What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-09-09 compared with 2024-08-05 · 179 added, 118 removed, 169 unchanged (64% of the section changed)

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● 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 restrictions imposed by the covenants contained in the Exit Facility (as defined in Note 3— Chapter 11 Proceedings and Emergence) and the Operating Subsidiary LLC Agreement (as defined in Note 3— Chapter 11 Proceedings and Emergence) and our ability to comply with the financial covenants contained in the Exit Facility (as defined in Note 13— Debt);

● the impact of several recent key management changes and the Company’s ability to retain key employees following the financial restructuring;

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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.

Refer to Note 3— Chapter 11 Proceedings and Emergence in the Notes to Condensed Consolidated Financial Statements for a summary of our voluntary filing under Chapter 11 of the Bankruptcy Code, our emergence therefrom and our delisting of our common stock from the Nasdaq.

Refer to Note 13— Debt for details regarding our Exit Facility and Note 15— Commitments and Contingencies for details regarding our Service Agreements and the Trademark Licensing Agreement.

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

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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.

Further, our highly efficient, low emission, resilient 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.

Because our microturbines can provide a reliable source of power and can operate on multiple fuel sources, management believes they help solve the “Energy Trilemma” of resiliency, sustainability and 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).

During the three months ended December 31, 2023 our net income increased by 483% to $24.2 million and our basic and diluted income per share increased by 469% to $1.27 compared to a $6.3 million net loss and $(0.35), respectively, in the same period of the previous fiscal year.

The increase to net income during the three months ended December 31, 2023 was primarily due to the impact of the Chapter 11 reorganization, inclusive of a gain on settlement of debt upon emergence from Chapter 11 on December 7, 2023 of $35.3 million.

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

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

In the energy efficiency market, we continue to expand our market presence in hotels, office buildings, hospitals, retail and industrial applications globally.

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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.

Given the volatility of the oil and gas market,

our business strategy is to ensure diversification by also targeting projects within the energy efficiency and renewable energy markets.

We continue to focus on improving our products based on customer input, building brand awareness and new channels to market by developing a diversified network of strategic distribution partners.

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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.

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 Energy-as-a-Service (“EaaS”) business.

An overview of our direction, targets and key initiatives are as follows:

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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.

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.

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, natural resources, renewable energy, critical power supply, microgrid and transportation products), we identify specific targeted vertical market segments.

Within each of these segments, we identify what we believe to be the critical factors to success and base our plans on those factors.

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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 June 30,

Three Months Ended December 31,

Nine Months Ended December 31,

Energy efficiency

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Renewable energy

Transportation

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.

In such applications, our microturbines are able to maximize the availability of usable energy to provide a significant economic advantage to our customers while reducing their on-site 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% to approximately 85% for hot water and chilled water to as much as 90% or more for some steam and direct drying applications.

Natural Resources—Crude Oil, Natural Gas, Shale Gas & Mining

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They also run efficiently on other small biogas applications like food processing plants, livestock farms and agricultural green waste operations.

Microturbines can burn these renewable fuels with minimal emissions, thereby, in some cases, avoiding the imposition of penalties incurred

for pollution while simultaneously producing electricity from this “free” renewable fuel source for use at the site or in the surrounding areas.

Microturbines can burn these renewable fuels with minimal emissions, thereby, in some cases, avoiding the imposition of penalties incurred for pollution while simultaneously producing electricity from this “free” renewable fuel source for use at the site or in the surrounding areas.

Our microturbines have demonstrated effectiveness in these smaller applications and may outperform conventional combustion engines in some situations, including when the gas contains a high amount of sulfur, as the sulfur can contaminate combustion engines’ lube oil, leading to equipment breakdowns and higher lifecycle costs.

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We have seen continued development in the microgrid market segment

Net product orders were approximately $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.

Transportation

Our technology can also be used in Hybrid Electric Vehicle (“HEV”) applications.

Our customers have applied our products in HEV applications such as transit buses and Class 7 and 8 work trucks.

In these applications, the microturbine acts as an onboard battery charger to recharge the battery system as needed.

The benefits of microturbine-powered HEV hybrids include extended range, fuel economy gains, quieter operation, reduced emissions, and higher reliability when compared with traditional internal combustion engines.

Additionally, our technology has been used in marine applications.

Our customers have applied our products in the commercial vessel and luxury yacht market segments.

