1. Description of the Company and Basis of Presentation

Capstone Turbine Corporation (the “Company”) develops, manufactures, markets and services microturbine technology solutions for use in stationary distributed power generation applications, including cogeneration (combined heat and power (“CHP”), integrated combined heat and power (“ICHP”), and combined cooling, heat and power (“CCHP”)), renewable energy, natural resources and critical power supply. In addition, the Company’s microturbines can be used as battery charging generators for hybrid electric vehicle applications. The Company was organized in 1988 and has been commercially producing its microturbine generators since 1998.

The Company has incurred significant operating losses since its inception. Management anticipates incurring additional losses until the Company can produce sufficient revenue to cover its operating costs. To date, the Company has funded its activities primarily through private and public equity offerings. This Annual Report on Form 10‑K (this “Form 10‑K”) refers to the Company’s fiscal years ending March 31 as its “Fiscal” years.

The consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company continues to be negatively impacted by the softness of the global oil and gas markets, a substantially stronger U.S. dollar (making our products more expensive overseas) and ongoing geopolitical tensions in Russia, North Africa and Middle East. The Company’s net loss from operations for the Fiscal years ended 2016, 2015 and 2014 was $24.5 million, $30.9 million and $15.3 million, respectively. Management believes that the Company will make progress on its path to profitability by improving its net loss from operations through lowering its operating costs and the continued development of other geographical and vertical markets. The Company’s cash and cash equivalents as of March 31, 2016 and 2015 were $11.7 million ($16.7 million when combined with restricted cash related to the line of credit (the “Credit Facility”)) with Wells Fargo Bank, National Association (“Wells Fargo”) and $32.2 million, respectively. See Note 11—Revolving Credit Facility for discussion of the Credit Facility. Cash and cash equivalents and restricted cash, less the amount outstanding under the Credit Facility, was $7.2 million and $19.3 million as of March 31, 2016 and March 31, 2015, respectively. Although the Company realized working capital improvements during Fiscal 2016 because of a reduction in finished goods inventory, the Company’s working capital requirements for Fiscal 2016 were higher than planned, primarily as a result of lower than expected revenue, slower collection of accounts receivable and lower than anticipated inventory turns. Additionally, the Company has an at-the-market offering program in place pursuant to which the Company may offer and sell, from time to time after the lock up period at its sole discretion, shares of its common stock. See Note 9— Underwritten and Registered Direct Placement of Common Stock for disclosure with respect to the at-the-market offering program. The Company completed an underwritten public offering on April 22, 2016 in which it sold shares of common stock. See Note 15— Subsequent Events for discussion with respect to this public offering. In connection with this underwritten public offering, the Company is subject to a lock up with respect to the at-the-market offering program that expires in September 2016.

Based on management’s projections, free cash of approximately $7.2 million (cash, cash equivalents and restricted cash less amounts outstanding under the Credit Facility) and net proceeds of approximately $13.1 million from the April 22, 2016 underwritten public offering are sufficient to meet the Company’s anticipated cash needs for working capital and capital expenditures for at least the next twelve months. If revenue is less than management’s projections, management has the ability to reduce expenses to extend its liquidity to provide adequate resources for a similar period of time. In addition, management has the ability to manage certain operating assets and liabilities, specifically the procurement of inventory and timing of payments of accounts payable, capital expenditures and certain operating expenses depending on the results of its operations to preserve its cash and cash equivalents.

If revenue declines at a greater rate than contemplated above or if management cannot reduce expenses to offset the lower revenue and extend its liquidity, the Company would need additional financing. Until such time as the Company can generate positive cash flows from operations, the Company likely will continue to have a need for additional capital. The Company may seek to raise funds by selling additional securities after the lock up period (through the at-the-market offering discussed above or some other offering) to the public or to selected investors or by obtaining additional debt financing.  There is no assurance that the Company will be able to obtain additional funds on commercially favorable terms or at all. If the Company raises additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be reduced. In addition, any equity or debt securities that the Company would issue may have rights, preferences or privileges senior to those of the holders of its common stock. Should the Company be unable to execute its plans (including raising funds through the at-the-market offering program after the lock up period and maintaining availability under its Credit Facility) or obtain additional financing that may be needed, the Company may need to significantly reduce its operations. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

On November 6, 2015, the Company filed a Certificate of Amendment to its Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a 1-for-20 reverse stock split of the issued and outstanding shares of the Company’s common stock, par value $0.001 per share, effective as of 4:30 p.m. Eastern Standard Time on the filing date. For purposes of presentation, all share and per share information and instruments outstanding under stock plans contained in this report on Form 10-K has been retroactively adjusted to reflect the reverse stock split.

The consolidated financial statements include the accounts of the Company, Capstone Turbine International, Inc., its wholly owned subsidiary that was formed in June 2004, Capstone Turbine Singapore Pte., Ltd., its wholly owned subsidiary that was formed in February 2011, and Capstone Turbine Financial Services, LLC, its wholly owned subsidiary that was formed in October 2015, after elimination of inter-company transactions.