What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-31 compared with 2021-03-30 · 226 added, 204 removed, 274 unchanged (61% of the section changed)

4 unchanged sentences

A description of material factors known to the Company that may cause its results to vary, or may cause management to deviate from its current plans and expectations, is set forth under “Risk Factors” in this report.

“Forward-Looking Statements.” The following discussion should also be read in conjunction with the Company’s consolidated financial statements and the related Notes included in this report.

See also “Forward-Looking Statements.” The following discussion should also be read in conjunction with the Company’s consolidated financial statements and the related Notes included in this report.

Executive Overview

The Company designs, engineers, manufactures, markets and sells a broad range of advanced, emission-certified engines and power systems that run on a wide variety of clean, alternative fuels, including natural gas, propane, and biofuels, as well as gasoline and diesel options, within the energy, industrial and transportation end markets with primary manufacturing, assembly, engineering, R&D, sales and distribution facilities located in suburban Chicago, Illinois and Darien, Wisconsin.

The Company designs, engineers, manufactures, markets and sells a broad range of advanced, emission-certified engines and power systems that run on a wide variety of clean, alternative fuels, including natural gas, propane, and biofuels, as well as gasoline and diesel options, within the power systems, industrial and transportation end markets with primary manufacturing, assembly, engineering, R&D, sales and distribution facilities located in suburban Chicago, Illinois and Darien, Wisconsin.

The Company provides highly engineered, comprehensive solutions designed to meet specific customer application requirements and technical specifications, including those imposed by environmental regulatory bodies, such as the EPA, the CARB and the MEE.

1 unchanged sentence

The Company manages the business as a single reporting segment.

For 2020, net sales decreased $128.4 million, or 24%, compared to 2019, as a result of sales decreases of $73.5 million, $49.1 million, and $5.9 million in the energy, industrial, and transportation end markets, respectively.

For 2021, net sales increased $38.6 million, or 9%, compared to 2020, as a result of sales increases of $42.5 million and $22.3 million within the transportation and industrial end markets, respectively, partly offset by a decrease of $26.2 million in the power systems end market.

Gross margin was 9.0% and 14.0% during 2021 and 2020, respectively.

Gross profit decreased during 2020 by $41.4 million compared to 2019, while operating expenses decreased by $2.5 million as compared to 2019.

Interest expense decreased by $2.2 million in 2020 versus 2019.

The Company recognized a loss of $1.4 million in 2019 as a result of the change in the value of the Weichai Warrant including the impact of the exercise in the second quarter of 2019.

Weichai Transactions , included in Item 8.

Financial Statements and Supplementary Data , for additional information.

There was no impact from a change in the value of warrants for 2020 due to the Weichai Warrant being exercised in April 2019.

Also, the Company recorded an income tax benefit of $3.7 million for 2020 versus an expense of $0.4 million for 2019.

Collectively, these factors contributed to a $31.2 million increase in the net loss, which totaled $23.0 million in 2020 compared to net income of $8.2 million in 2019.

Diluted loss per share was $1.00 in the 2020 period compared to diluted earnings per share of $0.38 in 2019.

Adjusted net loss, which excludes certain items described below that the Company believes are not indicative of its ongoing operating performance, was $11.1 million in 2020 compared to Adjusted net income of $28.1 million in 2019 .

Adjusted loss per share was $0.48 in 2020 compared to Adjusted earnings per share of $1.30 in 2019.

Adjusted earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) was $3.0 million in 2020 compared to Adjusted EBITDA of $45.2 million in 2019.

Adjusted net (loss) income, Adjusted (loss) earnings per share and Adjusted EBITDA are non-GAAP financial measures.

For a reconciliation of each of these measures to the nearest applicable GAAP financial measure, as well as additional information about these non-GAAP measures, see the section entitled Non-GAAP Financial Measures in this Item 7.

Gross profit decreased during 2021 by $17.2 million compared to 2020, while operating expenses increased by $2.7 million as compared to 2020.

Interest expense increased by $1.6 million in 2021 versus 2020.

Other expense (income), net increased b y $1.2 million during 2021.

Also, the Company recorded an income tax benefit of $0.4 million for 2021 versus a benefit of $3.7 million for 2020.

