher margin rental revenue in the nine months ended December 31, 2022. Research and Development (“R&D”) Expenses decreased $0.9 million, or 35%, to $1.7 million from $2.6 million as a result of lower costs from actions taken in our cost reduction plan during the nine months ended December 31, 2022. Selling, General, and Administrative (“SG&A”) Expenses decreased $1.7 million, or 10%, to $15.4 million from $17.1 million primarily as a result of decreases of approximately $1.5 million labor costs and $0.7 million in marketing related costs, partially offset by an increase of $0.7 million in consulting expense. These decreases were primarily due to lower costs from actions taken in our cost reduction plan during the nine months ended December 31, 2022. Interest Expense for the nine months ended December 31, 2022 and 2021 was $4.6 million and $3.8 million, respectively, due to higher interest rates. See Liquidity and Capital Resources below for additional discussion on our interest expense. Gain on Extinguishment of Debt of approximately $1.9 million during the nine months ended December 31, 2021 was the result of the forgiveness of the PPP Loan. See Note 10 – Term Note Payable. Other Income for the nine months ended December 31, 2021 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 10 – Term Note Payable. Liquidity and Capital Resources Cash Flows Our cash requirements depend on many factors, including the execution of our business strategy and plan. We have invested our cash in institutional funds that invest in high quality short-term money market instruments to provide liquidity for operations and for capital preservation. Our cash and cash equivalents balances decreased $5.9 million during the nine months ended December 31, 2022, primarily due to the net loss and an increase in inventory purchases, partially offset by improved collections of accounts receivable and net proceeds from the August 2022 public offering. 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 the August 2022 public offering. Operating Activities During the nine months ended December 31, 2022, we used $7.8 million in cash in our operating activities, which consisted of a net loss for the period of $12.2 million and cash used for working capital of $0.9 34 Table of Contents million, partially offset by non-cash adjustments (primarily depreciation and amortization, inventory provision, warranty provision and stock based compensation) of $5.3 million. During the nine months ended December 31, 2021, we used $23.0 million in cash in our operating activities, which consisted of a net loss for the period of $13.3 million, cash used for working capital of $11.4 million and non-cash adjustments (primarily gain on extinguishment of debt, warranty provision, depreciation and amortization, stock based compensation and inventory provision) of $1.7 million. The following is a summary of the significant sources (uses) of cash from operating activities (amounts in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended December 31, ​ 2022 2021 Net loss $ (12,191) $ (13,322) ​ Non-cash operating activities(1) ​ 5,328 ​ 1,682 ​ Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ 9,077 ​ (6,249) ​ Inventories ​ (9,080) ​ (5,637) ​ Accounts payable and accrued expenses ​ (276) ​ 5,953 ​ Prepaid expenses, other current assets and other assets ​ ​ (933) ​ ​ 509 ​ Other changes in operating assets and liabilities ​ 312 ​ (5,929) ​ Net cash provided by (used) in operating activities ​ $ (7,763) ​ $ (22,993) ​ (2) Represents a change in gain on extinguishment of debt, warranty provision, depreciation and amortization, stock-based compensation expense, inventory provision, accounts receivable and sales return allowances. The change in non-cash operating activities during the nine months ended December 31, 2022, compared to the same period the previous year was primarily driven by the gain on extinguishment of debt resulting from the forgiveness of the PPP Loan during the first quarter of Fiscal 2022 and an increase in depreciation expense related to the additions to our rental fleet during the nine months ended December 31, 2022, compared to the same period the previous fiscal year. The change in accounts receivable was primarily the result of improved collections during the nine months ended December 31, 2022 compared to the same period in the previous fiscal year. The change in inventory was primarily the result of an increase in raw materials during the nine months ended December 31, 2022 to secure inventory with long lead times, compared to the nine months ended December 31, 2021. The change in accounts payable and accrued expenses was primarily due to higher accounts payable payments to vendors during the nine months ended December 31, 2022 compared to the same period of the previous fiscal year. The change in other operating assets and liabilities during the nine months ended December 31, 2022 compared to the same period in the previous fiscal year, was primarily driven by the decrease in our accrued warranty reserve during the nine months ended December 31, 2021, as we had additional spend for the reliability repair program. Investing Activities Net cash used in investing activities of $4.0 million and $5.7 million during the nine months ended December 31, 2022 and 2021, respectively, primarily related to the additions to our rental fleet of approximately $4.1 million and $5.1 million, respectively. Financing Activities During the nine months ended December 31, 2022, we generated cash of approximately $5.8 million from financing activities, compared to cash generated during the nine months ended December 31, 2021 of approximately $10.5 million. The funds generated from financing activities during the nine months ended December 31, 2022 were primarily the result of net proceeds from the August 2022 public offering, which were partially offset by financing related to additions to our rental fleet. The funds generated from financing activities during the nine months ended December 31, 2021 were primarily the result of net proceeds from the June 2021 Common Stock offering and proceeds from the at-the-market offering program described below. At-the-market offerings On June 7, 2018, we entered into a sales agreement with H.C. Wainwright & Co., LLC (the “Sales Agreement”) 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, having an aggregate offering price of up to $25.0 million. 