Capstone Green Energy Holdings Inc

To the Stockholders and Board of Directors of

Capstone Green Energy Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Capstone Green Energy Corporation (the “Company”) as of March 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity (deficiency) and cash flows for each of the two years in the period ended March 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph – Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventory Reserves

The Company’s gross inventory and inventory reserve totaled approximately $42.9 million and $2.5 million as of March 31, 2023, respectively. In addition, approximately $3.1 million of inventory was classified as long-term on the Company’s consolidated balance sheet. As described in Note 2 to the consolidated financial statements, management values inventories at the lower of cost (determined on a first-in-first-out basis) or net realizable value and estimates a potential reserve for obsolete or slow-moving goods. In determining this estimate, the Company will both (a) perform a monthly analysis to compare the previous 36-month usage of its inventory to the current quantities on hand and (b) judgmentally review their reserve estimate for any non-recurring adjustments that may be necessary based on their knowledge of the business. Changes in the assumptions used could have a significant impact on the valuation of inventory.

The principal considerations for our determination that performing procedures relating to the inventory reserve is a critical audit matter are (i) the significant judgement required by management when determining the estimate for the inventory reserve; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s estimate and significant assumptions related to the inventory reserve.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included:

Revenue Recognition – Bill and Hold Transactions

The Company’s revenues totaled approximately $73.9 million for the year ended March 31, 2023. During the year ended March 31, 2023, the Company utilized third-party warehouses in the normal course of business to store customer-ordered equipment for various periods of time until such customers we ready to take delivery of the equipment. Such transactions, which are commonly referred to as Bill-and-Hold transactions, required the Company to evaluate whether or not revenue is properly recognized in connection with the ASC 606. The Company has historically failed to properly identify and apply the appropriate guidance under ASC 606 to such transactions, which has resulted in the identification of material weaknesses in internal controls over financial reporting.

The principal consideration for our determination that performing procedures related to bill and hold transactions was a critical audit matter was the high degree of effort in performing the audit procedures to test such transactions.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included the following:

Factory Protection Plan Liability

The Company’s factory protection plan (“FPP”) liability as of March 31, 2023 was $10.8 million. The Company accounts for the costs of such factory protection plans at the time the customer orders the spare part. The Company has historically failed to properly identify and apply the appropriate accounting guidance to such transactions, which has resulted in the identification of material weaknesses in internal controls over financial reporting.

The principal consideration for our determination that performing procedures related to the FPP liability was a critical audit matter was the high degree of effort in performing the audit procedures to test such transactions.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included the following:

/s/ Marcum LLP

Marcum LLP

We have served as the Company’s auditor since 2017.

Los Angeles, CA

June 12, 2024