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) 2024 2023 Net sales $ 121,198 $ 127,088 Cost of sales (exclusive of depreciation and amortization shown separately below) 101,086 108,421 Selling, general, and administrative expense 13,348 13,165 Depreciation and amortization 12,547 11,516 Other operating expense (income), net ( 1,000 ) 1,061 Loss from operations ( 4,783 ) ( 7,075 ) Interest expense 5,366 4,288 Other expense (income), net 4,153 ( 2,208 ) Loss before provision for income taxes and share of net income from joint venture ( 14,302 ) ( 9,155 ) Provision for income taxes ( 506 ) ( 1,301 ) Share of net income from joint venture 2,271 281 Net loss $ ( 12,537 ) $ ( 10,175 ) Other comprehensive income (loss): Foreign currency translation gain (loss) $ ( 2,346 ) $ 1,840 Interest rate swap: Change in fair value, net of tax — ( 230 ) Reclassification adjustments included in net loss, net of tax ( 449 ) ( 468 ) Other comprehensive income (loss) $ ( 2,795 ) $ 1,142 Comprehensive loss $ ( 15,332 ) $ ( 9,033 ) Basic and diluted net loss per share $ ( 0.34 ) $ ( 0.29 ) Shares used to calculate basic and diluted net loss per share 47,724 45,309 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, 2024 December 31, 2023 Assets Current assets: Cash and cash equivalents $ 20,610 $ 21,903 Accounts receivable, net of allowances of $ 1,626 and $ 1,241 at March 31, 2024 and December 31, 2023 71,862 65,545 Inventories 72,718 71,563 Income tax receivable 11,952 11,885 Prepaid assets 5,957 2,464 Other current assets 10,439 9,194 Total current assets 193,538 182,554 Property, plant and equipment, net of accumulated depreciation of $ 260,340 and $ 254,013 at March 31, 2024 and December 31, 2023 179,647 185,812 Operating lease right-of-use assets 42,141 43,357 Intangible assets, net 55,268 58,724 Investment in joint venture 34,409 32,701 Deferred tax assets 734 734 Other non-current assets 7,087 7,003 Total assets $ 512,824 $ 510,885 Liabilities, Preferred Stock, and Stockholders’ Equity Current liabilities: Accounts payable $ 50,786 $ 45,480 Accrued salaries, wages and benefits 16,920 15,464 Income tax payable 431 524 Short-term debt and current maturities of long-term debt 7,014 3,910 Current portion of operating lease liabilities 5,177 5,735 Other current liabilities 14,464 10,506 Total current liabilities 94,792 81,619 Deferred tax liabilities 4,739 4,988 Long-term debt, net of current maturities 151,531 149,369 Operating lease liabilities, net of current portion 45,803 47,281 Other non-current liabilities 18,349 24,827 Total liabilities 315,214 308,084 Commitments and contingencies (Note 10) Series D perpetual preferred stock - $ 0.01 par value per share, 65 shares authorized, issued and outstanding at March 31, 2024 and December 31, 2023 81,469 77,799 Stockholders’ equity: Common stock - $ 0.01 par value per share, 90,000 shares authorized, 49,520 and 47,269 shares issued and outstanding at March 31, 2024 and December 31, 2023 495 473 Additional paid-in capital 464,081 457,632 Accumulated deficit ( 307,885 ) ( 295,348 ) Accumulated other comprehensive loss ( 40,550 ) ( 37,755 ) Total stockholders’ equity 116,141 125,002 Total liabilities, preferred stock, and stockholders’ equity $ 512,824 $ 510,885 See notes to condensed consolidated financial statements (unaudited). 4 Table of Contents NN, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, (in thousands) 2024 2023 Cash flows from operating activities Net loss $ ( 12,537 ) $ ( 10,175 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 12,547 11,516 Amortization of debt issuance costs and discount 544 353 Paid-in-kind interest 730 — Total derivative loss, net of cash settlements 3,331 386 Share of net income from joint venture, net of cash dividends received ( 2,271 ) ( 281 ) Share-based compensation expense 846 381 Deferred income taxes ( 260 ) 480 Other ( 666 ) ( 287 ) Changes in operating assets and liabilities: Accounts receivable ( 6,888 ) ( 5,506 ) Inventories ( 1,554 ) ( 447 ) Accounts payable 6,130 2,813 Income taxes receivable and payable, net ( 163 ) ( 283 ) Other 923 1,276 Net cash provided by operating activities 712 226 Cash flows from investing activities Acquisition of property, plant and equipment ( 5,460 ) ( 4,997 ) Proceeds from sale of property, plant, and equipment 98 1,035 Net cash used in investing activities ( 5,362 ) ( 3,962 ) Cash flows from financing activities Proceeds from long-term debt 13,001 17,000 Repayments of long-term debt ( 29,808 ) ( 17,832 ) Cash paid for debt issuance costs ( 646 ) ( 55 ) Proceeds from sale-leaseback of equipment 4,910 — Proceeds from sale-leaseback of land and buildings 16,863 — Repayments of financing obligations ( 99 ) — Proceeds from short-term debt — 2,923 Other ( 651 ) ( 785 ) Net cash provided by financing activities 3,570 1,251 Effect of exchange rate changes on cash flows ( 213 ) 222 Net change in cash and cash equivalents ( 1,293 ) ( 2,263 ) Cash and cash equivalents at beginning of period 21,903 12,808 Cash and cash equivalents at end of period $ 20,610 $ 10,545 See notes to condensed consolidated financial statements (unaudited). 