Capstone Energy Plus, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation s The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Form 10-Q and the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for Fiscal 2023. All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are approximate. Special Note Regarding Forward-Looking Statements This Form 10-Q includes certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). These statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “expect,” “anticipate,” “should,” “believe,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend” and variations of these terms and similar expressions are intended to identify these forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among others, statements relating to our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those expressed in, or implied by, the forward-looking statements included in this Form 10-Q as a result of various factors, including, among others: ● our ability to realize the anticipated benefits of our recently completed financial restructuring; ● the restrictions imposed by the covenants contained in the Exit Facility (as defined in Note 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; ● risks related to the restatement of our previously issued consolidated financial statements, including costs, risks and uncertainties associated with the pending SEC investigation into the circumstances surrounding such restatement; ● our ability to remediate the material weaknesses in internal control over financial reporting disclosed in the Annual Report on Form 10-K for Fiscal 2023; ● risks related to our history of net losses and ability to raise additional capital and fund future operating requirements; ● risks related to the limitation of capital available to the Company; ● the development of the market for and customer uses of our microturbines, including our Energy-as-a-Service solutions; ● our ability to develop new products and enhance existing products; ● our ability to produce products on a timely basis in a high-quality manner; ● the availability of sources for and costs of component parts; ● our ability to obtain direct material products on a timely and cost-effective basis; ● competition in the markets in which we operate; ● operational interruption by fire, earthquake and other events beyond our control; ● federal, state and local regulations of our markets and products; ● the financial performance of the oil and natural gas industry and other general business, industry and economic conditions applicable to us; ● changes to trade regulation, quotas, duties or tariffs and sanctions caused by the changing U.S. and geopolitical environments, including the ongoing conflicts in Ukraine, Israel and Gaza; ● security and cybersecurity risks related to our electronic processing of sensitive and confidential business and product data; ● our ability to adequately protect our intellectual property rights; ● the impact of pending or threatened litigation; and 31 Table of Contents ● other risks and uncertainties discussed in “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for Fiscal 2023. Furthermore, new risks may emerge from time to time and it is not possible for us to predict all risks, nor can we assess the impact of all factors on the business or the extent to which any factor, or combination of factors, may cause actual results, performance or achievement to differ materially from those contained in any forward-looking statements. Forward-looking statements speak only as of the date of this Form 10-Q. Except as expressly required under federal securities laws and the rules and regulations of the Securities and Exchange Commission (the "SEC"), we do not have any obligation, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-Q, whether as a result of new information or future events or otherwise. Readers should not place undue reliance on the forward-looking statements included in this Form 10-Q or that may be made elsewhere from time to time by us, or on our behalf. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. All references in this Quarterly Report on Form 10-Q to “the Company,” “we,” “us,” “our,” or “Capstone” are to Capstone Green Energy Corporation and its consolidated subsidiaries prior to the Effective Date (as defined Note 3 - Chapter 11 Proceedings and Emergence) and to Capstone Green Energy Holdings, Inc. and its consolidated subsidiaries following the Effective Date. Recent Developments 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. Overview We are the market leader in microturbine energy systems based on the number of microturbines sold annually and total installed base. Generally, power purchased from the electric utility grid is less costly than power produced by distributed generation technologies in simple cycle mode. Utilities may also charge fees to interconnect to their power grids. However, when considering and including the waste heat from our microturbine (CHP and CCHP) the economic benefit improves significantly. Further, our 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 “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 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. The renewable energy market is fueled by landfill gas, biodiesel and biogas from sources such as food processing, agricultural waste and livestock manure. Our product