What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-05 compared with 2024-08-05 · 85 added, 154 removed, 202 unchanged (54% of the section changed)

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Recent Developments

Refer to Note 3— Chapter 11 Proceedings in the Notes to Condensed Consolidated Financial Statements for a summary of our voluntary filing under Chapter 11 of the Bankruptcy Code and our emergence therefrom, the Exit Facility, the Operating Subsidiary LLC Agreement, Service Agreements, Trademark Licensing Agreement, the delisting of our common stock from the Nasdaq and the implemented 2023 Equity Incentive Plan.

Refer to Note 17– Subsequent Events in the Notes to Condensed Consolidated Financial Statements for a summary of our voluntary filing under Chapter 11 of the Bankruptcy Code and our emergence therefrom, the Exit Facility, the Operating Subsidiary LLC Agreement, Service Agreements, Trademark Licensing Agreement, the delisting of our common stock from the Nasdaq and the implemented 2023 Equity Incentive Plan.

We are the market leader in microturbine energy systems based on the number of microturbines sold annually and total installed base.

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

During the three months ended September 30, 2023 our net loss increased by 57% to $5.9 million and our basic and diluted loss per share increased by 42% to $0.32 compared to $3.8 million and $0.22, respectively, in the same period of the previous fiscal year.

The increase in the net loss during the three months ended September 30, 2023 was primarily the result of higher direct material costs, and higher operating and interest expenses, partially offset by increase in revenue and a greater contribution from the higher margin rental business.

During the three months ended June 30, 2023 our net loss increased by 35% to $5.7 million and our basic and diluted loss per share increased by 15% to $0.31 compared to $4.2 million and $0.27, respectively, in the same period of the previous fiscal year.

The increase in the net loss during the three months ended June 30, 2023 was primarily the result of higher direct material costs, and higher operating and interest expenses, partially offset by increase in revenue and a greater contribution from the higher margin rental business.

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

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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.

In addition, management closely monitors operating expenses and strives to improve manufacturing efficiencies while simultaneously lowering direct material costs and increasing average selling prices.

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

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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.

Focus on Vertical Markets Within the distributed generation markets that we serve, we focus on vertical markets that we identify as having the greatest near-term potential.

In our primary products and applications (energy efficiency, renewable energy, natural resources, critical power supply, and microgrid products), we identify specific targeted vertical market segments.

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

Three Months Ended September 30,

Six Months Ended September 30,

Three Months Ended June 30,

Energy efficiency

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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.

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.

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We have seen continued development in the microgrid market segment.

Net product orders were approximately $6.3 million and $14.5 million for the three months ended September 30, 2023 and 2022, respectively.

Ending backlog was approximately $17.9 million at September 30, 2023 compared to $42.8 million at March 31, 2023.

The Book-to-bill ratio was 0.4:1 and 1.6.1 for the three months ended September 30, 2023 and 2022, respectively.

Net product orders were approximately $2.8 million and $8.5 million for the three months ended June 30, 2023 and 2022, respectively.

Ending backlog was approximately $26.1 million at June 30, 2023 compared to $42.8 million at March 31, 2023.

Book-to-bill ratio was 0.2:1 and 1.4:1 for the three months ended June 30, 2023 and 2022, respectively.

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

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We offer new and remanufactured parts through our global distribution network.

Service revenue in the second quarter of Fiscal 2024 was approximately 19% of total revenue.

Service revenue in the first quarter of Fiscal 2024 was approximately 21% of total revenue.

Product Robustness and Life Cycle Maintenance Costs We continue to invest in enhancements that relate to high performance and high reliability.

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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, C600, C800 and C1000 Series microturbines, will be our foundational product lines for the foreseeable future.

We expect that our existing product platforms, the C65, C200, C600, C800 and C1000

Series microturbines, will be our foundational product lines for the foreseeable future.

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

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

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.

