NN INC 10-Q

Item 1. Financial Statements NN, Inc. Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share data) 2022 2021 2022 2021 Net sales $ 127,297 $ 117,244 $ 380,726 $ 367,205 Cost of sales (exclusive of depreciation and amortization shown separately below) 108,033 98,642 316,500 298,127 Selling, general, and administrative expense 10,205 12,181 38,453 40,341 Depreciation and amortization 11,193 11,605 33,962 34,860 Other operating expense (income), net ( 17 ) ( 572 ) 1,862 ( 901 ) Loss from operations ( 2,117 ) ( 4,612 ) ( 10,051 ) ( 5,222 ) Interest expense 3,746 3,578 10,673 9,175 Loss on extinguishment of debt and write-off of debt issuance costs — — — 2,390 Derivative payments on interest rate swap — — — 1,717 Loss on interest rate swap — — — 2,033 Other income, net ( 1,156 ) ( 4,346 ) ( 4,219 ) ( 2,788 ) Loss before benefit (provision) for income taxes and share of net income from joint venture ( 4,707 ) ( 3,844 ) ( 16,505 ) ( 17,749 ) Benefit (provision) for income taxes 1,068 ( 375 ) ( 1,514 ) 612 Share of net income from joint venture 1,424 842 3,935 3,456 Net loss $ ( 2,215 ) $ ( 3,377 ) $ ( 14,084 ) $ ( 13,681 ) Other comprehensive income (loss): Foreign currency translation loss $ ( 7,653 ) $ ( 2,612 ) $ ( 13,543 ) $ ( 1,550 ) Interest rate swap: Change in fair value, net of tax 904 ( 176 ) 2,464 ( 176 ) Reclassification adjustment for losses (gains) included in net loss, net of tax ( 116 ) 22 ( 51 ) 2,873 Other comprehensive income (loss) $ ( 6,865 ) $ ( 2,766 ) $ ( 11,130 ) $ 1,147 Comprehensive loss $ ( 9,080 ) $ ( 6,143 ) $ ( 25,214 ) $ ( 12,534 ) Basic net loss per common share: Net loss per common share $ ( 0.11 ) $ ( 0.13 ) $ ( 0.49 ) $ ( 0.75 ) Weighted average common shares outstanding 44,711 44,455 44,670 43,862 Diluted net loss per common share: Net loss per common share $ ( 0.11 ) $ ( 0.13 ) $ ( 0.49 ) $ ( 0.75 ) Weighted average common shares outstanding 44,711 44,455 44,670 43,862 See notes to condensed consolidated financial statements (unaudited). 3 Table of Contents NN, Inc. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except per share data) September 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 12,551 $ 28,656 Accounts receivable, net of allowances of $ 1,476 and $ 1,352 at September 30, 2022 and December 31, 2021, respectively 83,496 71,419 Inventories 84,172 75,027 Income tax receivable 11,104 11,808 Other current assets 12,768 9,372 Total current assets 204,091 196,282 Property, plant and equipment, net of accumulated depreciation of $ 214,254 and $ 197,936 at September 30, 2022 and December 31, 2021, respectively 195,084 209,105 Operating lease right-of-use assets 46,164 46,443 Intangible assets, net 77,958 88,718 Investment in joint venture 28,193 34,045 Deferred tax assets 375 314 Other non-current assets 5,750 4,194 Total assets $ 557,615 $ 579,101 Liabilities, Preferred Stock, and Stockholders’ Equity Current liabilities: Accounts payable $ 45,107 $ 36,710 Accrued salaries, wages and benefits 13,024 17,739 Income tax payable 902 2,072 Current maturities of long-term debt 3,150 3,074 Current portion of operating lease liabilities 5,033 5,704 Other current liabilities 11,351 8,718 Total current liabilities 78,567 74,017 Deferred tax liabilities 6,408 7,456 Long-term debt, net of current portion 154,351 151,052 Operating lease liabilities, net of current portion 51,102 51,295 Other non-current liabilities 10,635 17,289 Total liabilities 301,063 301,109 Commitments and contingencies (Note 9) Series D perpetual preferred stock - $ 0.01 par value per share, 65 shares authorized, issued and outstanding at September 30, 2022 and December 31, 2021, respectively 61,786 53,807 Stockholders' equity: Common stock - $ 0.01 par value per share, 90,000 shares authorized, 43,882 and 43,027 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively 439 430 Additional paid-in capital 470,543 474,757 Accumulated deficit ( 233,184 ) ( 219,100 ) Accumulated other comprehensive loss ( 43,032 ) ( 31,902 ) Total stockholders’ equity 194,766 224,185 Total liabilities, preferred stock, and stockholders’ equity $ 557,615 $ 579,101 See notes to condensed consolidated financial statements (unaudited). 4 Table of Contents NN, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity Three Months Ended September 30, 2022 and 2021 (Unaudited) Common Stock Accumulated deficit Accumulated other comprehensive income (loss) (in thousands) Number of shares Par value Additional paid-in capital Total Balance as of June 30, 2022 43,884 $ 439 $ 473,019 $ ( 230,969 ) $ ( 36,167 ) $ 206,322 Net loss — — — ( 2,215 ) — ( 2,215 ) Dividends accrued for preferred stock — — ( 2,783 ) — — ( 2,783 ) Share-based compensation expense ( 2 ) — 991 — — 991 Change in estimate of share-based award vesting — — ( 684 ) — — ( 684 ) Change in fair value of interest rate swap, net of tax of $ 241 — — — — 904 904 Reclassification of interest rate swap settlement to net loss, net of tax of $( 30 ) — — — — ( 116 ) ( 116 ) Foreign currency translation loss — — — — ( 7,653 ) ( 7,653 ) Balance as of September 30, 2022 43,882 $ 439 $ 470,543 $ ( 233,184 ) $ ( 43,032 ) $ 194,766 Common Stock Accumulated deficit Accumulated other comprehensive income (loss) (in thousands) Number of shares Par value Additional paid-in capital Total Balance as of June 30, 2021 43,034 $ 430 $ 477,923 $ ( 216,179 ) $ ( 29,819 ) $ 232,355 Net loss — — — ( 3,377 ) — ( 3,377 ) Dividends accrued for preferred stock — — ( 2,314 ) — — ( 2,314 ) Share-based compensation expense — — 931 — — 931 Change in fair value of interest rate swap, net of tax of $ 53 — — — — ( 176 ) ( 176 ) Reclassification of interest rate swap settlement to net loss, net of tax of $ 7 — — — — 22 22 Foreign currency translation loss — — — — ( 2,612 ) ( 2,612 ) Balance as of September 30, 2021 43,034 $ 430 $ 476,540 $ ( 219,556 ) $ ( 32,585 ) $ 224,829 See notes to condensed consolidated financial statements (unaudited). 5 Table of Contents NN, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity Nine Months Ended September 30, 2022 and 2021 (Unaudited) Common Stock Accumulated deficit Accumulated other comprehensive income (loss) (in thousands) Number of shares Par value Additional paid-in capital Total Balance as of December 31, 2021 43,027 $ 430 $ 474,757 $ ( 219,100 ) $ ( 31,902 ) $ 224,185 Net loss — — ( 14,084 ) — ( 14,084 ) Dividends accrued for preferred stock — — ( 7,979 ) — — ( 7,979 ) Share-based compensation expense 886 9 4,537 — — 4,546 Restricted shares forgiven for taxes ( 31 ) — ( 88 ) — — ( 88 ) Change in estimate of share-based award vesting — — ( 684 ) — — ( 684 ) Change in fair value of interest rate swap, net of tax of $ 655 — — — — 2,464 2,464 Reclassification of interest rate swap settlement to net loss, net of tax of $( 13 ) — — — — ( 51 ) ( 51 ) Foreign currency translation loss — — — — ( 13,543 ) ( 13,543 ) Balance as of September 30, 2022 43,882 $ 439 $ 470,543 $ ( 233,184 ) $ ( 43,032 ) $ 194,766 Common Stock Accumulated deficit Accumulated other comprehensive income (loss) (in thousands) Number of shares Par value Additional paid-in capital Total Balance as of December 31, 2020 42,686 $ 427 $ 493,332 $ ( 205,875 ) $ ( 33,732 ) $ 254,152 Net loss — — — ( 13,681 ) — ( 13,681 ) Dividends accrued for preferred stock — — ( 19,054 ) — — ( 19,054 ) Shares issued for option exercises 6 — 48 — — 48 Share-based compensation expense 394 4 2,913 — — 2,917 Restricted shares forgiven for taxes ( 52 ) ( 1 ) ( 362 ) — — ( 363 ) Change in estimate of share-based award vesting — — ( 337 ) — — ( 337 ) Change in fair value of interest rate swap, net of tax of $ 53 — — — — ( 176 ) ( 176 ) Reclassification of interest rate swap settlement to net loss, net of tax of $ 868 — — — — 2,873 2,873 Foreign currency translation loss — — — — ( 1,550 ) ( 1,550 ) Balance as of September 30, 2021 43,034 $ 430 $ 476,540 $ ( 219,556 ) $ ( 32,585 ) $ 224,829 See notes to condensed consolidated financial statements (unaudited). 