NN INC 10-Q

Item 1. Financial Statements NN, Inc. Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) Three Months Ended March 31, (in thousands, except per share data) 2023 2022 Net sales $ 127,088 $ 128,067 Cost of sales (exclusive of depreciation and amortization shown separately below) 108,421 104,578 Selling, general, and administrative expense 13,165 13,454 Depreciation and amortization 11,516 11,429 Other operating expense, net 1,061 2,026 Loss from operations ( 7,075 ) ( 3,420 ) Interest expense 4,288 3,439 Other income, net ( 2,208 ) ( 2,996 ) Loss before provision for income taxes and share of net income from joint venture ( 9,155 ) ( 3,863 ) Provision for income taxes ( 1,301 ) ( 1,531 ) Share of net income from joint venture 281 2,092 Net loss $ ( 10,175 ) $ ( 3,302 ) Other comprehensive income: Foreign currency translation gain $ 1,840 $ 2,600 Interest rate swap: Change in fair value, net of tax ( 230 ) 1,187 Reclassification adjustment for losses (gains) included in net loss, net of tax ( 468 ) 34 Other comprehensive income $ 1,142 $ 3,821 Comprehensive income (loss) $ ( 9,033 ) $ 519 Basic and diluted net loss per common share $ ( 0.29 ) $ ( 0.13 ) Weighted average common shares outstanding 45,309 44,594 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) March 31, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 10,545 $ 12,808 Accounts receivable, net of allowances of $ 1,572 and $ 1,469 at March 31, 2023 and December 31, 2022 80,003 74,129 Inventories 81,778 80,682 Income tax receivable 12,087 12,164 Prepaid assets 7,076 2,794 Other current assets 9,016 9,123 Total current assets 200,505 191,700 Property, plant and equipment, net of accumulated depreciation of $ 232,086 and $ 225,046 at March 31, 2023 and December 31, 2022 194,513 197,637 Operating lease right-of-use assets 46,280 46,713 Intangible assets, net 69,327 72,891 Investment in joint venture 32,212 31,802 Deferred tax assets 102 102 Other non-current assets 4,334 5,282 Total assets $ 547,273 $ 546,127 Liabilities, Preferred Stock, and Stockholders’ Equity Current liabilities: Accounts payable $ 49,975 $ 45,871 Accrued salaries, wages and benefits 14,251 11,671 Income tax payable 560 926 Current maturities of long-term debt 6,258 3,321 Current portion of operating lease liabilities 5,008 5,294 Other current liabilities 15,288 11,723 Total current liabilities 91,340 78,806 Deferred tax liabilities 6,064 5,596 Long-term debt, net of current portion 146,228 149,389 Operating lease liabilities, net of current portion 50,710 51,411 Other non-current liabilities 10,715 9,960 Total liabilities 305,057 295,162 Commitments and contingencies (Note 9) Series D perpetual preferred stock - $ 0.01 par value per share, 65 shares authorized, issued and outstanding at March 31, 2023 and December 31, 2022 67,752 64,701 Stockholders' equity: Common stock - $ 0.01 par value per share, 90,000 shares authorized, 43,772 and 43,856 shares issued and outstanding at March 31, 2023 and December 31, 2022 438 439 Additional paid-in capital 465,377 468,143 Accumulated deficit ( 255,373 ) ( 245,198 ) Accumulated other comprehensive loss ( 35,978 ) ( 37,120 ) Total stockholders’ equity 174,464 186,264 Total liabilities, preferred stock, and stockholders’ equity $ 547,273 $ 546,127 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 March 31, 2023 and 2022 (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, 2022 43,856 $ 439 $ 468,143 $ ( 245,198 ) $ ( 37,120 ) $ 186,264 Net loss — — — ( 10,175 ) — ( 10,175 ) Dividends accrued for preferred stock — — ( 3,051 ) — — ( 3,051 ) Share-based compensation expense — — 381 — — 381 Restricted shares forgiven for taxes ( 84 ) ( 1 ) ( 96 ) — — ( 97 ) Other comprehensive income — — — — 1,142 1,142 Balance as of March 31, 2023 43,772 $ 438 $ 465,377 $ ( 255,373 ) $ ( 35,978 ) $ 174,464 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 — — — ( 3,302 ) — ( 3,302 ) Dividends accrued for preferred stock — — ( 2,538 ) — — ( 2,538 ) Shares issued under stock incentive plans 893 9 ( 9 ) — — — Share-based compensation expense — — 949 — — 949 Restricted shares forgiven for taxes ( 30 ) — ( 87 ) — — ( 87 ) Other comprehensive income — — — — 3,821 3,821 Balance as of March 31, 2022 43,890 $ 439 $ 473,072 $ ( 222,402 ) $ ( 28,081 ) $ 223,028 See notes to condensed consolidated financial statements (unaudited). 