What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-05 compared with 2023-02-14 · 208 added, 258 removed, 148 unchanged (76% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operation s

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Form 10-Q and in our Annual Report on Form 10-K for Fiscal 2021.

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.

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Our actual results may differ materially from those expressed in, or implied by, the forward-looking statements included in this Form 10-Q as a result of various factors, including, among others:

● the additional covenants imposed by our most recent amendment to the A&R Note Purchase Agreement with Goldman Sachs and our ability to refinance the outstanding indebtedness thereunder;

● the availability of credit and compliance with the agreements governing our indebtedness;

● 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 18 – Subsequent Events) and the Operating Subsidiary LLC Agreement (as defined in Note 18 – 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;

● the worldwide supply chain issues that affect our ability get direct material products on a timely and cost-effective basis;

● the development of the market for and customer uses of our microturbines, including our EaaS;

● 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;

● availability of sources for and costs of component parts;

● 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;

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● federal, state and local regulations of our markets and products;

● usage of our federal and state net operating loss carryforwards;

● the financial performance of the oil and natural gas industry and other general business, industry and economic conditions applicable to us;

● changes to international trade regulation, quotas, duties or tariffs, and sanctions caused by the changing U.S.

and geopolitical environment, including the ongoing conflict between Russia and the Ukraine;

● 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;

● the impact of the recent departure of several key management and other employees;

● our ability to adequately protect our intellectual property rights;

● the COVID -19 pandemic, which may cyclically continue to adversely affect our business, financial condition and results of operations;

● the potential that our use of cash for operations and expansion of our rental fleet could result in our cash falling below the minimum balance required by the A&R Note Purchase Agreement with Goldman Sachs, therefore violating a covenant in that agreement;

● the risk that our inventory balances continue to rise due to purchases of long lead time inventory, and the consequences of a backlog of obsolete or excess inventory;

● the impact of pending or threatened litigation;

● other risks and uncertainties discussed in “Item 1A.

Risk Factors” included in our Annual Report on Form 10-K for Fiscal 2022 and in ‘Item 1A.

Risk Factors” included in this Quarterly Report on Form 10-Q.

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.

We are the market leader in microturbines based on the number of microturbines sold.

Generally, power purchased from the electric utility grid is less costly than power produced by distributed generation technologies.

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 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.

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, we can provide economic benefits to end users in instances where the waste heat from our microturbine has value (CHP and CCHP), where fuel costs are low (renewable energy/renewable fuels), where the costs of connecting to the grid may be high or impractical (such as remote power applications), where reliability and power quality are of critical importance, or in situations where peak shaving could be economically advantageous because of highly variable electricity prices.

Our microturbines can be interconnected to other distributed energy resources to form “microgrids” (also called “distribution networks”) located within a specific geographic area and provide power to a group of buildings.

Because our microturbines can provide a reliable source of power and can operate on multiple fuel sources, management believes they offer a level of flexibility not currently offered by other technologies such as reciprocating engines.

In addition to our existing microturbine products, since September 2020, we have offered additional energy conversion products in the form of Baker Hughes 5 MW, 12 MW, and 16 MW industrial gas turbines, where we will purchase and resell their product (although there was no revenue from sales of additional energy conversion products in the form of Baker Hughes industrial gas turbines for the three and nine months ended December 31, 2022 or 2021).

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.

We intend to begin to manufacture modular hybrid energy stations and lithium-ion battery energy storage systems (“BESS”) to be sold either individually or combined as part of a custom microturbine-battery storage solution.

We consider our microturbines, Baker Hughes turbines, and hybrid energy stations to be a part of our Energy Conversion Products business line.

We also added a new Energy Storage Products business line in Fiscal 2022 and there has not yet been any revenue from this business line.

Our goals for Fiscal 2023 are to:

● expand our EaaS business by growing the long-term rental fleet,

● focus on growing top line revenue through our new Direct Solutions Sales team and growing the DSS subscription program,

● broaden our diverse energy products and service offerings,

● increase aftermarket margins and escalate parts availability, and

● focus on managing working capital and inventory turns.

During the nine months ended December 31, 2022 our net loss decreased by 8% to $12.3 million and our basic and diluted loss per share improved by 21% to $0.73 compared to $13.3 million and $0.92, respectively, in the same period of the previous fiscal year.

The improvement in the net loss during the nine months ended December 31, 2022 was

primarily the result of a greater contribution from the higher margin rental business, a reduction of operating expenses, partially offset by higher direct material costs and higher interest expense.

The improvement in the net loss per share was primarily the result of the $1.1 million improvement noted above and an increase in weighted average shares outstanding to 16.8 million for the nine months ended December 31, 2022 from 14.5 million for the same period of the previous fiscal year.

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.

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 December 31,

Nine Months Ended December31,

Three Months Ended September 30,

Six Months Ended September 30,

Energy efficiency

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Energy efficiency refers to the proper utilization of both electrical and thermal energies in the power production process.