5 Table of Contents NN, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity Three Months Ended March 31, 2024 and 2023 (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, 2023 47,269 $ 473 $ 457,632 $ ( 295,348 ) $ ( 37,755 ) $ 125,002 Net loss — — — ( 12,537 ) — ( 12,537 ) Dividends accrued for preferred stock — — ( 3,670 ) — — ( 3,670 ) Shares issued for warrants exercised 1,896 19 9,367 9,386 Shares issued under stock incentive plans, net of forfeitures 374 4 ( 4 ) — — — Share-based compensation expense — — 846 — — 846 Restricted shares surrendered for tax withholdings under stock incentive plans ( 19 ) ( 1 ) ( 90 ) — — ( 91 ) Other comprehensive loss — — — — ( 2,795 ) ( 2,795 ) Balance as of March 31, 2024 49,520 $ 495 $ 464,081 $ ( 307,885 ) $ ( 40,550 ) $ 116,141 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 — — — ( 10,175 ) — ( 10,175 ) Dividends accrued for preferred stock — — ( 3,051 ) — — ( 3,051 ) Share-based compensation expense — — 381 — — 381 Restricted shares surrendered for tax withholdings under stock incentive plans ( 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 See notes to condensed consolidated financial statements (unaudited). 6 Table of Contents NN, Inc. Notes to Condensed Consolidated Financial Statements March 31, 2024 (Unaudited) Note 1. Interim Financial Statements Nature of Business NN, Inc., a Delaware corporation, is a 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 a variety of end markets on a global basis. As of March 31, 2024, we had 27 facilities in North America, Europe, South America, and Asia. 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, 2023, was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”), which we filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 12, 2024. 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, 2024 and 2023; financial position as of March 31, 2024 and December 31, 2023; and cash flows for the three months ended March 31, 2024 and 2023, 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 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 2023 Annual Report. The results for the three months ended March 31, 2024, are not necessarily indicative of results for the year ending December 31, 2024, 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 Not Yet Adopted In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2023-07, Segment Reporting (Topic 832): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires additional disclosures related to reportable segments, including significant segment expenses and other segment items. ASU 2023-07 also permits entities to disclose more than one measure of a segment’s profit or loss and requires quarterly disclosure of certain information that is now only required annually. The new segment disclosures are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We plan to adopt ASU 2023-07 in our Form 10-K for the year ended December 31, 2024 on a retrospective basis and are in the process of assessing the impact on our disclosures. 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, 2024 and 2023, we incurred fees of $ 0.3 million and $ 0.2 million, respectively, 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). 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. 7 Table of Contents The following table presents our financial performance by reportable segment. Three Months Ended March 31, 2024 2023 Net sales: Mobile Solutions $ 73,060 $ 78,018 Power Solutions 48,238 49,072 Intersegment sales eliminations ( 100 ) ( 2 ) Total $ 121,198 $ 127,088 Income (loss) from operations: Mobile Solutions $ ( 2,143 ) $ ( 3,319 ) Power Solutions 3,979 1,747 Corporate ( 6,619 ) ( 5,503 ) Total $ ( 4,783 ) $ ( 7,075 ) Note 3. 