What changed in this filing

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Item 1A. Risk Factors

2024-09-27 compared with 2024-06-13 · 99 added, 176 removed, 520 unchanged (35% of the section changed)

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References to impacts on the trading price of the New Common Stock (as defined below) assume that the New Common Stock will resume trading on an over-the-counter basis.

As of the date of the filing of this Annual Report, no quote of the New Common Stock is published.

As of the date of the filing of this Annual Report, no quote of the New Common Stock has been published.

There can be no assurances as to when over-the-counter trading will resume.

See “—There is currently no public trading market for our New Common Stock.”

See “—There is currently no public trading market for our New Common Stock, and we cannot assure you that an active trading market will develop for the New Common Stock.”

Summary of Risk Factors

The following is a summary of the principal risks that could adversely affect our business, operations, and financial results.

Risks Related to Our Emergence from Chapter 11

● Emergence (as defined below) may have a negative impact on our business relationships.

● Long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.

● There are significant risks related to our substantial indebtedness.

● Financial results after Emergence may not reflect historical trends or meet our expectations.

● Increased levels of employee attrition as a result of our Emergence, including among senior management.

● There is currently no public trading market for our New Common Stock.

Risks Related to Our Corporate Structure

● We are a holding company with nominal net worth and will depend on dividends and distributions from our Operating Subsidiary (as defined below) to pay any dividends.

● Holders of the Preferred Units (as defined below) can exercise significant control over our Operating Subsidiary, which could limit our ability to influence the outcome of key corporate actions of our Operating Subsidiary.

Risks Related to Our Restatement

● We have restated our consolidated financial statements for prior annual and interim periods and have concluded two Audit Committee Investigations, all of which have affected and may continue to affect investor confidence, our stock price, our ability to raise capital in the future, our reputation with our customers, and our ability to timely file our periodic reports with the SEC, and has resulted in stockholder litigation against certain of our current and former executives and may result in additional litigation in the future.

● The SEC enforcement division is conducting an investigation into the circumstances surrounding the Restatement, the results of which may have a material adverse effect on our financial condition and business.

● We have incurred and expect to continue to incur significant expenses related to the Audit Committee Investigations (as defined below), Restatement and remediation of deficiencies in our internal control over financial reporting and disclosure controls and procedures, and any resulting litigation.

● The Audit Committee Investigations, the findings thereof, and the Restatement process have diverted, and may continue to divert, management and other human resources from the operation of our business.

● Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public markets to raise debt or equity capital.

Risks Related to Our Business Operations and Financial Results

● We may be unable to fund our future operating requirements, which could force us to curtail our operations.

● We have realized reductions in our operating costs and, as a result, our ability to cut costs further and sustain our business initiatives may be limited.

● We are exposed to floating interest rate risk under the Exit Note Purchase Agreement, which could cause our debt service obligations to increase significantly.

● Regional epidemics or global pandemics may materially and adversely affect our business, financial condition and results of operations.

● A sustainable market for microturbines may never develop or may take longer to develop than we anticipate, which would adversely affect our results of operations.

● Product quality expectations may not be met, causing slower market acceptance or warranty cost exposure.

● Our products involve a lengthy sales cycle, and we may not anticipate sales levels appropriately, which could impair our results of operations.

● If we do not effectively implement our sales, marketing and service plans, our sales will not grow and our results of operations will suffer.

● Changes to trade regulations, quotas, duties or tariffs, and sanctions caused by the changing U.S.

and geopolitical environments or otherwise, may increase our costs or limit the amount of raw materials and products that we can import, or may otherwise adversely impact our business.

● We may not be able to retain or develop relationships with OEMs or distributors in our targeted markets, in which case our sales would not increase as expected.

● If any of our distributor relationships are not successful, we may terminate or choose not to renew the related distributor agreement, which may result in interference with the wind down of the relationship or the transition of end-user service agreements and could potentially negatively impact our distribution channels or result in litigation costs or other expenses or cash flow.

● We have substantial accounts receivable and increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on our cash flows and results of operations.

● Loss of a significant customer could have a material adverse effect on our results of operations.

● We may not achieve production cost reductions necessary to competitively price our products, which would adversely affect our sales.

● We may incur costs and liabilities as a result of product liability claims.

● Operational restructuring may result in asset impairment or other unanticipated charges.

● We may not be able to manage our growth effectively, expand our production capabilities or improve our operational, financial and management information systems, which would impair our results of operations.

● Our success depends in significant part upon the continuing service of management and key employees, and several key management and other employees have recently left Capstone.

● Our operations are vulnerable to interruption by fire, earthquake, riots, domestic and international instability, war, terrorism, geopolitical events and other events beyond our control.

● Activities necessary to integrate any future acquisitions may result in costs greater than current expectations or be less successful than anticipated.

● We may be adversely impacted by the effects of climate change and may incur increased costs and experience other impacts due to new or more stringent greenhouse gas regulations designed to address climate change.

Risks Related to Our Product Offerings

● We depend upon the development of new products and enhancements of existing products.

● Our operating results are dependent, in large part, upon the successful commercialization of our products.

Failure to produce our products as scheduled and budgeted would materially and adversely affect our business and financial condition.

● We may not be able to produce our products on a timely basis if we fail to correctly anticipate product supply requirements or if we suffer delays in production resulting from issues with our suppliers.

Our suppliers may not supply us with a sufficient number of components or components of adequate quality, or they may provide components at significantly increased prices.

● Commodity market factors impact our costs and availability of materials.

● We operate in a highly competitive market among competitors that have significantly greater resources than we have, and we may not be able to compete effectively.

● Our business and financial performances depend in part on the oil and natural gas industry, where a continued movement towards clean energy and away from fossil fuels, as well as a decline in prices for oil and natural gas, may have an adverse effect on our revenue, cash flows, profitability, and growth.

● Our sales and results of operations could be materially and adversely impacted by risks inherent in international markets.

● We may not be able to develop sufficiently trained applications engineering, installation, and service support to serve our targeted markets.