In such applications, our microturbines are able to maximize the availability of usable energy to provide a significant economic advantage to customers while reducing their onsite emissions.

CHP and CCHP can improve site economics by capturing the waste heat created from a single combustion process to increase the efficiency of the total system, from approximately 30 percent to 80 percent or more.

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.

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Our microturbines are installed in the natural resource market for use in both onshore and offshore applications, including oil and gas exploration, production, and at compression and transmission sites as a highly efficient and reliable source of power.

In some cases, these oil and gas or mining operations have no electric utility grid and rely solely on power generated onsite.

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 - flare gas, or associated gas, into a useable fuel to provide prime power to these sites.

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

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Microgrid is a group of interconnected loads and distributed energy resources that acts as a single controllable energy entity with respect to the grid.

Distributed energy resources typically include other dual-mode microturbines, reciprocating engines, solar photovoltaic (PV), wind turbine, fuel cells and battery storage.

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;

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We have seen continued development in the microgrid market segment.

There was no revenue in the Microgrid market vertical for the three and nine months ended December 31, 2022.

Net product orders were approximately $1.7 million and $4.5 million for the three months ended December 31, 2022 and 2021, respectively.

Ending backlog was approximately $21.8 million at December 31, 2022 compared to $25.3 million at March 31, 2022.

The gross book-to-bill ratio was 0.8:1 and 0.5:1 for the three months ended December 31, 2022 and 2021, respectively.

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.

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 continue to refine our distribution channels to address our specific targeted markets.

Our Distributor Support System (“DSS program”) provides additional support for distributor business development activities, customer lead generation, brand awareness and tailored marketing services for each of our major geography and market verticals.

This program is funded by our distributors and was developed to provide improved worldwide distributor training, sales efficiency, website development and company branding and to provide funding for increased strategic marketing activities.

See Note 12 – Revenue Recognition for additional discussion of revenue recognition for this program.

Service As part of our Energy-as-a-Service business line, we provide service primarily through our global distribution network.

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Factory protection plans are generally paid quarterly in advance.

Our FPP backlog as of December 31, 2022 was approximately $71.5 million, which represents the value of the contractual agreement for FPP services that had not been earned and extends through Fiscal 2042.

Our FPP backlog as of March 31, 2022 was approximately $79.1 million, which represents the value of the contractual agreement for FPP services that then had not been earned and extends through Fiscal 2042.

Additionally, we offer new and remanufactured parts through our global distribution network.

Service revenue in the third quarter of Fiscal 2023 was approximately 39% of total revenue.

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.

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

An important element of our continued innovation and product strategy is to focus on the engineering of our product hardware and electronics to make them work together more effectively and deliver improved microturbine performance, reliability and low maintenance cost to our customers.

New Product Development Our new product development is targeted specifically to meet the needs of our selected vertical markets.

We expect that our existing product platforms, the C65, C200 and C1000 Series microturbines, will be our foundational product lines for the foreseeable future.

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.

During Fiscal 2022, we continued to expand and develop our new hydrogen products.

In March 2022, we released a commercially available hydrogen-based combined heat and power (CHP) product, which can safely run on a 30% hydrogen-70% natural gas mix.

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 continuing these efforts, we are testing a 100% hydrogen gas combustion system through our research and development partnership with Argonne National Laboratory.

Cost and Core Competencies We believe that the core competencies of our products are air-bearing technology, advanced combustion technology and sophisticated power electronics to form efficient and ultra-low emission electricity and cooling and heat production systems.

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.

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Many components used in the manufacture of our products are readily fabricated from commonly available raw materials or off-the-shelf items available from multiple supply sources;

however, certain items are custom made to meet our specifications and require longer lead time.

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, single source suppliers with long lead times may be more challenging to transition to another supplier.

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 Capstone’s promising technology and early market leadership into achieving positive cash flow with growing market presence and improving financial performance.

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 Policies and Estimates

The preparation of our condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses.

Management believes the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain.

Actual results could differ from management’s estimates.

Management believes the critical accounting policies listed below affect our more significant accounting judgments and estimates used in the preparation of the condensed consolidated financial statements.

These policies are described in greater detail in our Annual Report on Form 10-K for Fiscal 2022 and continue to include the following areas:

● Revenue recognition;

● Inventory write-downs and classification of inventories;

● Estimates of warranty obligations;

● Accounts receivable allowances;

● Sales return allowances;

● Deferred tax assets and valuation allowance;

● Impairment of long-lived assets, including intangible assets with finite lives;

● Stock-based compensation expense.

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.

Results of Operations

Three Months Ended December 31, 2022 and 2021

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

Three Months Ended December 31,

Three Months Ended September 30, 2023 and 2022

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

Three Months Ended September 30,

United States and Canada

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Middle East and Africa

Revenue for the three months ended December 31, 2022 decreased $1.0 million to $19.6 million from $20.6 million for the three months ended December 31, 2021.