6 Table of Contents NN, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (in thousands) 2022 2021 Cash flows from operating activities Net loss $ ( 14,084 ) $ ( 13,681 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 33,962 34,860 Amortization of debt issuance costs and discount 1,021 1,049 Loss on extinguishment of debt and write-off of debt issuance costs — 2,390 Total derivative gain, net of cash settlements ( 4,858 ) ( 856 ) Share of net income from joint venture, net of cash dividends received 2,310 ( 3,456 ) Compensation expense from issuance of share-based awards 3,862 2,580 Deferred income taxes ( 1,831 ) ( 3,720 ) Other ( 3,096 ) ( 1,834 ) Changes in operating assets and liabilities: Accounts receivable ( 15,667 ) 136 Inventories ( 11,314 ) ( 13,252 ) Accounts payable 9,827 7,982 Income taxes receivable and payable, net ( 403 ) ( 5,171 ) Other ( 2,400 ) ( 1,336 ) Net cash provided by (used in) operating activities ( 2,671 ) 5,691 Cash flows from investing activities Acquisition of property, plant and equipment ( 14,011 ) ( 14,556 ) Proceeds from sale of property, plant, and equipment 460 1,177 Cash paid for post-closing adjustments on sale of business — ( 3,880 ) Cash settlements of interest rate swap — ( 15,420 ) Net cash used in investing activities ( 13,551 ) ( 32,679 ) Cash flows from financing activities Cash paid for debt issuance costs ( 136 ) ( 7,360 ) Proceeds from issuance of preferred stock — 61,793 Redemption of preferred stock — ( 122,434 ) Proceeds from long-term debt 32,000 166,000 Repayments of long-term debt ( 28,158 ) ( 88,058 ) Repayments of short-term debt, net — ( 1,563 ) Other ( 2,265 ) ( 3,859 ) Net cash provided by financing activities 1,441 4,519 Effect of exchange rate changes on cash flows ( 1,324 ) ( 1,058 ) Net change in cash and cash equivalents ( 16,105 ) ( 23,527 ) Cash and cash equivalents at beginning of period 28,656 48,138 Cash and cash equivalents at end of period $ 12,551 $ 24,611 See notes to condensed consolidated financial statements (unaudited). 7 Table of Contents NN, Inc. Notes to Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) Note 1. Interim Financial Statements Nature of Business NN, Inc. is a global diversified industrial company that combines advanced engineering and production capabilities with in-depth materials science expertise to design and manufacture high-precision components and assemblies primarily for the automotive, general industrial, electrical, aerospace, defense, and medical markets. As used in this Quarterly Report on Form 10-Q (this “Quarterly Report”), the terms “NN,” the “Company,” “we,” “our,” or “us” refer to NN, Inc., and its subsidiaries. Basis of Presentation The accompanying condensed consolidated financial statements have not been audited. The Condensed Consolidated Balance Sheet as of December 31, 2021, was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”), which we filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 11, 2022. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to fairly state our results of operations for the three and nine months ended September 30, 2022 and 2021; financial position as of September 30, 2022 and December 31, 2021; and cash flows for the nine months ended September 30, 2022 and 2021, on a basis consistent with our audited consolidated financial statements. These adjustments are of a normal recurring nature and are, in the opinion of management, necessary to state fairly the Company’s financial position and operating results for the interim periods. Certain prior period amounts have been reclassified to conform to the current year’s presentation. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted from the unaudited condensed consolidated financial statements presented in this Quarterly Report. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the 2021 Annual Report. The results for the three and nine months ended September 30, 2022, are not necessarily indicative of results for the year ending December 31, 2022, or any other future periods. Except for per share data or as otherwise indicated, all U.S. dollar amounts and share counts presented in the tables in these Notes to Condensed Consolidated Financial Statements are in thousands. Accounting Standards Recently Adopted In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. In addition, ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. Further, for the diluted earnings-per-share calculation, the new guidance requires entities to use the if-converted method for all convertible instruments and generally requires entities to include the effect of share settlement for instruments that may be settled in cash or shares, among other things. The adoption of ASU 2020-06 effective January 1, 2022 did not have a material impact on our consolidated financial statements and related disclosures. In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which clarifies the accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. Specifically, ASU 2021-04 requires the issuer to treat a modification of an equity-classified warrant as an exchange of the original warrant. The difference between the fair value of the modified warrant and the fair value of the warrant immediately before modification is then recognized as an issuance cost or discount of the related transaction. Since we do not have any equity-classified written call options that would be subject to this guidance, the adoption of ASU 2021-04 did not have any impact on our consolidated financial statements and related disclosures during the nine months ended September 30, 2022. Accounting Standards Not Yet Adopted In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance (“ASU 2021-10”), which requires business entities to provide certain annual disclosures when 8 Table of Contents they have received government assistance and use a grant or contribution accounting model by analogy to other accounting guidance. Such disclosures include the nature of the transactions, significant