Capstone Energy Plus, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation s The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Form 10-Q and the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for Fiscal 2023. All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are approximate. Special Note Regarding Forward-Looking Statements This Form 10-Q includes certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). These statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “expect,” “anticipate,” “should,” “believe,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend” and variations of these terms and similar expressions are intended to identify these forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among others, statements relating to our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those expressed in, or implied by, the forward-looking statements included in this Form 10-Q as a result of various factors, including, among others: ● our ability to realize the anticipated benefits of our recently completed financial restructuring; ● the restrictions imposed by the covenants contained in the Exit Facility (as defined in Note 17 – Subsequent Events) and the Operating Subsidiary LLC Agreement (as defined in Note 17 – Subsequent Events) and our ability to comply with the financial covenants contained in the Exit Facility; ● the impact of several recent key management changes and the Company’s ability to retain key employees following the financial restructuring; ● risks related to the restatement of our previously issued consolidated financial statements, including costs, risks and uncertainties associated with the pending SEC investigation into the circumstances surrounding such restatement; ● our ability to remediate the material weaknesses in internal control over financial reporting disclosed in the Annual Report on Form 10-K for Fiscal 2023; ● risks related to our history of net losses and ability to raise additional capital and fund future operating requirements; ● risks related to the limitation of capital available to the Company; ● the development of the market for and customer uses of our microturbines, including our Energy-as-a-Service solutions; ● our ability to develop new products and enhance existing products; ● our ability to produce products on a timely basis in a high-quality manner; ● the availability of sources for and costs of component parts; ● our ability to obtain direct material products on a timely and cost-effective basis; ● competition in the markets in which we operate; ● operational interruption by fire, earthquake and other events beyond our control; ● federal, state and local regulations of our markets and products; ● the financial performance of the oil and natural gas industry and other general business, industry and economic conditions applicable to us; ● changes to trade regulation, quotas, duties or tariffs and sanctions caused by the changing U.S. and geopolitical environments, including the ongoing conflicts in Ukraine, Israel and Gaza; ● security and cybersecurity risks related to our electronic processing of sensitive and confidential business and product data; ● our ability to adequately protect our intellectual property rights; ● the impact of pending or threatened litigation; and 33 Table of Contents ● other risks and uncertainties discussed in “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for Fiscal 2023. Furthermore, new risks may emerge from time to time and it is not possible for us to predict all risks, nor can we assess the impact of all factors on the business or the extent to which any factor, or combination of factors, may cause actual results, performance or achievement to differ materially from those contained in any forward-looking statements. Forward-looking statements speak only as of the date of this Form 10-Q. Except as expressly required under federal securities laws and the rules and regulations of the Securities and Exchange Commission (the "SEC"), we do not have any obligation, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-Q, whether as a result of new information or future events or otherwise. Readers should not place undue reliance on the forward-looking statements included in this Form 10-Q or that may be made elsewhere from time to time by us, or on our behalf. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. All references in this Quarterly Report on Form 10-Q to “the Company,” “we,” “us,” “our,” or “Capstone” are to Capstone Green Energy Corporation and its consolidated subsidiaries prior to the Effective Date (as defined below) and to Capstone Green Energy Holdings, Inc. and its consolidated subsidiaries following the Effective Date. Recent Developments 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. Overview We are the market leader in microturbine energy systems based on the number of microturbines sold annually and total installed base. Generally, power purchased from the electric utility grid is less costly than power produced by distributed generation technologies in simple cycle mode. Utilities may also charge fees to interconnect to their power grids. However, when considering and including the waste heat from our microturbine (CHP and CCHP) the economic benefit improves significantly. Further, our clean technology can produce thermal energy at a lower carbon footprint. These benefits