The $1.0 million decrease was primarily driven by a $2.2 million decrease in the Middle East and Africa, $0.8 million in Europe and Russia and $0.5 million in Asia and Australia, partially offset by increases of $2.3 million in United States and Canada and $0.2 million in Latin America.

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

The increase in the United States and Canada was primarily attributable to an increase in our EaaS long-term rental services and product shipments into the natural resources vertical markets compared to the same period last year.

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.

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

Three Months Ended December 31,

Three Months Ended September 30,

Microturbine Product

Total Product and Accessories

Parts, Service and Rentals

For the three months ended December 31, 2022, revenue from microturbine products and accessories decreased $2.3 million, or 19%, to $10.0 million from $12.3 million for the three months ended December 31, 2021.

The $2.3 million decrease was primarily driven by a decrease in megawatts and units shipped during the three months ended December 31, 2022 compared to the same period last year.

Megawatts shipped were 7.6 megawatts and 10.3 megawatts during the three months ended December 31, 2022 and 2021, respectively.

Average revenue per megawatt shipped was approximately $1.2 million and $1.1 million during the three months ended December 31, 2022 and 2021, respectively.

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.

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

Parts, service and rentals revenue (which are part of our EaaS business line and includes revenue from our parts shipments, FPP contracts, rentals, Distributor Support Subscription fees, and other service revenue) increased $1.3 million, or 16%, to $9.6 million for three months ended December 31, 2022 from $8.3 million for the three months ended December 31, 2021.

The $1.3 million increase was primarily driven by an increase in rental revenue as a result of our EaaS business plan during the three months ended December 31, 2022 compared to the same period last year.

Sales to RSP Systems and Cal Microturbine accounted for 21% and 14% of our revenue for the three months ended December 31, 2022, respectively.

Sales to E-Finity, RSP Systems, and Radian Oil & Gas Services Co, accounted for 13%, 10%, and 10% of our revenue for the three months ended December 31, 2021, respectively.

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 .

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

Gross profit was $2.7 million, or 14% of revenue, for the three months ended December 31, 2022 compared to a gross profit of $2.2 million, or 11% of revenue, for the three months ended December 31, 2021.

The increase of $0.5 million was primarily the result of current year product price increases and an increase in higher margin rental revenue.

The increase was also due to higher direct material profit of $0.8 million and lower warranty expense of $0.2 million, partially offset by higher production and service center labor and overhead expense of $0.3 million, and inventory charges of $0.2 million.

Direct material profit, calculated as total revenue less our direct material costs, increased $0.8 million during the third quarter of Fiscal 2023 compared to the third quarter of Fiscal 2022.

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.

The increase of $1.9 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 due to higher margin rental business, partially offset by higher direct material costs due to vendor price increases and supply chain shortages.

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

Warranty expense is a combination of a standard warranty provision recorded at the time revenue is recognized and changes, if any, in estimates for reliability repair programs.

Reliability repair programs are based upon estimates that are recorded in the period that new information becomes available, including design changes, cost of repair and product enhancements, which can include both in-warranty and out-of-warranty systems.

The decrease in warranty expense of $0.2 million is primarily due to declining failure and repair rates.

During the three months ended December 31, 2021, we shipped approximately $0.4 million of parts to replace high risk failure parts in some of our fielded units due to a previously identified supplier defect and recorded it against the $4.9 million reserve established during the three months ended March 31, 2021.

Production and service center labor and overhead expense increased by $0.3 million primarily because of an increase of $0.8 million in depreciation and rent expense related to our rental business, partially offset by decreases of $0.3 million in labor costs and $0.2 million in supplies expense, primarily as a result of higher margin rental revenue in the three months ended December 31, 2022.

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 December 31,

Three Months Ended September 30,

Product and accessories

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As a percentage of total revenue

The $1.2 million decrease in product and accessories gross profit was primarily the result of higher material costs and lower product sales in the three months ended December 31, 2022.

Product and accessories gross margin as a percentage of product and accessories revenue decreased to (16)% during the three months ended December 31, 2022, from (3)% during the three months ended December 31, 2021, primarily driven by higher direct material costs related to supply chain shortages from key vendors in the three months ended December 31, 2022.

Parts, service and rentals gross margin as a percentage of parts and service revenue increased to 45% during the three months ended December 31, 2022, compared to 31% during the three months ended December 31, 2021 primarily as a result of higher margin rental revenue in the three months ended December 31, 2022.

Research and Development (“R&D”) Expenses decreased $0.2 million, or 25%, to $0.6 million from $0.8 million as a result of lower costs from actions taken in our cost reduction plan during the three months ended December 31, 2022.

