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) 2023 2022 2023 2022 Net sales $ 124,443 $ 127,297 $ 376,737 $ 380,726 Cost of sales (exclusive of depreciation and amortization shown separately below) 104,543 108,033 320,648 316,500 Selling, general, and administrative expense 11,693 10,205 35,833 38,453 Depreciation and amortization 11,577 11,193 34,643 33,962 Other operating expense (income), net ( 631 ) ( 17 ) ( 526 ) 1,862 Loss from operations ( 2,739 ) ( 2,117 ) ( 13,861 ) ( 10,051 ) Interest expense 5,739 3,746 15,484 10,673 Other expense (income), net ( 1,463 ) ( 1,156 ) 1,970 ( 4,219 ) Loss before benefit (provision) for income taxes and share of net income from joint venture ( 7,015 ) ( 4,707 ) ( 31,315 ) ( 16,505 ) Benefit (provision) for income taxes 245 1,068 ( 1,381 ) ( 1,514 ) Share of net income from joint venture 1,713 1,424 3,087 3,935 Net loss $ ( 5,057 ) $ ( 2,215 ) $ ( 29,609 ) $ ( 14,084 ) Other comprehensive loss: Foreign currency translation loss $ ( 3,072 ) $ ( 7,653 ) $ ( 3,606 ) $ ( 13,543 ) Interest rate swap: Change in fair value, net of tax — 904 ( 230 ) 2,464 Reclassification adjustments included in net loss, net of tax ( 449 ) ( 116 ) ( 1,366 ) ( 51 ) Other comprehensive loss $ ( 3,521 ) $ ( 6,865 ) $ ( 5,202 ) $ ( 11,130 ) Comprehensive loss $ ( 8,578 ) $ ( 9,080 ) $ ( 34,811 ) $ ( 25,214 ) Basic and diluted net loss per share $ ( 0.18 ) $ ( 0.11 ) $ ( 0.84 ) $ ( 0.49 ) Shares used to calculate basic and diluted net loss per share 47,539 44,711 46,410 44,670 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, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 21,790 $ 12,808 Accounts receivable, net of allowances of $ 1,210 and $ 1,469 at September 30, 2023 and December 31, 2022 73,229 74,129 Inventories 70,917 80,682 Income tax receivable 12,182 12,164 Prepaid assets 3,800 2,794 Other current assets 11,339 9,123 Total current assets 193,257 191,700 Property, plant and equipment, net of accumulated depreciation of $ 243,638 and $ 225,046 at September 30, 2023 and December 31, 2022 185,707 197,637 Operating lease right-of-use assets 43,549 46,713 Intangible assets, net 62,202 72,891 Investment in joint venture 29,131 31,802 Deferred tax assets 164 102 Other non-current assets 6,688 5,282 Total assets $ 520,698 $ 546,127 Liabilities, Preferred Stock, and Stockholders’ Equity Current liabilities: Accounts payable $ 49,347 $ 45,871 Accrued salaries, wages and benefits 13,243 11,671 Income tax payable 340 926 Short-term debt and current maturities of long-term debt 6,699 3,321 Current portion of operating lease liabilities 5,407 5,294 Other current liabilities 13,483 11,723 Total current liabilities 88,519 78,806 Deferred tax liabilities 4,137 5,596 Long-term debt, net of current portion 145,892 149,389 Operating lease liabilities, net of current portion 47,841 51,411 Other non-current liabilities 16,288 9,960 Total liabilities 302,677 295,162 Commitments and contingencies (Note 9) Series D perpetual preferred stock - $ 0.01 par value per share, 65 shares authorized, issued and outstanding at September 30, 2023 and December 31, 2022 74,295 64,701 Stockholders’ equity: Common stock - $ 0.01 par value per share, 90,000 shares authorized, 47,311 and 43,856 shares issued and outstanding at September 30, 2023 and December 31, 2022 473 439 Additional paid-in capital 460,382 468,143 Accumulated deficit ( 274,807 ) ( 245,198 ) Accumulated other comprehensive loss ( 42,322 ) ( 37,120 ) Total stockholders’ equity 143,726 186,264 Total liabilities, preferred stock, and stockholders’ equity $ 520,698 $ 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 September 30, 2023 and 2022 (Unaudited) Common Stock Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Total (in thousands) Number of shares Par value Balance as of June 30, 2023 47,019 $ 470 $ 462,525 $ ( 269,750 ) $ ( 38,801 ) $ 154,444 Net loss — — — ( 5,057 ) — ( 5,057 ) Dividends accrued for preferred stock — — ( 3,347 ) — — ( 3,347 ) Shares issued under stock incentive plans, net of forfeitures 292 3 ( 3 ) — — — Share-based compensation expense — — 1,207 — — 1,207 Other comprehensive loss — — — — ( 3,521 ) ( 3,521 ) Balance as of September 30, 2023 47,311 $ 473 $ 460,382 $ ( 274,807 ) $ ( 42,322 ) $ 143,726 Common Stock Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Total (in thousands) Number of shares Par value 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 ) Shares forfeited under stock incentive plans ( 2 ) — — — — — Share-based compensation expense — — 307 — — 307 Other comprehensive loss — — — — ( 6,865 ) ( 6,865 ) Balance as of September 30, 2022 43,882 $ 439 $ 470,543 $ ( 233,184 ) $ ( 43,032 ) $ 194,766 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, 2023 and 2022 (Unaudited) Common Stock Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Total (in thousands) Number of shares Par value Balance as of December 31, 2022 43,856 $ 439 $ 468,143 $ ( 245,198 ) $ ( 37,120 ) $ 186,264 Net loss — — ( 29,609 ) — ( 29,609 ) Dividends accrued for preferred stock — — ( 9,594 ) — — ( 9,594 ) Shares issued under stock incentive plans, net of forfeitures 3,598 36 ( 57 ) — — ( 21 ) Share-based compensation expense — — 2,058 — — 2,058 Restricted shares forgiven for taxes ( 143 ) ( 2 ) ( 168 ) — — ( 170 ) Other comprehensive loss — — — — ( 5,202 ) ( 5,202 ) Balance as of September 30, 2023 47,311 $ 473 $ 460,382 $ ( 274,807 ) $ ( 42,322 ) $ 143,726 Common Stock Additional paid-in capital Accumulated deficit Accumulated other comprehensive loss Total (in thousands) Number of shares Par value 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 ) Shares issued under stock incentive plans, net of forfeitures 886 9 ( 9 ) — — — Share-based compensation expense — — 3,862 — — 3,862 Restricted shares forgiven for taxes ( 31 ) — ( 88 ) — — ( 88 ) Other comprehensive loss ( 11,130 ) ( 11,130 ) Balance as of September 30, 2022 43,882 $ 439 $ 470,543 $ ( 233,184 ) $ ( 43,032 ) $ 194,766 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) 2023 2022 Cash flows from operating activities Net loss $ ( 29,609 ) $ ( 14,084 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 34,643 33,962 Amortization of debt issuance costs and discount 1,409 1,021 Paid-in-kind interest 1,491 — Total derivative loss (gain), net of cash settlements 3,139 ( 4,858 ) Share of net income from joint venture, net of cash dividends received 851 2,310 Share-based compensation expense 2,058 3,862 Deferred income taxes ( 1,531 ) ( 1,831 ) Other ( 776 ) ( 3,096 ) Changes in operating assets and liabilities: Accounts receivable 335 ( 15,667 ) Inventories 9,692 ( 11,314 ) Accounts payable 5,240 9,827 Income taxes receivable and payable, net ( 576 ) ( 403 ) Other ( 2,476 ) ( 2,400 ) Net cash provided by (used in) operating activities 23,890 ( 2,671 ) Cash flows from investing activities Acquisition of property, plant and equipment ( 16,292 ) ( 14,011 ) Proceeds from sale of property, plant, and equipment 2,876 460 Net cash used in investing activities ( 13,416 ) ( 13,551 ) Cash flows from financing activities Proceeds from long-term debt 52,000 32,000 Repayments of long-term debt ( 55,522 ) ( 28,158 ) Cash paid for debt issuance costs ( 55 ) ( 136 ) Proceeds from short-term debt 3,648 — Other ( 1,276 ) ( 2,265 ) Net cash provided by (used in) financing activities ( 1,205 ) 1,441 Effect of exchange rate changes on cash flows ( 287 ) ( 1,324 ) Net change in cash and cash equivalents 8,982 ( 16,105 ) Cash and cash equivalents at beginning of period 12,808 28,656 Cash and cash equivalents at end of period $ 21,790 $ 12,551 See notes to condensed consolidated financial statements (unaudited). 7 Table of Contents NN, Inc. Notes to Condensed Consolidated Financial Statements September 30, 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. As of September 30, 2023, we had 27 facilities in North America, Europe, South America, and Asia. 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 and nine months ended September 30, 2023 and 2022; financial position as of September 30, 2023 and December 31, 2022; and cash flows for the nine months ended September 30, 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 and nine months ended September 30, 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 nine months ended September 30, 2023, we incurred fees of $ 0.8 million, related to the sale of receivables which is recorded in the Other expense (income), net line item on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Facility Closures Due to ongoing efforts to optimize the Company’s manufacturing footprint, we ceased manufacturing operations at several facilities during the nine months ended September 30, 2023, including at our Irvine and Taunton locations. We sold machinery and equipment from these locations and recognized a loss on sales of $ 0.2 million during the nine months ended September 30, 2023. The loss, which is primarily reported within our Power Solutions segment, is included in the Other operating expense (income), net line item on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In June 2023, we began subleasing our Irvine and Taunton facilities under subleases that terminate in 2034 and 2035, respectively. Note 2. Segment Information Our business is aggregated into the following two reportable segments: • Mobile Solutions, which is focused on growth in the automotive, general industrial, and medical 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. 