● Changes in our product components may require us to replace parts held at distributors.

● Utility companies or governmental entities could place barriers to our entry into the marketplace, and we may not be able to effectively sell our products.

Risks Related to Pending Litigation and Government Regulation

● We operate in a highly regulated business environment, and changes in regulation could impose significant costs on us or make our products less economical, thereby affecting demand for our microturbines.

● We and certain of our former directors and officers are subject to various legal proceedings.

Risks Related to Data, Security, and Intellectual Property

● Our business could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their intellectual property rights.

● We face security and cybersecurity risks related to our electronic processing of sensitive and confidential business and product data.

If we are unable to protect our data or the data of our customers, a security breach could damage our reputation and have a material adverse effect on our business.

Risks Related to Ownership of Our New Common Stock

● Our management has identified material weaknesses in its internal control over financial reporting and we determined that our disclosure controls and procedures were ineffective as of March 31, 2023.

If we fail to remediate the material weaknesses or if we otherwise fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results may be affected, and such failure may adversely affect investor confidence and business operations.

● Future issuances or sales of our New Common Stock or exercises by holders of any warrants we may issue could lower our stock price and dilute the interests of existing stockholders.

● Once trading in the New Common Stock commences, the market price of our New Common Stock is likely to be highly volatile and you could lose all or part of your investment in our securities.

● If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

● Provisions in our certificate of incorporation and bylaws, as well as Delaware law, may discourage, delay, or prevent a merger or acquisition at a premium price.

● We do not intend to pay cash dividends.

We have never paid cash dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

Consequently, any gains from an investment in our securities will likely depend on whether the price of our New Common Stock increases.

● Risks Related to Our Emergence from Chapter 11, such as those associated with the impact of Emergence on our business relationships, our long-term liquidity requirements, our substantial indebtedness and the fact that there is currently no public trading market for the New Common Stock.

● Risks Related to Our Corporate Structure , such as those associated to the fact that we are a holding company with stockholders’ deficiency and the significant control that holders of our Preferred Units have over our Operating Subsidiary.

● Risks Related to Our Restatement, such as those related to the impact of the Restatement on investor confidence and our ability to raise capital in the future, stockholder litigation, the SEC investigation and the expenses incurred related to the remediation of material weaknesses identified by management.

● Risks Related to Our Business Operations and Financial Results , such as those associated with our ability to fund future operating requirements, that a sustainable market for microturbines may never develop, our lengthy sales cycle, changes to trade regulations, quotas, duties or tariffs, and sanctions, relationships with our OEMs and our distributors, customer concentration risk, product liability claims, our dependence upon the continuing service of management and key employees, and our vulnerability to interruption by fire, earthquake, riots, domestic and international instability, war, terrorism, geopolitical events and other events beyond our control.

● Risks Related to Our Product Offerings , such as those associated with our ability to successfully commercialize our products, our ability to produce our products as scheduled and budgeted;

our dependence on our suppliers;

commodity market factors;

and our dependence in part on the oil and natural gas industry.

● Risks Related to Pending Litigation and Government Regulation , such as those associated with the highly regulated business environment in which we operate and the legal proceedings in which we and certain of our current and former directors and officers are involved.

● Risks Related to Data, Security, and Intellectual Property , such as those associated with our ability to adequately protect our intellectual property rights and cybersecurity risks.

● Risks Related to Ownership of Our New Common Stock , such as those associated with the material weaknesses in internal control over financial reporting identified by management, and the likelihood that the market price of our New Common Stock will be highly volatile.

For a more complete discussion of the material risks facing our business, please see below.

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Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.

On March 31, 2023, we had cash and cash equivalents of $12.8 million and working capital deficiency of $56.8 million.

On March 31, 2024, we had cash of $2.1 million and working capital deficiency of $38.5 million.

This compares to $12.8 million and $56.8 million, respectively, as of March 31, 2023.

On May 31, 2024, we had cash and cash equivalents of approximately $0.8 million.

We face uncertainty regarding the adequacy of our long-term liquidity and capital resources.

In addition to the cash requirements necessary to fund ongoing operations, we have incurred

significant professional fees and other costs in connection with the preparation and administration of the Chapter 11 Cases.

In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with the preparation and administration of the Chapter 11 Cases.

In addition, the Notes (as defined below) bear interest at a rate equal to the Adjusted Term SOFR (as defined in the Exit Note Purchase Agreement) plus 7.00% per annum.

100% of the interest payable under the Notes is payable in kind until December 7, 2024, after which we must start paying cash interest.

We cannot assure you that cash on hand at Emergence, cash flow from operations, and the financing pursuant to the Exit Facility will be sufficient to continue to fund our operations or to pay cash interest on the Notes when due.

We cannot assure you that cash on hand and cash flow from operating activities will be sufficient to continue to fund our operations or to pay cash interest on the Notes when due.

Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things, our ability to:

(i) comply with the terms and conditions of the Exit Note Purchase Agreement and associated agreements, (ii) maintain adequate cash on hand, and (iii) generate cash flow from operations.

(i) comply with the terms and conditions of the Exit Note Purchase Agreement and associated agreements, (ii) maintain adequate cash on hand, and (iii) generate cash flow from operating activities.

There are significant risks related to our substantial indebtedness.

We are party to an Exit Note Purchase Agreement (the “Exit Note Purchase Agreement”), by and among Operating Subsidiary, as the issuer, the Company and Capstone Financial Services, as the guarantors (the “Guarantors”), Purchaser and the Collateral Agent (each as defined in the Exit Note Purchase Agreement).

We are party to an Exit Note Purchase Agreement (the “Exit Note Purchase Agreement”), for an aggregated principal amount of $28.0 million, including accrued and unpaid interest subject to the terms and conditions set forth in the Exit Note Purchase Agreement by and among Operating Subsidiary, as the issuer, the Guarantors, Purchaser and the Collateral Agent.