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Results of Operations

Three Months Ended September 30, 2023 and 2022

Three Months Ended June 30, 2023 and 2022

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

Three Months Ended September 30,

Three Months Ended June 30,

United States and Canada

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Middle East and Africa

Revenue for the three months ended September 30, 2023 increased $8.3 million to $28.4 million from $20.1 million for the three months ended September 30, 2022.

The $8.3 million increase was primarily driven by increases of $5.0 million in the United States and Canada and $4.1 million in Latin America, partially offset by decreases of $0.6 million in Asia and Australia and $0.3 million in Europe and Russia.

The increases in the United States and Canada and Latin America were primarily attributable to an increase of product deliveries for projects during the three months ended September 30, 2023.

The decreases in Asia and Australia and Europe and Russia were due to decreases in product shipments into the renewable energy vertical markets in those regions compared to the same period last year.

Revenue for the three months ended June 30, 2023 increased $5.1 million to $23.9 million from $18.8 million for the three months ended June 30, 2022.

The $5.1 million increase was primarily driven by a $3.4 million increase in Europe and Russia, $2.2 million in Asia and Australia, and $0.6 million in United States and Canada, partially offset by a decrease of $1.1 million in Latin America.

The increases in Europe and Russia, Asia and Australia, and United States and Canada were primarily attributable to an increase in our EaaS long-term rental services and product shipments into the natural resources vertical markets in those regions compared to the same period last year.

The decrease in Latin America was primarily attributable to a decrease in our product shipments into the renewable energy and microgrid vertical markets compared to the same period last year.

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

Three Months Ended September 30,

Three Months Ended June 30,

Microturbine Product

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Parts and Service

For the three months ended September 30, 2023, revenue from microturbine products and accessories increased $5.5 million, or 57%, to $15.1 million from $9.6 million for the three months ended September 30, 2022.

The $5.5 million increase was primarily driven by a increase in megawatts and units shipped during the three months ended September 30, 2023 compared to the same period last year.

Megawatts shipped were 12.2 megawatts and 8.7 megawatts during the three months ended September 30, 2023 and 2022, respectively.

Average revenue per megawatt shipped was approximately $1.2 million and $1.1 million during the three months ended September 30, 2023 and 2022, respectively.

For the three months ended June 30, 2023, revenue from microturbine products and accessories increased $3.4 million, or 35%, to $13.2 million from $9.8 million for the three months ended June 30, 2022.

The $3.4 million increase was primarily driven by an increase in megawatts and units shipped during the three months ended June 30, 2023 compared to the same period last year.

Megawatts shipped were 11.0 megawatts and 8.1 megawatts during the three months ended June 30, 2023 and 2022, respectively.

Average revenue per megawatt shipped was approximately $1.2 million during the three months ended June 30, 2023 and 2022, respectively.

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

Parts, service and rentals revenue (which are part of our EaaS business line and includes revenue from our parts shipments, factory protection plan (“FPP”) contracts, rentals, Distributor Support Subscription fees, and other service revenue) increased $2.8 million, or 27%, to $13.3 million for three months ended September 30, 2023 from $10.5 million for the three months ended September 30, 2022.

The $2.8 million increase was primarily driven by an increase in rental revenue as a result of our EaaS business plan during the three months ended September 30, 2023 compared to the same period last year.

Sales to E-Finity Distribution Generation, LLC and Cal Microturbine accounted for 21% and 11% of our revenue for the three months ended September 30, 2023, respectively.

Sales to RSP Systems, Capstone Engineered Solutions, Cal Microturbine, and Horizon Power Systems accounted for 15%, 13%, 12%, and 10% of our revenue for the three months ended September 30, 2022, respectively .

Parts, service and rentals revenue (which are part of our EaaS business line and includes revenue from our parts shipments, factory protection plan (“FPP”) contracts, rentals, Distributor Support Subscription fees, and other service revenue) increased $1.7 million, or 19%, to $10.7 million for three months ended June 30, 2023 from $9.0 million for the three months ended June 30, 2022.

The $1.7 million increase was primarily driven by an increase in rental revenue as a result of our EaaS business plan during the three months ended June 30, 2023 compared to the same period last year.