5 Table of Contents NN, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, (in thousands) 2023 2022 Cash flows from operating activities Net loss $ ( 10,175 ) $ ( 3,302 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 11,516 11,429 Amortization of debt issuance costs and discount 353 332 Impairments of property, plant and equipment — 233 Total derivative loss (gain), net of cash settlements 386 ( 2,543 ) Share of net income from joint venture, net of cash dividends received ( 281 ) 1,934 Share-based compensation expense 381 949 Deferred income taxes 480 ( 42 ) Other ( 287 ) ( 826 ) Changes in operating assets and liabilities: Accounts receivable ( 5,506 ) ( 17,633 ) Inventories ( 447 ) ( 5,536 ) Accounts payable 2,813 11,416 Income taxes receivable and payable, net ( 283 ) ( 631 ) Other 1,276 ( 1,003 ) Net cash provided by (used in) operating activities 226 ( 5,223 ) Cash flows from investing activities Acquisition of property, plant and equipment ( 4,997 ) ( 4,262 ) Proceeds from sale of property, plant, and equipment 1,035 36 Net cash used in investing activities ( 3,962 ) ( 4,226 ) Cash flows from financing activities Proceeds from long-term debt 17,000 8,000 Repayments of long-term debt ( 17,832 ) ( 8,729 ) Cash paid for debt issuance costs ( 55 ) — Proceeds from short-term debt, net 2,923 — Other ( 785 ) ( 787 ) Net cash provided by (used in) financing activities 1,251 ( 1,516 ) Effect of exchange rate changes on cash flows 222 2,936 Net change in cash and cash equivalents ( 2,263 ) ( 8,029 ) Cash and cash equivalents at beginning of period 12,808 28,656 Cash and cash equivalents at end of period $ 10,545 $ 20,627 See notes to condensed consolidated financial statements (unaudited). 6 Table of Contents NN, Inc. Notes to Condensed Consolidated Financial Statements March 31, 2023 (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, 2022, was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”), which we filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 10, 2023. 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 months ended March 31, 2023 and 2022; financial position as of March 31, 2023 and December 31, 2022; and cash flows for the three months ended March 31, 2023 and 2022, 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 2022 Annual Report. The results for the three months ended March 31, 2023, are not necessarily indicative of results for the year ending December 31, 2023, 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. Accounts Receivable Sales Programs We participate in programs established by our customers which allows us to sell certain receivables from that customer on a non-recourse basis to a third-party financial institution. During the three months ended March 31, 2023, we incurred fees of $ 0.2 million related to the sale of receivables which is recorded in the Other income, net line item on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Assets Held For Sale Due to a strategic shift to focus on growth opportunities and ongoing efforts to optimize the Company’s manufacturing footprint, we plan to cease manufacturing operations at several facilities during 2023, including our Irvine and Taunton locations. We are in the process of selling machinery and equipment from these locations, which are a part of our Power Solutions segment, and recognized a $ 0.5 million loss on sales during the three months ended March 31, 2023, which is included in the Other operating expense, net line item on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In addition, there is machinery and equipment with a net book value of $ 0.8 million which we sold in the second quarter of 2023 that is classified as held for sale as of March 31, 2023 and is included in the Other current assets line item on the Condensed Consolidated Balance Sheets. 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, 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. 