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. On July 15, 2020, we entered into an amendment to the Sales Agreement, which modified 35 Table of Contents 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. No shares of our Common Stock under the at-the-market offering program were issued during the nine months ended December 31, 2022. Following the filing of our Annual Report on Form 10-K on July 13, 2022, we are now subject to General Instruction I.B.6 of Form S-3, which limits the amounts that we may sell under our registration statement on Form S-3. At the conclusion of our public offering in August of 2022, we had no remaining shares available for issuance with respect to this ATM Program. Common Stock Offerings On June 17, 2021, we entered into an amended and restated underwriting agreement (the “Wainwright Underwriting Agreement”) with H.C. Wainwright & Co., LLC (“Wainwright”) whereby we agreed to sell to Wainwright, and Wainwright agreed to purchase, in a firm commitment underwritten public offering 1,904,763 shares (the “Wainwright Shares”) of our common stock, $0.001 par value per share (the “Wainwright Offering”). The offering price to the public in the Wainwright Offering was $5.25 per share of Common Stock, and Wainwright agreed to purchase the Wainwright Shares from the Company pursuant to the Wainwright Underwriting Agreement at a price of $4.91 per share, representing an underwriting discount of 6.5%. Pursuant to the Wainwright Underwriting Agreement, we also granted Wainwright an option to purchase, for a period of 30 days from the date of the Wainwright Underwriting Agreement, up to an additional 285,714 shares of Common Stock (the “Option Shares”). On June 21, 2021, Wainwright exercised the option in full. The Wainwright Offering closed on June 22, 2021, and we received net proceeds of $10.5 million after deducting $1.0 million in underwriting discounts, commissions and offering expenses paid by the Company. On August 18, 2022, we entered into an underwriting agreement (the “Lake Street Underwriting Agreement”) with Lake Street Capital Markets, LLC and Joseph Gunnar and Company, LLC (the “Underwriters”) whereby we agreed to sell to the Underwriters, and the Underwriters agreed to purchase, in a firm commitment underwritten public offering 2,934,498 (the “Lake Street Shares”) of the Company’s Common Stock, $0.001 par value per share (the “Lake Street Offering”) and accompanying warrants to purchase up to 2,934,498 shares of common stock. The offering price to the public in the Offering was $2.75 per share of Common Stock and accompanying warrant, and the Underwriters agreed to purchase the shares and accompanying warrant from the Company pursuant to the Lake Street Underwriting Agreement at a price of $2.585 per share and accompanying warrant, representing an underwriting discount of 6.0%. The Lake Street Offering closed on August 24, 2022, and the Company received net proceeds of $7.3 million after deducting $0.8 million in underwriting discounts, commissions and offering expenses paid by the Company. Warrants 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 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 December 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, we entered into an Amendment No. 3 to the Purchase Warrant for shares of our Common Stock (the “Amendment No. 3”) with Special Situations Investing Group II, LLC (as successor in interest to Goldman Sachs & Co. LLC) (the “Warrant Holder”) that amended that certain Purchase Warrant for shares of our Common Stock originally issued by the Company to Goldman Sachs & Co. LLC, dated February 4, 2019, as amended (the “Original 36 Table of Contents Warrant”). As of December 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 $2.75 per share. September 2019 Pre-Funded and Series D Warrants On September 4, 2019, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain institutional and accredited investors pursuant to which we agreed to issue and sell in a registered direct offering (the “Registered Direct Offering”) an aggregate of 580,000 shares of our Common Stock at a negotiated purchase price of $5.00 per share, and pre-funded warrants to purchase up to an aggregate of 440,000 shares of our Common Stock at a negotiated purchase price of $5.00 per Pre-Funded Warrant, for aggregate gross proceeds of approximately $5.1 million (580,000 shares of common stock plus 440,000 pre-funded warrants at a $5.00 per share purchase price), before deducting placement agent fees and other offering expenses. 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. 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 December 31, 2022, there were 75,000 Series D warrants outstanding at an exercise price of $6.12 per share. August 2022 Warrants On August 24, 2022 we issued 2,934,498 of common stock warrants with an exercise price of $2.75 in conjunction with the Lake Street Offering. There were no stock options exercised during the three months ended December 31, 2022 and 2021. Repurchases of shares of our Common Stock for employee taxes due on vesting of restricted stock units, net of employee stock purchases, resulted in approximately $0.1 million of net cash used during the nine months ended December 31, 2022 and 2021, respectively. Three-year Term Note On February 4, 2019, we entered into a Note Purchase Agreement, by and among us, certain subsidiaries of us as guarantors, Goldman Sachs Specialty Lending Holdings, Inc., as collateral agent and any other Purchasers party thereto from time to time, in connection with the sale of senior secured notes of us in a private placement exempt from registration under the Securities Act of 1933, as amended. Under the Note Purchase Agreement, we sold to the Purchaser $30.0 million aggregate principal amount of senior secured notes (the “Goldman Notes”). The first interest payment on the Notes was on March 31, 2019. On October 1, 2020, pursuant to A&R Note Purchase Agreement, we increased the amount of borrowing under the Notes by $20.0 million to $50.0 million, and all outstanding Notes bear interest at the Adjusted (London Interbank Offer) LIBO Rate (as defined in the A&R Note Purchase Agreement) plus 8.75% per annum. The Notes do not amortize and the entire principal balance is due in a single payment on the maturity date. 