The Exit Note Purchase Agreement provides for:

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(ii) a roll up of $8.0 million of DIP Roll Up Notes (plus any accrued unpaid interest) (collectively with the roll up of the $12.6 million DIP New Money Notes, the “Exit Roll Up Notes”);

(iii) an additional $7.0 million new money committed delayed draw term loan facility (the “Exit New Money Notes” and, together with the Exit Roll Up Notes, the “Notes”), of which $3.0 million was drawn at closing.

(iii) an additional $7.0 million new money committed delayed draw term loan facility (the “Exit New Money Notes” and, together with the Exit Roll Up Notes, the “Notes”).

The Exit Note Purchase Agreement also provides for a $10.0 million uncommitted incremental facility.

As of May 31, 2024, we had $29.7 million in borrowing outstanding under the Notes.

As of March 31, 2024, we had $28.9 million in borrowings outstanding under the Notes, including accrued and unpaid interest.

The Exit Roll Up Notes mature on December 7, 2026, and the Exit New Money Notes mature on December 7, 2025.

The Exit Note Purchase Agreement contains customary covenants, including, among others, covenants that restrict our ability to incur debt, grant liens, make certain investments and acquisitions, pay dividends, repurchase equity interests, repay certain debt, amend certain contracts, enter into affiliate transactions and asset sales or make certain equity issuances, and a minimum liquidity covenant and minimum consolidated adjusted EBITDA covenant.

As of March 31, 2024, we were not in compliance with the minimum adjusted EBITDA covenant contained in the Exit Note Purchase Agreement.

In anticipation of such default, we obtained a waiver from the Purchaser and the Collateral Agent on March 27, 2024.

The Notes issued pursuant to the Exit Note Purchase Agreement are secured by a lien on substantially all of the present and future property and assets of Operating Subsidiary and each Guarantor, subject to customary exceptions and exclusions.

The Exit Note Purchase Agreement also includes conditions precedent, representations and warranties, affirmative and negative covenants, events of default, and other customary provisions, including financial covenants with respect to minimum consolidated liquidity and minimum consolidated adjusted EBITDA.

Refer to Note— 12 Debt in the Notes to Consolidated Financial Statements.

On March 27, 2024, the Company obtained a waiver from the Purchaser and the Collateral Agent in anticipation of default on March 31, 2024.

The waiver granted was specific to the $1.0 million consolidated adjusted EBITDA covenant for the measurement date of March 31, 2024, and covered the period until June 30, 2024.

There can be no assurance that the Purchaser and the Collateral Agent will waive any future defaults that may occur.

If future defaults occur, the Purchaser and the Collateral Agent can exercise their rights and remedies under the Exit Note Purchase Agreement (and other security related documents), including a right to accelerate the maturity of our repayment obligations under the Notes.

We believe it is probable the consolidated liquidity and consolidated adjusted EBITDA financial covenants discussed below will not be satisfied on September 30, 2024.

We are working to secure a waiver of the covenants or an amendment to the Exit Note Purchase Agreement with the senior lender, but no assurance can be given that such a waiver or amendment will be obtained.

We have the right to cure an event of default for a breach of the consolidated adjusted EBITDA covenant with a prepayment on the Notes up to the amount that is required to achieve the minimum consolidated adjusted EBITDA covenant for the quarter.

In the event the Company does not cure the breach, the requisite Purchaser may cause the Collateral Agent to enforce any and all liens and security interests created pursuant to the Collateral Documents and may enforce any and all rights and remedies available.

Consequently, the Exit new money notes, net of discount were reclassified to current on the Company’s Consolidated Balance Sheet as of March 31, 2024.

Our obligations under the Exit Note Purchase Agreement have important consequences, including the following:

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As a result of the implementation of the Plan and the transactions contemplated thereby, our future results of operations, financial condition, and business may not be comparable to the results of operations, financial condition, and business reflected in our historical financial statements.

In connection with the disclosure statement we filed with the Bankruptcy Court, and the hearing to consider confirmation of the Plan, we prepared projected financial information to demonstrate the feasibility of the Plan and our ability to continue operations upon our Emergence.

In connection with the disclosure statement, we filed with the Bankruptcy Court, and the hearing to consider confirmation of the Plan, we prepared projected financial information to demonstrate the feasibility of the Plan and our

ability to continue operations upon our Emergence.

Those projections were prepared solely for the purpose of bankruptcy proceedings and have not been, and will not be, updated on an ongoing basis and should not be relied upon by investors.

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There is currently no public trading market for our New Common Stock, and we cannot assure you that an active trading market will develop for the New Common Stock.

As a result of the implementation of the Plan and the transactions contemplated thereby, the stockholders of Capstone Green Energy Corporation received their pro rata share of 18,540,877 shares of the common stock of Capstone Green Energy Holdings, Inc., par value $0.001 per share (the “New Common Stock”).

As a result of the implementation of the Plan and the transactions contemplated thereby, the stockholders of Capstone Green Energy Corporation received their pro rata share of 18,540,877 shares of common stock of Capstone Green Energy Holdings, Inc., par value $0.001 per share (the “New Common Stock”).

There is currently no public trading market for the New Common Stock because we have not been current in our annual and quarterly reports pursuant to Section 13 and 15(d) of the Exchange Act (the “Reporting Obligations”), we have been unable to obtain a ticker symbol for the New Common Stock or to obtain quotation on any OTC Markets Group, Inc.

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Risks Related to our Corporate Structure

We are a holding company with nominal net worth and will depend on dividends and distributions from our Operating Subsidiary to pay any dividends.

The Company is a holding company with nominal net worth.

We are a holding company with an stockholders’ deficiency and will depend on dividends and distributions from our Operating Subsidiary to pay any dividends.

The Company is a holding company with stockholders’ deficiency.

We do not have any material assets nor conduct any business operations other than our investment in the Operating Subsidiary.

Our business operations are conducted

primarily out of the Operating Subsidiary and certain of its subsidiaries.