7 Table of Contents The following table presents our financial performance by reportable segment. Three Months Ended March 31, 2023 2022 Net sales: Mobile Solutions $ 78,018 $ 76,070 Power Solutions 49,072 52,011 Intersegment sales eliminations ( 2 ) ( 14 ) Total $ 127,088 $ 128,067 Income (loss) from operations: Mobile Solutions $ ( 3,319 ) $ 1,969 Power Solutions 1,747 364 Corporate ( 5,503 ) ( 5,753 ) Total $ ( 7,075 ) $ ( 3,420 ) Note 3. Inventories Inventories are comprised of the following amounts: March 31, 2023 December 31, 2022 Raw materials $ 31,462 $ 32,146 Work in process 25,433 24,610 Finished goods 24,883 23,926 Total inventories $ 81,778 $ 80,682 Note 4. Intangible Assets 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, 2022 $ 22,356 $ 50,535 $ 72,891 Amortization ( 839 ) ( 2,725 ) ( 3,564 ) Balance as of March 31, 2023 $ 21,517 $ 47,810 $ 69,327 Intangible assets are reviewed for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. As of March 31, 2023, our market capitalization was at a level that was less than the net book value of our stockholders’ equity, which was deemed 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 three months ended March 31, 2023. 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, 2022 $ 31,802 Share of earnings 281 Foreign currency translation gain 129 Balance as of March 31, 2023 $ 32,212 Note 6. Income Taxes Our effective tax rate was ( 14.2 )% and ( 39.6 )% for the three months ended March 31, 2023 and 2022, respectively. The effective tax rates for the three months ended March 31, 2023 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 8 Table of Contents portion of the future tax benefit may not be realized. In addition, the effective tax rate was unfavorably impacted by the U.S. tax on the earnings of foreign subsidiaries under the global intangible low-taxed income regime. Note 7. Debt On March 22, 2021, we entered into a new $ 150.0 million term loan facility (as amended from time to time, the “Term Loan Facility”) and a new $ 50.0 million asset backed credit facility (as amended from time to time, the “ABL Facility”). On March 3, 2023, we amended the Term Loan Facility (the “Term Loan Amendment”) and ABL Facility to adjust certain covenants under the agreements, as well as to replace references to LIBOR with secured overnight finance rate (“SOFR”) for interest rate calculations. The following table presents the outstanding debt balances. March 31, 2023 December 31, 2022 Term Loan Facility $ 147,000 $ 147,375 ABL Facility 1,000 1,000 International loans 11,290 8,729 Total principal 159,290 157,104 Less-current maturities of long-term debt 6,258 3,321 Principal, net of current portion 153,032 153,783 Less-unamortized debt issuance costs and discount (1) 6,804 4,394 Long-term debt, net of current portion $ 146,228 $ 149,389 _______________________________ (1) In addition to this amount, costs of $ 0.6 million and $ 0.6 million related to the ABL Facility were recorded in other non-current assets as of March 31, 2023 and December 31, 2022, respectively. Term Loan Facility Effective March 31, 2023, outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month, three-month, or six-month SOFR with a duration adjustment (“Adjusted SOFR”), 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 March 31, 2023, the Term Loan Facility bore interest, based on one-month Adjusted SOFR, at 11.782 %. Beginning with the second quarter of 2023, interest is increased on a paid-in-kind basis at a rate between 0.50 % and 2.00 % (“PIK interest”), dependent on the Company’s leverage ratio and whether the Company completes a qualifying junior equity raise by June 30, 2023. The PIK interest is payable on the loan maturity date of September 22, 2026. The Term Loan Facility requires quarterly principal payments of $ 0.4 million with the remaining unpaid principal amount due at the loan maturity date. We may be required to make additional principal payments annually that are calculated as a percentage of our excess cash flow, as defined by the lender, based on our net leverage ratio. The Term Loan Facility is collateralized by all of our assets. The Term Loan Facility has a first lien on all domestic assets other than accounts receivable and inventory and has a second lien on domestic accounts receivable and inventory. We were in compliance with all requirements under the Term Loan Facility as of March 31, 2023. The Term Loan Facility was issued at a $ 3.8 million discount and we have capitalized an additional $ 5.3 million in 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. We had an interest rate swap that changed the one-month LIBOR to a fixed rate of 1.291 % on $ 60.0 million of the outstanding balance of the Term Loan Facility. During the first quarter of 2023, we terminated the interest rate swap and received cash proceeds of $ 2.5 million which was equal to its fair value. 