Selling, General, and Administrative (“SG&A”) Expenses increased $0.1 million, or 2%, to $5.4 million from $5.3 million primarily as a result of increases of approximately $0.3 million in marketing related costs and $0.3 million in consulting expense, partially offset by a decrease of $0.5 million in labor costs during the three months ended December 31, 2022 compared to the same period last year.

Interest Expense for the three months ended December 31, 2022 and 2021 was $1.9 million and $1.3 million, respectively, due to an increase in interest rates.

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.

Nine Months Ended December 31, 2022 and 2021

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

Nine Months Ended December 31,

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

3 unchanged sentences

Middle East and Africa

Revenue for the nine months ended December 31, 2022 increased $5.1 million, or 9%, to $59.0 million from $53.9 million for the nine months ended December 31, 2021.

The $5.1 million increase was primarily driven by the $13.7 million increase in United States and Canada, offset by decreases of $3.1 million in Latin America, $2.5 million in Middle East and Africa, $1.5 million in Asia and Australia and $1.5 million in Europe and Russia.

The decreases in Europe and Russia, Latin America, Asia and Australia, and Middle East and Africa are primarily attributable to decreases in product shipments into the energy efficiency and natural resources vertical markets in those regions compared to the same period last year.

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):

Nine Months Ended December 31,

Six Months Ended September 30,

Microturbine Product

Total Product and Accessories

Parts, Service and Rentals

For the nine months ended December 31, 2022, revenue from microturbine products and accessories increased $0.6 million, or 2%, to $29.8 million from $29.2 million for the nine months ended December 31, 2021.

The $0.6 million increase was primarily due to higher accessory sales during the nine months ended December 31, 2022 compared to the same period last year.

Megawatts shipped were 25.0 megawatts and 25.2 megawatts during the nine months ended December 31, 2022 and 2021, respectively.

Average revenue per megawatt shipped was approximately $1.1 million during the nine months ended December 31, 2022 and 2021.

Parts, service and rentals revenue (which are part of our EaaS business line and includes revenue from our parts shipments, FPP contracts, rentals, Distributor Support Subscription fees, and other service revenue) increased $4.5 million, or 19%, to $29.2 million for nine months ended December 31, 2022 from $24.7 million for the nine months ended December 31, 2021.

The $4.5 million increase was primarily driven by an increase in rental revenue as a result of our EaaS business plan, and an increase in revenue from our FPP contracts during the nine months ended December 31, 2022 compared to the same period last year.

Sales to Cal Microturbine and RSP Systems accounted for 16% and 13% of our revenue for the nine months ended December 31, 2022, respectively.

E-Finity accounted for 15% of our revenue for the nine months ended December 31, 2021.

Gross Profit was approximately $9.6 million, or 16% of revenue, for the nine months ended December 31, 2022 compared to a gross profit of $7.6 million, or 14% of revenue, for the nine months ended December 31, 2021.

The increase of $2.0 million was primarily a result of higher direct material profit of $4.1 million, partially offset by increases in our production and service labor and overhead expenses of $1.7 million, and higher inventory charges of $0.4 million.

Direct material profit, calculated as total revenue less our direct material costs, increased $4.1 million during the nine months ended December 31, 2022 compared to the nine months ended December 31, 2021 primarily due to an increase in sales, partially offset by higher direct material costs due to vendor price increases and supply chain shortages.

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 $1.7 million in the nine months ended December 31, 2022 compared to the nine months ended December 31, 2021 primarily due to an increase of approximately $2.5 million in facilities costs, offset by a decrease in labor costs of $0.8 million, primarily as a result of lower overhead costs and higher margin rental revenue in the nine months ended December 31, 2022.

Inventory charges increased by $0.4 million during the nine months ended December 31, 2022 compared to the nine months ended December 31, 2021 primarily as the result of an increase in the provision for excess and obsolete inventory as we reserved for some older inventory parts.

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.

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

Nine Months Ended December 31,

Six Months Ended September 30,

Product and accessories

4 unchanged sentences

As a percentage of total revenue

The $1.9 million decrease in product and accessories gross profit in the nine months ended December 31, 2022 was primarily due to high costs driven by material cost increases from key vendors.

Product and accessories gross margin as a percentage of product and accessories revenue decreased to (11)% during the nine months ended December 31, 2022, from (4)% during the nine months ended December 31, 2021, primarily due to higher product material costs in the nine months ended December 31, 2022 driven by price increases from key vendors.

Parts and service gross margin as a percentage of parts and service revenue increased to 44% during the nine months ended December 31, 2022, compared to 36% during the nine months ended December 31, 2021, primarily due to lower overhead costs and higher margin rental revenue in the nine months ended December 31, 2022.

Research and Development (“R&D”) Expenses decreased $0.9 million, or 35%, to $1.7 million from $2.6 million as a result of lower costs from actions taken in our cost reduction plan during the nine months ended December 31, 2022.