Sales to Horizon Power Systems, Optimal Group Australia Pty Ltd.

and E-Finity Distribution Generation, LLC accounted for 15%, 13% and 10% of our revenue for the three months ended June 30, 2023, respectively.

Sales to Cal Microturbine and E-Finity Distribution Generation, LLC accounted for 24% and 11% of our revenue for the three months ended June 30, 2022, respectively.

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

Gross profit was $5.3 million, or 19% of revenue, for the three months ended September 30, 2023 compared to a gross profit of $3.4 million, or 17% of revenue, for the three months ended September 30, 2022.

Gross profit was $3.4 million, or 14% of revenue, for the three months ended June 30, 2023 compared to a gross profit of $2.5 million, or 13% of revenue, for the

three months ended June 30, 2022.

The increase of $0.9 million was primarily the result of an increase in higher margin rental revenue.

The increase was also due to higher direct material profit of $2.2 million, partially offset by higher production and service center labor and overhead expense of $0.3 million.

Direct material profit, calculated as total revenue less our direct material costs, increased $2.2 million during the second quarter of Fiscal 2024 compared to the second quarter of Fiscal 2023.

The increase was also due to higher direct material profit of $1.9 million and lower warranty expense of $0.1 million, partially offset by higher production and service center labor and overhead expense of $1.1 million.

Direct material profit, calculated as total revenue less our direct material costs, increased $1.9 million during the first quarter of Fiscal 2024 compared to the first quarter of Fiscal 2023.

The increase was due to higher margin rental business, partially offset by higher direct material costs due to vendor price increases and supply chain shortages.

We increased our sales prices effective January 2023 and are negotiating with vendors to reduce these costs.

Production and service center labor and overhead expense increased by $0.3 million during the second quarter of Fiscal 2024 compared to the second quarter of Fiscal 2023.

The increase was primarily due to increases of $0.4 million in facilities expenses.

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

Three Months Ended September 30,

Product and accessories

As a percentage of product and accessories revenue

Parts, service and rentals

As a percentage of parts, service and rentals revenue

Total Gross Profit

As a percentage of total revenue

The $1.2 million improvement in product and accessories gross profit was primarily the result of increase in volume of product shipments in the three months ended September 30, 2023.

Product and accessories gross margin as a percentage of product and accessories revenue increased to (1)% during the three months ended September 30, 2023, from (15)% during the three months ended September 30, 2022, primarily driven by higher product sales in the three months ended September 30, 2023.

Parts, service and rentals gross margin as a percentage of parts and service revenue decreased to 41% during the three months ended September 30, 2023, compared to 46% during the three months ended September 30, 2022 primarily as a result of higher material and overhead costs in the three months ended September 30, 2023.

Research and Development (“R&D”) Expenses increased by less than $0.1 million, or 8%, to $0.7 million from $0.6 million as a result of lower costs from actions taken in our cost reduction plan during the three months ended September 30, 2022.

Selling, General, and Administrative (“SG&A”) Expenses increased $4.1 million, or 80%, to $9.2 million from $5.1 million primarily as a result of increases of approximately $4.0 million in legal and accounting fees incurred primarily for the Chapter 11 proceedings during the three months ended September 30, 2023 compared to the same period last year.

See Note 3 – Chapter 11 Proceedings for details of the bankruptcy plan.

Interest Expense for the three months ended September 30, 2023 and 2022 was $1.8 million and $1.3 million, respectivly.

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

Six Months Ended September 30, 2023 and 2022

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

Six Months Ended September 30,

United States and Canada

Europe and Russia

Latin America

Asia and Australia

Middle East and Africa

Revenue for the six months ended September 30, 2023 increased $13.4 million, or 34%, to $52.3 million from $38.9 million for the six months ended September 30, 2022.

The $13.4 million increase was primarily driven by increases of $5.6 million in the United States and Canada, $3.1 million in Latin America, $3.1 million in Europe and Russia and $1.6 million in Asia and Australia.