The application for our marine products is for use as a ship auxiliary engine.

In this application, the microturbines provide power to the vessel’s electrical loads and, in some cases, the vessel can utilize the exhaust energy to increase the overall efficiency of the application, thereby reducing overall fuel consumption and emissions.

Another feasible application is similar to our HEV application where the vessel is driven by an electric propulsion system and the microturbine serves as an on board range extender.

Transportation is a developing market segment for us.

We have experienced continued development in these vertical markets and remain focused on the development of these applications.

Net product orders were approximately $5.9 million and $1.7 million for the three months ended December 31, 2023 and 2022, respectively.

Ending backlog was approximately $18.7 million at December 31, 2023 compared to $42.8 million at March 31, 2023.

The book-to-bill ratio was 1.2:1 and 0.8:1 for the three months ended December 31, 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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As a result, management believes the book-to-bill ratio demonstrates the current demand for our products in the given period.

Sales and Distribution Channels We seek out distributors that have business experience and capabilities to support our growth plans in our targeted markets.

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.

We have a total of 52 distributors, Original Equipment Manufacturers (“OEMs”) and national accounts.

In the United States and Canada, we currently have 8 distributors, OEMs and national accounts.

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

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

As part of our EaaS 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.

Factory protection plans (FPPs) 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.

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

Service revenue in the third quarter of Fiscal 2024 was approximately 32% 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 costs 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, C600, C800 and C1000

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

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 C1000S Series microturbines, will be our foundational product lines for the foreseeable future.

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

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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 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.

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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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.

Note 2— Basis of Presentation, Significant Accounting Policies and Going Concern 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 estimates and methods used in the preparation of our Condensed Consolidated Financial Statements.

Results of Operations

Three Months Ended June 30, 2023 and 2022

Three Months Ended December 31, 2023 and 2022

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

Three Months Ended June 30,

Three Months Ended December 31,

United States and Canada

Europe and Russia

Latin America

Asia and Australia

Middle East and Africa

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.

Total Revenue

Revenue for the three months ended December 31, 2023 decreased $6.4 million to $14.6 million from $21.0 million for the three months ended December 31, 2022.

The $6.4 million decrease was primarily driven by decreases in revenue of $7.4 million in the United States and Canada and $0.5 million in Russia, partially offset by increases of $0.7 million in Latin America, $0.5 million in Asia and Australia and $0.3 million in Europe.

The decreases in the United States and Canada were primarily attributable to a decrease of product deliveries for projects during the three months ended December 31, 2023 and the decrease in Russia was a result of United States sanctions.

The increases in Latin America, Asia and Australia and Europe were due to an increase in our EaaS long-term rental services and product shipments into the natural resources and renewable energy vertical markets in those regions compared to the same period last year.

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

Three Months Ended June 30,

Three Months Ended December 31,

Microturbine Product

Total Product and Accessories

Parts and Service

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.

Parts and services

Total Revenue

For the three months ended December 31, 2023, revenue from microturbine products and accessories decreased $5.9 million, or 53%, to $5.2 million from $11.1 million for the three months ended December 31, 2022.

The $5.9 million decrease was primarily driven by a decrease in megawatts and units shipped during the three months ended December 31,

2023 compared to the same period last year.

Megawatts shipped were 4.4 megawatts and 8.2 megawatts during the three months ended December 31, 2023 and 2022, respectively.

Product demand was adversely affected by the Chapter 11 Bankruptcy as customers assess the long-term viability of the Company.

Average revenue per megawatt shipped was approximately $1.2 million and $1.2 million during the three months ended December 31, 2023 and 2022, respectively, illustrating the effect of previously announced Product price increases.

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

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.

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) decreased $0.5 million, or 5%, to $9.4 million for three months ended December 31, 2023 from $9.9 million for the three months ended December 31, 2022.

The $0.5 million decrease was primarily driven by decreases of $0.4 million in distributor support services, $0.3 million in spare parts and $0.2 million in engineering service revenue, partially offset by an increase of $0.4 million in rentals during the three months ended December 31, 2023 compared to the same period last year.

Refer to Note 15 – Commitments and Contingencies — Related Party Transactions, in the Notes to Condensed Consolidated Financial Statements for information related to Reorganized PrivateCo’s retained assets and distributor services business connected to our emergence from the Chapter 11 Cases.