Selling, General, and Administrative (“SG&A”) Expenses decreased $1.7 million, or 10%, to $15.4 million from $17.1 million primarily as a result of decreases of approximately $1.5 million labor costs and $0.7 million in marketing related costs, partially offset by an increase of $0.7 million in consulting expense.

These decreases were primarily due to lower costs from actions taken in our cost reduction plan during the nine months ended December 31, 2022.

Interest Expense for the nine months ended December 31, 2022 and 2021 was $4.6 million and $3.8 million, respectively, due to higher interest rates.

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.

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

Gain on Extinguishment of Debt of approximately $1.9 million during the nine months ended December 31, 2021 was the result of the forgiveness of the PPP Loan.

See Note 10 – Term Note Payable.

Other Income for the nine months ended December 31, 2021 includes the payment to the Company of $0.6 million of PPP Loan proceeds previously repaid in accordance with the Fourth Amendment to the Note Purchase Agreement between the Company and Goldman Sachs Specialty Lending Group, L.P.

See Note 10 – Term Note Payable.

Liquidity and Capital Resources

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

We have invested our cash in institutional funds that invest in high quality short-term money market instruments to provide liquidity for operations and for capital preservation.

Our cash and cash equivalents balances decreased $5.9 million during the nine months ended December 31, 2022, primarily due to the net loss and an increase in inventory purchases, partially offset by improved collections of accounts receivable and net proceeds from the August 2022 public offering.

Cash used in investing activities was primarily to continue the expansion of the rental fleet, which was partially offset by cash provided by financing activities from the issuance of common stock through the August 2022 public offering.

Operating Activities During the nine months ended December 31, 2022, we used $7.8 million in cash in our operating activities, which consisted of a net loss for the period of $12.2 million and cash used for working capital of $0.9

million, partially offset by non-cash adjustments (primarily depreciation and amortization, inventory provision, warranty provision and stock based compensation) of $5.3 million.

During the nine months ended December 31, 2021, we used $23.0 million in cash in our operating activities, which consisted of a net loss for the period of $13.3 million, cash used for working capital of $11.4 million and non-cash adjustments (primarily gain on extinguishment of debt, warranty provision, depreciation and amortization, stock based compensation and inventory provision) of $1.7 million.

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

Nine Months Ended December 31,

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,

Non-cash operating activities(1)

2 unchanged sentences

Accounts payable and accrued expenses

Operating lease liability

Prepaid expenses, other current assets and other assets

Factory protection plan liability

Other changes in operating assets and liabilities

Net cash provided by (used) in operating activities

(2) Represents a change in gain on extinguishment of debt, warranty provision, depreciation and amortization, stock-based compensation expense, inventory provision, accounts receivable and sales return allowances.

The change in non-cash operating activities during the nine months ended December 31, 2022, compared to the same period the previous year was primarily driven by the gain on extinguishment of debt resulting from the forgiveness of the PPP Loan during the first quarter of Fiscal 2022 and an increase in depreciation expense related to the additions to our rental fleet during the nine months ended December 31, 2022, compared to the same period the previous fiscal year.

The change in accounts receivable was primarily the result of improved collections during the nine months ended December 31, 2022 compared to the same period in the previous fiscal year.

The change in inventory was primarily the result of an increase in raw materials during the nine months ended December 31, 2022 to secure inventory with long lead times, compared to the nine months ended December 31, 2021.

The change in accounts payable and accrued expenses was primarily due to higher accounts payable payments to vendors during the nine months ended December 31, 2022 compared to the same period of the previous fiscal year.

The change in other operating assets and liabilities during the nine months ended December 31, 2022 compared to the same period in the previous fiscal year, was primarily driven by the decrease in our accrued warranty reserve during the nine months ended December 31, 2021, as we had additional spend for the reliability repair program.

Investing Activities Net cash used in investing activities of $4.0 million and $5.7 million during the nine months ended December 31, 2022 and 2021, respectively, primarily related to the additions to our rental fleet of approximately $4.1 million and $5.1 million, respectively.

Financing Activities During the nine months ended December 31, 2022, we generated cash of approximately $5.8 million from financing activities, compared to cash generated during the nine months ended December 31, 2021 of approximately $10.5 million.

The funds generated from financing activities during the nine months ended December 31, 2022 were primarily the result of net proceeds from the August 2022 public offering, which were partially offset by financing related to additions to our rental fleet.

The funds generated from financing activities during the nine months ended December 31, 2021 were primarily the result of net proceeds from the June 2021 Common Stock offering and proceeds from the at-the-market offering program described below.

At-the-market offerings

On June 7, 2018, we entered into a sales agreement with H.C.

Wainwright & Co., LLC (the “Sales Agreement”) with respect to an at-the-market offering program (the “ATM Program”) pursuant to which we may offer and sell, from time to time at our sole discretion, shares of our Common Stock, having an aggregate offering price of up to $25.0 million.

