Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under “Note Regarding Forward-Looking Statements” and Item 1A (Risk Factors) in this Form 10-K. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Form 10-K.
Post Fiscal 2023 Developments
Voluntary Petition for Bankruptcy
As previously reported in the Company’s Current Report on Form 8-K filed with the SEC on September 28, 2023, the Company and its wholly owned direct subsidiaries, Capstone Turbine International, Inc. and Capstone Turbine Financial Services, LLC. (together with the Company, the “Debtors”), commenced voluntary proceedings under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Chapter 11 proceedings are jointly administered under the caption In re Capstone Green Energy Corporation, Inc., et al. (the “Chapter 11 Cases”). The Debtors continue to operate their business in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. At hearings before the Bankruptcy Court on September 29, 2023, the Debtors obtained approval from the Bankruptcy Court of certain “first day” motions containing customary relief intended to assure the Debtors’ ability to continue their ordinary course operations during the Chapter 11 Cases.
Concurrent with the petition, the Debtors entered into the Transaction Support Agreement (“TSA”) with the pre-petition senior secured creditor, Broad Street Credit Holdings, LLC. (“Broad Street”), and Goldman Sachs Specialty Lending Group, L.P. (the “Collateral Agent”). The TSA, among other things, provided that Broad Street and the Collateral Agent would support the Debtors’ restructuring efforts as set forth in, and subject to the terms and conditions of, the TSA. The TSA contained customary conditions, representations, and warranties of the parties and is subject to a number of conditions, including, among others, the accuracy of the representations and warranties of the parties and compliance with the obligations set forth in the TSA. The TSA also provided for termination by the parties upon the occurrence of certain events.
See additional discussion in Note 17– Subsequent Events in the Notes to Consolidated Financial Statements.
Emergence from Voluntary Chapter 11 Proceedings
The Bankruptcy Court confirmed the Plan on November 14, 2023, and the Debtors satisfied all conditions required for Plan effectiveness and emerged from the Chapter 11 Cases ("Emergence") on December 7, 2023 (the “Effective Date”). On or following the Effective Date and pursuant to the terms of the Plan, the following occurred or became effective:
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▪Restructuring: Capstone Green Energy Corporation was reorganized pursuant to the TSA and became a private company (“Reorganized PrivateCo”) that continues to own assets consisting of (i) all of the Company’s right, title, and interest in and to certain trademarks of the Company and (ii) assets owned by the Company relating to distributor support services ((i) and (ii) together, the “Retained Assets”) and certain income tax attributes that remained with Reorganized PrivateCo. Capstone Turbine International became a publicly-traded company and was renamed Capstone Green Energy Holdings, Inc. This entity is the successor entity for purposes of SEC registration. Pre-petition equity holders received 100% of the common equity in this public entity, subject to dilution for any equity incentive plans implemented as part of the reorganization. All equity of the predecessor entity was cancelled, and the predecessor entity became a reorganized private company. The reorganized private company equity is owned 100% by the pre-petition senior secured lender in exchange for the satisfaction of $35.0 million of its pre-petition claims, and $10.0 million of its DIP claim. A new subsidiary to the public entity was created, issuing 100% of its common equity to the public entity, and 100% of its preferred equity to the reorganized private entity. The new subsidiary ("Operating Subsidiary”) conducts the legacy Capstone business (other than in respect of the Retained Assets). The preferred equity is convertible at the option of the holder at any time to 37.5% of the common equity deemed outstanding, making the common equity of Operating Subsidiary subject to dilution to 62.5% ownership.
▪Exit Financing: The DIP Facility converted into an Exit Facility for an aggregate principal amount of $27.0 million, consisting of (1) $7.0 million new money notes, (2) a roll-up of secured obligations under the pre-petition debt in the amount of $8.0 million, and (3) a roll-up of the DIP new money notes of $12.0 million, subject to the terms and conditions set forth in the Exit Facility Agreement. The new money notes mature two years from the Effective Date, and the roll-up debts mature three years from the Effective Date. Interest is calculated using a SOFR rate plus an applicable margin, and a portion is paid-in-kind until the third year following emergence. In the original Plan, the Exit Facility was to be for an aggregate principal amount of $25.0 million, with only $5.0 million in new money notes. The final approved Plan increased the new money notes to $7.0 million upon the confirmation of the Plan by Bankruptcy Court.
Exit Facility Agreement
In connection with the emergence form the Chapter 11 Cases, on the Effective Date, Operating Subsidiary entered into an Exit Note Purchase Agreement (the “Exit Note Purchase Agreement”), by and among Operating Subsidiary, as the issuer, the Company and Capstone Financial Services, as the guarantors (the “Guarantors”), Purchaser and the Collateral Agent (each as defined in the Exit Note Purchase Agreement). The Exit Note Purchase Agreement provides for:
(i) a roll up of the $12.6 million DIP New Money Notes (plus any accrued unpaid interest);
(ii) a roll up of $8.0 million of DIP Roll Up Notes (plus any accrued unpaid interest) (collectively with the roll up of the $12.6 million DIP New Money Notes, the “Exit Roll Up Notes”); and
(iii) an additional $7.0 million new money committed delayed draw term loan facility (the “Exit New Money Notes” and, together with the Exit Roll Up Notes, the “Notes”), of which $3.0 million was drawn at closing.
The Exit Note Purchase Agreement also provides for a $10.0 million uncommitted incremental facility. The proceeds of the $7.0 million of Exit New Money Notes were used to fund restructuring expenses and for working capital, for general corporate purposes and to pay interest, premiums, fees and expenses payable under the other Note Documents (as defined in the Exit Note Purchase Agreement). The Notes bear interest at a rate equal to the Adjusted Term SOFR (as defined in the Exit Note Purchase Agreement) plus 7.00% per annum. A portion of the interest on the Notes is paid-in-kind until the third year following the Effective Date. As of May 31, 2024, we had $29.7 million in borrowing outstanding under the Notes.
The Exit Roll Up Notes mature on December 7, 2026, and the Exit New Money Notes mature on December 7, 2025.