The increases were primarily attributable to an increase in our EaaS long-term rental services and product deliveries during the six months ended September 30, 2023.

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

Six Months Ended September 30,

Microturbine Product

Total Product and Accessories

Parts and Service

For the six months ended September 30, 2023 revenue from microturbine products and accessories increased $8.9 million, or 46%, to $28.3 million from $19.4 million for the six months ended September 30, 2022.

The $8.9 million increase was primarily due to higher product sales during the six months ended September 30, 2023 compared to the same period last year.

Megawatts shipped were 24.2 megawatts and 16.8 megawatts during the six months ended September 30, 2023 and 2022, respectively.

Average revenue per megawatt shipped was approximately $1.2 million and $1.1 million during the six months ended September 30, 2023 and 2022, respectively.

Parts, service and rentals revenue (which are part of our EaaS business line and includes revenue from our parts shipments, FPP contracts, rentals, Distributor Support Subscription fees, and other service revenue) increased $4.5 million, or 23%, to $24.0 million for six months ended September 30, 2023 from $19.5 million for the six months ended September 30, 2022.

The $4.5 million increase was primarily driven by an increase in rental revenue as a result of our EaaS business plan during the six months ended September 30, 2023 compared to the same period last year.

E-Finity and Cal Microturbine accounted for 16% and 10% of revenue for the six months ended September 30, 2023, respectively.

Cal Microturbine accounted for 18% of revenue for the six months ended September 30, 2022.

Gross Profit was approximately $8.7 million, or 17% of revenue, for the six months ended September 30, 2023 compared to a gross profit of $5.9 million, or 15% of revenue, for the six months ended September 30, 2022.

The increase of $1.9 million was primarily due to higher direct material profit of $4.1 million, partially offset by higher production and service center labor and overhead expense of $1.3 million.

Direct material profit, calculated as total revenue less our direct material costs, increased $4.1 million during the six months ended September 30, 2023 compared to the six months ended September 30, 2022 primarily due to an increase in sales, partially offset by higher direct material costs due to vendor price increases and supply chain shortages.

We increased our sales prices effective January 2023 and are negotiating with vendors to reduce these costs.

Production and service center labor and overhead expense increased $1.3 million in the six months ended September 30, 2023 compared to the six months ended September 30, 2022 primarily due to increases of facility expenses, partially offset by a decrease in supplies expense of $0.3 million.

Production and service center labor and overhead expense increased $1.1 million during the first quarter of Fiscal 2024 compared to the first quarter of Fiscal 2023, primarily because of increases of $0.7 million in depreciation and rent expense related to our rental business, $0.4 million in allocated costs for shared-services facilities expense and $0.2 million in consulting expense, partially offset by a decrease of $0.2 million in freight expense.

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

Six Months Ended September 30,

Three Months Ended June 30,

Product and accessories

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As a percentage of total revenue

The $0.2 million increase in product and accessories gross profit in the six months ended September 30, 2023 was primarily the result of increases in volume of product shipments.

Product and accessories gross margin as a percentage of product and accessories revenue increased to (4)% during the six months ended September 30, 2023 from (7)% during the six months ended September 30, 2022, primarily due to higher product sales in the six months ended September 30, 2023.

Parts, services and rentals gross margin as a percentage of parts, services and rentals revenue increased to 41% during the six months ended September 30, 2023 compared to 37% during the six months ended September 30, 2022, primarily due to higher margin rental revenue in the six months ended September 30, 2023.

Research and Development (“R&D”) Expenses increased $0.2 million, or 21%, to $1.3 million from $1.1 million, primarily as a result of lower costs from actions taken in our cost reduction plan during the six months ended September 30, 2022 .

Selling, General, and Administrative (“SG&A”) Expenses increased $6.0 million, or 60%, to $16.0 million from $10.0 million, primarily as a result of increases of approximately $4.7 million in legal fees incurred primarily for the Chapter 11 proceedings, $1.1 million in consulting expenses and $0.2 million in accounting costs.

