13. Temporary Equity

Overview

As of March 31, 2026, the Company's temporary equity consists solely of the Redeemable Series A Convertible Preferred Stock issued on March 31, 2026, in connection with the March 2026 PIPE. The Operating Subsidiary's Redeemable Preferred Units, which had been classified as temporary equity in prior periods, were fully redeemed on March 31, 2026, as described below.

Part I — Redeemable Preferred Units (Extinguished March 31, 2026)

Issuance and Terms

In connection with the Company's emergence from Chapter 11 bankruptcy on December 7, 2023 (the "Effective Date"), the Operating Subsidiary issued 10,449,863 Preferred Units to Capstone Distributor Support Services Corporation ("CDSS"), an entity controlled by Goldman Sachs. The Preferred Units represented an aggregate 37.5% equity ownership interest in the Operating Subsidiary (the "Aggregate Purchase Price") and were classified as temporary equity due to their redeemable nature.

The Preferred Units provided CDSS with the following rights:

None of the Preferred Units were converted into Common Units prior to their redemption.

Valuation and Measurement

The Preferred Units were initially measured at fair value upon issuance using an option-pricing method ("OPM") under ASC 480-10-S99-3A, which treats the common and preferred units as call options on the enterprise value of the Operating Subsidiary with exercise prices based on the liquidation preference of the Preferred Units. The enterprise value used in the OPM was the value agreed upon by the parties in connection with the restructuring as approved by the U.S. Bankruptcy Court. The initial fair value was established at $13.9 million.

Subsequent remeasurement of the Preferred Units followed the HLBV method, with the maximum redemption value defined under the Capstone Green Energy LLC Agreement as the greater of (i) the share price of CGEH common stock (if publicly traded), with appropriate adjustments, or (ii) the Aggregate Purchase Price plus declared but unpaid dividends. The carrying value of the Preferred Units was not reduced below the initial recorded value of $13.9 million, consistent with the guidance in ASC 480-10-S99.

For fiscal years ended March 31, 2026 and March 31, 2025, the Company's common stock was publicly traded on the OTCQX Best Market. As of March 31, 2025, the closing price of CGEH common stock was $0.75 per share. The maximum redemption value as of March 31, 2025 did not exceed the initial fair value of $13.9 million; accordingly, no adjustment to the carrying value was recorded for Fiscal 2025.

Earnings Allocation

For the fiscal year ended March 31, 2026, the Company reported net income of $2.8 million, or $0.14 per basic share. However, net loss attributable to common stockholders was $66.8 million, or $3.21 per basic and diluted share, after deducting a non-cash deemed dividend of $69.6 million representing the accretion of the Operating Subsidiary's Redeemable Preferred Units to their maximum redemption value immediately prior to their full redemption on March 31, 2026. Accordingly, net income was allocated between controlling and noncontrolling interests pursuant to the HLBV method. For the fiscal year ended March 31, 2025, the Company reported a net loss; therefore, no allocation of losses was made to the noncontrolling interest, as the holder's contractual liquidation preference protected it from absorbing losses.

Redemption

On March 29, 2026, the Operating Subsidiary and the Company entered into a Preferred Unit Redemption Agreement with CDSS, providing for the full redemption of all outstanding Preferred Units for a redemption price of $83.5 million. The redemption closed on March 31, 2026, and was funded using a portion of the net proceeds from the March 2026 PIPE. As a result of the redemption, CDSS no longer holds any equity interest in the Operating Subsidiary, and Capstone Green Energy LLC is now a wholly owned subsidiary of the Company. The Preferred Units are no longer outstanding as of March 31, 2026. See Note 15 for additional information.

The following table presents the activity in the Redeemable Preferred Units for the fiscal years presented (in thousands):

Part II — Redeemable Series A Convertible Preferred Stock

Issuance

On March 31, 2026, in connection with the March 2026 PIPE, the Company issued 80,000 shares of Redeemable Series A Convertible Preferred Stock (the "Redeemable Series A Preferred Stock") to funds managed by Monarch Alternative Capital LP ("Monarch") at a stated value of $1,000 per share, for an aggregate purchase price of $80.0 million. The Certificate of Designation establishing the Redeemable Series A Preferred Stock was filed with the Secretary of State of the State of Delaware and became effective on March 31, 2026. As redemption of the Redeemable Series A Preferred Stock is not solely within the Company's control, it is classified as temporary equity in accordance with ASC 480.