8 Table of Contents The following table presents our financial performance by reportable segment. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net sales: Mobile Solutions $ 78,961 $ 76,122 $ 234,132 $ 225,542 Power Solutions 45,484 51,124 142,618 155,184 Intersegment sales eliminations ( 2 ) 51 ( 13 ) — Total $ 124,443 $ 127,297 $ 376,737 $ 380,726 Income (loss) from operations: Mobile Solutions $ ( 1,283 ) $ ( 474 ) $ ( 6,063 ) $ 3,224 Power Solutions 3,936 2,582 8,266 4,376 Corporate ( 5,392 ) ( 4,225 ) ( 16,064 ) ( 17,651 ) Total $ ( 2,739 ) $ ( 2,117 ) $ ( 13,861 ) $ ( 10,051 ) Note 3. Inventories Inventories are comprised of the following amounts: September 30, 2023 December 31, 2022 Raw materials $ 26,780 $ 32,146 Work in process 23,317 24,610 Finished goods 20,820 23,926 Total inventories $ 70,917 $ 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 ( 2,515 ) ( 8,174 ) ( 10,689 ) Balance as of September 30, 2023 $ 19,841 $ 42,361 $ 62,202 Intangible assets are reviewed for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. There were no indicators of impairment at September 30, 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 3,087 Dividends paid by joint venture ( 3,938 ) Foreign currency translation loss ( 1,820 ) Balance as of September 30, 2023 $ 29,131 Note 6. Income Taxes Our effective tax rate was 3.5 % and ( 4.4 )% for the three and nine months ended September 30, 2023, respectively, and 22.7 % and ( 9.2 )% for the three and nine months ended September 30, 2022, respectively. The effective tax rates for the three and nine months ended September 30, 2023 and 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 for the three and nine months ended September 30, 9 Table of Contents 2023 was favorably impacted by a net valuation allowance release based on management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. 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. September 30, 2023 December 31, 2022 Term Loan Facility $ 147,741 $ 147,375 ABL Facility — 1,000 International loans 10,704 8,729 Total principal 158,445 157,104 Less: short-term debt and current maturities of long-term debt 6,699 3,321 Principal of long-term debt, net of current portion 151,746 153,783 Less: unamortized debt issuance costs and discount (1) 5,854 4,394 Long-term debt, net of current portion $ 145,892 $ 149,389 _______________________________ (1) In addition to this amount, costs of $ 0.5 million and $ 0.6 million related to the ABL Facility were recorded in other non-current assets as of September 30, 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 %. Beginning in the second quarter of 2023, interest was increased on a paid-in-kind basis at a rate between 1.00 % and 2.00 % (“PIK interest”), dependent on the Company’s leverage ratio. The PIK interest is payable on the loan maturity date of September 22, 2026. At September 30, 2023, the Term Loan Facility bore interest, including PIK interest, based on one-month Adjusted SOFR, at 14.291 %. 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 September 30, 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 September 30, 2023, using one-month Adjusted SOFR plus a 2.00 % margin, the interest rate on outstanding borrowings under the ABL Facility was 7.429 %. 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. 10 Table of Contents As of September 30, 2023, we had no outstanding borrowings under the ABL Facility, $ 10.9 million of outstanding letters of credit, and $ 28.7 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 September 30, 2023. Note 8. Leases The following table contains supplemental cash flow information related to leases. Nine Months Ended September 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used in finance leases $ 258 $ 262 Operating cash flows used in operating leases 10,533 10,865 Financing cash flows used in finance leases 1,084 2,177 Right-of-use assets obtained in exchange for new finance lease liabilities 1,619 908 Right-of-use assets obtained in exchange for new operating lease liabilities (1) 477 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, 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. 