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 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. As of December 31, 2022, we are in compliance with the other covenants contained in the A&R Note Purchase Agreement, as amended by A&R NPA Second Amendment. 37 Table of Contents We were compliant with the Adjusted EBITDA covenant as of December 31, 2022. On August 24, 2022 we completed a public stock offering with net proceeds of $7.5 million. (See Note 8 - Offering of Common Stocks and Warrants), which Goldman Sachs Specialty Lending Group, L.P. agreed satisfied the Company’s obligation to use commercially reasonable best efforts to raise at least $10 million through a sale of its common stock by September 14, 2022. On September 9, 2022, we engaged Greenhill as financial advisor and investment banker in conjunction with the commercially reasonable best effort of refinancing the Goldman Notes. Greenhill’s activities were ongoing as of December 31, 2022. 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. On April 24, 2020, we entered into a promissory note with Western Alliance Bank. The Company received the full amount of the PPP Loan on April 24, 2020. 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 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 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 and Other Operating Assets and Liabilities Cash used for working capital was $0.9 million during the nine months ended December 31, 2022, a decrease of $10.5 million from the cash used for working capital of $11.4 million during the nine months ended December 31, 2021. These decreases in cash used for working capital and other operating assets and liabilities were primarily due to improved collections of accounts receivable and lower warranty claims. Additionally, the change in accounts payable and accrued expenses was primarily due to increased accounts payable payments to vendors. Liquidity and Going Concern In connection with the preparation of these condensed consolidated financial statements for the three and nine months ended December 31, 2022, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about our ability to meet obligations as they became due over the next twelve months from the date of issuance of our third quarter of Fiscal 2023 interim condensed consolidated financial statements. Management assessed that there were such conditions and events, primarily the October 1, 2023 due date for the Goldman Sachs Specialty Lending Group, L.P. outstanding debt of $51.0 million at fair value (see Note 10 – Term Note Payable in the Notes to the Condensed Consolidated Financial Statements for further discussion of the outstanding debt). As of December 31, 2022, the Company had cash and cash equivalents of $16.6 million. While the Company believes internally generated cash will adequately fund operating and investment activities over the next twelve months, there will not be sufficient internally generated cash, nor does the Company expect that it could obtain sufficient financing through underwritten public offerings, at-the-market offerings or other similar methods, to retire the outstanding debt. The Company has engaged Greenhill, a global investment banking firm, to assess financing alternatives related to the Note Payable as well as to raise incremental capital for general corporate purposes. Greenhill’s refinancing efforts are ongoing as of December 31, 2022. As there is no guarantee that the Company will successfully complete these financing activities, these conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date the financial statements are issued. The Company has taken several steps to reduce operating costs and to conserve cash, including staff reductions, price increases, emphasis on the higher margin EaaS business, and the engagement of Greenhill to assist in debt refinancing. 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 working capital requirements may vary materially from those now planned. The amount of capital that we will need in the future to fund our operations will require us to achieve significantly increased sales volume, which is dependent on many factors, including: ● worldwide supply chain issues, including raw materials shortages and freight surcharges; 38 Table of Contents ● the market acceptance of our products and services; ● our business, product and capital expenditure plans; ● capital improvements to new and existing facilities; ● our competitors’ response to our products and services; ● our relationships with customers, distributors, dealers and project resellers; and ● our customers’ ability to afford and/or finance our products. Our accounts receivable balance, net of allowances, was $15.1 million and $24.7 million as of December 31, 2022 and March 31, 2022, respectively. Days sales outstanding in accounts receivable (“DSO”) decreased by 84 days to 66 days as of December 31, 2022 compared to 150 days as of March 31, 2022, primarily due to an increase in accounts receivable collections, and benefitting from a $1.3 million offset of certain customer receivable accounts against notes payable to the same customer related to our rental units.. 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. No assurance can be given that future bad debt expense will not increase above current operating levels. Increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on cash flows and results of operations. In addition, our ability to access the capital markets may be severely restricted or made very expensive at a time when we need, or would like, to do so, which could have a material adverse impact on our liquidity and financial resources. 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. New Accounting Pronouncements Refer to Note 3 – Recently Issued Accounting Pronouncements in the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for information regarding new accounting standards. Off-Balance Sheet Arrangements We do not have any material off-balance sheet arrangements.