sales in the oil and gas and other natural resources market is driven by our microturbines’ reliability, emissions profile and ease of installation. Given the volatility of the oil and gas market, 32 Table of Contents 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. Our focus is on products and solutions that provide near term opportunities to drive repeatable business rather than discrete projects for niche markets. In addition, management closely monitors operating expenses and strives to improve manufacturing efficiencies while simultaneously lowering direct material costs and increasing average selling prices. The key drivers to our success are revenue growth, higher average selling prices, lower direct material costs, positive new order flow, reduced cash usage and expansion of the Energy-as-a-Service (“EaaS”) business. An overview of our direction, targets and key initiatives are as follows: 1. Our Energy Conversion Products business line is driven by our industry-leading, highly efficient, low-emission, resilient microturbine energy systems offering scalable solutions in addition to a broad range of customer-tailored solutions. We target specific market verticals for these products. Focus on Vertical Markets. Within the distributed generation markets that we serve, we focus on vertical markets that we identify as having the greatest near-term potential. In our primary products and applications (energy efficiency, 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. Given the volatility of the oil and gas market, we have refocused our business strategy to target projects within the energy efficiency and renewable energy markets. The following table summarizes our percentage or product revenues by vertical markets for which we had product revenues for the periods presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended December 31, ​ Nine Months Ended December 31, ​ 2023 2022 2023 2022 Energy efficiency ​ 38% ​ 72% ​ 41% ​ 55% Natural resources ​ 43% ​ 24% ​ 48% ​ 34% Renewable energy ​ 13% ​ 4% ​ 10% ​ 9% Microgrid ​ — ​ — ​ — ​ 2% Transportation ​ 6% ​ — ​ 1% ​ — 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 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. 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 and industrial waste. Natural Resources—Crude Oil, Natural Gas, Shale Gas & Mining Our microturbines are installed in the natural resource market for use in both onshore and offshore applications, including oil and gas exploration, production, and at compression and transmission sites as a highly efficient and reliable source of power. In some cases, these oil and gas or mining operations have no electric utility grid and rely solely on power generated on-site. There are numerous locations, on a global scale, where the drilling, production, compression and transportation of natural resources and other extraction and production processes create fuel byproducts, which are traditionally burned or released into the atmosphere. Our microturbines can turn these fuel byproducts, such as flare gas, or associated gas, into a useable fuel to provide prime power to these sites. 33 Table of Contents Renewable Energy There is a growing transition to renewable energy sources and technologies on a global scale. Our microturbines run efficiently on renewable fuels such as methane and other biogases from landfills, wastewater treatment facilities and renewable natural gas. They also run efficiently on other small biogas applications like food processing plants, livestock farms and agricultural green waste operations. Microturbines can burn these renewable fuels with minimal emissions, thereby, in some cases, avoiding the imposition of penalties incurred for pollution while simultaneously producing electricity from this “free” renewable fuel source for use at the site or in the surrounding areas. Our microturbines have demonstrated effectiveness in these smaller applications and may outperform conventional combustion engines in some situations, including when the gas contains a high amount of sulfur, as the sulfur can contaminate combustion engines’ lube oil, leading to equipment breakdowns and higher lifecycle costs. Microgrid Microgrid is a group of interconnected loads and distributed energy resources that acts as a single controllable energy entity with respect to the grid. Distributed energy resources typically include other dual-mode microturbines, reciprocating engines, solar photovoltaic (PV), wind turbines, fuel cells and battery storage. Microgrids can be connected to larger electricity grids; however, in the event of a widespread outage, the microgrid will disconnect from the main grid and continue to operate independently to maintain the electricity supply to the homes and businesses that are connected to the microgrid’s electricity network. Our microturbines have the ability to meet the needs of microgrid end-users by lowering their overall cost to operate and by providing a versatile dispatchable technology that is fuel flexible and scalable enough to fit a wide variety of applications. We have seen continued development in the microgrid market segment 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. Backlog 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. A portion of our backlog is concentrated in the oil and gas market, which may impact the overall timing of shipments or the conversion of backlog to revenue. The timing of the backlog is based on the requirement date indicated by our customers. However, based on historical experience, management expects that a significant portion of our backlog may not be shipped within the next 18 months. Additionally, the timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and customer delivery schedule changes), most of which are not in our control and can affect the timing of our revenue. As a result, management believes the book-to-bill ratio demonstrates the current demand for our products in the given period. 