The Notes issued pursuant to the Exit Note Purchase Agreement are secured by a lien on substantially all of the present and future property and assets of New Subsidiary and each Guarantor, subject to customary exceptions and exclusions. The Exit Note Purchase Agreement also includes conditions precedent, representations and warranties,
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affirmative and negative covenants, events of default, and other customary provisions, including financial covenants with respect to minimum consolidated liquidity and minimum consolidated adjusted EBITDA.
The minimum liquidity covenant will be tested at all times from and after June 30, 2024, and will require the Company and its subsidiaries to maintain a minimum average Consolidated Liquidity (as defined in the Exit Note Purchase Agreement) during any seven consecutive day period of no less than:
(i) from June 30, 2024 to March 30, 2025, $2,000,000;
(ii) from March 31, 2025 to June 29, 2025, $2,500,000;
(iii) from June 30, 2025 to September 29, 2025, $3,000,000;
(iv) from September 30, 2025 to March 30, 2026, $3,500,000; and
(v) from March 31 2026 to December 7, 2026, $4,000,000.
The minimum consolidated adjusted EBITDA covenant will be tested on the last day of each fiscal quarter, commencing with March 31, 2024, and will require the Company and its subsidiaries to maintain a minimum Consolidated Adjusted EBITDA (as defined in the Exit Note Purchase Agreement) as at the end of any fiscal quarter (i) from the Closing Date, December 7, 2023 until September 30, 2024, for the period of the fiscal quarters then ended in such calendar year and (ii) from October 1, 2024, for the four fiscal quarter period then ended, of no less than the correlative amount indicated below (with corresponding calendar quarters also included as reference):
Fiscal Quarter Ending
Consolidated Adjusted EBITDA
March 31, 2024
$1,000,000
June 30, 2024
$1,500,000
September 30, 2024
$2,500,000
December 31, 2024
$4,000,000
March 31, 2025
$5,000,000
June 30, 2025
$5,500,000
September 30, 2025
$6,000,000
December 31, 2025
$6,500,000
March 31, 2026
$8,000,000
June 30, 2026
$8,000,000
September 30, 2026
$8,000,000
As of March 31, 2024, we were not in compliance with the minimum adjusted EBITDA covenant contained in the Exit Note Purchase Agreement. In anticipation of such default, we obtained a waiver from the Purchaser and the Collateral Agent on March 27, 2024. There can be no assurance that the Purchase and the Collateral Agent will waive any future defaults that may occur. If future defaults occur, the Purchaser and the Collateral Agent can exercise their rights and remedies under the Exit Note Purchase Agreement (and other security related documents), including a right to accelerate the maturity of our repayment obligations under the Notes.
Operating Subsidiary LLC Agreement
In connection with the Emergence, on the Effective Date, Operating Subsidiary, Reorganized PrivateCo and the Company entered into the Operating Subsidiary LLC Agreement. Pursuant to the Operating Subsidiary LLC Agreement, the Company owns Common Units with an aggregate value representing 62.5% equity ownership in the Operating Subsidiary and Reorganized PrivateCo owns Preferred Units with an aggregate value representing non-dilutable 37.5% equity ownership in the Operating Subsidiary on an as-converted basis. The Preferred Units rank senior in certain respects to the Common Units and subordinate to Operating Subsidiary’s existing and future indebtedness, and the Preferred Units will be entitled to vote with the Common Units on an as-converted basis. Additionally, pursuant to the Operating Subsidiary LLC Agreement, Operating Subsidiary may not undertake certain actions without the prior written approval of
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Reorganized PrivateCo. Subject to certain exceptions, Operating Subsidiary may not, among other things: (1) alter or change the rights, preferences or privileges of the Preferred Units or amend any of Operating Subsidiary’s governing documents; (2) make any change in corporate form, including conversion to a corporation; (3) increase the authorized number of Preferred Units; (4) issue any Common Units or equivalents to any person or group of persons (other than the Company), or approve the sale by the Company of Common Units or equivalents to any person or group of persons, such that after the issuance or sale, as applicable, such person or group of persons would own an aggregate number of Common Units in excess of 25% of the actually outstanding Common Units on the date of the Operating Subsidiary LLC Agreement; (5) create any new class of units with preference over, or parity with, the Preferred Units; (6) authorize, issue or reclassify any securities issued by Operating Subsidiary, its subsidiaries and controlled affiliates (the “Restricted Entities”), other than issuances of Common Units to the Company; (7) sell, issue, sponsor, create or distribute any digital tokens, cryptocurrency or other blockchain-based assets; (8) incur new third party indebtedness exceeding $5.0 million, other than (A) debt contemplated by the TSA, (B) lease or other obligations relating to the rental of equipment to customers or otherwise for energy-as-a-service (EaaS) business activity and (C) debt permitted under the DIP Note Purchase Agreement; (9) declare or pay distributions other than (A) for tax purposes and (B) distributions from Operating Subsidiary’s subsidiaries or controlled affiliate to Operating Subsidiary or its wholly owned subsidiaries; (10) effectuate any liquidation event; (11) acquire any business, ownership of any equity securities in any person other than a wholly owned subsidiary, or enter into a joint venture arrangement; (12) conduct any public offering or direct listing on a national securities exchange; (13) enter into any merger or other transaction resulting in Operating Subsidiary’s equity interests being listed or quoted for trading on an exchange or otherwise subject to registration; (14) commence, settle, defend or make any material decisions with respect to any material settlement or litigation; (15) make any material change to the nature of Operating Subsidiary’s Existing Business (as defined in the Operating Subsidiary LLC Agreement); or (16) enter into any affiliated party transaction except for (A) payments to holders of Common Units (including the Company) in accordance with the terms of the Services Agreement (described below) and (B) compensation arrangements.