See Note 3 – Chapter 11 Proceedings for details of the bankruptcy plan.

Interest Expense for the six months ended September 30, 2023 and 2022 was $3.5 million and $2.6 million, respectively.

Product and accessories gross margin as a percentage of product and accessories revenue was (7)% during the three months ended June 30, 2023 and 2022.

Parts, service and rentals gross margin as a percentage of parts and service revenue increased to 41% during the three months ended June 30, 2023, compared to 28% during the three months ended June 30, 2022 primarily as a result of higher margin rental revenue in the three months ended June 30, 2023.

Research and Development (“R&D”) Expenses increased $0.2 million, or 40%, to $0.7 million from $0.5 million as a result of lower costs from actions taken in our cost reduction plan during Fiscal 2023.

Selling, General, and Administrative (“SG&A”) Expenses increased $1.9 million, or 39%, to $6.8 million from $4.9 million primarily as a result of increases of approximately $0.8 million in consulting expense, $0.7 million in legal costs, $0.6 million in marketing related costs and $0.2 million in labor costs, partially offset by a decrease of $0.4 million in allocated costs for shared-services facilities expense during the three months ended June 30, 2023 compared to the same period last year.

Interest Expense for the three months ended June 30, 2023 and 2022 was $1.7 million and $1.3 million, respectively, due to an increase in interest rates.

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

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

Our cash and cash equivalents balances decreased $10.3 million during the six months ended September 30, 2023, primarily due to the net loss and cash used in operating activities.

Operating Activities During the six months ended September 30, 2023, we used $9.4 million in cash in our operating activities, which consisted of a net loss for the period of $11.6 million and cash used for working capital of $2.0 million, partially offset by non-cash adjustments (primarily depreciation and amortization, inventory provision, warranty provision and stock-based compensation) of $4.2 million.

During the six months ended September 30, 2022, we used $3.0 million in cash in our operating activities, which consisted of a net loss for the period of $7.9 million, cash provided from working capital of $1.4 million and non-cash adjustments (primarily gain on extinguishment of debt, warranty provision, depreciation and amortization, stock-based compensation and inventory provision) of $3.5 million.

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

Six Months Ended September 30,

Our cash and cash equivalents balances decreased $7.0 million during the three months ended June 30, 2023, primarily due to cash used in operating activities.

Cash used in investing activities was primarily to continue the expansion of the rental fleet.

Operating Activities During the three months ended June 30, 2023, we used $4.8 million in cash in our operating activities, which consisted of a net loss for the period of $5.7 million and cash used for working capital of $1.2 million, partially offset by non-cash adjustments (primarily depreciation and amortization, inventory provision, warranty provision and stock-based compensation) of $2.1 million.

During the three months ended June 30, 2022, we used $3.6 million in

cash in our operating activities, which consisted of a net loss for the period of $4.2 million, cash used for working capital of $0.9 million and non-cash adjustments (primarily depreciation and amortization, stock-based compensation, inventory provision and warranty provision) of $1.5 million.

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

Three Months Ended June 30,

Non-cash operating activities(1)

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Prepaid expenses, other current assets and other assets

Factory protection plan liability

Other changes in operating assets and liabilities

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(1) Represents a change in depreciation and amortization, stock-based compensation expense, inventory provision, warranty provision and sales return allowances.

The change in non-cash operating activities during the six months ended September 30, 2023, compared to the same period the previous year was primarily driven by an increase in depreciation expense related to the additions to our rental fleet and the increase in the amortization of our right-of-use assets during the six months ended September 30, 2023.

The change in accounts receivable was primarily the result of delayed collections during the six months ended September 30, 2023 compared to the same period in the previous fiscal year.

The change in inventory was primarily the result of a decrease in finished goods during the six months ended September 30, 2023.

The change in accounts payable and accrued expenses was primarily due to lower accounts payable payments to vendors during the six months ended September 30, 2023 compared to the same period of the previous fiscal year.