We will set the parameters for sales of the shares, including the number to be sold, the time period during which sales are requested to be made, any limitation on the number that may be sold in one trading day and any minimum price below which sales may not be made.

On July 15, 2020, we entered into an amendment to the Sales Agreement, which modified

the Sales Agreement to, among other things, amend the termination provisions of the Agreement and amend the maximum amount of shares of our Common Stock that we may offer and sell through or to H.C.

Wainwright & Co., LLC from time to time under the ATM Program.

On March 19, 2021, we entered into a second amendment to the Sales Agreement, which modified the Sales Agreement to, among other things, reflect our filing of a new Registration Statement on Form S-3 with the SEC on March 22, 2021 and set the maximum amount of shares of our Common Stock that we may offer and sell through or to H.C.

Wainwright at $50 million from the date of the amendment to the Sales Agreement, subject to certain limitations set forth in the amendment.

No shares of our Common Stock under the at-the-market offering program were issued during the nine months ended December 31, 2022.

Following the filing of our Annual Report on Form 10-K on July 13, 2022, we are now subject to General Instruction I.B.6 of Form S-3, which limits the amounts that we may sell under our registration statement on Form S-3.

At the conclusion of our public offering in August of 2022, we had no remaining shares available for issuance with respect to this ATM Program.

Common Stock Offerings

On June 17, 2021, we entered into an amended and restated underwriting agreement (the “Wainwright Underwriting Agreement”) with H.C.

Wainwright & Co., LLC (“Wainwright”) whereby we agreed to sell to Wainwright, and Wainwright agreed to purchase, in a firm commitment underwritten public offering 1,904,763 shares (the “Wainwright Shares”) of our common stock, $0.001 par value per share (the “Wainwright Offering”).

The offering price to the public in the Wainwright Offering was $5.25 per share of Common Stock, and Wainwright agreed to purchase the Wainwright Shares from the Company pursuant to the Wainwright Underwriting Agreement at a price of $4.91 per share, representing an underwriting discount of 6.5%.

Pursuant to the Wainwright Underwriting Agreement, we also granted Wainwright an option to purchase, for a period of 30 days from the date of the Wainwright Underwriting Agreement, up to an additional 285,714 shares of Common Stock (the “Option Shares”).

On June 21, 2021, Wainwright exercised the option in full.

The Wainwright Offering closed on June 22, 2021, and we received net proceeds of $10.5 million after deducting $1.0 million in underwriting discounts, commissions and offering expenses paid by the Company.

On August 18, 2022, we entered into an underwriting agreement (the “Lake Street Underwriting Agreement”) with Lake Street Capital Markets, LLC and Joseph Gunnar and Company, LLC (the “Underwriters”) whereby we agreed to sell to the Underwriters, and the Underwriters agreed to purchase, in a firm commitment underwritten public offering 2,934,498 (the “Lake Street Shares”) of the Company’s Common Stock, $0.001 par value per share (the “Lake Street Offering”) and accompanying warrants to purchase up to 2,934,498 shares of common stock.

The offering price to the public in the Offering was $2.75 per share of Common Stock and accompanying warrant, and the Underwriters agreed to purchase the shares and accompanying warrant from the Company pursuant to the Lake Street Underwriting Agreement at a price of $2.585 per share and accompanying warrant, representing an underwriting discount of 6.0%.

The Lake Street Offering closed on August 24, 2022, and the Company received net proceeds of $7.3 million after deducting $0.8 million in underwriting discounts, commissions and offering expenses paid by the Company.

Goldman Warrant

On February 4, 2019, we sold to Goldman Sachs & Co.

LLC (the “Holder”), a Purchase Warrant for shares of our Common Stock (the “Warrant”) pursuant to which the Holder may purchase shares of our Common Stock in an aggregate amount of up to 404,634 shares (the “Warrant Shares”).

Our Common Stock and warrant transactions during Fiscal 2021 triggered certain anti-dilution provisions in the warrants outstanding.

As of December 31, 2022, the Holder may purchase shares of our Common Stock in an aggregate amount of up to 463,067 shares at an exercise price of $2.61 per share.

Goldman “2020 Warrant”

On October 1, 2020, we entered into an Amendment No.

3 to the Purchase Warrant for shares of our Common Stock (the “Amendment No.

3”) with Special Situations Investing Group II, LLC (as successor in interest to Goldman Sachs & Co.

LLC) (the “Warrant Holder”) that amended that certain Purchase Warrant for shares of our Common Stock originally issued by the Company to Goldman Sachs & Co.

LLC, dated February 4, 2019, as amended (the “Original

As of December 31, 2022, the holder may purchase shares of our Common Stock in an aggregate amount of up to 291,295 shares at an exercise price of $2.75 per share.