As a result, in addition to the restrictions on payment of dividends that apply under the terms of our existing indebtedness and the limited liability company agreement of Operating Subsidiary (as defined below) (the “Operating Subsidiary LLC Agreement”), our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers from the Operating Subsidiary.

Our business operations are conducted primarily out of the Operating Subsidiary and certain of its subsidiaries.

As a result, in addition to the restrictions on payment of dividends that apply under the terms of our existing indebtedness and the limited liability company agreement of Operating Subsidiary (the “Operating Subsidiary LLC Agreement”), our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers from the Operating Subsidiary.

Payments to us from the Operating Subsidiary will be contingent upon its earnings and subject to any limitations on the ability of such entity to make payments or other distributions to us, including limitations contained in the Operating Subsidiary LLC Agreement.

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Subject to certain exceptions, the Operating Subsidiary must not, among other things:

(1) alter or change the rights, preferences or privileges of the Preferred Units or amend any of the Operating Subsidiary’s governing documents;

(1) alter or change the rights, preferences or privileges of the 10,449,863 Series A Redeemable Preferred Units (the “Preferred Units”) or amend any of the Operating Subsidiary’s governing documents;

(2) make any change in corporate form, including conversion to a corporation;

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(5) create any new class of units with preference over, or parity with, the Preferred Units;

(6) authorize, issue or reclassify any securities issued by New Subsidiary, its subsidiaries and controlled affiliates (the “Restricted Entities”), other than issuances of Common Units to the Company;

(6) authorize, issue or reclassify any securities issued by Operating Subsidiary, its subsidiaries and controlled affiliates (the “Restricted Entities”), other than issuances of Common Units to the Company;

(7) sell, issue, sponsor, create or distribute any digital tokens, cryptocurrency or other blockchain-based assets;

(8) incur new third party indebtedness exceeding $5.0 million, other than (A) debt contemplated by the TSA, (B) lease or other obligations relating to the rental of equipment to customers or otherwise for energy-as-a-service (EaaS) business activity and (C) debt permitted under the DIP Note Purchase Agreement (see Note 17 – Subsequent Events – DIP Note Purchase Agreement in the Notes to Consolidated Financial Statements);

(9) declare or pay distributions other than (A) for tax purposes and (B) distributions from the Operating Subsidiary’s subsidiaries or controlled affiliate to the Operating Subsidiary or its wholly owned subsidiaries;

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or (16) enter into any affiliated party transaction except for (A) payments to holders of Common Units (including the Company) in accordance with the terms of the Services Agreement (as defined below) and (B) compensation arrangements.

In addition, pursuant to the Operating Subsidiary LLC Agreement, the Company, its subsidiaries and controlled affiliates may not, without the consent of the holders of a majority of the Preferred Units held by the Preferred Members (which, on the effective date of the New Subsidiary LLC Agreement is solely Capstone Distributor Support Services, Inc.), engage in any business opportunities, make any investments or enter into any transactions, including any of the foregoing which are or would reasonably be expected to be within the scope of, or would reasonably be deemed to be beneficial to, the “Existing Business” (as defined in the Operating Subsidiary LLC Agreement) of Operating Subsidiary.

In addition, pursuant to the Operating Subsidiary LLC Agreement, the Company, its subsidiaries and controlled affiliates may not, without the consent of the holders of a majority of the Preferred Units held by the Preferred Members (which, on the effective date of the Operating Subsidiary LLC Agreement is solely Capstone Distributor Support Services, Inc.), engage in any business opportunities, make any investments or enter into any transactions, including any of the foregoing which are or would reasonably be expected to be within the scope of, or would reasonably be deemed to be beneficial to, the “Existing Business” (as defined in the Operating Subsidiary LLC Agreement) of Operating Subsidiary.

Further, pursuant to the Operating Subsidiary LLC Agreement, at any time during the six-month period following the sixth anniversary of the effective date of the Operating Subsidiary LLC Agreement, the Preferred Requisite Members may elect to have all, but not less than all, of the then outstanding Preferred Units redeemed.

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The aggregate price for Preferred Units will be an amount equal to the greater of (i) the $10,449,863, plus declared but unpaid distributions, or (ii) the fair market value of the Preferred Units on an as-converted to Common Units basis at the time of such redemption.

The Preferred Member’s 37.5% equity interest in the Operating Subsidiary is non-dilutable.

The Preferred Member’s 37.5% equity interest in Operating Subsidiary is non-dilutable.

See “Management’s Discussion and Analysis of Financial Condition—Operating Subsidiary LLC Agreement” for a more detailed description of the terms of the Operating Subsidiary LLC Agreement and the restrictions imposed on the Company and its subsidiaries pursuant to the Operating Subsidiary LLC Agreement.

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This Restatement was required to correct for the following:

(i) the timing of revenue recognition related to bill-and-hold arrangements, (ii) the timing of recognizing certain expenses associated with factory protection plan contracts.

These issues were investigated by our audit committee and (iii) reclassification of term not payable (the “Revenue Recognition Investigation”) and are addressed in the Restatement, as well as other immaterial misstatements.

(i) the timing of revenue recognition related to bill-and-hold arrangements, including the removal of certain finance leases derived from bill-and-hold arrangements;

(ii) the timing of recognizing certain expenses associated with factory protection plan contracts;

and (iii) reclassification of term note payable, as well as other immaterial misstatements.

Such Restatement:

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In addition, based on information learned as part of the Restatement process, the Audit Committee commenced an investigation (the “FPP Investigation” and, together with the Revenue Recognition Investigation, the “Audit Committee Investigations”) into FPP related practices.

The FPP Investigation was conducted with the assistance of outside counsel retained by the Audit Committee.

The Audit Committee Investigations were conducted with the assistance of outside counsel retained by the Audit Committee.

Through the FPP Investigation, the Audit Committee identified evidence that, at times during the fiscal years covered in this Annual Report, former senior executives delayed shipment of available parts under the FPP and delayed recording the associated expense on the Company’s financial statements.

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The financial statement impact of such activity in prior reporting periods, if any, has been addressed through the Company’s Restatement.