Pursuant to the Operating Subsidiary LLC Agreement, the Company, its subsidiaries and controlled affiliates (other than the Restricted Entities) (the “Unrestricted Entities”) may not, without the consent of the holders of a majority of the Preferred Units held by the Preferred Members (the “Preferred Requisite Members” which, on the effective date of the Operating Subsidiary LLC Agreement is solely Reorganized PrivateCo), engage in any business opportunities, make any investments or enter into any transactions, including any of the foregoing which are or would reasonably be expected to be within the scope of, or would reasonably be deemed to be beneficial to, the Existing Business of Operating Subsidiary; provided that such consent shall not be unreasonably withheld, conditioned or delayed, including in circumstances in which any Unrestricted Entity proposes to engage in any such business opportunities, make any such investments or enter into any such transactions and (i) where the business opportunity, investment or transaction (the “New Opportunity”) would constitute a change in the Existing Business if the Restricted Entities were to engage in such New Opportunity, make such investments or enter into such transactions and the Preferred Requisite Members do not consent to such change following Operating Subsidiary’s request reasonably in advance of such New Opportunity for the Preferred Requisite Members to be able to reasonably consider such request, or (ii) the New Opportunity is not within the scope of the Existing Business and either (A) the New Opportunity is first presented to Operating Subsidiary, Operating Subsidiary proposes such New Opportunity to the Preferred Requisite Members reasonably in advance of such New Opportunity for the Preferred Requisite Members to be able to reasonably consider such proposal, and the Preferred Members (as defined in the Operating Subsidiary LLC Agreement) do not agree to fund their proportionate share of the cost thereof, or (B) the New Opportunity is funded entirely with the proceeds of financing transactions by, or through the issuance of securities of, any Unrestricted Entity.
Pursuant to the Operating Subsidiary LLC Agreement, at any time during the six-month period following the sixth anniversary of the effective date of the Operating Subsidiary LLC Agreement, the Preferred Requisite Members may elect to have all, but not less than all, of the then outstanding Preferred Units redeemed (a “Redemption Request”). In such event, Operating Subsidiary will redeem all, but not less than all, of the Preferred Units, except Operating Subsidiary may not make such payment if (a) such payment is prohibited by the Delaware Limited Liability Company Act. or (b) Operating Subsidiary is, or by such payment would be, insolvent (together, the “Redemption Exceptions”). The aggregate price for Preferred Units will be an amount equal to the greater of (i) the $10,449,863, plus declared but unpaid distributions, or (ii) the fair market value of the Preferred Units on an as-converted to Common Units basis at the time of such redemption (the “Redemption Price”). If a Redemption Exception prevents Operating Subsidiary from redeeming all Preferred Units, Operating Subsidiary will redeem the maximum possible number of Preferred Units from the Preferred Members without triggering any Redemption Exceptions. At any time thereafter when the Redemption Exceptions do not
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prevent Operating Subsidiary from redeeming Preferred Units that remain issued and outstanding, Operating Subsidiary will immediately use its funds to redeem the balance of the Preferred Units that Operating Subsidiary became obligated to redeem (but which it has not yet redeemed) at the then applicable Redemption Price. Operating Subsidiary may raise new capital to fund the Redemption Price.
Pursuant to the Operating Subsidiary LLC Agreement, each Preferred Member has the right to all or any portion of such Preferred Member’s pro rata portion, at such Preferred Member’s sole discretion, of new securities that any Restricted Entity may from time to time propose to issue or sell to any party, subject to the terms and certain exceptions set forth in the Operating Subsidiary LLC Agreement. Members may not transfer their Units (as defined in the Operating Subsidiary LLC Agreement), provided that all, but not less than all, Preferred Units held by the Preferred Members may be transferred only if: (i) transferred to the same transferee (or its Affiliates) as part of the same transaction or series of related transactions, in which case (A) the Preferred Members must cause the recipient(s) of such Preferred Units to comply with the terms of the Operating Subsidiary LLC Agreement, and (B) if such recipient(s) are competitors of the Company only if first converted into Common Units; or (ii) transferred to more than one unaffiliated transferees as part of the same transaction or series of related transactions, in which case (A) the Preferred Members will cause the recipients of such Preferred Units to comply with the terms of the Operating Subsidiary LLC Agreement, (B) if such recipients are competitors of the Company only if first converted into Common Units, and (C) one transferee must continue to hold a sufficient number of Preferred Units so that such transferee qualifies as the Preferred Requisite Member. Each Preferred Member has a right of first refusal if any Common Member (the “Offering Member”) receives a bona fide offer that the Offering Member desires to accept to transfer all or any portion of such Offering Member’s Units (the “Offered Units”). Each time the Offering Member receives an offer for a transfer of all or any portion of such Offering Member’s Units, the Offering Member is required to first make an offering of the Offered Units to the Preferred Members, in accordance with the terms set forth in the Operating Subsidiary LLC Agreement and subject certain exceptions set forth therein, prior to transferring such Offered Units. Additionally, subject to certain exceptions set forth in the Operating Subsidiary LLC Agreement, the Company has a right of first offer if the Preferred Members wish to transfer Preferred Units to a third party. Each Preferred Member is permitted to participate in any proposed transfer by a Common Member of any Units to any Person, in accordance with the terms set forth in the Operating Subsidiary LLC Agreement and subject to certain exceptions set forth therein.
Services Agreement between the Company and Operating Subsidiary
In connection with the emergence from the Chapter 11 Cases, on the Effective Date, the Company entered into a Services Agreement (the “Services Agreement”) by and among the Company and Operating Subsidiary. The Services Agreement provides, among other things, that the Company will provide certain services to Operating Subsidiary, in its capacity as a majority equity holder of Operating Subsidiary, and in consideration for the services provided by the Company, Operating Subsidiary will reimburse the Company for its reasonable audit, board and executive compensation expenses incurred in connection with being a publicly traded company (the “New Capstone Services Fee”). The New Capstone Services Fee for the Company’s fiscal year 2023 will not exceed $2,500,000, in the aggregate (the “Services Fee Cap”), which amount will be prorated based on the number of days in such fiscal year following execution of the Services Agreement. Effective as of April 1 of each year, beginning with April 1, 2024, the Services Fee Cap will increase for each fiscal year by an amount equal to the greater of (a) 3.5000% and (b) the Consumer Price Index, as set by the U.S. Bureau of Labor Statistics and available on March 31 of each year; provided that such increase effective on April 1, 2024, shall be equal to 1.7500%.