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. Effective March 3, 2023, the variable borrowing rate is either 1) Adjusted SOFR 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 Adjusted SOFR. At March 31, 2023, using one-month Adjusted SOFR plus a 2.00 % margin, the weighted average interest rate on outstanding borrowings under the ABL 9 Table of Contents Facility was 6.89 %. We pay a commitment fee of 0.375 % for unused capacity under the ABL Facility and a 2.125 % fee on the amount of letters of credit outstanding. The final maturity date of the ABL Facility is March 22, 2026. As of March 31, 2023, we had $ 1.0 million of outstanding borrowings under the ABL Facility, $ 10.9 million of outstanding letters of credit, and $ 32.5 million available for future borrowings under the ABL Facility. The ABL Facility has a first lien on domestic accounts receivable and inventory. We were in compliance with all requirements under the ABL Facility as of March 31, 2023. Note 8. Leases The following table contains supplemental cash flow information related to leases. Three Months Ended March 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used in finance leases $ 84 $ 80 Operating cash flows used in operating leases 4,056 4,204 Financing cash flows used in finance leases 689 700 Right-of-use assets obtained in exchange for new finance lease liabilities — 395 Right-of-use assets obtained in exchange for new operating lease liabilities (1) 477 1,305 _______________________________ (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 March 31, 2023. Other Legal Matters 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. 10 Table of Contents Note 10. Preferred Stock and Stockholders' Equity Series D Perpetual Preferred Stock On March 22, 2021, we completed a private placement of 65,000 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 March 31, 2023, the carrying value of the Series D Preferred Stock shares was $ 67.8 million, which included $ 21.1 million of accumulated unpaid and deemed dividends. The following table presents the change in the Series D Preferred Stock carrying value during the three months ended March 31, 2023. Balance as of December 31, 2022 $ 64,701 Accrual of in-kind dividends 2,410 Amortization 641 Balance as of March 31, 2023 $ 67,752 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. The following tables summarize revenue by customer geographical region. Three Months Ended March 31, 2023 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total United States and Puerto Rico $ 37,206 $ 40,222 $ ( 2 ) $ 77,426 China 13,812 749 — 14,561 Brazil 11,611 110 — 11,721 Mexico 4,279 3,488 — 7,767 Germany 1,732 74 — 1,806 Poland 1,856 5 — 1,861 Other 7,522 4,424 — 11,946 Total net sales $ 78,018 $ 49,072 $ ( 2 ) $ 127,088 11 Table of Contents Three Months Ended March 31, 2022 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total United States and Puerto Rico $ 37,810 $ 40,486 $ ( 14 ) $ 78,282 China 12,552 1,244 — 13,796 Brazil 10,720 345 — 11,065 Mexico 5,064 4,741 — 9,805 Germany 1,283 62 — 1,345 Poland 1,340 4 — 1,344 Other 7,301 5,129 — 12,430 Total net sales $ 76,070 $ 52,011 $ ( 14 ) $ 128,067 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 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 March 31, 2023 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total Automotive $ 55,804 $ 8,803 $ — $ 64,607 General Industrial 20,213 14,605 — 34,818 Residential/Commercial Electrical — 14,585 — 14,585 Other 2,001 11,079 ( 2 ) 13,078 Total net sales $ 78,018 $ 49,072 $ ( 2 ) $ 127,088 Three Months Ended March 31, 2022 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total Automotive $ 50,596 $ 10,078 $ — $ 60,674 General Industrial 21,805 16,335 — 38,140 Residential/Commercial Electrical — 17,199 — 17,199 Other 3,669 8,399 ( 14 ) 12,054 Total net sales $ 76,070 $ 52,011 $ ( 14 ) $ 128,067 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 $ 1.2 million and $ 0.7 million as of March 31, 2023 and December 31, 2022, respectively. Revenue recognized for performance obligations satisfied or partially satisfied during the three months ended March 31, 2023 included $ 0.3 million that was included in deferred revenue as of December 31, 2022. 