As part of the Restatement process, the Company corrected its accounting treatment of FPP expenses so that claims are recorded at the time a claim is received and accepted, as opposed to when the claim is satisfied.

Refer to Note 13 – Commitments and Contingencies – Legal Matters in the Notes to Consolidated Financial Statements and to “Business—Legal Proceedings” for information regarding legal proceedings in which we are involved.

As part of the Restatement process, the Company corrected its accounting treatment of sales and FPP expenses so that bill-and-hold sales are recorded when all elements for revenue recognition as a bill-and-hold sale have been met and claims under the FPP program are recorded at the time a claim is received and accepted, as opposed to when the claim is satisfied.

Refer to Note 14— Commitments and Contingencies in the Notes to Consolidated Financial Statements and to “Legal Proceedings” for information regarding legal proceedings in which we are involved.

The SEC enforcement division is conducting an investigation into the circumstances surrounding the Restatement, the results of which may have a material adverse effect on our financial condition and business.

Following the conclusion of each Audit Committee Investigations, the Audit Committee self-reported its findings to the Division of Enforcement of the SEC.

Following the self-report, the SEC enforcement division has commenced an investigation relating to the circumstances surrounding the Restatement and the findings of the Audit Committee in respect of the FPP Investigation (the “SEC Investigation”).

Following the conclusion of each Audit Committee Investigation, the Audit Committee self-reported its findings to the Division of Enforcement of the SEC.

Following the self-report, the SEC enforcement division has commenced an investigation relating to the circumstances surrounding the Restatement (the “SEC Investigation”).

We are cooperating with the SEC in connection with its investigation.

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Regardless of the outcome, the SEC Investigation has had and may continue to have an adverse impact on us because of legal costs, diversion of management resources, and other factors.

The SEC Investigation could also result in reputational harm to us, which, among

other things, may limit our ability to obtain new customers and enter into new agreements with our existing customers, or our ability to obtain financing, and have a material adverse effect on our current and future business, financial condition, results of operations and prospects.

The SEC Investigation could also result in reputational harm to us, which, among other things, may limit our ability to obtain new customers and enter into new agreements with our existing customers, or our ability to obtain financing, and have a material adverse effect on our current and future business, financial condition, results of operations and prospects.

We cannot predict the duration or outcome of the SEC Investigation at this time.

Further, as a result of the conclusions of the Revenue Recognition Investigation and the Restatement, certain of our directors and officers are currently the subject of securities class action litigation.

See Note 13 – Commitments and Contingencies – Legal Matters in the Notes to Consolidated Financial Statements and “Business—Legal Proceedings” for information about the SEC Investigation and legal proceedings involving the Company’s directors and officers.

The Restatement, as well as our reported material weaknesses in internal control over financial reporting (including the related disclosure of the Audit Committee Investigations made in this Annual Report on Form 10-K), may subject us to additional litigation or regulatory examinations, investigations, proceedings, or orders.

Further, as a result of the conclusions of the Revenue Recognition Investigation and the Restatement, certain of our current and former directors and officers are currently the subject of securities class action litigation.

See Note 14— Commitments and Contingencies in the Notes to Consolidated Financial Statements and “Legal Proceedings” for information about the SEC Investigation and legal proceedings involving the Company’s directors and officers.

subject us to additional litigation or regulatory examinations, investigations, proceedings, or orders.

Our management has devoted and may be required to devote significant time and attention to these matters.

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Although we maintain applicable insurance, we cannot be certain that our insurance coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.

We have incurred and expect to continue to incur significant expenses related to the Audit Committee Investigations, Restatement, and remediation of deficiencies in our internal control over financial reporting and disclosure controls and procedures, and any resulting litigation .

We have devoted substantial internal and external resources towards the Audit Committee Investigations and the Restatement and expect to continue to devote substantial such resources towards the implementation of enhanced procedures and controls over deficiencies that resulted in the Restatement and the remediation of other deficiencies in our internal control over financial reporting.

We have incurred and expect to continue to incur significant expenses related to remediation of material weaknesses in our internal control over financial reporting and disclosure controls and procedures, and any resulting litigation .

We have devoted substantial internal and external resources towards the Audit Committee Investigations and the Restatement and expect to continue to devote substantial such resources towards the implementation of enhanced procedures and controls over material weaknesses that resulted in the Restatement and the remediation of other deficiencies in our internal control over financial reporting.

Because of these efforts, we have incurred and expect that we will continue to incur significant fees and expenses for legal, accounting, financial, and other consulting and professional services, as well as the implementation and maintenance of systems and processes that will need to be updated, supplemented, or replaced.

We have taken a number of remediation efforts in response to the Audit Committee Investigations.

We have made a number of remediation efforts in response to the Audit Committee Investigations.

However, there can be no assurance that these steps will be successful.

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The incurrence of significant additional expense or the requirement that management devotes substantial time that could reduce the time available to execute on our business strategies, could have a material adverse effect on our business, financial condition, and results of operations.

The Audit Committee Investigations, the findings thereof, and the Restatement process have diverted, and may continue to divert, management and other human resources from the operation of our business.

The absence of timely and accurate financial information has hindered and may in the future hinder our ability to effectively manage our business.

The Audit Committee Investigations, the findings thereof, and the process of the Restatement have diverted, and may continue to divert, management and other human resources from the operation of our business.

Our Board, members of management, and accounting, legal, administrative and other staff and outside consultants have spent significant time on the Audit Committee Investigations, the findings thereof, and the process of the Restatement and will likely spend significant time on the remediation of disclosure controls and procedures and internal control over our financial reporting.

These resources have been, and will likely continue to be, diverted from the strategic and day-to-day management of our business, which may have an adverse effect on our results of operations, financial condition and ability to accomplish our strategic objectives.

Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public markets to raise debt or equity capital.

This Annual Report on Form 10-K for the year ended March 31, 2023 is being filed nearly one year after its due date and we have not yet filed our Quarterly Reports on Form 10-Q for the first three quarters of Fiscal 2024.