The change in other operating assets and liabilities during the six months ended September 30, 2023 compared to the same period in the previous fiscal year, was primarily driven by the decreases in deferred revenue attributable to customer deposits, FPP contracts and DSS program.

Investing Activities Net cash used in investing activities were $3.9 million and $2.6 million during the six months ended September 30, 2023 and 2022, respectively, primarily due to the additions to our rental fleet of approximately $3.9 million and $1.9 million, respectively.

Financing Activities During the six months ended September 30, 2023, we generated cash of approximately $2.9 million from financing activities, compared to cash generated during the six months ended September 30, 2022 of approximately $6.8 million.

The funds generated from financing activities during the six months ended September 30, 2023 were primarily the result of net cash of $3.0 million received from the issuance of additional pre-petition senior secured notes under the Amended and Restated (“A&R”) Note Purchase Agreement on September 22, 2023 (“Pre-Funding Advance”).

This amendment was entered into to provide liquidity to Capstone for working capital needs to operate the business during the bankruptcy proceedings and until Capstone could secure additional funding through a debtor-in-possession financing facility.

See Note 3– Chapter 11 Proceedings in the Notes to Condensed Consolidated Financial Statements for further discussion of the outstanding debt and the post emergence financing.

The funds generated from financing activities during the six months ended September 30, 2022 were primarily the result of net proceeds net proceeds from the issuance of common stock and warrants of $7.3 million, offset by $0.5 million in repayments of lease obligations.

Term Note Payable On July 6, 2023, we entered into a Fourth Amendment (the “Fourth Amendment”) to the A&R Note Purchase Agreement by and among ourselves, certain subsidiaries of ours, Goldman Sachs Specialty Lending Group, L.P.

(as successor in interest to Goldman Sachs Specialty Lending Holdings, Inc.), as collateral agent (the “Collateral Agent”) and the purchaser party thereto (the “Purchaser”).

The Fourth Amendment provides for (i) the waiver by the Purchaser and the Collateral Agent of the 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 $50 million aggregate principal amount of Notes outstanding pursuant to the A&R Note Purchase Agreement from October 1, 2023 to September 1, 2024;

(iii) an amendment fee payable by us at maturity equal to 1.00% of the principal balance of the Notes on the Fourth Amendment Effective Date (the “Fourth Amendment Effective Date”);

(iv) a due date for the next interest payment on the date that is 30 days from the Fourth Amendment Effective Date, which interest payment was originally due on July 3, 2023;

(v) following our entry into a Transaction Support Agreement (as defined below), 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 will increase 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 the Collateral Agent 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 Collateral Agent board observer to attend the meetings of our Board of Directors (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 a transaction support agreement with one or more lenders in form and substance mutually satisfactory to the Collateral Agent and us (the “Transaction Support Agreement”) within 30 days of the Fourth Amendment 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 Transaction Support Agreement in form and substance satisfactory to the Collateral Agent within 45 days after the Fourth Amendment Effective Date;

(iii) close the transactions specified by the Transaction Support Agreement 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 the Collateral Agent on a quarterly basis.

The Fourth Amendment also imposes restrictions on our ability to (i) pay professional fees for the 30 days 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.

On August 16, 2023, we entered into a Fifth Amendment (the “Fifth Amendment”) to the A&R Note Purchase Agreement by and among ourselves, certain subsidiaries of ours, the Collateral Agent and the purchaser.

The Fifth Amendment provides for (i) the waiver by the Purchaser and the Collateral Agent of our breach of a covenant contained in the A&R Note Purchase Agreement to enter into a Transaction Support Agreement with one or more lenders in form and substance mutually satisfactory to the Collateral Agent and ourselves within 30 days of the Fourth Amendment Effective Date and the failure to make an interest payment within 30 days of the Fourth Amendment Effective Date;

(ii) a due date for the next interest payment on August 22, 2023 or such later date as is agreed to by the Collateral Agent in its sole discretion, which interest payment was originally due within 30 days of the Fourth Amendment Effective Date to the A&R Note Purchase Agreement;