September 2019 Pre-Funded and Series D Warrants

On September 4, 2019, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain institutional and accredited investors pursuant to which we agreed to issue and sell in a registered direct offering (the “Registered Direct Offering”) an aggregate of 580,000 shares of our Common Stock at a negotiated purchase price of $5.00 per share, and pre-funded warrants to purchase up to an aggregate of 440,000 shares of our Common Stock at a negotiated purchase price of $5.00 per Pre-Funded Warrant, for aggregate gross proceeds of approximately $5.1 million (580,000 shares of common stock plus 440,000 pre-funded warrants at a $5.00 per share purchase price), before deducting placement agent fees and other offering expenses.

In a concurrent private placement, we agreed to issue to the purchasers warrants to purchase 765,000 shares of Common Stock, which represent 75% of the number of shares of Common Stock and shares underlying the Pre-Funded Warrants purchased in the Registered Direct Offering, pursuant to the Securities Purchase Agreement.

The Common Warrants are exercisable for shares of Common Stock at an initial exercise price of $6.12 per share for a period of five years, starting on April 2, 2020 and expiring on April 2, 2025.

In January 2021, three warrant holders exercised their rights to the warrant agreement to exercise on a cashless basis 690,000 Series D warrants at an exercise price of $6.12 per share under the warrant agreement.

In accordance with terms of the warrant agreement, after taking into account the shares withheld to satisfy the cashless exercise option, we issued 352,279 shares of Common Stock.

As of December 31, 2022, there were 75,000 Series D warrants outstanding at an exercise price of $6.12 per share.

August 2022 Warrants

On August 24, 2022 we issued 2,934,498 of common stock warrants with an exercise price of $2.75 in conjunction with the Lake Street Offering.

There were no stock options exercised during the three months ended December 31, 2022 and 2021.

Repurchases of shares of our Common Stock for employee taxes due on vesting of restricted stock units, net of employee stock purchases, resulted in approximately $0.1 million of net cash used during the nine months ended December 31, 2022 and 2021, respectively.

Three-year Term Note On February 4, 2019, we entered into a Note Purchase Agreement, by and among us, certain subsidiaries of us as guarantors, Goldman Sachs Specialty Lending Holdings, Inc., as collateral agent and any other Purchasers party thereto from time to time, in connection with the sale of senior secured notes of us in a private placement exempt from registration under the Securities Act of 1933, as amended.

Under the Note Purchase Agreement, we sold to the Purchaser $30.0 million aggregate principal amount of senior secured notes (the “Goldman Notes”).

The first interest payment on the Notes was on March 31, 2019.

On October 1, 2020, pursuant to A&R Note Purchase Agreement, we increased the amount of borrowing under the Notes by $20.0 million to $50.0 million, and all outstanding Notes bear interest at the Adjusted (London Interbank Offer) LIBO Rate (as defined in the A&R Note Purchase Agreement) plus 8.75% per annum.

The Notes do not amortize and the entire principal balance is due in a single payment on the maturity date.

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

Pursuant to the First Amendment to the A&R Note Purchase dated as of May 13, 2021, the minimum consolidated liquidity requirement increased from $9.0 million to $12.0 million for the period from the Amendment Date to March 31, 2022, and $9.0 million thereafter.

The financial covenants of the A&R Note Purchase Agreement require the Company not to exceed specified levels of Adjusted EBITDA losses relative to its financial model, beginning with the fiscal quarter ending September 30, 2021.

As of March 31, 2022, we were not in compliance with the Adjusted EBITDA covenant contained in the A&R Note Purchase Agreement and did not cure such non-compliance by prepaying the Notes.

As a result, we were in breach of the Adjusted EBITDA covenant as of May 27, 2022.

On July 13, 2022 we entered into the A&R NPA Second Amendment with the Purchaser and the Collateral Agent, pursuant to which (i) the Purchaser and the Collateral Agent waived our breach of the Adjusted EBITDA covenant and (ii) the A&R Note Purchase Agreement has been amended to, among other things, add certain new covenants, including requirements that we use our commercially reasonable best efforts to raise at least $10 million through a sale of our common stock by September 14, 2022 and refinance the Notes by October 1, 2022.

As of December 31, 2022, we are in compliance with the other covenants contained in the A&R Note Purchase Agreement, as amended by A&R NPA Second Amendment.

We were compliant with the Adjusted EBITDA covenant as of December 31, 2022.

On August 24, 2022 we completed a public stock offering with net proceeds of $7.5 million.

(See Note 8 - Offering of Common Stocks and Warrants), which Goldman Sachs Specialty Lending Group, L.P.

agreed satisfied the Company’s obligation to use commercially reasonable best efforts to raise at least $10 million through a sale of its common stock by September 14, 2022.

On September 9, 2022, we engaged Greenhill as financial advisor and investment banker in conjunction with the commercially reasonable best effort of refinancing the Goldman Notes.

Greenhill’s activities were ongoing as of December 31, 2022.

Paycheck Protection Program Loan On April 15, 2020, we applied for an unsecured PPP Loan in the principal amount of $2,610,200 under the Small Business Administration Paycheck Protection Program enabled by the Coronavirus Aid, Relief and Economic Security Act of 2020.