Services Agreement between Reorganized PrivateCo and Operating Subsidiary
In connection with the emergence from the Chapter 11 Cases, on the Effective Date, Operating Subsidiary entered into a Services Agreement (the “Reorganized PrivateCo Services Agreement”) by and among Reorganized PrivateCo and Operating Subsidiary. The Reorganized PrivateCo Services Agreement provides that, among other things, Operating Subsidiary will provide certain services to Reorganized PrivateCo, and Reorganized PrivateCo will provide to Operating Subsidiary’s distributors on a subcontracted basis and, where applicable, to Operating Subsidiary, certain ongoing services and transition services related to Reorganized PrivateCo’s distributor support services business. Reorganized PrivateCo will pay to Operating Subsidiary a service fee (the “Reorganized PrivateCo Services Fee”) of an amount in cash equal to 90% of Reorganized PrivateCo’s Income (as defined in the Reorganized PrivateCo Services Agreement) less itemized expenses incurred and actually paid in cash by Reorganized PrivateCo in direct support of Operating Subsidiary’s
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distributors and in Reorganized PrivateCo’s performance of the services (excluding the Reorganized PrivateCo Services Fees).
Trademark License Agreement
In connection with the emergence from the Chapter 11 Cases, on the Effective Date, the Company entered into a Trademark License Agreement (the “Trademark License Agreement”) by and between Reorganized PrivateCo, as licensor, and the Company, as licensee. The Trademark License Agreement provides that, among other things, Reorganized PrivateCo grants the Company a non-exclusive, royalty-bearing, non-transferable, non-sublicensable (except to the Company’s affiliates), worldwide, perpetual (subject to the terms and conditions of the Trademark License Agreement), irrevocable (subject to the terms and conditions of the Trademark License Agreement), limited license, under all of its right, title and interest in and to the Capstone Trademarks (as defined in the Trademark License Agreement) to use the Capstone Trademarks solely in connection with the Business (as defined in the Trademark License Agreement). In consideration for the license, the Company pays to Reorganized PrivateCo an annual royalty of $100,000. Reorganized PrivateCo may not assign the Capstone Trademarks to any third party without the Company’s consent, not to be unreasonably withheld, delayed or conditioned (subject to the terms and conditions of the Trademark License Agreement). If Reorganized PrivateCo does not use any of the Capstone Trademarks for six consecutive months, then the Capstone Trademarks will be assigned to the Company for no further consideration.
Overview
We are the market leader in microturbine energy systems based on the number of microturbines sold annually. 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 microturbines have 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. We are currently exploring energy conversion options for the smaller end of the power spectrum.
During our fourth fiscal quarter ended March 31, 2023, our revenue decreased by 13% over the same quarter last year. Net revenue totaled $14.0 million, cost of goods sold totaled $12.5 million and delivered $1.5 million of gross profit. The decrease in net revenue included a 74% decrease in accessories revenue and a 44% decrease in product revenues, offset by an increase of 103% in rental revenue and an increase of 5% in parts and service revenue, compared to our fourth quarter of Fiscal 2022. The decrease in cost of goods sold was mainly due to product mix and higher margin rental business. The net operating loss for our fourth quarter of Fiscal 2023 was $10.3 million and $0.56 per share, compared to $7.3 million and $0.48 per share for our fourth quarter of Fiscal 2022. During the fourth quarter of Fiscal 2023, we booked an additional $3.4 million bad debt reserve compared to the same period last year.
For Fiscal 2023, net revenue was $73.9 million, a 15% increase from the prior year. The increase was led by service and rental revenue, which were up 30% to $29.0 million as we expanded the EaaS rental business. Product revenue increased to $33.2 million, or 6%, on 192 unit sales. Accessories and parts revenue increased by only 2%, with sanctions with Russia limiting the delivery of parts. Gross profit increased with the top line growth to $9.1 million, up 61% from Fiscal 2022, on the shift of sales mix to our higher margin rental business and product mix.
During Fiscal 2023, our net loss was $24.5 million and our basic and diluted net loss per share was $1.43, compared to $22.4 million and $1.52, respectively, in the same period of the previous fiscal year. The $2.1 million increase in the net loss during Fiscal 2023 was primarily the result of higher direct material costs and interest expense, partially offset by a greater contribution from the higher margin rental business. The improvement in the net loss per share was primarily the result of an increase in weighted average shares outstanding to 17.2 million for Fiscal 2023 from 14.7 million for Fiscal 2022.
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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 and biogas from sources such as wastewater, 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 and 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 and reduced cash usage.
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, microgrid and transportation 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 on targeting projects within the energy efficiency and renewable energy markets.
The following table summarizes our percentage of product revenues by vertical markets for which we had product revenues for the periods presented:
Year Ended
March 31,
2023
2022
Energy efficiency
56%
69%
Natural resources
34%
14%
Renewable energy
8%
17%
Microgrid
2%
0%
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 on-site emissions. CHP and CCHP can improve site economics by capturing the exhaust heat created from a single combustion process to increase the efficiency of the total system, from approximately 30% to 80% 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.
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
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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 on-site. 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, such as 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.
Backlog
Net product orders were approximately $35.5 million and $29.4 million for Fiscal 2023 and 2022, respectively. Ending backlog was approximately $42.8 million at March 31, 2023 compared to $40.5 million at March 31, 2022. Book-to-bill ratio was 1.1:1 and 0.9:1 for Fiscal 2023 and 2022, 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,
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OEMs and national accounts. We continue to refine our distribution channels to address our specific targeted markets.
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 geographic 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 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.
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.
We offer new and remanufactured parts through our global distribution network. Service revenue was approximately 29% and 35% of total revenue in Fiscal 2023 and Fiscal 2022, respectively.
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 costs 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 C1000S 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.