(iii) a minimum Consolidated Liquidity covenant requirement of $3.5 million, commencing on July 14, 2023 and operative through September 1, 2024;

and (iv) the amendment of the milestones with respect of the Transaction Support Agreement to require that we (A) agree to the terms and form of the Transaction Support Agreement (which may include a structure including bankruptcy proceedings) with one or more lenders in form and substance mutually satisfactory to the Collateral Agent and ourselves by August 22, 2023 or such later date as is agreed to by the Collateral Agent in its sole discretion,(B) subject to any 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 Transaction Support Agreement in form and substance satisfactory to the Collateral Agent by August 31, 2023 or such later date as is agreed to by the Collateral Agent in its sole discretion, and (C) that we shall have closed the transactions specified by the Transaction Support Agreement by September 15, 2023 or such later date as is agreed by the Collateral Agent in its sole discretion.

On September 22, 2023, we entered into a Sixth Amendment (the “Sixth Amendment”) to the A&R Note Purchase Agreement by and among ourselves, certain of our subsidiaries, the Collateral Agent and the Purchaser.

Pursuant to the Sixth Amendment, we issued and the Purchaser purchased for $3,000,000 in cash additional senior secured notes on September 22, 2023 (the “Additional Notes”).

The Additional Notes bear interest at the SOFR Rate plus 8.75% per annum, payable-in-kind on the last day of each interest period of one-, two-, three- or six-months (but, in the case of a six-month interest period, every three-months).

The entire principal amount of the Additional Notes is due and payable on September 1, 2024 (the “Maturity Date”).

The Additional Notes do not amortize and the entire principal balance is due in a single payment on the Maturity Date.

As of September 30, 2023, $57.0 million in borrowings were outstanding under the Notes, which includes the accrual for an exit fee to be paid at maturity or upon pre-payment.

Interest expense related to the Notes payable during the three months ended September 30, 2023 and 2022 was $1.8 million and $1.3 million, respectively.

Interest expense related to the Notes payable during the six months ended September 30, 2023 and 2022 was $3.5 million and $2.6 million, respectively.

The change in non-cash operating activities during the three months ended June 30, 2023, compared to the same period the previous year was primarily driven by an increase in depreciation expense related to the additions to our rental fleet during the three months ended June 30, 2023.

The change in accounts receivable was primarily the result of delayed collections during the three months ended June 30, 2023 compared to the same period in the previous fiscal year.

The change in inventory was primarily the result of the decreases in finished goods and raw materials during the three months ended June 30, 2023 as we continue to manage inventory, compared to the three months ended June 30, 2022.

The change in accounts payable and accrued expenses was primarily due to lower accounts payable payments to vendors during the three months ended June 30, 2023 compared to the same period of the previous fiscal year.

The change in other operating assets and liabilities during the three months ended June 30, 2023 compared to the same period in the previous fiscal year, was primarily driven by the decreases in deferred revenue attributable to customer deposits, FPP contracts and DSS program.

Investing Activities Net cash used in investing activities was $2.2 million and $1.9 million during the three months ended June 30, 2023 and 2022, respectively, primarily due to the additions to our rental fleet of approximately $2.2 million and $1.8 million, respectively.

Financing Activities Net cash used in financing activities was $32,000 and $0.2 million during the three months ended June 30, 2023 and 2022, respectively, which were the result of repayment of notes payable and lease obligations .

Term Note Payable On February 4, 2019, we entered into a Note Purchase Agreement, by and among us, certain of our subsidiaries 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 Amended and Restated (“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 is due in a single payment on the maturity date.

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

Pursuant to the First Amendment to the A&R Note Purchase dated as of May 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

On July 13, 2022 we entered into the A&R NPA Second Amendment with the Purchaser and the Collateral Agent, pursuant to which (i) the Purchaser and the Collateral Agent waived our breach of the Adjusted EBITDA covenant and (ii) the A&R Note Purchase Agreement 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.

As a result of our restated earnings, we were not in compliance with the Adjusted EBITDA covenant contained in the A&R Note Purchase Agreement.