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 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. The other category includes products sold in aerospace, defense, medical, and other industries. Three Months Ended March 31, 2024 Mobile Solutions Power Solutions Intersegment Sales Eliminations Total Automotive $ 48,975 $ 8,256 $ — $ 57,231 General Industrial 18,713 13,138 — 31,851 Residential/Commercial Electrical — 20,232 — 20,232 Other 5,372 6,612 ( 100 ) 11,884 Total net sales $ 73,060 $ 48,238 $ ( 100 ) $ 121,198 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 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 $ 0.3 million and $ 0.4 million as of March 31, 2024 and December 31, 2023, respectively. Revenue recognized for performance obligations satisfied or partially satisfied during the three months ended March 31, 2024 included $ 0.4 million that was included in deferred revenue as of December 31, 2023. 8 Table of Contents 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, 2024, 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 4. Inventories Inventories are comprised of the following amounts: March 31, 2024 December 31, 2023 Raw materials $ 25,940 $ 25,456 Work in process 24,446 22,942 Finished goods 22,332 23,165 Total inventories $ 72,718 $ 71,563 Note 5. 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, 2023 $ 19,003 $ 39,721 $ 58,724 Amortization ( 838 ) ( 2,618 ) ( 3,456 ) Balance as of March 31, 2024 $ 18,165 $ 37,103 $ 55,268 Intangible assets are reviewed for impairment when changes in circumstances indicate the carrying value of those assets may not be recoverable. There were no impairment charges for the three months ended March 31, 2024 and 2023. Note 6. 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, with the share of net income from the joint venture recorded in the Mobile Solutions segment. The following table shows changes in our investment in the JV. Balance as of December 31, 2023 $ 32,701 Share of earnings 2,271 Foreign currency translation loss ( 563 ) Balance as of March 31, 2024 $ 34,409 Note 7. Debt On March 22, 2021, we entered into a $ 150.0 million term loan facility (as amended from time to time, the “Term Loan Facility”) and a $ 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 Financing Rate (“SOFR”) for interest rate calculations. The following table presents the outstanding debt balances. March 31, 2024 December 31, 2023 Term Loan Facility $ 132,513 $ 148,114 Financing obligations from sale-leaseback transactions 21,673 — International loans 9,983 10,655 Unamortized debt issuance costs and discount (1) ( 5,624 ) ( 5,490 ) Total debt $ 158,545 $ 153,279 _______________________________ (1) In addition to this amount, costs of $ 0.5 million and $ 0.5 million related to the ABL Facility were recorded in other non-current assets as of March 31, 2024 and December 31, 2023, respectively. 9 Table of Contents We capitalized interest costs of $ 0.5 million and $ 0.3 million in the three months ended March 31, 2024 and 2023, respectively, related to construction in progress. Term Loan Facility 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 our leverage ratio. The PIK interest is payable on the loan maturity date of September 22, 2026. At March 31, 2024, the Term Loan Facility bore interest, including PIK interest, based on one-month Adjusted SOFR, at 14.305 %. 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, 2024. The Term Loan Facility was issued at a $ 3.8 million discount and we have capitalized an additional $ 5.5 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 then fair value. ABL Facility The ABL Facility provides for a senior secured revolving credit facility, with an original commitment amount of $ 50.0 million, of which a maximum of $ 30.0 million is available in the form of letters of credit and a maximum of $ 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. The maximum commitment amount may be increased or decreased from time to time based on the terms of conditions of the ABL Facility. 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) 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, 2024, using one-month Adjusted SOFR plus a 2.00 % margin, the interest rate on outstanding borrowings under the ABL Facility would have been 7.418 %. 