We have continued to 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 to 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 times. 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, it may be more challenging to transition to another supplier from
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single source suppliers with long lead times. 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 our promising technology and early market leadership into achieving positive cash flow with growing market presence and improving financial performance.
We currently occupy warehouse and office space in Van Nuys, California with a production capacity of approximately 2,000 units per year, depending on product mix.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these 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 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. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following critical accounting estimates affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
● Our revenue consists of sales of products, parts, accessories, rentals, and service, which includes FPPs, net of discounts. Our distributors purchase products, parts, and FPPs for sale to end users and are also required to provide a variety of additional services, including application engineering, installation, commissioning and post-commissioning services. Our standard terms of sales to distributors and direct end users include transfer of title, care, custody and control at the point of shipment, payment terms ranging from full payment in advance of shipment to payment in 90 days, and no post-shipment performance obligations by us except for warranties provided on the products and parts sold. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the selling price is fixed or determinable and collectability is reasonably assured. Service revenue derived from time and materials contracts is recognized as the service is performed. FPP contracts are agreements to perform certain agreed-upon services to maintain a product for a specified period of time. Service revenue derived from FPP contracts is recognized on a straight-line basis over the contract period. We occasionally enter into agreements that contain multiple elements, such as equipment, installation, engineering and/or service. Effective January 1, 2018, we launched our DSS program to fund additional support for distributor business development activities, customer lead generation, brand awareness and tailored marketing services for each of our major geographic and market verticals. Service revenue derived from our DSS program is recognized on a pro rata basis as the distributors purchase our products.
● Our inventories are valued at the lower of cost (determined on a first in first out basis) or net realizable value. We routinely evaluate the composition of our inventories and identify slow-moving, excess, obsolete or otherwise impaired inventories. 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. Future product enhancement and development may render certain inventories obsolete, resulting in additional write-downs of inventories. In addition, inventories are classified as current or long-term based on our sales forecast and also, in part, based on our projected usage for warranty claims and service. A change in forecast could impact the classification of inventories.
● We provide for the estimated cost of warranties at the time revenue from sales is recognized. We also accrue the estimated costs to address reliability repairs on products no longer under warranty when, in our judgment, and in accordance with a specific plan developed by us, it is prudent to provide such repairs. We estimate warranty expenses based upon historical and projected product failure rates, estimated costs of parts, labor
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and shipping to repair or replace a unit and the number of units covered under the warranty period. While we engage in extensive quality programs and processes, our warranty obligation is affected by failure rates and service costs in correcting failures. As we have more units commissioned and longer periods of actual performance, additional data becomes available to assess future warranty costs. When we have sufficient evidence that product changes are altering the historical failure occurrence rates, the impact of such changes is then taken into account in estimating future warranty liabilities. Changes in estimates are recorded in the period that new information, such as design changes, costs of repair and product enhancements, becomes available. Should actual failure rates or service costs differ from our estimates, revisions to the warranty liability would be required and could be material to our financial condition, results of operations and cash flow. The balance for the warranty reserve was $1.6 million and $1.5 million as of March 31, 2023 and 2022, respectively.
● Trade accounts receivable are recorded at the invoiced amount and are typically non-interest bearing. We maintain allowances for estimated losses resulting from the inability of our customers to make required payments and other accounts receivable allowances. We evaluate all accounts aged over 60 days past payment terms. 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 recognize stock-based compensation expense associated with stock options in the statement of operations. Determining the amount of stock-based compensation to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of stock options. We calculate the grant-date fair values using the Black-Scholes valuation model.
The use of the Black-Scholes model requires us to make estimates of the following assumptions:
● Expected volatility —The estimated stock price volatility was derived based upon our actual historic stock prices over the expected option life, which represents our best estimate of expected volatility.
● Expected option life —The expected life, or term, of options granted was derived from historical exercise behavior and represents the period of time that stock option awards are expected to be outstanding.
● Risk-free interest rate —We used the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected life assumption as the risk-free interest rate.
The amount of stock-based compensation cost is recorded on a straight-line basis over the vesting period.
Results of Operations
Year Ended March 31, 2023 Compared to Year Ended March 31, 2022
The following table summarizes our revenue by geographic markets (amounts in millions):
Year Ended March 31,
2023
2022
United States and Canada
$
47.0
$
30.8
Europe and Russia (1)
14.5
14.3
Latin America
5.8
7.8
Asia and Australia
6.1
10.2
Middle East and Africa
0.5
0.9
Total
$
73.9
$
64.0
(1) Revenue from Russia represented approximately 20% and 23% of European and Russian markets for the years ended March 31, 2023 and 2022, respectively.
Revenue for Fiscal 2023 increased $9.9 million, or 15%, to $73.9 million from $64.0 million for Fiscal 2022. The change in revenue for Fiscal 2023 compared to Fiscal 2022 included increases in revenue of $16.2 million from the United States and Canadian markets and $0.2 million from the European and Russian markets. These overall increases in revenue
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were offset by decreases in revenue of $4.1 million from the Asian and Australian markets, $2.0 million from the Latin American markets, and $0.4 million from the Middle East and African markets. The increases in the United States and Canada, and Europe and Russia were primarily attributable to an increase in our EaaS long-term rental services and product shipments into the energy efficiency vertical markets compared to the same period last year. The decreases in Latin America, the Middle East and Africa, and Asia and Australia are primarily attributable to decreases in product shipments into the natural resources and renewable energy vertical markets in those regions compared to the same period last year.
The following table summarizes our revenue (revenue amounts in millions):
Year Ended March 31,
2023
2022
Revenue
Megawatts
Units
Revenue
Megawatts
Units
Microturbine Product
$
33.2
29.0
192
$
31.3
29.7
181
Accessories
1.8
1.4
Total Product and Accessories
35.0
32.7
Parts and Service
30.7
28.5
Rentals
8.2
2.8
Total
$
73.9
$
64.0
For Fiscal 2023, revenue from microturbine products and accessories increased $2.3 million, or 7%, to $35.0 million from $32.7 million for Fiscal 2022. The $2.3 million increase was primarily driven by an increase in units shipped, specifically our C1000S Series and C65 Series microturbine systems during Fiscal 2023 compared to the prior year. Average revenue per megawatt shipped was approximately $1.1 million in each of Fiscal 2023 and 2022. 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. Accessories revenue increased $0.4 million, or 29%, to $1.8 million from $1.4 million for Fiscal 2022, primarily due to product configurations for projects that required increased accessories in Fiscal 2023 compared to Fiscal 2022.