Collectively, these factors contributed to a $25.5 million increase in the net loss, which totaled $48.5 million in 2021 compared to net loss of $23.0 million in 2020.

Diluted loss per share was $2.12 in the 2021 period compared to diluted loss per share of $1.00 in 2020.

Adjusted net loss, which excludes certain items described below that the Company believes are not indicative of its ongoing operating performance, was $26.7 million in 2021 compared to Adjusted net loss of $11.1 million in 2020.

Adjusted loss per share was $1.16 in 2021 compared to Adjusted loss per share of $0.48 in 2020.

Adjusted earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) was a loss of $12.4 million in 2021 compared to Adjusted EBITDA of $3.0 million in 2020.

Adjusted net loss, Adjusted (loss) earnings per share and Adjusted EBITDA are non-GAAP financial measures.

For a reconciliation of each of these measures to the nearest applicable GAAP financial measure, as well as additional information ab out these non-GAAP measures, see the section entitled Non-GAAP Financial Measures in this Item 7.

Net sales by geographic area and by end market for 2021 and 2020 are presented below:

1 unchanged sentence

Geographic Area % of Total % of Total

United States $ 406,077 89 % $ 366,445 88 %

North America 8,616 2 % 9,831 2 %

5 unchanged sentences

End Market % of Total % of Total

Energy $ 149,282 36 % $ 222,779 41 %

Power Systems $ 123,132 27 % $ 149,282 36 %

Industrial 153,289 34 % 131,026 31 %

11 unchanged sentences

The Company and Weichai executed the Collaboration Agreement in order to achieve their respective objectives, enhance the cooperation alliance and share experiences, expertise and resources.

Among other things, the Collaboration Arrangement established a joint steering committee, permitted Weichai to second a limited number of technical, marketing, sales, procurement and finance personnel to work at the Company and established several collaborations related to stationary natural-gas applications and Weichai diesel engines.

Among other things, the Collaboration Arrangement established a joint steering committee, permitted Weichai to second a limited number of technical, marketing, sales,

procurement and finance personnel to work at the Company and established several collaborations related to stationary natural-gas applications and Weichai diesel engines.

The Collaboration Agreement also provides for the steering committee to create various subcommittees with operating roles and otherwise governs the treatment of intellectual property of parties prior to the collaboration and the intellectual property developed during the collaboration.

3 unchanged sentences

The Company purchased $12.4 million and $18.6 million of inventory from Weichai during 2021 and 2020, respectively.

PSI also entered into a series of Shareholder Loan agreements with Weichai.

Debt , included in Item 8.

Financial Statements and Supplementary Data , for additional information.

Incremental Financial Reporting, Internal Control Remediation, and Government Investigation and Other Legal Matter Expenses

8 unchanged sentences

Recent Trends and Business Outlook

Recent COVID-19 Outbreak, Oil and Gas Market Volatility, and 2021 Outlook

The COVID-19 pandemic has resulted in the implementation of significant governmental measures to control the spread of the virus, including quarantines, travel restrictions, business shutdowns, and restrictions on the movement of people in the United States and abroad.

Impact of COVID-19, Oil and Gas Market Volatility, Supply Chain Challenges, Legal Costs

The COVID-19 pandemic has resulted in the implementation of significant governmental measure s to control the spread of the virus, including quarantines, travel restrictions, business shutdowns, and restrictions on the movement of people in the United States and abroad.

These factors, in turn, have impacted and may continue to impact the Company’s operations, financial condition, and demand for its goods and services, as well as its overall ability to react timely to mitigate any further impact of the COVID-19 pandemic.

In April 2020, the Company aggressively implemented contingency actions as a result of the expected significant negative impacts of these factors.

The Company’s temporary cost reduction measures included:

• reduced hours of operations of the Company’s production facilities;

• reduced work week for all office employees;

The Company’s temporary cost reduction measures included, among others, reduced hours of operations of the Company’s production facilities;

reduced pay for salaried employees between 10% and 30%, depending on the employee’s position;

1 unchanged sentence

deferred spending on certain R&D programs;

• implemented a hiring freeze;

• restricted all non-essential travel;

• minimized discretionary expenses and consulting services.

and minimized discretionary expenses and consulting services.