terms and conditions, accounting policies, and affected financial statement line items. ASU 2021-10 may be applied either prospectively or retrospectively. We are in the process of assessing the impact ASU 2021-10 may have on our annual disclosures for the year ending December 31, 2022. Note 2. Segment Information Our business is aggregated into the following two reportable segments: • Mobile Solutions, which is focused on growth in the automotive and general industrial end markets; and • Power Solutions, which is focused on growth in the electrical, general industrial, automotive, aerospace, defense, and medical end markets. These divisions are considered our two operating segments as each engages in business activities for which it earns revenues and incurs expenses, discrete financial information is available for each, and this is the level at which the chief operating decision maker reviews discrete financial information for purposes of allocating resources and assessing performance. The following tables present results of operations by reportable segment. Mobile Solutions Power Solutions Corporate and Consolidations Total Three Months Ended September 30, 2022 Net sales $ 76,122 $ 51,124 $ 51 (a) $ 127,297 Income (loss) from operations ( 474 ) 2,582 ( 4,225 ) ( 2,117 ) Interest expense ( 3,746 ) Other 1,156 Loss from operations before income taxes and share of net income from joint venture $ ( 4,707 ) Three Months Ended September 30, 2021 Net sales $ 68,586 $ 48,680 $ ( 22 ) (a) $ 117,244 Income (loss) from operations ( 257 ) 1,252 ( 5,607 ) ( 4,612 ) Interest expense ( 3,578 ) Other 4,346 Loss from operations before income taxes and share of net income from joint venture $ ( 3,844 ) Mobile Solutions Power Solutions Corporate and Consolidations Total Nine Months Ended September 30, 2022 Net sales $ 225,542 $ 155,184 $ — $ 380,726 Income (loss) from operations 3,224 4,376 ( 17,651 ) ( 10,051 ) Interest expense ( 10,673 ) Other 4,219 Loss from operations before income taxes and share of net income from joint venture $ ( 16,505 ) Nine Months Ended September 30, 2021 Net sales $ 220,248 $ 147,026 $ ( 69 ) (a) $ 367,205 Income (loss) from operations 8,342 6,559 ( 20,123 ) ( 5,222 ) Interest expense ( 9,175 ) Other ( 3,352 ) Loss from operations before income taxes and share of net income from joint venture $ ( 17,749 ) _______________________________ (a) Includes elimination of intersegment transactions occurring during the ordinary course of business. 9 Table of Contents Note 3. Inventories Inventories are comprised of the following amounts: September 30, 2022 December 31, 2021 Raw materials $ 32,821 $ 27,221 Work in process 29,349 24,960 Finished goods 22,002 22,846 Total inventories $ 84,172 $ 75,027 Note 4. Intangible Assets, Net The following table shows changes in the carrying amount of intangible assets, net, by reportable segment. Mobile Solutions Power Solutions Total Balance as of December 31, 2021 $ 25,709 $ 63,009 $ 88,718 Amortization ( 2,515 ) ( 8,245 ) ( 10,760 ) Balance as of September 30, 2022 $ 23,194 $ 54,764 $ 77,958 Intangible assets are reviewed for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. As of September 30, 2022, our market capitalization remained at a level that was less than the net book value of our stockholders’ equity. The decline in our market capitalization during the nine months ended September 30, 2022 was a triggering event that caused us to perform impairment analyses on our long-lived assets. Based on our analyses, the carrying values of the long-lived assets were recoverable and no impairment charge was recorded during the nine months ended September 30, 2022. Note 5. Investment in Joint Venture We own a 49 % investment in Wuxi Weifu Autocam Precision Machinery Company, Ltd. (the “JV”), a joint venture located in Wuxi, China. The JV is jointly controlled and managed, and we account for it under the equity method. The following table shows changes in our investment in the JV. Balance as of December 31, 2021 $ 34,045 Share of earnings 3,935 Dividends paid by joint venture ( 6,245 ) Foreign currency translation loss ( 3,542 ) Balance as of September 30, 2022 $ 28,193 Note 6. Income Taxes Our effective tax rate was 22.7 % and ( 9.2 )% for the three and nine months ended September 30, 2022, respectively, and ( 9.8 )% and 3.5 % for the three and nine months ended September 30, 2021, respectively. The effective tax rates for the three and nine months ended September 30, 2022 differ from the U.S. federal statutory tax rate of 21 % primarily due to the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and by limitation on the amount of tax benefit recorded for loss carryforwards in certain jurisdictions where we believe it is more likely than not that a portion of the future tax benefit may not be realized. In addition, the effective tax rate was favorably impacted by the recording of interest income on the Company’s federal income tax refund requested as a result of the CARES act. 10 Table of Contents Note 7. Debt On March 22, 2021, we entered into a new $ 150.0 million term loan facility (the “Term Loan Facility”) and a new $ 50.0 million asset backed credit facility (the “ABL Facility”). The following table presents debt balances as of September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 Term Loan Facility $ 147,750 $ 148,875 ABL Facility 6,000 — International lines of credit and other loans 8,436 10,930 Total principal 162,186 159,805 Less-current maturities of long-term debt 3,150 3,074 Principal, net of current portion 159,036 156,731 Less-unamortized debt issuance costs and discount (1) 4,685 5,679 Long-term debt, net of current portion $ 154,351 $ 151,052 _______________________________ (1) In addition to this amount, costs of $ 0.7 million and $ 0.7 million related to the ABL Facility were recorded in other non-current assets as of September 30, 2022 and December 31, 2021, respectively. Term Loan Facility Outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month LIBOR (subject to a 1.000 % floor) plus an applicable margin of 6.875 % or 2) the greater of various benchmark rates plus an applicable margin of 5.875 %. At September 30, 2022, the Term Loan Facility bore interest, based on one-month LIBOR, at 9.990 %. We have an interest rate swap, which expires in July 2024, that changes the one-month LIBOR to a fixed rate of 1.291 % on $ 60.0 million of the outstanding balance of the Term Loan Facility. The Term Loan Facility requires quarterly principal payments of $ 0.4 million with the remaining unpaid principal amount due on the final maturity date of September 22, 2026. The Term Loan Facility is collateralized by all of our assets. The Term Loan Facility has a first lien on all assets other than accounts receivable and inventory and has a second lien on accounts receivable and inventory. On March 3, 2022, we amended our Term Loan Facility, which increased the quarterly maximum consolidated net leverage ratio. We were in