Parts, service and rentals revenue (which is part of our EaaS business line and includes revenue from our parts shipments, FPP contracts, rentals, Distributor Support Subscription fees, and other service revenue) for Fiscal 2023 increased $7.6 million, or 24%, to $38.9 million from $31.3 million for Fiscal 2022. The $7.6 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, partially offset by lower engineering service revenue and spare parts.
Sales to E-Finity and RSP Systems accounted for 12% and 11%, respectively, of our revenue for the fiscal year ended March 31, 2023. Sales to E-Finity accounted for 18% of our revenue for the year ended March 31, 2022.
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 approximately $9.1 million, or 12% of revenue, for Fiscal 2023, compared to gross profit of $5.6 million, or 9% of revenue, for Fiscal 2022. The increase in gross profit of $3.5 million during Fiscal 2023 compared to Fiscal 2022 was primarily because of an increase in revenue, partially offset by higher direct material costs of $6.2 million, an increase in service center labor and overhead expense of $2.4 million and higher inventory charges of $0.3 million.
Production and service center labor and overhead expense increased $2.4 million during Fiscal 2023 compared to Fiscal 2022 primarily because of increases of approximately $3.3 million in depreciation and rent expense related to our rental business, partially offset by a $0.9 million decrease in labor costs due to the implementation of an expense reduction plan, primarily as a result of higher margin rental revenue in Fiscal 2023.
Inventory charges increased $0.3 million during Fiscal 2023 compared to Fiscal 2022 primarily as the result of an increase in the provision for excess and obsolete inventory as we reserved for some older inventory parts.
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The following table summarizes our gross profit (in millions except percentages):
Year Ended March 31,
2023
2022
Gross Profit
Product and accessories
$
(4.9)
$
(4.4)
As a percentage of product and accessories revenue
(14)
%
(13)
%
Parts, service and rentals
$
14.0
$
10.0
As a percentage of parts, service and rentals revenue
36
%
32
%
Total Gross Profit
$
9.1
$
5.6
As a percentage of total revenue
12
%
9
%
The $0.5 million decrease in product and accessories gross profit during Fiscal 2023 compared to Fiscal 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 (14)% during Fiscal 2023 from (13)% during Fiscal 2022, primarily due to higher product material costs in Fiscal 2023 driven by price increases from key vendors. Parts, service and rentals gross margin as a percentage of parts, service and rentals revenue increased to 36% for Fiscal 2023 compared to 32% for Fiscal 2022 primarily due to lower overhead costs and higher margin rental revenue in Fiscal 2023.
Research and Development Expenses (“R&D”) R&D expenses for Fiscal 2023 decreased $1.0 million, or 29%, to $2.4 million from $3.4 million for Fiscal 2022, as a result of lower costs from actions taken in our cost reduction plan during Fiscal 2023.
Selling, General and Administrative (“SG&A”) Expenses SG&A expenses for Fiscal 2023 increased $2.9 million to $25.1 million from $22.2 million for Fiscal 2022. The net increase in SG&A expenses was primarily as a result of increases of approximately $3.9 million of net bad debt expense, $1.2 million in consulting expense, $0.5 million in allocated costs for shared-services facilities, partially offset by decreases of $1.2 million in labor costs, $0.8 million in legal fees, and $0.7 million in marketing related costs.
Interest Expense Interest expense for Fiscal 2023 increased to $6.2 million from $5.0 million in Fiscal 2022, due to rising interest rates. See Liquidity and Capital Resources below for additional discussion on our interest expense.
Gain 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.
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 decreased $12,000, or 63%, to $7,000 during Fiscal 2023 from $19,000 during Fiscal 2022. Income tax expense incurred was related to state and foreign taxes. The effective income tax rate of -0.1% differs from the federal and state blended statutory rate of approximately 25.28% primarily as a result of maintaining a full valuation allowance against net deferred tax assets. At March 31, 2023, we had federal and state net operating loss carryforwards of approximately $538.8 million and $185.6 million, respectively, which may be utilized to reduce future taxable income, subject to any limitations under Section 382 of the Internal Revenue Code of 1986. We provided a valuation allowance for 100% of our net deferred tax asset of $153.2 million at March 31, 2023 because the realization of the benefits of these favorable tax attributes in future income tax returns is not deemed more likely than not. Similarly, at March 31, 2022, the net deferred tax asset was fully reserved.
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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 decreased $9.7 million during Fiscal 2023, compared to a decrease of $27.0 million during Fiscal 2022. The decrease in cash and cash equivalents during Fiscal 2023 was 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.
See “ — Recent Developments” for a summary of the implementation of the Plan and the transactions contemplated thereby, which has had a significant impact on our sources of liquidity and capital resources since March 31, 2023.
Operating Activities During Fiscal 2023, net cash used by operating activities was $7.9 million, consisting of a net loss for the period of $24.5 million, partially offset by changes in operating assets and liabilities of $5.3 million and non-cash adjustments (primarily warranty provision, accounts receivable allowances, depreciation and amortization, stock-based compensation and inventory provision) of $11.3 million. During Fiscal 2022, net cash used by operating activities was $27.5 million, consisting of a net loss for the period of $22.4 million and changes in operating assets and liabilities of $8.8 million, partially offset by non-cash adjustments (primarily warranty provision, accounts receivable allowances, depreciation and amortization, stock-based compensation and inventory provision) of $3.7 million.
Cash changes in operating assets and liabilities were a source of $5.3 million during Fiscal 2023, an increase of $14.1 million from cash uses in operating assets and liabilities of $8.8 million during Fiscal 2022. The increase was primarily due to improved collections of accounts receivable, lower warranty claims and an increase in deferred revenue.