The measures with regard to pay for salaried employees and the suspension of the Company’s 401-(k) match plan match were in effect through December 31, 2020.

1 unchanged sentence

The Company continues to review operating expenses, including prioritizing certain R&D investments in support of the Company’s long-term growth objectives.

During 2021, the Company took rightsizing actions to align its staffing with current needs, while also streamlining certain roles.

These actions, when coupled with attrition, contributed to the reduction of approximately 100 position s, or approximately 12.5% of the Company’s headcount.

Also, the Company continues to review its facilities footprint in light of its current and planned business mix and its evolving needs.

To date, these efforts resulted in the exit and sublease of its Hanover Park, IL materials and warehousing facility which is expected to generate annualized savings of approximately $1.3 million , with approximately $0.9 million expected to be realized in 2022.

The full impact of the COVID-19 pandemic continues to evolve as of the date of this 2021 Annual Report.

During 2020, as a result of the COVID-19 pandemic, the global economy experienced substantial turmoil, which led to challenging market conditions across certain areas of the Company’s business and, in part, contributed to an overall reduction in demand for the Company’s products.

In addition, due to unprecedented decreases in demand, an oil price war, and economic uncertainty resulting from the COVID-19 pandemic, average crude oil prices were considerably lower in 2020 as compared to 2019.

However, since May 2020 through the date of this 2020 Annual Report, crude oil prices have increased.

A significant portion of the Company’s sales and profitability is derived from the sale of products that are used within the oil and gas industry.

In early 2021, the Company experienced delays in its supply chain due to temporary shortages of raw materials and container delays of overseas materials as bottlenecks occurred at ports in Asia and North America.

This, in turn, has caused delivery delays to some of the Company’s customers.

The Company is also experiencing inflationary cost pressures for certain materials and is working to mitigate the impact through price increases and other measures, where possible.

The potential for continued disruptions, economic uncertainty, inflationary cost pressures, and unfavorable oil and gas market dynamics may have a material adverse impact that may result in the recognition of material impairments or other related charges.

The Company expects its sales and profitability for the full year of 2021 to be above 2020 levels as a result of anticipated growth across all of its end markets.

As compared to 2020, the sales growth is projected to occur in the second, third and fourth quarters of 2021.

Notwithstanding this positive outlook, which is being driven in part by expectations for improved economic conditions within the United States and across the Company’s various markets, the Company cautions that significant uncertainty still remains as a result of the COVID-19 pandemic.

During 2020, as a result of the COVID-19 pandemic, the global economy experienced substantial turmoil, which led to challenging market conditions across certain areas of the Company’s business.

At year-end 2021, crude oil prices were 55% above prices at year-end 2020, a meaningful improvement.

However, U.S.

rig counts have been slower to return as the average count for 2021 was up 10% versus 2020 and average rig counts remain significantly below the full year averag e during 2019.

Meanwhile, the Company believes that capital spending within the U.S.

oil markets during 2021 remained well below 2019 levels.

factors have contributed to a continued challenging environment for the sale of the Company’s oil and gas related products durin g 2021.

A significant portion of the Company’s sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry.

In addition, the Company experienced delays in its supply chain during 2021 due to temporary shortages of raw materials and container delays of overseas materials as bottlenecks occurred at ports in Asia and North America.

This, in turn, caused delivery delays to some of the Company’s customers.

The Company also experienced inflationary cost pressures for certain materials and shipping-related costs.

Additionally, the Company experienced higher tariff costs as a result of the non-renewal of certain tariff exclusions.

The Company is working to mitigate the impact of these matters through price increases and other measures, such as seeking certain tariff exclusions, where possible.

However, during 2021 the Company was unable to adequately recover these higher costs.

The potential for continued disruptions, economic uncertainty, and unfavorable spending on behalf of the Company’s customers with oil and gas exposure may have a material adverse impact on the timing of delivery of customer orders and the levels of future customer orders.

Lastly, during 2021, the Company continued to incur substantial legal costs related to governmental investigations matters and its obligations to indemni fy certain former officers and employees of the Company.

Specifically, spending activity was elevated during 2021 due to the USAO trial involving former officers and employees of the Company that occurred during the year.

With a verdict reached in the USAO trial matter involving former officers and employees in September 2021, the Company believes its costs related to the matter will cease.