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, 2024, we had no outstanding borrowings under the ABL Facility, $ 9.9 million of outstanding letters of credit, and $ 26.4 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, 2024. Sale-Leaseback Transactions In March 2024, we sold three of our properties for an aggregate sales price of $ 16.9 million, with the net proceeds used to repay a portion of the outstanding borrowings under the Term Loan Facility. Concurrent with the sale, we entered into a 20-year lease agreement for these properties. Since the lease agreement allows for us to exercise renewal options that extend for substantially all of the remaining economic life, the transaction is accounted for as a failed sale-leaseback. As a result, the properties remain on our Condensed Consolidated Balance Sheets and the non-land assets will continue to be depreciated over their remaining useful lives. The $ 16.9 million of gross proceeds was recognized as a financing obligation as a component of long-term debt. The monthly lease payments, which increase 3.0% each year, will be amortized as principal payments and interest expense based on an effective interest rate of 9.715 %. We incurred $ 0.6 million in debt issuance costs related to this transaction which will be amortized over the term of the debt. In March 2024, we sold multiple pieces of manufacturing equipment for an aggregate sales price of $ 4.9 million. Concurrent with the sale, we entered into a 5-year lease agreement that includes a repurchase option for this equipment. Since the lease agreement allows for us to exercise an early buyout option, the transaction is accounted for as a failed sale-leaseback. As a result, the assets remain on our Condensed Consolidated Balance Sheets and will continue to be depreciated over their remaining useful lives. The $ 4.9 million of gross proceeds was recognized as a financing obligation as a component of long-term debt. The monthly lease payments will be amortized as principal payments and interest expense on an effective interest rate of 10.475 %. 10 Table of Contents Note 8. Preferred Stock 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 additional paid-in capital due to the absence of retained earnings. 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, 2024, the carrying value of the Series D Preferred Stock shares was $ 81.5 million, which included $ 34.8 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, 2024. Balance as of December 31, 2023 $ 77,799 Accrual of in-kind dividends 2,714 Amortization 956 Balance as of March 31, 2024 $ 81,469 Note 9. Leases The following table contains supplemental cash flow information related to leases. Three Months Ended March 31, 2024 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used in operating leases $ 2,739 $ 4,056 Operating cash flows used in finance leases 81 84 Financing cash flows used in finance leases 559 689 Right-of-use assets obtained in exchange for new operating lease liabilities (1) — 477 _______________________________ (1) Includes new leases, renewals, and modifications. We recognized sublease income of $ 0.9 million and $ 0.1 million in the three months ended March 31, 2024 and 2023, respectively. Note 10. 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. 11 Table of Contents 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, 2024. 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 11. Income Taxes Our effective tax rate was ( 3.5 )% and ( 14.2 )% for the three months ended March 31, 2024 and 2023, respectively. The effective tax rates for the three months ended March 31, 2024 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 unfavorably impacted by the U.S. tax on the earnings of foreign subsidiaries under the global intangible low-taxed income regime. Note 12. 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, 2024 2023 Numerator: Net loss $ ( 12,537 ) $ ( 10,175 ) Adjustment for preferred stock cumulative dividends and deemed dividends ( 3,670 ) ( 3,051 ) Numerator for basic and diluted net loss per common share $ ( 16,207 ) $ ( 13,226 ) Denominator: Weighted average common shares outstanding 48,488 43,847 Adjustment for participating securities ( 3,454 ) ( 742 ) Adjustment for warrants outstanding (1) 2,690 2,204 Shares used to calculate basic and diluted net loss per share 47,724 45,309 Basic and diluted net loss per common share $ ( 0.34 ) $ ( 0.29 ) 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). 12 Table of Contents 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, 2024 2023 Stock Options 257 516 2019 Warrants 1,500 1,500 Performance share units 268 — Total antidilutive securities 2,025 2,016 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 March 31, 2024. The 2019 Warrants excluded from the calculation of diluted net loss per share had a per share exercise price of $ 11.03 . Performance share units are potentially dilutive when the related performance criterion has been met. Note 13. 