Holders of the Series A Preferred Stock are entitled to vote together with common stockholders on an as-converted basis, possess separate class voting rights over certain significant corporate actions, and have the right to designate directors to the Company’s board of directors, subject to certain ownership thresholds. The Series A Preferred Stock is convertible at the option of the holder into shares of common stock at an initial conversion price of $5.00 per share, subject to certain anti-dilution adjustments.

Dividends

The Redeemable Series A Preferred Stock accrues a cumulative paid-in-kind ("PIK") dividend at an initial rate of 5.00% per annum on the original issue price, as increased by prior PIK dividends, compounding annually. The PIK dividend accrues daily from the date of issuance and compounds on each anniversary thereof automatically, without any requirement for declaration by the Company. Beginning on June 30, 2030, the Company may elect to pay accrued and unpaid dividends for any quarterly period in cash, provided the Company satisfies minimum earnings, leverage, and liquidity requirements (the "Minimum Financial Metrics"). The Redeemable Series A Preferred Stock also participates in any dividends or distributions paid on the common stock on an as-converted basis.

The dividend rate is subject to increase as follows:

Conversion

The Series A Preferred Stock is initially recorded at its allocated purchase price, net of $6.0 million of issuance costs. Subsequent measurement depends on whether the instrument is currently redeemable or probable of redemption. If redemption becomes probable, or if the instrument becomes currently redeemable, the carrying amount is adjusted to its redemption value in accordance with applicable SEC guidance. As of March 31, 2026, the Series A Preferred Stock is not currently redeemable or probable of redemption and, therefore, is not currently subject to remeasurement. Cumulative dividends, which are paid-in-kind by increasing the accreted value of the shares, are recorded as an increase to the carrying amount of the redeemable preferred stock at a dividend rate of 5% per annum.

Additionally, two features within the Series A Preferred Stock provide for potential cash payment upon the occurrence of certain events. These features were identified as embedded derivatives requiring bifurcation. The issuance-date fair values of these embedded derivatives were determined to be de minimis due to the likelihood of a triggering event occurring.

Optional Conversion: Each share of Redeemable Series A Preferred Stock is convertible at the holder's election at any time into a number of shares of common stock equal to (x) the original issue price of such share, plus accrued PIK dividends, divided by (y) the then-applicable conversion price. The initial conversion price is $5.00 per share, subject to customary anti-dilution adjustments.

Mandatory Conversion (Forced Conversion): Following a listing of the Company's common stock on a U.S. national securities exchange, the Company will have the right to require conversion of all outstanding Redeemable Series A Preferred Stock into common stock at the then-applicable conversion price if the volume-weighted average trading price of the common stock equals or exceeds $15.00 for at least 20 out of 30 consecutive trading days, subject to conditions including an effective resale registration statement, average daily trading volume of at least $5 million in value for at least 20 out of 30 consecutive trading days, and a publicly traded float of no less than $425 million.

As of March 31, 2026, 80,000 shares of Redeemable Series A Preferred Stock were outstanding, representing 16,000,000 shares of common stock on an as-converted basis at the initial conversion price of $5.00 per share.

Redemption

The Redeemable Series A Preferred Stock is redeemable at the option of the holder upon certain breaches by the Company, subject to available funds and the restrictions of the Exit Note Purchase Agreement. As redemption is contingent upon certain events not solely within the Company's control, Redeemable Series A Preferred Stock is classified as temporary equity rather than permanent equity.

Governance Rights

So long as Monarch holds at least 20% of the Company's common stock on an as-converted basis, it has the right to appoint two independent directors to the Board. Monarch retains the right to appoint one director while holding at least 10% on an as-converted basis, and board observer rights at 5% ownership. Monarch also holds broad consent rights over major corporate actions while a substantial portion of the Redeemable Series A Preferred Stock remains outstanding, and a potential board reconstitution right if the accreted value of the preferred exceeds $45 million after five years.

Registration Rights

In connection with the issuance of the Redeemable Series A Preferred Stock, the Company entered into a registration rights agreement pursuant to which the Company agreed to file a resale registration statement with the SEC registering the resale of the shares of common stock underlying the Redeemable Series A Preferred Stock within 30 days of the closing date.

The following table presents the activity in the Redeemable Series A Convertible Preferred Stock since issuance (in thousands):