compliance with all requirements under the Term Loan Facility as of September 30, 2022. The Term Loan Facility was issued at a $ 3.8 million discount and we capitalized an additional $ 2.8 million in new debt issuance costs. These costs are recorded as a direct reduction to the carrying amount of the associated long-term debt and amortized over the term of the debt. ABL Facility The ABL Facility provides for a senior secured revolving credit facility in the amount of $ 50.0 million, of which $ 30.0 million is available in the form of letters of credit and $ 5.0 million is available for the issuance of short-term swingline loans. The availability of credit under the ABL Facility is limited by a borrowing base calculation derived from accounts receivable and inventory held in the United States. Outstanding borrowings under the ABL Facility bear interest on a variable rate structure plus an interest rate spread that is based on the average amount of aggregate revolving commitment available. The variable borrowing rate is either 1) LIBOR plus an applicable margin of 1.75 % or 2.00 %, depending on availability, or 2) the greater of the federal funds rate or prime, plus an applicable margin of 0.75 % or 1.00 %, depending on availability. We may elect whether to use one-month, three-month, or six-month LIBOR, subject to a 0.50 % floor. Interest payments are due monthly on borrowings that utilize one-month LIBOR and quarterly on borrowings that utilize three-month or six-month LIBOR. At September 30, 2022, using one-month LIBOR plus a 1.75 % spread, the weighted average interest rate on outstanding borrowings under the ABL Facility was 4.56 %. We pay a commitment fee of 0.375 % for unused capacity under the ABL Facility and a 1.875 % fee on the amount of letters of credit outstanding. The final maturity date of the ABL Facility is March 22, 2026. As of September 30, 2022, we had $ 6.0 million of outstanding borrowings under the ABL Facility, $ 11.1 million of outstanding letters of credit, and $ 32.1 million available for future borrowings under the ABL Facility. The ABL Facility has a first lien on accounts receivable and inventory. We were in compliance with all requirements under the ABL Facility as of September 30, 2022. 11 Table of Contents Note 8. Leases The following table contains supplemental cash flow information related to leases. Nine Months Ended September 30, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used in finance leases $ 262 $ 154 Operating cash flows used in operating leases 10,865 10,369 Financing cash flows used in finance leases 2,177 3,545 Right-of-use assets obtained in exchange for new finance lease liabilities 908 1,541 Right-of-use assets obtained in exchange for new operating lease liabilities (1) 3,835 — _______________________________ (1) Includes new leases, renewals, and modifications. Note 9. Commitments and Contingencies Brazil ICMS Tax Matter Prior to the acquisition of Autocam Corporation (“Autocam”) in 2014, Autocam’s Brazilian subsidiary (“Autocam Brazil”) received notification from the Brazilian tax authority regarding ICMS (state value added tax) tax credits claimed on intermediary materials (e.g., tooling and perishable items) used in the manufacturing process. The Brazilian tax authority notification disallowed state ICMS tax credits claimed on intermediary materials based on the argument that these items are not intrinsically related to the manufacturing processes. Autocam Brazil filed an administrative defense with the Brazilian tax authority arguing, among other matters, that it should qualify for an ICMS tax credit, contending that the intermediary materials are directly related to the manufacturing process. We believe that we have substantial legal and factual defenses, and we plan to defend our interests in this matter vigorously. The matter encompasses several lawsuits filed with the Brazilian courts requesting declaratory actions that no tax is due or seeking a stay of execution on the collection of the tax. In 2018, we obtained a favorable decision in one of the declaratory actions for which the period for appeal has expired. We have filed actions in each court requesting dismissal of the matter based on the earlier court action. In May 2020, we received an unfavorable decision in one of the lawsuits, and as a result have recorded a liability to the Brazilian tax authorities and a receivable from the former shareholders of Autocam for the same amount. Although we anticipate a favorable resolution to the remaining matters, we can provide no assurances that we will be successful in achieving dismissal of all pending cases. The U.S. dollar amount that would be owed in the event of an unfavorable decision is subject to interest, penalties, and currency impacts and therefore is dependent on the timing of the decision. For the remaining open lawsuits, we currently believe the cumulative potential liability in the event of unfavorable decisions on all matters will be less than $ 5.0 million, inclusive of interest and penalties. We are entitled to indemnification from the former shareholders of Autocam, subject to the limitations and procedures set forth in the agreement and plan of merger relating to the Autocam acquisition. Management believes the indemnification would include amounts owed for the tax, interest, and penalties related to this matter. Accordingly, we do not expect to incur a loss related to this matter even in the event of an unfavorable decision and, therefore, have not accrued an amount for the remaining matters as of September 30, 2022. Securities Offering Matter On November 1, 2019, Erie County Employees’ Retirement System, on behalf of a purported class of plaintiffs, filed a complaint in the Supreme Court of the State of New York, County of New York against us, certain of our current and former officers and directors, and each of the underwriters involved in our public offering and sale of 14.4 million shares of our common stock pursuant to a preliminary prospectus supplement, dated September 10, 2018, a final prospectus supplement, dated September 13, 2018, and a base prospectus, dated April 19, 2017, relating to our effective shelf registration statement on Form S-3 (File No. 333-216737) (the “Offering”). The amended complaint alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 in connection with the Offering. On July 25, 2022, the parties filed a Stipulation of Settlement, which is subject to court approval, to settle the securities offering action. Under the terms of the Stipulation of Settlement, the Company and/or its insurance carrier will make a cash payment to the plaintiff in the amount of $ 9.5 million (the “Settlement Amount”), in exchange for which the Company and the other named defendants will be released from all claims related to the securities offering action. As of September 30, 2022, we have 12 Table of Contents previously paid covered expenses totaling $ 1.0 million meeting our directors' and officers' retention requirement and therefore the Settlement Amount will be covered and paid by our directors' and officers' insurance carrier. Other Legal Matters On April 25, 2022, we reached an agreement to settle breach of contract claims brought by a former customer regarding the sale of products by us in 2016. Under the agreement, we are paying $ 1.8 million to the customer in specified installments through July 2023. The $ 1.8 million settlement is included in the Other operating expense (income), net line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). All other legal proceedings are of an ordinary and routine nature and are incidental to our operations. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations, or cash flows. In making that determination, we analyze the facts and circumstances of each case at least quarterly in consultation with our attorneys and determine a range of reasonably possible outcomes. Note 10. Preferred Stock and Stockholders' Equity Series D Perpetual Preferred Stock On March 22, 2021, we completed a private placement of 65 thousand shares of newly designated Series D Perpetual Preferred Stock, with a par value of $ 0.01 per share (the “Series D Preferred Stock”), at a price of $ 1,000 per share, together with detachable warrants (the “2021 Warrants”) to purchase up to 1.9 million shares of our common stock at an exercise price of $ 0.01 per share. The Series D Preferred Stock has an initial liquidation preference of $ 1,000 per share and is redeemable at our option in cash at a redemption price equal to the liquidation preference then in effect. Series D Preferred Stock shares earn cash dividends at a rate of 10.0 % per year, payable quarterly in arrears, accruing whether or not earned or declared. If no cash dividend is paid, then the liquidation preference per share effective on the dividend date increases by 12.0 % per year. Beginning March 22, 2026, the cash dividend rate and in-kind dividend rate increase by 2.5 % per year. Cash dividends are required beginning on September 30, 2027. The Series D Preferred Stock is classified as mezzanine equity, between liabilities and stockholders’ equity, because certain features of the Series D Preferred Stock could require redemption of the Series D Preferred Stock upon a change of control event that is considered not solely within our control. For initial recognition, the Series D Preferred Stock was recognized at a discounted value, net of issuance costs and allocation to warrants and a bifurcated embedded derivative. The aggregate discount is amortized as a deemed dividend through March 22, 2026, which is the date the dividend rate begins to increase by 2.5 % per year. Deemed dividends adjust retained earnings (or in the absence of retained earnings, additional paid-in capital). In accordance with ASC 815-15, Derivatives and Hedging - Embedded Derivatives, certain features of the Series D Preferred Stock were bifurcated and accounted for as derivatives separately. Note 15 discusses the accounting for these features. As of September 30, 2022, the carrying value of the Series D Preferred Stock shares was $ 61.8 million, which included $ 15.1 million of accumulated unpaid and deemed dividends. The following table presents the change in the Series D Preferred Stock carrying value during the nine months ended September 30, 2022. Balance as of December 31, 2021 $ 53,807 Accrual of in-kind dividends 6,620 Amortization 1,359 Balance as of September 30, 2022 $ 61,786 Note 11. Revenue from Contracts with Customers Revenue is recognized when control of the good or service is transferred to the customer either at a point in time or, in limited circumstances, as our services are rendered over time. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or services. During the nine months ended September 30, 2022, we received equipment from a customer as part of the selling price of goods transferred. This noncash consideration was recognized as revenue equal to the fair value of the equipment received. 13 Table of Contents The following tables summarize revenue by customer geographical region. Three Months Ended September 30, 2022 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total United States and Puerto Rico $ 35,419 $ 39,579 $ 51 $ 75,049 China 12,839 1,378 — 14,217 Brazil 14,109 137 — 14,246 Mexico 5,185 4,769 — 9,954 Germany 1,432 84 — 1,516 Poland 1,100 2 — 1,102 Other 6,038 5,175 — 11,213 Total net sales $ 76,122 $ 51,124 $ 51 $ 127,297 Three Months Ended September 30, 2021 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total United States and Puerto Rico $ 35,812 $ 38,313 $ ( 22 ) $ 74,103 China 10,849 749 — 11,598 Brazil 8,951 192 — 9,143 Mexico 4,981 4,627 — 9,608 Germany 1,080 159 — 1,239 Poland 698 3 — 701 Other 6,215 4,637 — 10,852 Total net sales $ 68,586 $ 48,680 $ ( 22 ) $ 117,244 Nine Months Ended September 30, 2022 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total United States and Puerto Rico $ 109,183 $ 120,442 $ — $ 229,625 China 34,155 3,855 — 38,010 Brazil 36,122 794 — 36,916 Mexico 18,336 13,868 — 32,204 Germany 3,836 219 — 4,055 Poland 3,598 7 — 3,605 Other 20,312 15,999 — 36,311 Total net sales $ 225,542 $ 155,184 $ — $ 380,726 Nine Months Ended September 30, 2021 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total United States and Puerto Rico $ 108,534 $ 117,543 $ ( 69 ) $ 226,008 China 38,482 3,537 — 42,019 Brazil 28,604 727 — 29,331 Mexico 14,825 12,373 — 27,198 Germany 4,216 419 — 4,635 Poland 2,782 10 — 2,792 Other 22,805 12,417 — 35,222 Total net sales $ 220,248 $ 147,026 $ ( 69 ) $ 367,205 The following tables summarize revenue by customer industry. Our products in the automotive industry include high-precision components and assemblies for electric power steering systems, electric braking, electric motors, fuel systems, emissions control, transmissions, moldings, stampings, sensors, and electrical contacts. Our products in the general industrial industry 14 Table of Contents include high-precision metal and plastic components for a variety of industrial applications including diesel industrial motors, heating and cooling systems, fluid power systems, power tools, and more. While many of the industries we serve include electrical components, our products in the residential/commercial electrical industry category in the following tables include components used in smart meters, charging stations, circuit breakers, transformers, electrical contact assemblies, precision stampings, welded contact assemblies, and specification plating and surface finishing. Three Months Ended September 30, 2022 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total Automotive $ 51,388 $ 10,822 $ — $ 62,210 General Industrial 19,546 14,751 — 34,297 Residential/Commercial Electrical — 17,025 — 17,025 Other 5,188 8,526 51 13,765 Total net sales $ 76,122 $ 51,124 $ 51 $ 127,297 Three Months Ended September 30, 2021 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total