can be especially realized, when fuel costs are low, where the costs of connecting to the grid may be high or impractical (such as remote power applications or new grid services need to be provided), 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 are an inverter-based technology and 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 help solve the tri-lemma: (1) resiliency, (2) sustainability and (3) affordability. Management also believes our products and services 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 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). In the energy efficiency market, we continue to expand our market presence in hotels, office buildings, hospitals, retail, and industrial applications globally. The renewable energy market is fueled by landfill gas, biodiesel, and biogas from sources such as food processing, agricultural waste and livestock manure. Our product sales in the oil and gas and other natural resources market is driven by our microturbines’ reliability, emissions profile and ease of installation. Given the volatility of the oil and gas market, our business strategy is to ensure diversification by also targeting projects within the energy efficiency and renewable energy markets. 34 Table of Contents We continue to focus on improving our products based on customer input, building brand awareness and new channels to market by developing a diversified network of strategic distribution partners. Our focus is on products and solutions that provide near term opportunities to drive repeatable business rather than discrete projects for niche markets. In addition, management closely monitors operating expenses and strives to improve manufacturing efficiencies while simultaneously lowering direct material costs and increasing average selling prices. The key drivers to our success are revenue growth, higher average selling prices, lower direct material costs, positive new order flow, reduced cash usage and expansion of the EaaS business. An overview of our direction, targets and key initiatives are as follows: 1. Our Energy Conversion Products business line is driven by our industry-leading, highly efficient, low-emission, resilient microturbine energy systems offering scalable solutions in addition to a broad range of customer-tailored solutions. We target specific market verticals for these products. Focus on Vertical Markets Within the distributed generation markets that we serve, we focus on vertical markets that we identify as having the greatest near-term potential. In our primary products and applications (energy efficiency, renewable energy, natural resources, critical power supply, and microgrid products), we identify specific targeted vertical market segments. Within each of these segments, we identify what we believe to be the critical factors to success and base our plans on those factors. Given the volatility of the oil and gas market, we have refocused our business strategy to target projects within the energy efficiency and renewable energy markets. The following table summarizes our percentage or product revenues by vertical markets for which we had product revenues for the periods presented: ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ 2023 2022 Energy efficiency 43% ​ 44% Natural resources ​ 47% ​ 38% Renewable energy ​ 10% ​ 11% Microgrid ​ — ​ 7% 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 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 35 Table of Contents 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 turbines, 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 $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. 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 52 distributors, OEMs and national accounts. In the United States and Canada, we currently have 8 distributors, OEMs and national accounts. Outside of the United States and Canada, we currently have 44 distributors, OEMs and national accounts. We continue to refine our distribution channels to address our specific targeted markets. ​ 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 in the first quarter of Fiscal 2024 was approximately 21% of total revenue. 4. Product Robustness and Life Cycle Maintenance Costs We continue to invest in enhancements that relate to high performance and high reliability. An important element of our continued innovation and product strategy is to focus on the engineering of our product hardware and electronics to make them work together more effectively and deliver improved microturbine performance, reliability and low maintenance 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, C600, C800 and C1000 36 Table of Contents 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 our recuperator design air-bearing technology, advanced combustion technology and sophisticated power electronics to form efficient and ultra-low emission electricity and cooling and heat production systems. Our core intellectual property is contained within our air-bearing technology. We continue to review avenues for cost reduction by sourcing from the best value supply chain option. In order to utilize manufacturing facilities and technology more effectively, we are focused on continuous improvements in manufacturing processes. Additionally, considerable effort is being directed to manufacturing cost reduction through process