Sales to Cal Microturbine accounted for 17% of our revenue for the three months ended December 31, 2023, respectively.

RSP Systems and Cal Microturbine, two of our domestic distributors, accounted for 21% and 14% of revenue for the three months ended December 31, 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 $3.0 million, or 21% of revenue for the three months ended December 31, 2023 compared to a gross profit of $1.7 million, or 8% of revenue for the three months ended December 31, 2022.

The increase was primarily the result of an increase in product pricing and increased revenue from our higher margin rental business and lower inventory charges, partially offset by higher production and service center labor and overhead expenses.

Effective January 2023, we increased our sales prices and are negotiated with vendors to reduce material costs.

Production and service center labor and overhead expense increased by $0.6 million during the third quarter of Fiscal 2024 compared to the third quarter of Fiscal 2023.

The increase was primarily because of an increase of $0.6 million in depreciation and rent expense related to our rental business.

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

Three Months Ended June 30,

Three Months Ended December 31,

Product and accessories

As a percentage of product and accessories revenue

Parts, service and rentals

As a percentage of parts, service and rentals revenue

Parts, services and rentals

As a percentage of parts, services and rentals revenue

Total gross profit

As a percentage of total revenue

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.

The $0.2 million decrease in product and accessories gross profit was primarily the result of a decrease in volume of product shipments in the three months ended December 31, 2023.

Product and accessories gross margin as a percentage of product and accessories revenue decreased to (27)% during the three months ended December 31, 2023, from (11)% during the three months ended December 31, 2022, primarily driven by lower product sales and higher material and overhead costs in the three months ended December 31, 2023.

Parts, service and rentals gross margin as a percentage of parts and service revenue increased to 47% during the three months ended December 31, 2023, compared to 29% during the three months ended December 31, 2022 primarily as a result of increases in Parts prices and higher margin rental revenue in the three months ended December 31, 2023.

Research and Development (“R&D”) Expenses.

R&D expenses were $0.6 million and $0.6 million during the three months ended December 31, 2023 and 2022, respectively.

Selling, General, and Administrative (“SG&A”) Expenses.

SG&A expenses increased $4.1 million, or 73%, to $9.7 million from $5.6 million primarily as a result of increases of approximately $3.7 million in legal and accounting fees incurred primarily for the restatement activities and $1.3 million in stock-based compensation expense, partially offset by decreases of $0.5 million in marketing costs and $0.4 million in net credit loss expense during the three months ended December 31, 2023 compared to the same period last year.

See Fiscal Year 2022 10-K/A and Fiscal Year 2023 10-K for details of the Restatement.

Interest Expense.

Interest expense for the three months ended December 31, 2023 and 2022 was $1.1 million and $1.9 million, respectively.

The decrease in interest expense was primarily due to interest accruing on $30.0 million of borrowings under the DIP facility d uring the three months ended December 31, 2023 compared to the $51.0 million pre-petition notes during the three months ended December 31, 2022.

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

Nine Months Ended December 31, 2023 and 2022

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

Nine Months Ended December 31,

United States and Canada

Latin America

Asia and Australia

Middle East and Africa

Total Revenue

Revenue for the nine months ended December 31, 2023 increased $7.0 million, or 12%, to $66.9 million from $59.9 million for the nine months ended December 31, 2022.

The $7.0 million increase was primarily driven by increases of $5.1 million in Europe, $3.8 million in Latin America and $2.1 million in Asia and Australia, partially offset by a decrease of $2.2 million in Russia and $1.8 million in the United States and Canada.

The increases were primarily attributable to an increase in our EaaS long-term rental services and product deliveries for projects during the nine months ended December 31, 2023.

The decreases in the United States and Canada were primarily attributable to a decrease in our product shipments into the energy efficiency vertical markets in those regions compared to the same period last year.

The decrease in Russia were the result of United States sanctions.

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

Nine Months Ended December 31,

Microturbine Product

Total Product and Accessories

Parts and Services

Total Revenue

For the nine months ended December 31, 2023, revenue from microturbine products and accessories increased $3.0 million, or 10%, to $33.5 million from $30.5 million for the nine months ended December 31, 2022.

The $3.0 million increase was primarily due to higher product sales during the nine months ended December 31, 2023 compared to the same period last year.