However, at this time, the Company is not able to estimate the potential future amount of its indemnity obligations related to the pending SEC matter involving prior officers and employees.

Commitments and Contingencies for further discussion of the Company’s indemnification obligations.

Accordingly, the above challenges may continue to have a material adverse impact on the Company’s future results of operations, financial position and liquidity.

The Company expects its sales in 2022 to increase by at least 3% versus 2021 levels, a result of expectations for strong growth in the industrial and power systems end markets, partly mitigated by a reduction in sales in the transportation end market.

Gross profit as a percentage of sales is targeted to improve by at least 5 percentage points in 2022, a function of lower warranty expense, pricing actions, improved cost recovery and cost savings initiatives.

Notwithstanding this outlook, which is being driven in part by expectations for an improvement in supply chain dynamics, including timelier availability of parts, and a continuation of favorable economic conditions within the United States and across the Company’s various markets, the Company cautions that significant uncertainty remains as a result of supply chain challenges, inflationary costs, commodity volatility, and the COVID-19 pandemic, among other factors.

GM 6.0L Engine Off ering :

The Company had an exclusive third-party agreement with GM through December 31, 2019 to purchase and distribute GM 6.0L engines to on-highway customers.

With the GM announcement that it will discontinue its production of the GM 6.0L engine, the Company conducted last-time buys of this engine during 2019 and 2020, and anticipates some additional purchases during 2021, to ensure adequate supply to certain transportation customers.

The Company anticipates robust sales of this product during 2021.

However, with the anticipated exhaustion of its inventory for a particular customer near the end of 2021, future sales to this customer are anticipated to decline as sales of the GM 6.0L to this customer will cease.

For other customers, the Company anticipates that it will have a certain stock of pre-purchased GM 6.0L engines in inventory for future sales.

With the GM announcement that it will discontinue its production of the GM 6.0L engine, the Company conducted last-time buys of this engine during 2019 through 2021 (including the purchase of certain engines where prepayment was provided), to ensure adequate supply to certain transportation customers.

The Company experienced very strong sales of this product within its transportation end market during 2021 particularly with a large customer.

At December 31, 2021, the Company had fully exhausted its stock of engines where prepayment was provided and holds a small quantity of other GM 6.0L engines which it expects to deliver to customers throughout 2022.

The Company does not have a supply agreement with GM for its successor product to the GM 6.0L engine;

However, the Company is actively exploring opportunities to identify engine alternatives for this product.

In relation to these last-time buys, the Company had a net positive cash impact from customer prepayments of approximately $9.3 million as of December 31, 2020.

however, it will source the 6.0L through a GM designate third party manufacturer.

With the exhaustion of 6.0L engine inventory during 2021 where prepayment was received, coupled with its large customer obtaining future supply through alternative means, the Company anticipates significantly reduced sales within its transportation end market in 2022 as compared to 2021.

To service customers in the future, the Company has obtained access to a 6.0L engine that another manufacturer will be producing.

Hyster-Yale Supply Arrangement :

The Company had a multi-year supply agreement with Hyster-Yale, which ended December 31, 2018, for the supply of a range of engines at certain specified volume levels.

Since the beginning of 2019, the Company has continued to supply products to Hyster-Yale while the two parties continued to negotiate a new agreement.

The Company is nearing the completion of a renewed supply agreement;

however, Hyster-Yale has indicated that it will be obtaining alternative supply beginning in late 2021 for several high-volume engines that the Company currently provides, including the 2.0L and 2.4L engines sourced from the Company’s supplier SAME.

As a result of this, the Company expects to see a decline in sales volumes to Hyster-Yale in 2022 and 2023.

Hyster-Yale has indicated that it will be obtaining alternative supply beginning in late 2022 for several high-volume engines that the Company currently provides, including the 2.0L and 2.4L engines sourced from the Company’s supplier SAME.

As a result of this, the Company expects to see a decline in sales volumes to Hyster-Yale beginning in 2023.

The Company believes it is positioned to continue its relationship in a moderated capacity with this customer in 2023 and beyond.

1 unchanged sentence

The Company has initiated a set of business objectives aimed at improving profitability, streamlining processes, strengthening the business and focusing on achieving growth in higher-return product lines.