The following is a summary of the significant sources (uses) of cash from operating activities (amounts in thousands):
Year Ended March 31,
2023
2022
Net loss
$
(24,522)
$
(22,370)
Non-cash operating activities(1)
11,268
3,730
Changes in operating assets and liabilities:
Accounts receivable
4,060
(3,383)
Inventories
(11,521)
(9,105)
Accounts payable and accrued expenses
5,660
5,098
Operating lease liability
(1,304)
(613)
Prepaid expenses, other current assets and other assets
(1,210)
164
Other changes in operating assets and liabilities
9,625
(1,019)
Net cash provided by (used) in operating activities
$
(7,944)
$
(27,498)
(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 2023 compared to Fiscal 2022 was primarily driven by an increase of $3.9 million in bad debt reserve in Fiscal 2023 as compared to 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 an increase in depreciation expense related to the additions to our rental fleet during Fiscal 2023. The change in accounts receivable was primarily the result of improved collections in Fiscal 2023 compared to Fiscal 2022. The change in inventory was primarily the result of an increase in raw materials in Fiscal 2023 to secure inventory with longer lead times, compared to Fiscal 2022 and increased finished goods. The change in accounts payable and accrued expenses was primarily due to higher accounts payable payments to vendors during Fiscal 2023 compared to Fiscal 2022. The change in other operating assets and liabilities during Fiscal 2023 compared to Fiscal 2022 was primarily driven by the decrease in our accrued warranty reserve during Fiscal 2022, as we had additional spend for the reliability repair program and an increase in deferred revenue in Fiscal 2023.
Investing Activities Net cash used in investing activities of $8.2 million and $9.9 million during Fiscal 2023 and 2022, respectively, related primarily to the additions to our rental fleet of approximately $7.9 million and $8.7 million, respectively. The remaining amounts in Fiscal 2022 were primarily for sustaining our production and facilities.
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Financing Activities During Fiscal 2023, we generated approximately $6.4 million in cash from financing activities compared to cash generated during Fiscal 2022 of approximately $10.4 million. The funds generated from financing activities during the fiscal year ended March 31, 2023 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 fiscal year ended March 31, 2022 were primarily the result of net proceeds from our June 2021 common stock offering.
At-the-market Offerings
On June 7, 2018, we entered into a Sales Agreement (the “Sales Agreement”) with H.C. Wainwright & Co., LLC (“Wainwright”) 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 the Sales Agreement to, among other things, amend the termination provisions of the Sales Agreement and amend the maximum amount of shares of our common stock that we may offer and sell through or to Wainwright 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 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 ATM Program were issued during the fiscal year ended March 31, 2023. The ATM Program is no longer in effect following the Effective Date.
Common Stock Offerings
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 Lake Street 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 “Goldman Warrant”) pursuant to which the Holder could 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, 2023, the Holder could 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. The Goldman Warrant was cancelled on the Effective Date in accordance with the Plan.
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. Our common stock
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and warrant transactions during Fiscal 2023 triggered certain anti-dilution provisions in the warrants outstanding. As of March 31, 2023, the Warrant Holder could 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. The Goldman 2020 Warrant was cancelled on the Effective Date in accordance with the Plan.
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 warrant (the “Pre-Funded Warrants”), 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 (the “Common Warrants”), 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 were 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, 2023, there were 75,000 Series D warrants outstanding at an exercise price of $6.12 per share. The Series D warrants were cancelled on the Effective Date in accordance with the Plan.
August 2022 Warrants
On August 24, 2022, we issued 2,934,498 common stock warrants with an exercise price of $2.75 in conjunction with the Lake Street Offering. The August 2022 Warrants were cancelled on the Effective Date in accordance with the Plan.
There were no stock options exercised during Fiscal 2023 and 2022. Repurchases of shares of our common stock for employee taxes due upon vesting of restricted stock units, net of employee stock purchases, resulted in approximately $0.1 million of net cash used during each of Fiscal 2023 and 2022.
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 “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 bore 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 did not amortize and the entire principal balance was 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 included 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 12, 2021, the minimum consolidated liquidity requirement increased from $9.0 million to $12.0 million for the period from May 12, 2021 to March 31, 2022, and $9.0 million thereafter. The financial covenants of the A&R Note Purchase Agreement required 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
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Purchase Agreement was 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. On March 13, 2023, we transferred $9 million of funds from Bridge Bank, Affiliate of Western Alliance Bank, to Wells Fargo Bank. The Wells Fargo Bank account did not have an account control agreement in place, resulted in a breach of the Liquidity Covenant. We transferred the $9 million back to our Bridge Bank account on April 5, 2023. On April 21, 2023, we again breached the Liquidity Covenant when our total funds in accounts subject to account control agreements fell below $9 million. On July 3, 2023, we failed to make the interest payment for the most recently ended quarter. On July 6, 2023, we entered into the Fourth Amendment, which provided for, among other things, (i) the waiver by the Purchaser and the Collateral Agent of our breach of the minimum Consolidated Liquidity covenant contained in the A&R Note Purchase Agreement, the failure to make the interest payment for the most recently ended quarter and certain other breaches specified therein; (ii) the extension of the maturity of the Notes outstanding pursuant to the A&R Note Purchase Agreement from October 1, 2023 to September 1, 2024; (iii) an amendment fee payable at maturity equal to 1.00% of the principal balance of the Notes on the Effective Date; (iv) a due date for the next interest payment on the date that is 30 days from the Effective Date, which interest payment was originally due on July 3, 2023; (v) following the our entry into a transaction support agreement, the payment-in-kind of the quarterly interest payments that are due following the next the interest payment; (vi) a new minimum Consolidated Liquidity covenant requirement of $4.0 million, commencing on July 14, 2023, which amount increased to $4.5 million on August 16, 2023 and to $6.0 million on August 31, 2023; (vii) the replacement of the Adjusted LIBO Rate with a Term SOFR interest rate benchmark; (viii) the ability for Goldman to either (A) force a conversion of the interest rate benchmark to Base Rate or (B) impose default interest during an Event of Default; (ix) the right for one designated Goldman board observer to attend the meetings of our Board (and committees thereof) in a non-voting capacity, subject to certain customary exceptions; and (x) the amendment to certain provisions of the A&R Note Purchase Agreement, including to add a number of new covenants. Those new covenants include requirements that we (i) enter into the TSA with one or more lenders in form and substance mutually satisfactory to Goldman and us within 30 days of the Effective Date; (ii) subject to necessary stockholder approvals, execute and deliver, or reach agreement on substantially final versions of, the definitive documentation with respect of the transactions specified in the TSA in form and substance satisfactory to the Collateral Agent within 45 days after the Effective Date; (iii) close the transactions specified by the TSA by September 15, 2023; and (iv) provide a Section 382 analysis (i.e., an analysis relating to the potential limitation of the use of our net operating loss carryforwards due to ownership changes, which loss carryforwards we understand may be potentially valuable in one or more transaction structures) to Goldman on a quarterly basis. The Fourth Amendment also imposed restrictions on our ability to (i) pay professional fees for the next 30 days following the date of the Fourth Amendment in excess of $2,000,000 in the aggregate; (ii) make certain other cash disbursements in excess of thresholds set forth in the Fourth Amendment; and (iii) amend existing, or enter into new, employment agreements or pay or incur any bonus or severance payment.