improvement, product design, advanced manufacturing technology, supply management and logistics. Management expects to be able to leverage our costs as product volumes increase. Our manufacturing designs include the use of conventional technology, which has been proven in high- volume automotive and turbocharger production for many years. Many components used in the manufacture of our products are readily fabricated from commonly available raw materials or off-the-shelf items available from multiple supply sources; however, certain items are custom made to meet our specifications and require longer lead 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 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 The preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material. Critical accounting estimates are defined as follows: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate are reasonably likely to occur from period to period and the change would have a material impact on our financial condition or results of operations. Note 2, “Basis of Presentation and Significant Accounting Policies” in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended March 31, 2023 describe the significant accounting policies and methods used in the preparation of our Condensed Consolidated Financial Statements. 37 Table of Contents Results of Operations Three Months Ended June 30, 2023 and 2022 The following table summarizes our revenue by geographic markets (in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ ​ ​ 2023 ​ 2022 ​ United States and Canada ​ $ 12.1 ​ $ 11.5 ​ Europe and Russia ​ ​ 6.9 ​ ​ 3.5 ​ Latin America ​ ​ 1.1 ​ ​ 2.2 ​ Asia and Australia ​ ​ 3.7 ​ ​ 1.5 ​ Middle East and Africa ​ ​ 0.1 ​ ​ 0.1 ​ Total ​ $ 23.9 ​ $ 18.8 ​ 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 June 30, ​ ​ 2023 ​ 2022 ​ Revenue Megawatts Units Revenue Megawatts Units Microturbine Product ​ $ 13.0 11.0 62 ​ $ 9.4 8.1 53 Accessories ​ 0.2 ​ ​ ​ ​ 0.4 ​ ​ ​ Total Product and Accessories ​ 13.2 ​ ​ ​ ​ 9.8 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Parts and Service ​ ​ 7.7 ​ ​ ​ ​ ​ ​ 7.7 ​ ​ ​ ​ Rentals ​ ​ 3.0 ​ ​ ​ ​ ​ ​ 1.3 ​ ​ ​ ​ Total ​ $ 23.9 ​ ​ ​ ​ $ 18.8 ​ ​ ​ 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 $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 $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 38 Table of Contents 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 $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 $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): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ ​ 2023 2022 ​ Gross Profit ​ ​ ​ ​ ​ ​ ​ Product and accessories ​ $ (1.0) ​ $ — ​ As a percentage of product and accessories revenue ​ (7) % 0 % ​ ​ ​ ​ ​ ​ Parts, service and rentals ​ $ 4.4 ​ $ 2.5 ​ As a percentage of parts, service and rentals revenue ​ 41 % 28 % ​ ​ ​ ​ ​ ​ ​ ​ Total Gross Profit ​ $ 3.4 $ 2.5 ​ As a percentage of total revenue ​ ​ 14 % ​ 13 % 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. Liquidity and Capital Resources Cash Flows Our cash requirements depend on many factors, including the execution of our business strategy and plan. 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 39 Table of Contents 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, ​ 2023 2022 Net loss $ (5,679) $ (4,200) Non-cash operating activities(1) ​ 2,102 ​ 1,521 Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ (1,941) ​ 1,597 Inventories ​ 2,401 ​ 178 Accounts payable and accrued expenses ​ 3,624 ​ (2,668) Operating lease liability ​ ​ (626) ​ ​ (179) Prepaid expenses, other current assets and other assets ​ ​ (597) ​ ​ (253) Other changes in operating assets and liabilities ​ (4,086) ​ 439 Net cash used in operating activities ​ $ (4,802) ​ $ (3,565) (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 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 40 Table of Contents 27, 2022. On July 13, 2022 we entered into the A&R NPA Second Amendment with the Purchaser and the Collateral Agent, pursuant to which (i) the Purchaser and the Collateral Agent waived our breach of the Adjusted EBITDA covenant and (ii) the A&R Note Purchase Agreement 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 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 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. 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 May 2023, we implemented an 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 Sales Solutions Team was abandoned, and the effort in Energy Storage Products business was discontinued. 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 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. 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. 41 Table of Contents 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. Increased credit loss 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 has been severely restricted or made very expensive at a time when we need, or would like, to do so, which has had 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. 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 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 June 30, 2023. New Accounting Pronouncements Refer to Note 3 – Recently Issued Accounting Pronouncements in the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for information regarding new accounting standards.