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 11 Table of Contents 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, 2023, the carrying value of the Series D Preferred Stock shares was $ 74.3 million, which included $ 27.6 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, 2023. Balance as of December 31, 2022 $ 64,701 Accrual of in-kind dividends 7,451 Amortization 2,143 Balance as of September 30, 2023 $ 74,295 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 September 30, 2023 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total United States and Puerto Rico $ 37,048 $ 36,433 $ ( 2 ) $ 73,479 China 12,414 1,671 — 14,085 Brazil 13,936 215 — 14,151 Mexico 3,221 3,204 — 6,425 Germany 2,139 98 — 2,237 Poland 1,397 2 — 1,399 Other 8,806 3,861 — 12,667 Total net sales $ 78,961 $ 45,484 $ ( 2 ) $ 124,443 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 12 Table of Contents Nine Months Ended September 30, 2023 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total United States and Puerto Rico $ 112,850 $ 115,571 $ ( 13 ) $ 228,408 China 37,714 4,480 — 42,194 Brazil 37,372 479 — 37,851 Mexico 11,106 9,892 — 20,998 Germany 5,617 329 — 5,946 Poland 5,025 11 — 5,036 Other 24,448 11,856 — 36,304 Total net sales $ 234,132 $ 142,618 $ ( 13 ) $ 376,737 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 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, specification plating, and surface finishing. Three Months Ended September 30, 2023 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total Automotive $ 55,933 $ 8,641 $ — $ 64,574 General Industrial 17,284 12,351 — 29,635 Residential/Commercial Electrical — 17,802 — 17,802 Other 5,744 6,690 ( 2 ) 12,432 Total net sales $ 78,961 $ 45,484 $ ( 2 ) $ 124,443 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 13 Table of Contents Nine Months Ended September 30, 2023 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total Automotive $ 164,698 $ 26,559 $ — $ 191,257 General Industrial 56,725 40,466 — 97,191 Residential/Commercial Electrical — 49,995 — 49,995 Other 12,709 25,598 ( 13 ) 38,294 Total net sales $ 234,132 $ 142,618 $ ( 13 ) $ 376,737 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 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 $ 1.1 million and $ 0.7 million as of September 30, 2023 and December 31, 2022, respectively. Revenue recognized for performance obligations satisfied or partially satisfied during the nine months ended September 30, 2023 included $ 0.7 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 September 30, 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. 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, 2023 2022 2023 2022 Restricted stock $ 1,001 471 1,780 3,233 Performance share units 206 ( 201 ) 264 505 Stock options — $ 37 $ 14 $ 124 Share-based compensation expense $ 1,207 $ 307 $ 2,058 $ 3,862 14 Table of Contents Restricted Stock The following table presents the status of unvested restricted stock awards as of September 30, 2023 and changes during the nine months then ended. Nonvested Restricted Shares Weighted Average Grant-Date Fair Value Unvested at January 1, 2023 1,038 $ 4.03 Granted 3,711 1.37 Vested ( 1,130 ) 3.65 Forfeited ( 160 ) 1.51 Unvested at September 30, 2023 3,459 $ 1.41 During the nine months ended September 30, 2023, we granted 1,881,000 shares of restricted stock to non-executive directors, officers and certain other employees under the NN, Inc. 2022 Omnibus Incentive Plan (“2022 Omnibus Plan”). The shares of restricted stock vest pro-rata generally over three years for employees and over one year for non-executive directors. During the nine months ended September 30, 2023, we granted 1,830,000 shares of restricted stock to new executive officers as inducement awards, which vest pro-rata over five years . Total grant date fair value of restricted stock that vested in the nine months ended September 30, 2023, was $ 4.1 million. 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. The following table presents the status of unvested PSUs as of September 30, 2023 and activity during the nine months then ended. Nonvested PSU Awards Weighted Average Grant-Date Fair Value Nonvested at January 1, 2023 1,031 $ 3.80 Granted 3,621 1.14 Vested ( 67 ) 4.63 Forfeited ( 634 ) 2.47 Nonvested at September 30, 2023 3,951 $ 1.56 During the nine months ended September 30, 2023, we granted 561,000 PSUs to certain executive officers. These units 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 the three-year performance period that ends December 31, 2025. During the nine months ended September 30, 2023, we granted 3,060,000 PSUs to new executive officers as inducement awards. These units cliff-vest after five years and are contingent on the Company’s stock price meeting specified thresholds. We estimated the grant date fair value of the PSU awards using the Monte Carlo simulation model, as the total shareholder return metric and changes in stock price are considered market conditions under ASC Topic 718, Compensation – stock compensation . During the nine months ended September 30, 2023, 67,000 PSUs were subject to accelerated vesting upon a participant’s termination that was a qualifying event under the terms of the PSU award agreements. Total grant date fair value of PSUs that vested in the nine months ended September 30, 2023, was $ 0.3 million. 