Central to this plan is the Company’s increased emphasis on energy product offerings through new product development and investments, in addition to leveraging the Company’s relationship with Weichai.

With the introduction of numerous natural gas and diesel engines in 2019 and 2020, coupled with its existing strong product lineup, despite economic disruptions related to the COVID-19 pandemic, the Company believes that it has a solid foundation to achieve long-term growth, particularly within the energy market.

Central to this plan is the Company’s increased emphasis on power systems product offerings through new product development and investments, in addition to leveraging the Company’s relationship with Weichai.

With the introduction of numerous natural gas and diesel engines over the past few years, coupled with its existing strong product lineup, despite economic disruptions related to the COVID-19 pandemic, and supply chain challenges, the Company believes that it has a solid foundation to achieve long-term growth, particularly within the power systems market.

Results of Operations

13 unchanged sentences

Total operating expenses 82,841 80,172 2,669 3 %

Operating (loss) income (21,724) 17,203 (38,927) NM

Operating loss (41,570) (21,724) (19,846) 91 %

Other expense, net:

Interest expense 7,307 5,714 1,593 28 %

Loss from change in value and exercise of warrants — 1,352 (1,352) (100) %

Loss on debt extinguishment and modifications — 497 (497) (100) %

Other income, net (1,240) (677) (563) 83 %

Other expense (income), net 1 (1,240) 1,241 (100) %

Total other expense, net 7,308 4,971 2,337 47 %

(Loss) income before income taxes (26,695) 8,657 (35,352) NM

Income tax (benefit) expense (3,713) 409 (4,122) NM

Net (loss) income $ (22,982) $ 8,248 $ (31,230) NM

(Loss) earnings per common share:

Basic $ (1.00) $ 0.38 $ (1.38) NM

Diluted $ (1.00) $ 0.38 $ (1.38) NM

Loss before income taxes (48,878) (26,695) (22,183) 83 %

Income tax benefit (406) (3,713) 3,307 (89) %

Net loss $ (48,472) $ (22,982) $ (25,490) 111 %

Loss per common share:

Basic $ (2.12) $ (1.00) $ (1.12) 112 %

Diluted $ (2.12) $ (1.00) $ (1.12) 112 %

Non-GAAP Financial Measures:

Adjusted net (loss) income * $ (11,091) $ 28,112 $ (39,203) (139) %

Adjusted (loss) earnings per share * $ (0.48) $ 1.30 $ (1.78) (137) %

Adjusted net loss * $ (26,749) $ (11,091) $ (15,658) 141 %

Adjusted loss per share * $ (1.16) $ (0.48) $ (0.68) 142 %

EBITDA * $ (34,165) $ (12,781) $ (21,384) 167 %

Adjusted EBITDA * $ 3,015 $ 45,191 $ (42,176) (93) %

Adjusted EBITDA * $ (12,442) $ 3,015 $ (15,457) NM

NM Not meaningful

* See reconciliation of non-GAAP financial measures to GAAP results below

Net sales decreased $128.4 million, or 24%, in 2020 compared to 2019, as a result of s ales decreases of $73.5 million , $49.1 million and $5.9 million in the energy, industrial, and transportation end markets, respectively.

Lower energy end market sales were driven by decreased demand for the Company’s power generation products, especially those used within the oil and gas industry.

The decreased sales within the industrial end market reflects lower demand for products used across a wide range of applications, with the largest decreases attributable to those products used in the material handling/forklift and arbor care markets.

The decrease in transportation end market sales was primarily due to lower medium duty truck market business, in part driven by the inclusion of approximately $30 million of sales associated with the shipment of certain engines at the request of one of the Company’s customers (Freightliner) during the 2019 period, which impacted sales volume in 2020.

Partly offsetting the lower transportation sales were increases in the school bus and terminal tractor markets.

Net sales increased $38.6 million, or 9%, compared to 2020, as a result of sales increases of $42.5 million and $22.3 million within the transportation and industrial end markets, respectively, partly offset by a decrease of $26.2 million in the power systems end market.

The increase within the transportation end market was primarily driven by higher sales within the medium duty truck market partly attributable to lower sales volumes during 2020 due to the acceleration of shipments of certain engines during the fourth quarter of 2019, in combination with the continued sell down and exhaustion of certain 6.0L engines during 2021 that were previously prepaid by a customer under a long-term supply agreement.