On April 24, 2020, we entered into a promissory note with Western Alliance Bank.

The Company received the full amount of the PPP Loan on April 24, 2020.

In accordance with the requirements of the CARES Act, we used the proceeds from the PPP Loan to support fixed costs such as payroll costs, rent and utilities.

On May 13, 2020, we repaid $660,200 of the PPP Loan in accordance with the Fourth Amendment to the Note Purchase Agreement between the Company and Goldman Sachs Specialty Lending Group, L.P.

The advance under the PPP Loan bore interest at a rate per annum of 1%.

In February 2021, the Company applied for forgiveness in full of the original balance of the PPP loan and the loan was forgiven in full on June 30, 2021.

The Company received a refund of $660,200 and recorded these amounts within other income on the Company’s Condensed Consolidated Statements of Operations.

Management accounted for forgiveness on the PPP Loan in accordance with ASC 470 and recorded a gain on extinguishment of debt on its condensed consolidated financial statements and related footnote disclosures, provided forgiveness be approved by the SBA.

Working Capital and Other Operating Assets and Liabilities Cash used for working capital was $0.9 million during the nine months ended December 31, 2022, a decrease of $10.5 million from the cash used for working capital of $11.4 million during the nine months ended December 31, 2021.

These decreases in cash used for working capital and other operating assets and liabilities were primarily due to improved collections of accounts receivable and lower warranty claims.

Additionally, the change in accounts payable and accrued expenses was primarily due to increased accounts payable payments to vendors.

Liquidity and Going Concern In connection with the preparation of these condensed consolidated financial statements for the three and nine months ended December 31, 2022, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about our ability to meet obligations as they became due over the next twelve months from the date of issuance of our third quarter of Fiscal 2023 interim condensed consolidated financial statements.

Management assessed that there were such conditions and events, primarily the October 1, 2023 due date for the Goldman Sachs Specialty Lending Group, L.P.

outstanding debt of $51.0 million at fair value (see Note 10 – Term Note Payable in the Notes to the Condensed Consolidated Financial Statements for further discussion of the outstanding debt).

As of December 31, 2022, the Company had cash and cash equivalents of $16.6 million.

While the Company believes internally generated cash will adequately fund operating and investment activities over the next twelve months, there will not be sufficient internally generated cash, nor does the Company expect that it could obtain sufficient financing through underwritten public offerings, at-the-market offerings or other similar methods, to retire the outstanding debt.

The Company has engaged Greenhill, a global investment banking firm, to assess financing alternatives related to the Note Payable as well as to raise incremental capital for general corporate purposes.

Greenhill’s refinancing efforts are ongoing as of December 31, 2022.

As there is no guarantee that the Company will successfully complete these financing activities, these conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date the financial statements are issued.

The Company has taken several steps to reduce operating costs and to conserve cash, including staff reductions, price increases, emphasis on the higher margin EaaS business, and the engagement of Greenhill to assist in debt refinancing.

Net cash used in operating activities

(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.

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.

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.

Depending on the timing of our future sales and collection of related receivables, managing inventory costs and the timing of inventory purchases and deliveries required to fulfill the backlog, our future working capital requirements may vary materially from those now planned.

The amount of capital that we will need in the future to fund our operations will require us to achieve significantly increased sales volume, which is dependent on many factors, including:

● worldwide supply chain issues, including raw materials shortages and freight surcharges;

● the market acceptance of our products and services;

4 unchanged sentences

● our customers’ ability to afford and/or finance our products;

Our accounts receivable balance, net of allowances, was $15.1 million and $24.7 million as of December 31, 2022 and March 31, 2022, respectively.

Days sales outstanding in accounts receivable (“DSO”) decreased by 84 days to 66 days as of December 31, 2022 compared to 150 days as of March 31, 2022, primarily due to an increase in accounts receivable collections, and benefitting from a $1.3 million offset of certain customer receivable accounts against notes payable to the same customer related to our rental units..

In the Energy Efficiency market vertical we sell to end users that have been significantly, economically impacted by the pandemic, such as in the Hospitality and Health Care industries.

Additionally, the COVID-19 Pandemic heavily impacted our natural resources market vertical, where we primarily sell to Oil & Gas end users.

While oil prices have rebounded above $100 per barrel, we have not seen a corresponding rebound in capital expenditures or spending activity.

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

Increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on cash flows and results of operations.

In addition, our ability to access the capital markets may be severely restricted or made very expensive at a time when we need, or would like, to do so, which could have a material adverse impact on our liquidity and financial resources.

● 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 September 30, 2023, we had 50.2 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.

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.

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.

S ubsequent to September 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.

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.

New Accounting Pronouncements

Refer to Note 4 – Recently Issued Accounting Pronouncements in the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for information regarding new accounting standards.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

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