15 Table of Contents 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, 2023 $ ( 40,706 ) $ 1,905 $ — $ ( 38,801 ) Other comprehensive income (loss) before reclassifications ( 3,072 ) — — ( 3,072 ) Amounts reclassified from AOCI to interest expense (2) — ( 449 ) — ( 449 ) Net other comprehensive income (loss) ( 3,072 ) ( 449 ) — ( 3,521 ) Balance as of September 30, 2023 $ ( 43,778 ) $ 1,456 $ — $ ( 42,322 ) 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 ) 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 ( 3,606 ) ( 327 ) 97 ( 3,836 ) Amounts reclassified from AOCI to interest expense (2) — ( 1,366 ) — ( 1,366 ) Net other comprehensive income (loss) ( 3,606 ) ( 1,693 ) 97 ( 5,202 ) Balance as of September 30, 2023 $ ( 43,778 ) $ 1,456 $ — $ ( 42,322 ) 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 ) ______________________ (1) Income tax effect of changes in interest rate swap. (2) Represents (gain) loss recognized in interest expense on effective interest rate swap. 16 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Numerator: Net loss $ ( 5,057 ) $ ( 2,215 ) $ ( 29,609 ) $ ( 14,084 ) Adjustment for preferred stock cumulative dividends and deemed dividends ( 3,347 ) ( 2,783 ) ( 9,594 ) ( 7,979 ) Numerator for basic and diluted net loss per common share $ ( 8,404 ) $ ( 4,998 ) $ ( 39,203 ) $ ( 22,063 ) Denominator: Weighted average common shares outstanding 47,186 43,884 45,793 43,695 Adjustment for participating securities ( 3,496 ) ( 1,065 ) ( 2,365 ) ( 918 ) Adjustment for warrants outstanding (1) 3,849 1,892 2,982 1,893 Shares used to calculate basic and diluted net loss per share 47,539 44,711 46,410 44,670 Basic and diluted net loss per common share $ ( 0.18 ) $ ( 0.11 ) $ ( 0.84 ) $ ( 0.49 ) 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Stock Options 315 542 407 563 2019 Warrants 1,500 1,500 1,500 1,500 1,815 2,042 1,907 2,063 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 nine months ended September 30, 2023. The 2019 Warrants excluded from the calculation of diluted net loss per share had a per share exercise price of $ 11.03 . 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 warrants to purchase up to 2.0 million shares of our common 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 up to ten years after issuance. The 2023 Warrants include anti-dilution adjustments in the event of certain future equity issuances, stock splits, stock dividends, combinations or similar events. 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 17 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 $12.00 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. Due to the dilutive impact of subsequent issuances of warrants, the exercise price of the 2019 Warrants has been adjusted to $ 11.03 per share. The following table presents the change in the liability balance of the embedded derivatives during the nine months ended September 30, 2023. Balance as of December 31, 2022 $ 2,959 Issuances 2,712 Change in fair value (1) 1,642 Balance as of September 30, 2023 $ 7,313 _______________________________ (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 following tables show the fair values of the embedded derivatives within the fair value hierarchy. September 30, 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 $ 7,150 $ — $ 163 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 2023 Warrants and 2021 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 was 3 % as of September 30, 2023 and ranged from 3 % to 10 % as of December 31, 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, 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. 18 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Interest expense (benefit) (1) $ ( 449 ) $ ( 146 ) $ ( 1,366 ) $ ( 64 ) _______________________________ (1) Represents (gain) loss recognized in interest expense on effective 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 September 30, 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 $ 167.2 million and $ 155.2 million, with a carrying amount of $ 152.6 million and $ 152.7 million, as of September 30, 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. 19 Table of Contents