Partly mitigating these higher sales were lower sales of products used in the terminal tractor market.

Higher industrial end market sales reflect increased demand for products used across a range of applications, with the largest increases attributable to those products used in the material handling/forklift, arbor care and industrial cleaning equipment markets.

Lower power systems end market sales were driven by decreased demand for the Company’s power generation products, especially for demand response products and those used within the oil and gas industry.

Gross profit decreased by $17.2 million, or 29%, to $41.3 million in 2021, compared to $58.4 million in 2020.

Gross margin was 9.0% and 14.0% in 2021 and 2020, respectively.

The decline in gross margin is primarily due to higher warranty expenses, unfavorable product mix and the impact of lower sales, partly mitigated by cost savings driven by reductions in the production facility workforce and other actions, as well as favorable tariff costs.

For 2020, warranty costs were $19.5 million (net of supplier recoveries of $7.5 million), including an $8.7 million charge for adjustments to preexisting warranties, an increase of $9.4 million compared to warranty costs of $10.1 million (net of supplier recoveries of $3.0 million), including $2.7 million for adjustments to preexisting warranties.

The increase in warranty expense in 2020 was primarily attributable to higher than expected claims experience for certain engines sold to customers primarily within the transportation end market.

The decline in gross margin is primarily due to material cost increases, higher freight and tariff costs, higher warranty expenses, and unfavorable product mix, partly mitigated by the impact of higher sales.

For 2021, warranty costs were $22.8 million, an increase of $3.3 million compared to warranty costs of $19.5 million last year, due largely to higher charges within the transportation end market and lower recognized recoveries during 2021.

Research, Development and Engineering Expenses

Research, development and engineering expenses in 2020 were $25.4 million, an increase of $0.4 million, or 2%, from 2019 levels, primarily as a result of increased spending on project activity during the year, partly offset by the impact of cost savings actions.

Research, development and engineering expenses in 2021 were $22.4 million, a decrease of $2.9 million, or 12%, from 2020 levels, primarily as a result of lower project activity, coupled with lower wages and benefits driven by reduced headcount.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) decreased in 2020 by $2.4 million, or 4%, compared to 2019.

The decrease was primarily due to lower financial reporting costs as a result of the completion of the restatement of the Company’s financial statements in May 2019, lower incentive compensation expense, the impact of cost savings actions, lower severance costs and lower key employee retention program costs.

Partly offsetting the decline were higher legal costs related to the Company’s indemnification obligations of former officers and employees as a result of the exhaustion of its directors’ and officers’ insurance during the early part of 2020 (see additional discussion in Note 10.

Selling, general and administrative (“SG&A”) increased in 2021 by $6.1 million, or 12%, compared to 2020.

The increase was primarily due to higher legal expenses mostly related to the Company’s indemnification obligations of former officers and employees specifically related to elevated spending activity during 2021 as a result of the USAO’s trial, which concluded in September 2021 (see additional discussion in Note 10.

Commitments and Contingencies of Item 8.

Financial Statements and Supplementary Data ), among other items.

Financial Statements and Supplementary Data) .

As previously disclosed, the Company exhausted its directors’ and officers’ insurance during the early part of 2020.

The company also experienced higher wages and benefits expense during 2021 as 2020 included salary reductions and other cost containment actions.

In addition, there were higher severance costs largely related to rightsizing actions in 2021 as compared to 2020, due in part to certain actions that the Company took near the end of 2021.

These increases were partly offset by lower financial reporting costs during 2021, largely driven by continued efficiencies and lower staffing needs since completing the financial restatement and becoming a timely filer of its SEC filings.

Interest Expense

Interest expense decreased $2.2 million to $5.7 million in 2020 from $7.9 million in 2019 largely due to lower overall interest rates on the Company’s debt in 2020, as compared to the prior year.

Lower interest rates in 2020 were primarily due to refinancing the debt in April 2020.

Interest expense increased $1.6 million to $7.3 million in 2021 from $5.7 million in 2020 largely due to higher average outstanding debt and a higher overall effective interest rate on the Company’s debt during 2021, including fees, as compared to prior year.

Debt , included in Item 8.