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 March 31, 2023, 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. 12 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 March 31, 2023 2022 Restricted stock $ 167 604 Performance share units 200 289 Stock options 14 $ 56 Share-based compensation expense $ 381 $ 949 Restricted Stock The following table presents the status of unvested restricted stock awards as of March 31, 2023 and changes during the three months then ended. Nonvested Restricted Shares Weighted Average Grant-Date Fair Value Unvested at January 1, 2023 1,038 $ 4.03 Vested ( 642 ) 4.33 Unvested at March 31, 2023 396 $ 3.55 Total grant date fair value of restricted stock that vested in the three months ended March 31, 2023, was $ 2.8 million. 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 December 31, 2022 $ ( 40,172 ) $ 3,149 $ ( 97 ) $ ( 37,120 ) Other comprehensive income (loss) before reclassifications 1,840 ( 327 ) 97 1,610 Amounts reclassified from AOCI to interest expense (2) — ( 468 ) — ( 468 ) Net other comprehensive income (loss) 1,840 ( 795 ) 97 1,142 Balance as of March 31, 2023 $ ( 38,332 ) $ 2,354 $ — $ ( 35,978 ) Balance as of December 31, 2021 $ ( 32,016 ) $ 151 $ ( 37 ) $ ( 31,902 ) Other comprehensive income (loss) before reclassifications 2,600 1,503 ( 316 ) 3,787 Amounts reclassified from AOCI to interest expense (2) — 44 ( 10 ) 34 Net other comprehensive income (loss) 2,600 1,547 ( 326 ) 3,821 Balance as of March 31, 2022 $ ( 29,416 ) $ 1,698 $ ( 363 ) $ ( 28,081 ) ______________________ (1) Income tax effect of changes in interest rate swap. (2) Represents interest rate swap settlements of effective hedge. 13 Table of Contents Note 14. Net Loss Per Common Share The following table summarizes the computation of basic and diluted net loss per common share. Three Months Ended March 31, 2023 2022 Numerator: Net loss $ ( 10,175 ) $ ( 3,302 ) Adjustment for preferred stock cumulative dividends and deemed dividends ( 3,051 ) ( 2,538 ) Numerator for basic and diluted net loss per common share $ ( 13,226 ) $ ( 5,840 ) Denominator: Weighted average common shares outstanding 43,847 43,308 Adjustment for participating securities ( 742 ) ( 608 ) Adjustment for warrants outstanding (1) 2,204 1,894 Shares used to calculate basic and diluted net loss per share 45,309 44,594 Basic and diluted net loss per common share $ ( 0.29 ) $ ( 0.13 ) Cash dividends declared per common share $ — $ — _______________________________ (1) Outstanding warrants that are exercisable at an exercise price of $ 0.01 per share, are included in shares outstanding for calculation of basic earnings per share (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 March 31, 2023 2022 Options 516 600 2019 Warrants 1,500 1,500 2,016 2,100 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 and three months ended March 31, 2023. The 2019 Warrants excluded from the calculation of diluted net loss per share 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 2022 Annual Report. Embedded Derivatives In accordance with ASC 815-15, Derivatives and Hedging - Embedded Derivatives , certain features of our preferred stock and long term debt were bifurcated and accounted for as derivatives separately. In conjunction with the Term Loan Amendment, we issued detachable warrants to purchase up to 1.0 million shares of our comment stock at an exercise price of $ 0.01 per share (the “2023 Warrants”). The 2023 Warrants are exercisable, in full or in part, at any time prior to March 3, 2033. The 2023 Warrants include anti-dilution adjustments in the event of certain future equity issuances, stock splits, stock dividends, combinations or similar events. In addition, we are obligated