Automotive $ 43,486 $ 9,892 $ — $ 53,378 General Industrial 21,396 15,186 — 36,582 Residential/Commercial Electrical — 16,078 — 16,078 Other 3,704 7,524 ( 22 ) 11,206 Total net sales $ 68,586 $ 48,680 $ ( 22 ) $ 117,244 Nine Months Ended September 30, 2022 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total Automotive $ 150,834 $ 30,628 $ — $ 181,462 General Industrial 61,883 47,726 — 109,609 Residential/Commercial Electrical — 52,981 — 52,981 Other 12,825 23,849 — 36,674 Total net sales $ 225,542 $ 155,184 $ — $ 380,726 Nine Months Ended September 30, 2021 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total Automotive $ 139,877 $ 29,974 $ — $ 169,851 General Industrial 70,155 45,617 — 115,772 Residential/Commercial Electrical — 47,651 — 47,651 Other 10,216 23,784 ( 69 ) 33,931 Total net sales $ 220,248 $ 147,026 $ ( 69 ) $ 367,205 Deferred Revenue Deferred revenue relates to payments received in advance of performance under the contract and recognized as revenue as (or when) we perform under the contract. The balance of deferred revenue was $ 0.6 million and $ 0.5 million as of September 30, 2022 and December 31, 2021, respectively. Revenue recognized for performance obligations satisfied or partially satisfied during the nine months ended September 30, 2022 included $ 0.5 million that was included in deferred revenue as of December 31, 2021. Transaction Price Allocated to Future Performance Obligations We are required to disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of September 30, 2022, unless our contracts meet one of the practical expedients. Our contracts met the practical expedient for a performance obligation that is part of a contract that has an original expected duration of one year or less. 15 Table of Contents Note 12. Share-Based Compensation The following table lists the components of share-based compensation expense by type of award, which is recognized in the “Selling, general, and administrative expense” line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Stock options $ 37 $ 59 $ 124 $ 207 Restricted stock 471 521 3,233 1,660 Performance share units 483 351 1,189 1,050 Change in estimate of share-based award vesting (1) ( 684 ) — ( 684 ) ( 337 ) Share-based compensation expense $ 307 $ 931 $ 3,862 $ 2,580 _______________________________ (1) Amounts reflect the decrease in share-based compensation expense based on the change in estimate of the probability of vesting of share-based awards. S tock Options The following table presents stock option activity for the nine months ended September 30, 2022. Number of Options (in thousands) Weighted- Average Exercise Price (per share) Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at January 1, 2022 621 $ 12.24 Expired ( 79 ) 9.71 Outstanding at September 30, 2022 542 $ 12.61 3.6 years $ — (1) Exercisable at September 30, 2022 515 $ 12.77 3.4 years $ — (1) _______________________________ (1) The aggregate intrinsic value is the sum of intrinsic values for each exercisable individual option grant. The intrinsic value is the amount by which the closing market price of our stock at September 30, 2022 was greater than the exercise price of any individual option grant. Restricted Stock During the nine months ended September 30, 2022, we granted 897 thousand shares of restricted stock to non-executive directors, officers and certain other key employees under the NN, Inc. 2019 Omnibus Incentive Plan (“2019 Omnibus Plan”). The shares of restricted stock granted during the nine months ended September 30, 2022, vest pro-rata generally over three years for employees and over one year for non-executive directors. We determined the fair value of the shares awarded by using the closing price of our common stock as of the date of grant. The weighted average grant date fair value of restricted stock granted in the nine months ended September 30, 2022, was $ 3.31 per share. Total grant date fair value of restricted stock that vested in the nine months ended September 30, 2022, was $ 2.1 million. 16 Table of Contents The following table presents the status of unvested restricted stock awards as of September 30, 2022 and changes during the nine months then ended. Nonvested Restricted Shares (in thousands) Weighted Average Grant-Date Fair Value (per share) Unvested at January 1, 2022 469 $ 7.28 Granted 897 3.31 Vested ( 291 ) 7.05 Forfeited ( 11 ) 4.37 Unvested at September 30, 2022 1,064 $ 4.02 Performance Share Units Performance Share Units (“PSUs”) are a form of long-term incentive compensation awarded to executive officers and certain other key employees designed to directly align the interests of employees to the interests of our stockholders, and to create long-term stockholder value. Some PSUs are based on total shareholder return (“TSR Awards”), and other PSUs are based on return on invested capital (“ROIC Awards”). TSR Awards granted in 2022 were made pursuant to the 2019 Omnibus Plan and a Performance Share Unit Agreement (the “2019 Omnibus Agreement”). ROIC Awards granted in 2022 were made pursuant to the NN, Inc. 2022 Omnibus Incentive Plan and a Performance Share Unit Agreement. The TSR Awards vest, if at all, upon our achieving a specified relative total shareholder return, which will be measured against the total shareholder return of a specified index during specified performance periods as defined in the 2019 Omnibus Agreement. The ROIC Awards vest, if at all, upon our achieving a specified average return on invested capital during the performance periods. Each performance period generally begins on January 1 of the year of grant and ends 3 years later on December 31. We recognize compensation expense over the performance period in which the performance and market conditions are measured. If the PSUs do not vest at the end of the performance periods, then the PSUs will expire automatically. Upon vesting, the PSUs will be settled by the issuance of shares of our common stock, subject to the award recipient’s continued employment. The actual number of shares of common stock to be issued to each award recipient at the end of the performance periods will be interpolated between a threshold and maximum payout amount based on actual performance results. No dividends will be paid on outstanding PSUs during the performance period; however, dividend equivalents will be paid based on dividends declared and the number of shares of common stock that are ultimately earned at the end of the performance periods. The following table presents the goals with respect to PSUs granted in 2022. Threshold Performance (25% of Shares) Target Performance (100% of Shares) Maximum Performance (150% of Shares) TSR Awards 25 th Percentile 55 th Percentile 75 th Percentile Threshold Performance (50% of Shares) Target Performance (100% of Shares) Maximum Performance (150% of Shares) ROIC Awards 6.4 % 8.6 % 10.0 % We estimate the grant date fair value of TSR Awards using the Monte Carlo simulation model, as the total shareholder return metric is considered a market condition under ASC Topic 718, Compensation – stock compensation . The grant date fair value of ROIC Awards is based on the closing price of a share of our common stock on the date of grant. 