The Annual Report on Form 10-K for the year ended March 31, 2023 was filed nearly one year after its due date and our Quarterly Reports on Form 10-Q for the first three quarters of Fiscal 2024 and this Annual Report on Form 10-K were also not timely filed.

Because these filings have not been made within the timeframes required by SEC rules, we have not remained current in our reporting requirements with the SEC, and we will not be eligible to use a registration statement on Form S-3 that would allow us to continuously incorporate by reference our SEC reports into the registration statement, or to use “shelf” registration statements to conduct offerings, until approximately one year from the date we regain and maintain status as a current filer.

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Risks Related to Our Business Operations and Financial Results

Our independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern.

In connection with preparing the consolidated financial statements for the fiscal year ended March 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 Fiscal 2023 consolidated financial statements.

Management assessed that there were such conditions and events, primarily our current cash position, lack of liquidity, limits to accessing capital and debt funding options.

Management concluded, and our auditors agreed, that these conditions raise substantial doubt about our ability to continue as a going concern for a period of one year from the date the financial statements are issued.

The substantial doubt about our ability to continue as a going concern may negatively impact relationships with third parties with whom we do business, including customers, vendors and lenders, may impact our ability to raise additional capital for our business plan, and may lead us to seek bankruptcy protection again.

If we are unable to continue as a going concern, holders of our securities might lose their entire investment.

We are exposed to floating interest rate risk under the Exit Note Purchase Agreement, which could cause our debt service obligations to increase significantly.

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The occurrence of regional epidemics or a global pandemic may adversely affect our business, financial condition and results of operations.

For example, the COVID-19 pandemic has and could continue to materially and adversely affect our business, financial condition and results of operation.

For example, the COVID-19 pandemic has and could continue to materially and adversely affect our business, financial condition and results of operations.

The COVID-19 pandemic has also caused significant uncertainty and volatility in global financial markets.

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● the future costs and availability of fuels used by our microturbines;

● economic downturns and reductions in capital spending;

● consumer perceptions of our microturbines’ safety and quality;

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Further, we have at times undertaken programs to enhance the performance of units previously sold.

For example, our warranty provision was negatively impacted in Fiscal 2021 because of a supplier defect identified in fielded units.

In Fiscal 2021, a warranty reserve in the amount of $4.9 million was established related to reliability programs to account for the replacement of remaining high risk failure parts in some of our fielded units due to a supplier defect.

As of March 31, 2024, the balance for the warranty reserve was $1.4 million.

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For these and other reasons, the sales cycle associated with our products is typically lengthy and subject to several significant risks over which we have little or no control.

our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially.

We plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially.

If sales in any period fall significantly below anticipated levels, our financial condition, results of operations, and cash flow would suffer.

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As a result of these factors, a small fluctuation in timing of sales can cause operating results to vary materially from period to period.

Further, our inventory balance as of March 31, 2023 was $40.4 million, compared to $31.8 million as of March 31, 2022, as restated.

This increase was due to purchases of long lead time inventory, and there is a risk that our inventory balances continue to rise, and consequently see a backlog of obsolete or excess inventory.

Net product orders for Fiscal 2024 were $20.1 million and contributed to an ending backlog of $14.2 million at March 31, 2024.

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Following Russia’s military invasion of Ukraine in March 2022, we re-evaluated our efforts in the Russian and the surrounding CIS markets and have ceased exploring growth opportunities in such markets.

We do, however, continue to

evaluate customer orders and ensure that we are in compliance with all laws and regulations upon acceptance and before shipment.

We do, however, continue to evaluate customer orders and ensure that we are in compliance with all laws and regulations upon acceptance and before shipment.

If we are unable to conduct business with new or existing customers or pursue opportunities with sanctioned countries, including Russia, our business, including our revenue, profitability, and cash flows, could be materially adversely affected.

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At any given time, we may be in disputes with one or more distribution partners.

See Note 14— Commitments and Contingencies in the Notes to Consolidated Financial Statements and “Legal Proceedings” for information about the Company’s legal proceedings with Cal Microturbine.

Any such dispute could result in lengthy and costly litigation, even if the outcome is ultimately in our favor.

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A contractual dispute with a distribution partner may result in our or our distribution partner seeking to terminate the related distribution agreement, even if such termination would be wrongful, which could harm our business or interfere with a previously agreed wind down of the relationship or transition of end-user service agreements.

Any prolonged disruptions of our distribution channels that results from the termination of one or more of our distributions or our failure to renew our distribution agreements with our desired distributors, could negatively affect our ability to effectively sell our products and would materially and adversely affect our business, financial condition, results of operations and prospects.

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

Any prolonged disruptions of our distribution channels that results from the termination of one or more of our distributions or our failure to renew our

distribution agreements with our desired distributors, could negatively affect our ability to effectively sell our products and would materially and adversely affect our business, financial condition, results of operations and prospects.

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

Our accounts receivable balance, net of allowances, was $6.6 million and $7.1 million as of March 31, 2024 and 2023, respectively.

Days sales outstanding in accounts receivable (“DSO”) at the end of Fiscal 2023 was 46 days, compared with 90 days at the end of Fiscal 2022.

We recorded net bad debt expense of approximately $4.3 million and $0.4 million during Fiscal 2023 and 2022, respectively.

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

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

Our days sales outstanding (“DSO”) in accounts receivable at the end of Fiscal 2024 was 27 days, compared with 46 days at the end of Fiscal 2023.

We recorded net credit loss expense of approximately $0.4 million and $4.3 million during Fiscal 2024 and 2023, respectively.

No assurances 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 results of operations and cash flows.

Loss of a significant customer could have a material adverse effect on our results of operations.

E-Finity and RSP Systems accounted for approximately 12% and 11%, respectively, of our revenue for Fiscal 2023.

Additionally, E-Finity accounted for 12% of net accounts receivable as of March 31, 2023.

The loss of E-Finity, RSP Systems, or any other significant customer could have a material adverse effect on our results of operations and financial condition.