to issue 1.0 million warrants in the second quarter of 2023, subject to a contingency that expires June 30, 2023. The contingently issuable warrants would have the same terms and conditions as the 2023 Warrants. In conjunction with our placement of the Series D Preferred Stock, we issued the 2021 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 14 Table of Contents 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 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. In conjunction with our placement of the Series B Preferred Stock, we issued detachable warrants to purchase up to 1.5 million shares of our common stock at an exercise price of $ 11.49 per share (the “2019 Warrants”). The 2019 Warrants, are exercisable, in full or in part, at any time prior to December 11, 2026 and are subject to anti-dilution adjustments in the event of future below market issuances, stock splits, stock dividends, combinations or similar events. The following table presents the change in the liability balance of the embedded derivatives during the three months ended March 31, 2023. Balance as of December 31, 2022 $ 2,959 Issuances 2,712 Change in fair value (1) ( 2,009 ) Balance as of March 31, 2023 $ 3,662 _______________________________ (1) Changes in the fair value are recognized in the “Other income, net” line in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The following tables show the fair values of the embedded derivatives within the fair value hierarchy. March 31, 2023 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 3,055 — 607 December 31, 2022 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 2,831 — 128 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 March 31, 2023 and December 31, 2022. The fair value of the 2021 Warrants and 2023 Warrants is determined using the observable market price of a share of our common stock, less the $ 0.01 per share exercise price. 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 March 31, 2023 and December 31, 2022. Interest Rate Swap 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 had a notional amount of $ 60.0 million and a maturity date of July 31, 2024. We designated the 2021 Swap as a cash flow hedge at inception with cash settlements recognized in interest expense. During the first quarter of 2023, we terminated the 2021 Swap and received cash proceeds of $ 2.5 million which was the fair value of the 2021 Swap. Since the 2021 Swap was an effective cash flow hedge and the forecasted interest payments remaining probable of occurring, the gain will be recognized as a reduction to interest expense through the original maturity date of July 31, 2024. 15 Table of Contents The following table presents the effects of the interest rate swap on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Three Months Ended March 31, 2023 2022 Interest expense (benefit) (1) $ ( 468 ) $ 44 _______________________________ (1) Represents settlements on the interest rate swap. The following table shows the fair value of the interest rate swap within the fair value hierarchy. December 31, 2022 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 $ — $ 2,130 $ — Derivative asset - other non-current assets $ — $ 1,023 $ — Total $ — $ 3,153 $ — The fair value of the interest rate swap is calculated through standard pricing models which use inputs derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces. The counterparty to these derivative contracts is a highly rated financial institution which we believe carries only a minimal risk of nonperformance. Fair Value Disclosures Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, and debt. As of March 31, 2023 and December 31, 2022, the carrying values of these financial instruments, except for debt, approximated fair value. The fair value of our debt was $ 156.0 million and $ 155.2 million, with a carrying amount of $ 152.5 million and $ 152.7 million, as of March 31, 2023 and December 31, 2022, respectively. The fair value of debt was calculated by discounting the future cash flows to its present value using prevailing market interest rates for debt with similar creditworthiness, terms and maturities and is considered a Level 3 fair value measurement. 16 Table of Contents