Megawatts shipped were 27.6 megawatts and 25.1 megawatts during the nine months ended December 31, 2023 and 2022, respectively.

Average revenue per megawatt shipped was approximately $1.2 million and $1.1 million during the nine months December 31, 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 $4.0 million, or 14%, to $33.4 million for nine months ended December 31, 2023 from $29.4 million for the nine months ended December 31, 2022.

The $4.0 million increase was primarily driven by an increase in rental revenue as a result of our EaaS business plan during the nine months ended December 31, 2023 compared to the same period last year.

Sales to E-Finity Distribution Generation, LLC and Cal Microturbine accounted for 14% and 11% of our revenue for the nine months ended December 31, 2023, respectively.

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

Gross Profit.

Gross Profit was approximately $11.7 million, or 18% of revenue, for the nine months ended December 31, 2023 compared to a gross profit of $7.6 million, or 13% of revenue, for the nine months ended December 31, 2022.

The increase was primarily the result of an increase in product pricing and increased revenue from our higher margin rental business, and lower inventory charges, partially offset by higher production and service center labor and overhead expense.

Effective January 2023, we increased our sales prices and are negotiating with vendors to reduce these costs.

Production and service center labor and overhead expense increased $2.0 million in the nine months ended December 31, 2023 compared to the nine months ended December 31, 2022 primarily due to increases of approximately $2.3 million in depreciation and rent expense related to our rental business, $0.5 million in facilities costs, and $0.2 million in labor costs, partially offset by decreases of $0.7 million in freight expense and $0.3 million of supplies expense.

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

Nine Months Ended December 31,

Product and accessories

As a percentage of product and accessories revenue

Parts, services and rentals

As a percentage of parts, services and rentals revenue

Total gross profit

As a percentage of total revenue

Product and accessories gross margin as a percentage of product and accessories revenue increased to (8)% during the nine months ended December 31, 2023, from (9)% during the nine months ended December 31, 2022, primarily due to higher margin accessories revenue and increase in Product prices in the nine months ended December 31, 2023.

Parts, service and rentals gross margin as a percentage of parts and service revenue increased to 43% during the nine months ended December 31, 2023, compared to 35% during the nine months ended December 31, 2022 primarily as a result of higher margin rental revenue and Parts price increases.

Research and Development (“R&D”) Expenses.

R&D expenses increased $0.2 million, or 10%, to $1.9 million from $1.7 million as a result of higher labor costs incurred during the nine months ended December 31, 2023 .

Selling, General, and Administrative (“SG&A”) Expenses.

SG&A expenses increased $10.1 million, or 65%, to $25.7 million from $15.6 million primarily as a result of increases of approximately $8.6 million in legal and accounting fees incurred primarily for the restatement activities, $1.4 million in consulting expense and $1.3 million in stock-based compensation expense, partially offset by decreases of $0.5 million in facilities costs, $0.4 million in net credit loss expense and $0.3 million in marketing and travel costs during the nine months ended December 31, 2023 compared to the same period last year.

See our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2022 and our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 for details on the Restatement.

Interest Expense.

Interest expense for the nine months ended December 31, 2023 and 2022 was $4.6 million and $4.5 million, respectively.

The increase was primarily due to higher interest rates during the nine months ended December 31, 2023, partially offset by a decrease in interest accruing on $30.0 million of borrowings under the DIP facility compared

to the $51.0 million pre-petition notes.

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

Three Months Ended June 30,

Our cash and cash equivalents balances decreased $9.0 million during the nine months ended December 31, 2023, primarily due to cash used in operating activities, partially offset by net cash provided by financing activities.

Operating Activities During the nine months ended December 31, 2023, we used $22.1 million in cash in our operating activities, which consisted of a net income for the period of $12.7 million, offset by non-cash adjustments (primarily the reorganization items, net, paid-in-kind interest expense, depreciation and amortization of assets and stock-based compensation) of $25.9 million and cash used for working capital of $8.9 million.

During the nine months ended December 31, 2022, we used $8.4 million in cash in our operating activities, which consisted of a net loss for the period of $14.2 million, cash provided from working capital of $0.4 million and non-cash adjustments (primarily depreciation and amortization, inventory provision and stock-based compensation) of $5.4 million.