Cal Microturbine and E-Finity accounted for approximately 16% and 13%, respectively, of our revenue for Fiscal 2024.

Additionally, Supernova and CES accounted for 14% and 11%, respectively, of net accounts receivable as of March 31, 2024.

The loss of Cal Microturbine, E-Finity, or any other significant customer could have a material adverse effect on our results of operations and financial condition.

We may not achieve production cost reductions necessary to competitively price our products, which would adversely affect our sales.

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If we are successful in executing our business plan, we will experience growth in our business that could place a significant strain on our business operations, management, and other resources.

Our ability to manage our growth will

require us to expand our production capabilities, continue to improve our operational, financial and management information systems, and to motivate and effectively manage our employees.

Our ability to manage our growth will require us to expand our production capabilities, continue to improve our operational, financial and management information systems, and to motivate and effectively manage our employees.

We cannot provide assurance that our systems, procedures and controls, or financial resources will be adequate, or that our management will keep pace with this growth.

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The failure of our personnel to execute our strategy or our failure to retain management and personnel could have a material adverse effect on our business.

In March 2022, we implemented an expense reduction plan, which included furloughs, employment terminations, and pay cuts.

In May 2023, we implemented a second round of expense reductions, which included furloughs to employees.

In May 2023, we implemented an expense reduction plan, which included furloughs to employees.

We also recently suffered departures of other key personnel, including in accounting/finance and information technology.

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The demand for skilled workers is currently high.

We face an increasingly competitive labor market due to sustained labor shortages in part from the COVID-19 pandemic and are subject to inflationary pressures on employee wages and salaries which may increase labor costs.

We face an increasingly competitive labor market due to sustained labor shortages and are subject to inflationary pressures on employee wages and salaries which may increase labor costs.

In addition, we have already experienced involuntary turnover due to increased commuting costs for our employees.

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See “— Our management has identified material weaknesses in its internal control over financial reporting and we determined that our disclosure controls and procedures were ineffective as of March 31, 2024.

Our operations are vulnerable to interruption by fire, earthquake, riots, domestic and international instability, war, terrorism, geopolitical events and other events beyond our control.

Our executive offices, manufacturing facility, and auxiliary inventory storage facility are located in Southern California.

Our executive offices, manufacturing facility, and

auxiliary inventory storage facility are located in Southern California.

Because the Southern California area is located in an earthquake-sensitive area and because we have no redundancy facility located within or outside of Southern California, we are particularly susceptible to the risk of damage to, or total destruction of, our facilities in Southern California and the surrounding transportation infrastructure, which could affect our ability to make and transport our products.

While we take

steps to mitigate the impact of severe weather and environmental and natural disasters, the frequency and severity of which may be impacted by climate change and other natural and manmade events, such events could result in severe disruption to our business operations at these facilities.

While we take steps to mitigate the impact of severe weather and environmental and natural disasters, the frequency and severity of which may be impacted by climate change and other natural and manmade events, such events could result in severe disruption to our business operations at these facilities.

The combination of high inflation, illegal immigration, the cost of living, and reduced spending on law enforcement in and around our location in Southern California poses an elevated risk of social disturbances and riots.

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The potential impacts of climate change on our customers, product offerings, operations, facilities, and suppliers are accelerating and uncertain, as they will be particular to local and customer-specific circumstances.

These potential impacts may include, among other items, physical long-term changes in freshwater availability and the frequency and severity of weather events as well as customer product changes either through preference or regulation.

These potential impacts may include,

among other items, physical long-term changes in freshwater availability and the frequency and severity of weather events as well as customer product changes either through preference or regulation.

Concerns regarding climate change may lead to additional international, national, regional and local legislative and regulatory responses.

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Our operating results are dependent, in large part, upon the successful commercialization of our products.

Failure to produce our products as scheduled and budgeted would materially and adversely affect our business and financial condition.

Failure to produce our products as scheduled and budgeted could materially and adversely affect our business and financial condition.

We cannot be certain that we will deliver ordered products in a timely manner.

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We may experience delays in production if we fail to identify alternative suppliers or if any parts supply is interrupted, each of which could materially adversely affect our business and operations.

In addition, the COVID-19 pandemic caused labor shortages and disrupted global supply chains, which has contributed to prolonged disruptions.

The COVID-19 pandemic also contributed to growing inflationary pressures.

In order to reduce manufacturing lead times and ensure adequate component supply, we enter into agreements with certain suppliers that allow them to procure inventories based upon criteria defined by us.

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The pricing could impact the costs to manufacture our products.

During Fiscal 2023 and 2022, as a result of COVID-19 and other ongoing macroeconomic events, we saw significant price increases in the cost of our commodity materials.

During Fiscal 2024 and 2023, we saw significant price increases in the cost of our commodity materials.

If we are not able to acquire commodity materials at prices and on terms satisfactory to us or at all, our operating results may be materially adversely affected.

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They have substantially greater resources than we do and have established worldwide presence.

Because of greater resources, some of our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, to devote greater resources to the promotion and sale of their products than we can or lobby for governmental regulations and policies to create competitive advantages vis-à-vis our products.

Because of greater resources, some of our competitors may be able to adapt more quickly to new or emerging technologies, including artificial intelligence, and changes in customer requirements, to devote greater resources to the promotion and sale of their products than we can or lobby for governmental regulations and policies to create competitive advantages vis-à-vis our products.

We believe that developing and maintaining a competitive advantage will require continued investment by us in product development and quality, as well as attention to product performance, our product prices, our conformance to industry standards, manufacturing capability, and sales and marketing.

In addition, current and potential competitors have established or may in the future establish collaborative relationships among themselves or with third parties, including third parties with whom we have business relationships.

In addition, current and potential competitors have established or may in the future establish collaborative relationships among themselves or with third parties, including third parties with whom

we have business relationships.

Accordingly, new competitors or alliances may emerge and rapidly acquire significant market share.