34 Table of Contents 2. Sales and Distribution Channels. We seek out distributors that have business experience and capabilities to support our growth plans in our targeted markets. A significant portion of our revenue is derived from sales to distributors that resell our products to end users. We have a total of 52 distributors, Original Equipment Manufacturers (“OEMs”) and national accounts. In the United States and Canada, we currently have 8 distributors, OEMs and national accounts. Outside of the United States and Canada, we currently have 44 distributors, OEMs and national accounts. We continue to refine our distribution channels to address our specific targeted markets. ​ 3. Service. As part of our 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 (FPPs) are generally paid quarterly in advance. ​ We offer new and remanufactured parts through our global distribution network. Service revenue in the third quarter of Fiscal 2024 was approximately 32% of total revenue. 4. Product Robustness and Life Cycle Maintenance Costs. We continue to invest in enhancements that relate to high performance and high reliability. An important element of our continued innovation and product strategy is to focus on the engineering of our product hardware and electronics to make them work together more effectively and deliver improved microturbine performance, reliability and low maintenance costs to our customers. 5. New Product Development. Our new product development is targeted specifically to meet the needs of our selected vertical markets. We expect that our existing product platforms, the C65, C200, C600, C800 and C1000S Series microturbines, will be our foundational product lines for the foreseeable future. Our research and development project portfolio is centered on enhancing the features of these base products. We have continued to develop our new hydrogen products. In March 2022, we released a commercially available hydrogen-based combined heat and power (CHP) product, which can safely run on a 30% hydrogen-70% natural gas mix. In continuing these efforts, we are testing a 100% hydrogen gas combustion system through our research and development partnership with Argonne National Laboratory. 6. Cost and Core Competencies. We believe that the core competencies of our products are our recuperator design, air-bearing technology, advanced combustion technology and sophisticated power electronics to form efficient and ultra-low emission electricity and cooling and heat production systems. Our core intellectual property is contained within our air-bearing technology. We continue to review avenues for cost reduction by sourcing from the best value supply chain option. In order to utilize manufacturing facilities and technology more effectively, we are focused on continuous improvements in manufacturing processes. Additionally, considerable effort is being directed to manufacturing cost reduction through process improvement, product design, advanced manufacturing technology, supply management and logistics. Management expects to be able to leverage our costs as product volumes increase. Our manufacturing designs include the use of conventional technology, which has been proven in high- volume automotive and turbocharger production for many years. Many components used in the manufacture of our products are readily fabricated from commonly available raw materials or off-the-shelf items available from multiple supply sources; however, certain items are custom made to meet our specifications and require longer lead times. We believe that in most cases, adequate capacity exists at our suppliers and that alternative sources of supply are available or could be developed within a reasonable period of time; however, it may be more challenging to transition to another supplier from single source suppliers with long lead times. We regularly reassess the adequacy and abilities of our suppliers to meet our future needs. We believe that effective execution in each of these key areas will be necessary to leverage our promising technology and early market leadership into achieving positive cash flow with growing market presence and improving financial performance. We currently occupy warehouse and office space in Van Nuys, California with a production capacity of approximately 2,000 units per year, depending on product mix. 35 Table of Contents 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, 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 December 31, 2023 and 2022 The following table summarizes our revenue by geographic markets (in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended December 31, ​ 2023 2022 United States and Canada ​ $ 8.6 ​ $ 16.0 Europe ​ ​ 2.6 ​ ​ 2.3 Russia ​ ​ — ​ ​ 0.5 Latin America ​ ​ 1.5 ​ ​ 0.8 Asia and Australia ​ ​ 1.9 ​ ​ 1.4 Total Revenue ​ $ 14.6 ​ $ 21.0 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 December 31, ​ ​ 2023 ​ 2022 ​ Revenue Megawatts Units Revenue Megawatts Units Microturbine Product ​ $ 5.1 ​ 4.4 ​ 27 ​ $ 10.0 ​ 8.2 ​ 46 Accessories ​ 0.1 ​ ​ ​ ​ ​ 1.1 ​ ​ ​ ​ Total Product and Accessories ​ 5.2 ​ ​ ​ ​ ​ 11.1 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Parts and services ​ 6.6 ​ ​ ​ ​ ​ 7.5 ​ ​ ​ ​ Rentals ​ 2.8 ​ ​ ​ ​ ​ 2.4 ​ ​ ​ ​ Total Revenue ​ $ 14.6 ​ ​ ​ ​ ​ $ 21.0 ​ ​ ​ ​ 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, 36 Table of Contents 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, 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 December 31, ​ ​ 2023 ​ 2022 ​ Gross Profit ​ ​ ​ ​ ​ ​ ​ ​ Product and accessories ​ $ (1.4) ​ ​ $ (1.2) ​ As a percentage of product and accessories revenue ​ (27) % ​ (11) % ​ ​ ​ ​ ​ ​ ​ Parts, services and rentals ​ $ 4.4 ​ ​ $ 2.9 ​ As a percentage of parts, services and rentals revenue ​ 47 % ​ 29 % ​ ​ ​ ​ ​ ​ ​ Total gross profit ​ $ 3.0 ​ ​ $ 1.7 ​ As a percentage of total revenue ​ ​ 21 % ​ ​ 8 % 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. 37 Table of Contents 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, ​ 2023 2022 United States and Canada ​ $ 38.1 ​ $ 39.9 Europe ​ ​ 13.9 ​ ​ 8.8 Russia ​ ​ — ​ ​ 2.2 Latin America ​ ​ 7.6 ​ ​ 3.8 Asia and Australia ​ ​ 7.0 ​ ​ 4.9 Middle East and Africa ​ ​ 0.3 ​ ​ 0.3 Total Revenue ​ $ 66.9 ​ $ 59.9 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, ​ ​ 2023 ​ 2022 ​ Revenue Megawatts Units Revenue Megawatts Units Microturbine Product ​ $ 32.6 ​ 27.6 ​ 152 ​ $ 28.7 ​ 25.1 ​ 158 Accessories ​ 0.9 ​ ​ ​ ​ ​ 1.8 ​ ​ ​ ​ Total Product and Accessories ​ 33.5 ​ ​ ​ ​ ​ 30.5 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Parts and Services ​ 23.9 ​ ​ ​ ​ ​ 23.9 ​ ​ ​ ​ Rentals ​ 9.5 ​ ​ ​ ​ ​ 5.5 ​ ​ ​ ​ Total Revenue ​ $ 66.9 ​ ​ ​ ​ ​ $ 59.9 ​ ​ ​ ​ 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. 38 Table of Contents 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, ​ ​ ​ 2023 ​ ​ 2022 Gross Profit ​ ​ ​ ​ ​ ​ ​ ​ Product and accessories $ (2.6) ​ $ (2.6) ​ As a percentage of product and accessories revenue ​ (8) % ​ (9) % ​ ​ ​ ​ ​ ​ ​ Parts, services and rentals ​ $ 14.3 ​ ​ $ 10.2 ​ As a percentage of parts, services and rentals revenue ​ 43 % ​ 35 % ​ ​ ​ ​ ​ ​ ​ ​ ​ Total gross profit ​ $ 11.7 ​ ​ $ 7.6 ​ As a percentage of total revenue ​ ​ 18 % ​ ​ 13 % 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 39 Table of Contents 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 Cash Flows Our cash requirements depend on many factors, including the execution of our business strategy and plan. Our cash and cash equivalents balances decreased $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, ​ 2023 2022 Net income (loss) ​ $ 12,674 ​ $ (14,189) Non-cash operating activities(1) ​ (25,871) ​ 5,411 Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ 981 ​ 3,725 Inventories ​ 6,638 ​ (7,535) Accounts payable and accrued expenses ​ (4,646) ​ 920 Operating lease liability ​ ​ (2,464) ​ ​ (931) Prepaid expenses, other current assets and other assets ​ ​ (1,029) ​ ​ (933) Factory protection plan liability ​ ​ (2,527) ​ ​ 2,678 Other changes in operating assets and liabilities ​ (5,819) ​ 2,434 Net cash used in operating activities ​ $ (22,063) ​ $ (8,420) (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 40 Table of Contents 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. The amount of capital that we will need in the future to fund our operations will require us to achieve significantly increased sales volume, which is dependent on many factors, including: ● the market acceptance of our products and services; ● our business, product and capital expenditure plans; ● capital improvements to new and existing facilities; ● our competitors’ response to our products and services; ● our relationships with customers, distributors, dealers and project resellers; ● our customers’ ability to afford and/or finance our products; and ● reliability of the supply chain, including availability of raw materials. Management evaluated these conditions in relation to our ability to meet our obligations as they become due. Our ability to continue current operations and to execute on management’s plan is dependent on our ability to generate cash flows from operations. In May 2023, we implemented an expense reduction plan to align our cost structure. The cost reductions focused on non-operating, discretionary expenses and employee costs. Beginning May 12, 2023, nine employees were furloughed for a period of 180 days, the Sales Solutions Team was abandoned, and the effort in Energy Storage Products business was discontinued. 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. 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. 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. 41 Table of Contents 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. We emerged from Bankruptcy on December 7, 2023, and effected a financial and organizational restructuring. See Note 3– Chapter 11 Proceedings and Emergence in the Notes to Condensed Consolidated Financial Statements 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 December 31, 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. Item 3. 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.