17 Table of Contents The following table presents the status of unvested PSUs as of September 30, 2022 and changes during the nine months then ended. Nonvested TSR Awards Nonvested ROIC Awards Shares (in thousands) Weighted Average Grant-Date Fair Value (per share) Shares (in thousands) Weighted Average Grant-Date Fair Value (per share) Nonvested at January 1, 2022 194 $ 9.59 228 $ 8.14 Granted 382 2.53 408 2.62 Nonvested at September 30, 2022 576 $ 4.90 636 $ 4.60 Note 13. Accumulated Other Comprehensive Income The following tables present the components of accumulated other comprehensive income (loss) (“AOCI”). Foreign Currency Translation Interest rate swap Income taxes (1) Total Balance as of June 30, 2022 $ ( 37,906 ) $ 2,207 $ ( 468 ) $ ( 36,167 ) Other comprehensive income (loss) before reclassifications ( 7,653 ) 1,145 ( 241 ) ( 6,749 ) Amounts reclassified from AOCI to interest expense (2) — ( 146 ) 30 ( 116 ) Net other comprehensive income (loss) ( 7,653 ) 999 ( 211 ) ( 6,865 ) Balance as of September 30, 2022 $ ( 45,559 ) $ 3,206 $ ( 679 ) $ ( 43,032 ) Balance as of June 30, 2021 $ ( 29,819 ) $ — $ — $ ( 29,819 ) Other comprehensive income (loss) before reclassifications ( 2,612 ) ( 229 ) 53 ( 2,788 ) Amounts reclassified from AOCI to interest expense (2) — 29 ( 7 ) 22 Net other comprehensive income (loss) ( 2,612 ) ( 200 ) 46 ( 2,766 ) Balance as of September 30, 2021 $ ( 32,431 ) $ ( 200 ) $ 46 $ ( 32,585 ) Foreign Currency Translation Interest rate swap Income taxes (1) Total Balance as of December 31, 2021 $ ( 32,016 ) $ 151 $ ( 37 ) $ ( 31,902 ) Other comprehensive income (loss) before reclassifications ( 13,543 ) 3,119 ( 655 ) ( 11,079 ) Amounts reclassified from AOCI to interest expense (2) — ( 64 ) 13 ( 51 ) Net other comprehensive income (loss) ( 13,543 ) 3,055 ( 642 ) ( 11,130 ) Balance as of September 30, 2022 $ ( 45,559 ) $ 3,206 $ ( 679 ) $ ( 43,032 ) Balance as of December 31, 2020 $ ( 30,881 ) $ ( 3,712 ) $ 861 $ ( 33,732 ) Other comprehensive income (loss) before reclassifications ( 1,550 ) ( 229 ) 53 ( 1,726 ) Amounts reclassified from AOCI to interest expense (2) — 29 ( 7 ) 22 Amounts reclassified from AOCI to loss on interest rate swap (3) — 3,712 ( 861 ) 2,851 Net other comprehensive income (loss) ( 1,550 ) 3,512 ( 815 ) 1,147 Balance as of September 30, 2021 $ ( 32,431 ) $ ( 200 ) $ 46 $ ( 32,585 ) ______________________ 18 Table of Contents (1) Income tax effect of changes in interest rate swap. (2) Represents interest rate swap settlements of effective hedge. (3) Represents reclassification of derivative loss and settlements after discontinuation of hedge accounting. Note 14. Net Income (Loss) Per Common Share In accordance with ASC 260, Earnings Per Share, a company that has participating securities is required to utilize the two-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating securities. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potentially dilutive stock options, warrants, and convertible preferred stock. The following table summarizes the computation of basic and diluted net loss per common share. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Numerator: Net loss $ ( 2,215 ) $ ( 3,377 ) $ ( 14,084 ) $ ( 13,681 ) Less: Preferred stock cumulative dividends and deemed dividends ( 2,783 ) ( 2,314 ) ( 7,979 ) ( 19,054 ) Numerator for basic and diluted undistributed net loss per common share (1) $ ( 4,998 ) $ ( 5,691 ) $ ( 22,063 ) $ ( 32,735 ) Denominator: Weighted average common shares outstanding 43,884 43,034 43,695 42,980 Adjustment for unvested restricted common stock ( 1,065 ) ( 476 ) ( 918 ) ( 459 ) Adjustment for 2021 Warrants outstanding (2) 1,892 1,897 1,893 1,341 Shares used to calculate net loss per share, basic and diluted 44,711 44,455 44,670 43,862 Per common share net loss: Basic and diluted net loss per common share $ ( 0.11 ) $ ( 0.13 ) $ ( 0.49 ) $ ( 0.75 ) Cash dividends declared per common share $ — $ — $ — $ — _______________________________ (1) Preferred Stock does not participate in losses. (2) Weighted average 2021 Warrants outstanding are included in shares outstanding for calculation of basic earnings per share because they are exercisable at an exercise price of $ 0.01 per share, subject to certain adjustments (see Note 15). The following table presents securities that could be potentially dilutive in the future that were excluded from the calculation of diluted net loss per common share because they had an anti-dilutive effect. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Options 542 752 563 812 2019 Warrants 1,500 1,500 1,500 1,500 2,042 2,252 2,063 2,312 We have elected to allocate undistributed income to participating securities based on year-to-date results. As there was no undistributed income for the nine months ended September 30, 2022, no such allocation was necessary. In addition, given the undistributed loss in the three and nine months ended September 30, 2022 and 2021, options and the 2019 Warrants are considered anti-dilutive and were excluded from the calculation of diluted net loss per share. Stock options excluded from the calculations of diluted net loss per share had a per share exercise price ranging from $ 7.93 to $ 25.16 for the three months ended 19 Table of Contents September 30, 2022, and $ 7.93 to $ 25.16 for the three months ended September 30, 2021. Stock options excluded from the calculations of diluted net loss per share had a per share exercise price ranging from $ 7.93 to $ 25.16 for the nine months ended September 30, 2022, and $ 7.93 to $ 25.16 for nine months ended September 30, 2021. The 2019 Warrants excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2022 and 2021, had a per share exercise price of $ 11.49 . Note 15. Fair Value Measurements Fair value is an exit price representing the expected amount that an entity would receive to sell an asset or pay to transfer a liability in an orderly transaction with market participants at the measurement date. We followed consistent methods and assumptions to estimate fair values as more fully described in the 2021 Annual Report. Fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement. Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives, and long-term debt. As of September 30, 2022, the carrying values of these financial instruments approximated fair value. Derivative Financial Instruments Certain features were bifurcated and accounted for separately from the Series B Preferred Stock, which was redeemed in March 2021. The following feature was recorded as a derivative. • Warrants. In conjunction with our placement of the Series B Preferred Stock in December 2019, we issued detachable warrants to purchase up to 1.5 million shares of our common stock (the “2019 Warrants”), which are exercisable, in full or in part, at any time prior to December 11, 2026, at an exercise price of $ 11.49 per share. Certain features were bifurcated and accounted for separately from the Series D Preferred Stock that was issued on March 22, 2021. The following features were recorded as derivatives. • Change-in-control put feature. The Series D Preferred Stock includes a put feature that allows the holder to redeem the Series D Preferred Stock upon a change in control at the greater of 1) the liquidation preference plus accrued dividends or 2) 140 % of the liquidation preference. The put feature is considered a redemption right at a premium and is not clearly and closely related to the debt host. • Warrants. In conjunction with our placement of the Series D Preferred Stock, we issued detachable warrants to purchase up to 1.9 million shares of our common stock. The 2021 Warrants are exercisable, in full or in part, at any time prior to March 22, 2027, at an exercise price of $ 0.01 per share, subject to anti-dilution adjustments in the event of certain future equity issuances, stock splits, stock dividends, combinations or similar events. The following tables show the liabilities measured at fair value for the Preferred Stock derivatives as of September 30, 2022 and December 31, 2021. Fair Value Measurements as of September 30, 2022 Description Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Derivative liability - other non-current liabilities 3,230 — 136 Fair Value Measurements as of December 31, 2021 Description Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Derivative liability - other non-current liabilities 7,771 — 453 20 Table of Contents The following table presents the change in the Preferred Stock derivatives during the nine months ended September 30, 2022. Balance as of December 31, 2021 $ 8,224 Change in fair value (1) ( 4,858 ) Balance as of September 30, 2022 $ 3,366 _______________________________ (1) Changes in the fair value are recognized in the “Other expense (income), net” line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The fair value of the change-in-control put feature utilizes unobservable inputs based on the Company’s assessment of the probability of a change-in-control event occurring in a future period. The probability of a change-in-control event ranged from 3 % to 10 % as of September 30, 2022. The fair value of the 2019 Warrants is determined using a valuation model that utilizes unobservable inputs to determine the probability that the 2019 Warrants will remain outstanding for future periods. The probabilities resulted in a weighted average term of 2.9 years as of September 30, 2022, and 3.6 years as of December 31, 2021. The fair value of the 2021 Warrants is determined using the observable market price of a share of our common stock, less the $ 0.01 per share exercise price. Interest Rate Swaps We manage our exposure to fluctuations in interest rates using a mix of fixed and variable rate debt. We utilize fixed-rate interest rate swap agreements to change the variable interest rate to a fixed rate on a portion of our variable rate debt. On July 22, 2021, we entered into a fixed-rate interest rate swap agreement to change the LIBOR-based component of the interest rate on a portion of our variable rate debt to a fixed rate of 1.291 % (the “2021 Swap”). The 2021 Swap has a notional amount of $ 60.0 million and a maturity date of July 31, 2024. The objective of the 2021 Swap is to eliminate the variability of cash flows in interest payments on the first $ 60.0 million of variable rate debt attributable to changes in benchmark one-month LIBOR interest rates. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month LIBOR interest rates over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable rate debt. We designated the 2021 Swap as a cash flow hedge at inception. Cash settlements of the 2021 Swap are recognized in interest expense. On February 8, 2019, we entered into a $ 700.0 million fixed-rate interest rate swap agreement that changed the LIBOR-based portion of the interest rate on a portion of our variable rate debt to a fixed rate of 2.4575 % (the “2019 Swap”). On March 22, 2021, we terminated the 2019 Swap with a $ 13.7 million cash payment in connection with the extinguishment of our previously outstanding long-term variable-rate debt. The 2019 Swap was designated as a cash flow hedge at inception. However, in the fourth quarter of 2020, the 2019 Swap no longer qualified as an effective hedge, and subsequent changes in fair value of the 2019 Swap were recognized in earnings. Amounts recognized in earnings related to the 2019 Swap are recorded in the “Loss on interest rate swap” line on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) except that cash settlements prior to termination are recognized in “Derivative payments on interest rate swap.” Cash settlements during 2021 are presented in investing activities on the Condensed Consolidated Statements of Cash Flows. The following table presents the effect of the interest rate swaps on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Interest expense (1) $ ( 146 ) $ 29 $ ( 64 ) $ 29 Derivative payments on interest rate swap (2) — — — 1,717 Loss on interest rate swap (2) — — — 2,033 _______________________________ (1) Represents settlements on the interest rate swaps while the hedges are effective. (2) Represents settlements and changes in fair value on the 2019 Swap. 21 Table of Contents The following tables present the assets and liabilities measured at fair value on a recurring basis for the interest rate swaps as of September 30, 2022 and December 31, 2021. Fair Value Measurements as of September 30, 2022 Description Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Derivative asset - other current assets $ — $ 1,783 $ — Derivative asset - other non-current assets — 1,427 — Total $ — $ 3,210 $ — Fair Value Measurements as of December 31, 2021 Description Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Derivative asset - other non-current assets $ — $ 284 $ — Derivative liability - other current liabilities — ( 129 ) — Total $ — $ 155 $ — The inputs for determining fair value of the interest rate swaps are classified as Level 2 inputs. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces. Counterparty to this derivative contract is a highly rated financial institution which we believe carries only a minimal risk of nonperformance. Fixed Rate Debt The fair value of our outstanding fixed-rate debt included in the “International lines of credit and other loans” line item within Note 7 to these Notes to Condensed Consolidated Financial Statements approximated carrying value as of September 30, 2022 and December 31, 2021, respectively. These fair values represent Level 2 under the three-tier hierarchy described above. The carrying value of this fixed-rate debt was $ 8.4 million and $ 10.9 million as of September 30, 2022 and December 31, 2021, respectively. 22 Table of Contents