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In addition, a worsening of these conditions may have a material adverse impact on certain of our customers’ liquidity and financial positions, resulting in further spending reductions, delays in the collection of amounts owing to us, and other similar adverse effects.

Despite a recent increase in oil prices, we have not yet seen a corresponding significant increase in sales activity, primarily due to the customers in our natural resources market vertical not yet increasing their spend on capital expenditures that would include our microturbine product.

Our sales and results of operations could be materially and adversely impacted by risks inherent in international markets.

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Additionally, we need to reduce the total installed cost of our microturbines to enhance market opportunities.

Our inability to improve the quality of applications, installation and service while reducing associated costs could affect the marketability of our products.

inability to improve the quality of applications, installation and service while reducing associated costs could affect the marketability of our products.

Changes in our product components may require us to replace parts held at distributors.

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Any reduction or termination of such programs could increase the cost to our potential customers, making our systems less desirable, and thereby adversely affect our revenue and other operating results.

We and certain of our former directors and officers are subject to various legal proceedings.

We and certain of our current and former directors and officers are subject to various legal proceedings.

We are currently involved in the SEC Investigation and certain of our current and former directors and officers are involved in stockholder litigation related to our Restatement, and we and our directors and officers may be named as defendants in other types of legal proceedings in the future.

See “— We are involved in an ongoing government investigation by the SEC, the results of which may have a material adverse effect on our financial condition and business .”

that the Company breached its distributor agreement with Cal Microturbine and committed fraud in allowing another company, Capstone Engineered Solutions, to sell, rent and service turbines in Cal Microturbine’s exclusive territory under the distribution agreement.

The matter is in its preliminary stages with no hearing date set as of the date hereof.

On March 13, 2024, Cal Microturbine, a distributor of the Company, submitted a demand for arbitration before the American Arbitration Association seeking, among other things, approximately $24.5 million in damages and alleging that the Company breached its distributor agreement with Cal Microturbine and committed fraud in allowing another company, Capstone Engineered Solutions, to sell, rent and service turbines in Cal Microturbine’s exclusive territory under the distribution agreement.

On August 18, 2024, Cal Microturbine amended its complaint and reduced its damage claim to $18.8 million.

See “Legal Proceedings” for discussion of this and other legal proceedings faced by the Company.

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Further, our insurance coverage is limited for these and other claims against us, and we may not have adequate insurance or financial resources to pay for our liabilities or losses from any such claims.

See Note 13 – Commitments and Contingencies – Legal Matters in the Notes to Consolidated Financial Statements for information about legal proceedings involving the Company.

See Note 14— Commitments and Contingencies in the Notes to Consolidated Financial Statements for information about legal proceedings involving the Company.

Risks Related to Data, Security, and Intellectual Property

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6 of our 16 active U.S.

patents expired in 2023 and 2024.

patents expired in 2024.

In addition, we cannot be certain that we do not or will not infringe third parties’ intellectual property rights.

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Given the nature of our business, we collect, process, and retain sensitive and confidential customer and associated data, in addition to proprietary business information.

Our business, including our turbines and related energy assets, may be vulnerable to a data compromise, computer viruses, physical and electronic break-ins and manipulations and similar disruptions, which may not be prevented by our efforts to secure our computer systems and assets, which include vulnerability scans and patching, network firewalls, identity and access management, data encryption, intrusion detection and prevention devices.

Our cybersecurity efforts may not be able to prevent rapidly evolving types of cyber-attacks, and

a successful breach of our computer systems could result in the misappropriation of personal, payment or sensitive business information, as well as, among other things, unfavorable publicity, litigation by affected parties, damage to sources of competitive advantage, disruptions to our operations, loss of customers, financial obligations for damages related to the theft or misuse of such information, and costs to remediate such security vulnerabilities, any of which could have a substantial impact on our results of operations, financial condition or cash flows.

vulnerability scans and patching, network firewalls, identity and access management, data encryption, intrusion detection and prevention devices.

Our cybersecurity efforts may not be able to prevent rapidly evolving types of cyber-attacks, and a successful breach of our computer systems could result in the misappropriation of personal, payment or sensitive business information, as well as, among other things, unfavorable publicity, litigation by affected parties, damage to sources of competitive advantage, disruptions to our operations, loss of customers, financial obligations for damages related to the theft or misuse of such information, and costs to remediate such security vulnerabilities, any of which could have a substantial impact on our results of operations, financial condition or cash flows.

Both the frequency and magnitude of cyberattacks is expected to increase and attackers are becoming more sophisticated.

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Further, additional weaknesses in our internal control over financial reporting may be discovered in the future.

financial statements and satisfy our public reporting obligations within required time periods, could be adversely affected.

If we are unable to remediate our material weaknesses and otherwise implement and maintain effective internal control over financial reporting, our ability to record, process and report financial information accurately, and to prepare financial statements and satisfy our public reporting obligations within required time periods, could be adversely affected.

If we identify any new material weaknesses in the future, any such newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements.

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Once trading in the New Common Stock commences, the market price of our New Common Stock is likely to be highly volatile and you could lose all or part of your investment in our securities.

There is no history trading activity for our New Common Stock.

There is no historical trading activity for our New Common Stock.

See “— There is currently no public trading market for our New Common Stock .” An investment in our securities is risky, and stockholders could lose their investment in our securities or suffer significant losses and wide fluctuations in the market value of their investment.

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This type of litigation, regardless of whether we prevail on the underlying claim, could result in substantial costs and a diversion of management’s attention and resources, which could materially harm our financial condition, results of operations and cash flow.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable independent research about our business, our stock price and trading volume could decline.

The trading market for our New Common Stock will depend in part on the research and reports that securities or industry analysts publish about us or our business.

We do not have any control over these analysts.

If one or more of the analysts that covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline.

If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Provisions in our certificate of incorporation and bylaws, as well as Delaware law, may discourage, delay or prevent a merger or acquisition at a premium price.

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Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our securities if the price of our New Common Stock increases

Unresolved Staff Comments.

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-K

Item 1A. Risk Factors