The breach required a change in classification of the term note payable to current liability on the Condensed Consolidated Balance Sheet resulting in a liquidity issue for us.

See Note 18–Subsequent Events

in the Notes to Condensed Consolidated Financial Statements for a summary of our current outstanding debt facility, which we entered into after September 30, 2023.

Lease Commitments During the second quarter of Fiscal 2024 we entered into several rental agreements to rent used microturbine equipment from customers where that equipment was not currently in use.

See Note 17–Subsequent Events in the Notes to Condensed Consolidated Financial Statements for a summary of our current outstanding debt facility, which we entered into after June 30, 2023.

Lease Commitments During the first quarter of Fiscal 2024 we entered into two 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.

As of September 30, 2023, lease commitments totaled approximately 18.4 MW of microturbines, have an average term of 36 months, and a total commitment value of approximately $18.7 million.

Going Concern In connection with preparing the Condensed Consolidated Financial Statements for the three and six months ended September 30, 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 financial statements.

As of September 30, 2023, we had cash and cash equivalents of $2.5 million, and $57.0 million in borrowings were outstanding under the Notes.

We incurred a net loss of $11.6 million and used cash from operating activities of $9.4 million during the six months ended September 30, 2023.

As of June 30, 2023, lease commitments totaled approximately 11.8 MW of microturbines, have an average term of 36 months, and a total commitment value of approximately $10.5 million.

Going Concern In connection with preparing the Condensed Consolidated Financial Statements for the three months ended June 30, 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 financial statements.

As of June 30, 2023, we had cash and cash equivalents of $5.8 million, and $51.0 million in borrowings were outstanding under the Notes.

We incurred a net loss of $5.7 million and used cash from operating activities of $4.8 million during the first quarter of Fiscal 2024.

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.

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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 September 30, 2023, we had 50.2 MW of rental units in our fleet and under contract.

As of June 30, 2023, we had 41.5 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.

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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.

Our accounts receivable balance, net of allowances, was $8.7 million and $7.1 million as of September 30, 2023 and March 31, 2023, respectively.

DSO decreased by 18 days to 28 days as of September 30, 2023 compared to 46 days as of March 31, 2023, primarily due to an increase in revenue.

Our accounts receivable balance, net of allowances, was $8.9 million and $7.1 million as of June 30, 2023 and March 31, 2023, respectively.

DSO decreased by 11 days to 35 days as of June 30, 2023 compared to 46 days as of March 31, 2023, primarily due to an increase in revenue.

No assurance can be given that future credit loss expense will not increase above current operating levels.

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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.

S ubsequent to September 30, 2023, we reduced our outstanding debt via proceedings in U.S.

Subsequent to June 30, 2023, we reduced our outstanding debt via proceedings in U.S.

Chapter 11 Bankruptcy Court.

On September 28, 2023, we filed for a prepackaged financial restructuring with our Senior Lender,

Goldman Sachs under the U.S.

Chapter 11 Bankruptcy laws, as further discussed in Note 3– Chapter 11 Proceedings in the Notes to Condensed Consolidated Financial Statements.

On September 28, 2023, we filed for a prepackaged financial restructuring with our Senior Lender, Goldman Sachs under the U.S.

Chapter 11 Bankruptcy laws, as further discussed in Note 17–Subsequent Events in the Notes to Condensed Consolidated Financial Statements.

We emerged from Bankruptcy on December 7, 2023, and effected a financial and organizational restructuring.

In spite of these efforts and given our current cash position, lack of liquidity, limits to accessing capital and debt funding options and current economic and market risks, there is substantial doubt regarding our 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 financial statements as of, and for the period ended September 30, 2023.

In spite of these efforts and given our current cash position, lack of liquidity, limits to accessing capital and debt funding options, and current economic and market risks, there is substantial doubt regarding our 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 financial statements as of, and for the period ended June 30, 2023.

New Accounting Pronouncements

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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-Q

Item 2. Management’s Discussion and Analysis