As a result of the Company’s restated earnings, we were not in compliance with the Adjusted EBITDA covenant contained in the A&R Note Purchase Agreement as of May 31, 2024, and every subsequent quarter thereafter. The breach required a change in classification of the term note payable to a current liability on our consolidated balance sheet resulting in a liquidity issue for the Company (see Note 17–Subsequent Events in the Notes to the Consolidated Financial Statements for further discussion of the outstanding debt and the post emergence financing).
See “—Post Fiscal 2023 Developments—Exit Facility Agreement” for our current outstanding debt facility, which we entered into after March 31, 2023 and in accordance with the Plan.
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%.
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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 consolidated financial statements and related footnote disclosures, provided forgiveness be approved by the SBA.
Lease Commitments During Fiscal 2023, we entered into several rental agreements to rent used microturbine equipment from customers where that equipment was not currently in use. We then rent this equipment to end users as part of our Energy-as-a-Service business. These agreements totaled approximately 9.8 MW of microturbines, have an average term of 36 months, and a total commitment value of approximately $8.9 million.
Going Concern In connection with preparing the consolidated financial statements for the fiscal year ended March 31, 2023, 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 2023 consolidated financial statements. As of March 31, 2023, we had cash and cash equivalents of $12.8 million, and $51.0 million in borrowings were outstanding under the Notes. We incurred a net loss of $24.5 million and used cash from operating activities of $7.9 million during the Fiscal 2023.
There has been a history of recurring operating losses, negative cash flows from operating activities, 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 Russian invasion of Ukraine, and ongoing global geopolitical tensions. Our working capital requirements during Fiscal 2023 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 impacts from the ongoing conflict between Russia and Ukraine. In addition, as a result of the Company’s restated earnings, we were in breach of the Consolidated Adjusted EBITDA Financial Covenant to the Note Purchase Agreement dated as of December 9, 2019, and later amended for the quarter ended June 30, 2021. The breach required a change in classification of the term note payable to a current liability on our consolidated balance sheet resulting in a liquidity issue for the Company (see Note 11–Term Note Payable in the Notes to the Consolidated Financial Statements for further discussion of the outstanding debt). After evaluation of these conditions and events, management assessed that there was substantial doubt about our ability to continue as a going concern.
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:
● 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;
● our customers’ ability to afford and/or finance our products; and
● reliability of the supply chain, including availability of raw materials.
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.
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,
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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.
In September 2022, the furlough period ended, and employees returned and pay rates for those affected were returned to pre-furlough levels. The return to pre-furlough levels caused an increase in the operating costs while the EaaS rental business was being expanded.
In May 2023, we implemented a second expense reduction plan to align our cost structure. The cost reductions focused on non-operating, discretionary expenses and employee costs. Beginning May 12, 2023, nine employees were furloughed for a period of 180 days. The employees may be called back to work prior to November 13, 2023, if business activity requires.
In February 2022, we announced that we reached our goal of having 21.1 MW of rental units in our fleet and under contract. As of March 31, 2023, we had 40.5 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. 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.
We reduced our outstanding debt via proceedings in U.S. Chapter 11 Bankruptcy Court. On September 28, 2023, the Company filed for a prepackaged financial restructuring with its senior lender, Goldman Sachs, under the U.S. Chapter 11 Bankruptcy laws, as further discussed in Note 17 – Subsequent Events in the Notes to Consolidated Financial Statements. The Company emerged from Bankruptcy on December 7, 2023 and affected the financial and organizational restructuring.
Our accounts receivable balance, net of allowances, was $7.1 million and $15.9 million as of March 31, 2023 and 2022, respectively. DSO decreased to 46 days as of March 31, 2023, compared to 90 days as of March 31, 2022, primarily due to an increase in accounts receivable collections, and benefitting from 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, we have not seen a corresponding rebound in capital expenditures or spending activity. We recorded net bad debt expense of approximately $4.3 million and $0.4 million for Fiscal 2023 and 2022, respectively. Our allowance for doubtful accounts, was $4.8 million as of March 31, 2023 and $0.6 million as of March 31, 2022.
No assurances 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.
In spite of these efforts and given our current cash position, lack of liquidity, limits to accessing capital and debt funding options, and economic and market risk, there is substantial doubt regarding the Company’s ability to continue as a going concern and our ability to meet our financial obligations as they become due over the next twelve months from the date of issuance of our Fiscal 2023 financial statements
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Impact of Recently Issued Accounting Standards
Refer to Note 2 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements for information regarding new accounting standards.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this Item.
Item 8. Financial Statements and Supplementary Data.
Our Consolidated Financial Statements included in this Form 10-K beginning at page F-1 are incorporated in this Item 8 by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.