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, 2024 2023 Restricted stock $ 587 $ 167 Performance share units 259 200 Stock options — 14 Share-based compensation expense $ 846 $ 381 Restricted Stock The following table presents the status of unvested restricted stock awards as of March 31, 2024, and activity during the three months then ended. Nonvested Restricted Shares Weighted Average Grant-Date Fair Value Unvested at January 1, 2024 3,405 $ 1.41 Granted 374 5.02 Vested ( 70 ) 3.90 Unvested at March 31, 2024 3,709 $ 1.73 During the three months ended March 31, 2024, we granted 374,000 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. Total grant date fair value of restricted stock that vested in the three months ended March 31, 2024, was $ 0.3 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 March 31, 2024, and activity during the three months then ended. Nonvested PSU Awards Weighted Average Grant-Date Fair Value Nonvested at January 1, 2024 3,789 $ 1.29 Granted 143 6.42 Nonvested at March 31, 2024 3,932 $ 1.48 13 Table of Contents During the three months ended March 31, 2024, we granted 143,000 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, 2026. 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 . Note 14. 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, 2023 $ ( 38,762 ) $ 1,007 $ — $ ( 37,755 ) Other comprehensive income (loss) before reclassifications ( 2,346 ) — — ( 2,346 ) Amounts reclassified from AOCI to interest expense (2) — ( 449 ) — ( 449 ) Net other comprehensive income (loss) ( 2,346 ) ( 449 ) — ( 2,795 ) Balance as of March 31, 2024 $ ( 41,108 ) $ 558 $ — $ ( 40,550 ) 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 ) ______________________ (1) Income tax effect of changes in interest rate swap. (2) Represents gain recognized in interest expense on effective interest rate swap. 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 2023 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 prior to June 30, 2033. The 2023 Warrants include anti-dilution adjustments in the event of certain future equity issuances, stock splits, stock dividends, combinations or similar events. On April 12, 2024, 500,000 of the 2023 Warrants were exercised on a cashless basis, resulting in the issuance of 499,000 shares. 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 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. During the three months ended March 31, 2024, all of the 2021 Warrants were exercised on a cashless basis, resulting in the issuance of 1,896,000 shares. In conjunction with our placement of the Series B Preferred Stock, we issued the 2019 Warrants to purchase up to 1.5 million shares of our common stock. The 2019 Warrants, are exercisable, in full or in part, at any time prior to December 11, 2026, at an exercise price of $ 11.03 per share, and are subject to anti-dilution adjustments in the event of future below market issuances, stock splits, stock dividends, combinations or similar events. 14 Table of Contents The following table presents the change in the liability balance of the embedded derivatives during the three months ended March 31, 2024. Balance as of December 31, 2023 $ 16,556 Change in fair value (1) 3,780 Settlements ( 9,386 ) Balance as of March 31, 2024 $ 10,950 _______________________________ (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. March 31, 2024 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 $ 9,295 $ — $ 1,655 December 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 $ 15,421 $ — $ 1,135 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 (Level 1). 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 (Level 3). The probabilities resulted in a weighted average term of 2.9 years as of March 31, 2024 and December 31, 2023. 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 then 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. 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, 2024 2023 Interest benefit (1) $ ( 449 ) $ ( 468 ) _______________________________ (1) Represents gain recognized in interest expense on effective interest rate swap. 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, 2024 and December 31, 2023, the carrying values of these financial instruments, except for debt, approximated fair value. The fair value of our debt was $ 161.2 million and $ 162.2 million, with a carrying amount of $ 158.5 million and $ 153.3 million, as of March 31, 2024 and December 31, 2023, 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 (Level 3). 15 Table of Contents