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

Nine Months Ended December 31,

Net income (loss)

Non-cash operating activities(1)

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Prepaid expenses, other current assets and other assets

Factory protection plan liability

Other changes in operating assets and liabilities

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

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

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

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

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

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

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

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

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

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

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

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

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

Pursuant to the First Amendment to the A&R Note Purchase dated as of May 12, 2021, the minimum consolidated liquidity requirement increased from $9.0 million to $12.0 million for the period from May 12, 2021 to March 31, 2022, and $9.0 million thereafter.

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

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

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

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

On March 13, 2023, we transferred $9 million of funds from Bridge Bank, Affiliate of Western Alliance Bank, to Wells Fargo Bank.

The Wells Fargo Bank account did not have an account control agreement in place, resulted in a breach of the Liquidity Covenant.

We transferred the $9 million back to our Bridge Bank account on April 5, 2023.

On April 21, 2023, we again breached the Liquidity Covenant when our total funds in accounts subject to account control agreements fell below $9 million.

On July 3, 2023, we failed to make the interest payment for the most recently ended quarter.

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

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

See Note 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.

(1) Represents non-cash reorganization items, net (at Fiscal 2024), change in depreciation and amortization, stock-based compensation expense, inventory provision, warranty provision and accounts receivable and sales return allowances.

The change in non-cash operating activities during the nine months ended December 31, 2023, compared to the same period in the previous year was primarily driven by the net reorganization items, which included our gain on debt extinguishment, offset by increases in amortization expense of our right-of-use assets, stock-based compensation expense and paid-in-kind interest expense.

The change in accounts receivable was primarily the result of delayed collections during the nine months ended December 31, 2023 compared to the same period in the previous fiscal year.

The change in inventory compared to the nine months ended December 31, 2022, was primarily the result of a decrease in finished goods during the nine months ended December 31, 2023.

The change in accounts payable and accrued expenses was primarily due to higher payments to vendors during the nine months ended December 31, 2023, 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, 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 $4.6 million and $4.0 million during the nine months ended December 31, 2023 and 2022, respectively, primarily related to the additions to our rental fleet.

Financing Activities During the nine months ended December 31, 2023, we generated cash of approximately $17.6 million from financing activities, compared to cash generated during the nine months ended December 31, 2022 of approximately $6.5 million.

The funds generated from financing activities during the nine months ended December 31, 2023 were primarily the result of $12.0 million of funding under the DIP Facility, cash of $3.0 million received from the issuance of additional pre-petition senior secured notes under the A&R Note Purchase Agreement during the second quarter of Fiscal 2024 (“Pre-Funding Advance”) and $3.0 million of funding under the Exit Facility during the third quarter

of Fiscal 2024, partially offset by issuance costs of $0.2 million.

See Note 3— Chapter 11 Proceedings and Emergence in the Notes to Condensed Consolidated Financial Statements and Note 13— Debt for further discussion of the outstanding debt and the post emergence financing.

The funds generated from financing activities during the nine months ended December 31, 2022 were primarily the result of net proceeds net proceeds from the issuance of common stock and warrants of $7.3 million, offset by $0.8 million in repayments of lease obligations.

Debt Refer to Note 13— Debt in the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for information related to our notes.

Lease Commitments Refer to Note 16— Leases in the Notes to Condensed Consolidated Financial Statements for information related to our leases.

Going Concern In connection with preparing the Condensed Consolidated Financial Statements for the three and nine months ended December 31, 2023, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about our ability to meet our obligations as they became due for the next twelve months from the date of issuance of our financial statements.

As of December 31, 2023, we had cash and cash equivalents of $3.9 million and a working capital deficit of $9.3 million.

We incurred net income of $12.7 million and used cash from operating activities of $22.1 million during the nine months ended December 31, 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.

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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.

Furloughed employees were able to return to work in November 2023.

As of December 31, 2023, we had 51.2 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 $8.9 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.

Our accounts receivable balance, net of allowances, was $5.6 million and $7.1 million as of December 31, 2023 and March 31, 2023, respectively.

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

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

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Certain industries in which our customers do business and certain geographic areas have been and could continue to be adversely affected by the previously referenced economic and geopolitical considerations.

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.

Chapter 11 Bankruptcy laws.

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.

See Note 3– Chapter 11 Proceedings and Emergence in the Notes to Condensed Consolidated Financial Statements

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.

Quantitative and Qualitative Disclosures about Market Risk

As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

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