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Item 3. Legal Proceedings

2024-06-13 compared with 2022-07-14 · 52 added, 3 removed, 3 unchanged (95% of the section changed)

Legal Proceedings.

Refer to Note 12 – Commitments and Contingencies – Legal matters in the Notes to Consolidated Financial Statements for information regarding legal proceedings in which we are involved.

From time-to-time, we are involved in other pending and threatened litigation in the normal course of business in which claims for monetary damages are asserted.

In the opinion of management, the ultimate liability, if any, arising from such pending or threatened litigation is not expected to have a material effect on our results of operations, liquidity, or financial position.

The Company is from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business.

In addition, the Company and certain of its former and current directors and officers are a party to several material legal proceedings, which are described below.

The outcome of litigation is inherently uncertain.

If one or more legal matters were to be resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected.

SEC Investigation

In June 2023, prior to the issuance of the Company’s consolidated financial statements for the fiscal year ended March 31, 2023, the Audit Committee of the Company’s Board commenced the Revenue Recognition Investigation into certain accounting and internal control matters of the Company, principally focused on certain revenue recognition matters, and self-reported its findings to the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) upon the conclusion of the Revenue Recognition Investigation.

Following the self-report, The SEC Enforcement Division has commenced an investigation into the circumstances surrounding the Restatement (the “SEC Investigation”).

The Audit Committee further self-reported its findings pursuant to the FPP Investigation to the SEC.

The Company is cooperating with the SEC in connection with its investigation.

Investigations of this nature may be costly and require management to devote significant time and attention away from the ongoing operation of the business.

The Company cannot predict the duration or outcome of this matter.

Flexon, Jamison, Juric, Robinson, and Hencken

On October 13, 2023, a putative securities class action was filed in the U.S.

District Court for the Central District of California, captioned Spitzer v.

Flexon, et al., Case No.

2:23-cv-08659, naming certain of the Company’s current and former directors and officers as defendants.

The suit alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder based on allegedly false and misleading statements regarding, and allegedly inadequate disclosure surrounding, the Company’s business, operations and prospects and the circumstances leading up to the restatement of the Company’s quarterly and annual financial statements.

The suit is purportedly brought on behalf of persons and entities that purchased or otherwise acquired the Company’s securities between June 14, 2021 and September 22, 2023 and seeks to recover unspecified compensatory damages and other relief, including attorney’s fees.

The Company may incur significant legal expenses in defending the legal matters described above during the pendency of these matters, and in connection with any other potential legal matters, including expenses for the potential reimbursement of legal fees of officers and directors under indemnification obligations.

The Company anticipates these legal fees to not exceed the insurance deductible of $1.2 million.

Cal Microturbine Arbitration

On March 13, 2024, Cal Microturbine, a distributor of the Company, submitted a demand for arbitration before the American Arbitration Association seeking, among other things, approximately $24.5 million in damages and alleging

that the Company breached its distributor agreement with Cal Microturbine and committed fraud in allowing another company, Capstone Engineered Solutions, to sell, rent and service turbines in Cal Microturbine’s exclusive territory under the distribution agreement.

The parties are in the process of selecting the arbitration panel.

The matter is in its preliminary stages with no hearing date set as of the date hereof.

The Company cannot estimate the outcome and will fight this claim vigorously.

Capstone Turbine Corporation v.

Turbine International, LLC

On February 3, 2020, Capstone Turbine Corporation filed suit against its former distributor, Turbine International, LLC (“Turbine Intl.”), in the Superior Court of California for the County of Los Angeles under the following caption:

Capstone Turbine Corporation v.

Turbine International, LLC;

20STCV04372 (“Capstone-Turbine Intl.

Litigation”).

The Company has alleged claims against Turbine Intl.

for breach of contract and for injunctive relief relating to the parties’ prior distributor relationship, which terminated at the end of March 2018, and Turbine Intl.’s failure to satisfy its payment obligations under certain financial agreements, namely an accounts receivable agreement and promissory note in favor of Capstone.

As remedies for these claims, the Company is seeking compensatory, consequential, along with injunctive relief and attorney’s fees, interest, and costs.

On March 18, 2020, Turbine Intl.

filed its answer and cross-claims in the Capstone-Turbine Intl.

In its cross-claims, Turbine Intl.

asserted claims against Capstone, and individually against Mr.

James Crouse, Capstone’s Chief Revenue Officer, for breach of contract under the distributor agreement, accounts receivable agreement and promissory note, fraud, breach of the covenant of good faith and fair dealing, unjust enrichment and constructive trust, negligent misrepresentation, violation of the California unfair practices act, violation of racketeer influenced corrupt organizations act, and conspiracy to commit fraud.

As remedies for these alleged claims, Turbine Intl.

are seeking compensatory, consequential, and punitive damages along with attorney’s fees, interest, and costs.

Capstone answered the cross-claims on May 7, 2020.

On June 29, 2020, Capstone filed a motion to file a First Amended Complaint that would add, among other things, a claim for enforcement of a guaranty signed by an entity related to Turbine Intl., Hispania Petroleum, S.A., and personal claims against the principals of Turbine Intl.

and Hispania.

That motion was granted on August 19, 2020, and the First Amended Complaint (“FAC”) is now on file.

All of the new defendants have been served and have filed answers.

The Company has not recorded any liability as of March 31, 2023 as the matter is too early to estimate.

As of March 31, 2023, discovery had been served and answered on both sides.

On May 17, 2024, the trial was set for July 29, 2024;

and the court ordered the parties to mediate the matter by June 19, 2024.

Mine Safety Disclosures.

1 unchanged sentence

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 3. Legal Proceedings