Financial Statements and Supplementary Data for additional information.

Loss from Change in Value and Exercise of Warrants

There was no impact from a change in value of warrants for 2020 due to the Weichai Warrant being exercised in April 2019.

The Company recognized a loss of $1.4 million in 2019 as a result of the change in the value of the Weichai Warrant including the impact of the exercise.

Weichai Transactions and Note 8.

Fair Value of Financial Instruments , included in Item 8.

Financial Statements and Supplementary Data , for additional information.

Loss on Extinguishment of Debt

There was no loss on the extinguishment of debt during 2021.

The Company recognized a loss on the extinguishment of debt for the year ended December 31, 2020 of $0.5 million.

There was no loss on the extinguishment of debt for the year ended December 31, 2019.

Debt, included in Item 8.

Financial Statements and Supplementary Data , for additional information.

Other Income, Net

Other income, net increased by $0.6 million in 2020 primarily due to the receipt of life insurance proceeds upon the death of a former employee, partially offset by lower equity earnings from the Company’s joint venture.

Other Expense (Income), Net

Other expense (income), net experienced a loss of less than $0.1 million during 2021 compared to income of $1.2 million during 2020 primarily due to the receipt of life insurance proceeds upon the death of a former employee and equity earnings from the Company’s joint venture.

Refer to Note 15.

2 unchanged sentences

Income Tax (Benefit) Expense

The Company recorded an income tax benefit of $3.7 million in 2020 , a decrease of $4.1 million, as compared to income tax expense of $0.4 million in 2019.

The Company’s pretax loss was $26.7 million in 2020, compare d to pretax income of $8.7 million in 2019.

The increase in the tax benefit in 2020 is primarily attributable to the impact of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted in the first quarter of 2020, which allowed the Company to elect bonus depreciation for the 2018 and 2019 tax years, carryback net operating losses to earlier years, and immediately refund Alternative Minimum Tax (“AMT”) credits as well as a change in the deferred tax liability related to an indefinite-lived

intangible asset.

The Company continues to record a full valuation allowance against deferred tax assets which offsets the tax benefits associated with the pre-tax loss for 2020.

The Company recorded an income tax benefit of $0.4 million in 2021 , a decrease of $3.3 million, as compared to an income tax benefit of $3.7 million in 2020.

The Company’s pretax loss was $48.9 million in 2021, compare d to pretax loss of $26.7 million in 2020.

The Company continues to record a full valuation allowance against deferred tax assets which offsets the tax benefits associated with the pre-tax loss for both the 2021 and 2020 periods.

The income tax benefits for 2020 is primarily attributable to the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the period.

Income Taxes , included in Item 8.

14 unchanged sentences

Adjusted EBITDA Net income (loss)

The Company believes that Adjusted net (loss) income, Adjusted (loss) earnings per share, EBITDA, and Adjusted EBITDA provide relevant and useful information, which is widely used by analysts, investors and competitors in its industry as well as by the Company’s management in assessing the performance of the Company.

The Company believes that Adjusted net loss, Adjusted (loss) earnings per share, EBITDA, and Adjusted EBITDA provide relevant and useful information, which is widely used by analysts, investors and competitors in its industry as well as by the Company’s management in assessing the performance of the Company.

Adjusted net (loss) income is defined as net income as adjusted for certain items that the Company believes are not indicative of its ongoing operating performance.

2 unchanged sentences

Adjusted EBITDA further excludes the effects of other non-cash and certain other items that do not reflect the ordinary earnings of the Company’s operations.

Adjusted net (loss) income, Adjusted (loss) earnings per share, EBITDA, and Adjusted EBITDA are used by management for various purposes, including as a measure of performance of the Company’s operations and as a basis for strategic planning and forecasting.

Adjusted net (loss) income, Adjusted (loss) earnings per share, and Adjusted EBITDA may be useful to an investor because these measures are widely used to evaluate companies’ operating performance without regard to items excluded from the calculation of such measures, which can vary substantially from company to company depending on the accounting methods, the book value of assets, the capital structure and the method by which the assets were acquired, among other factors.

Adjusted net loss, Adjusted (loss) earnings per share, EBITDA, and Adjusted EBITDA are used by management for various purposes, including as a measure of performance of the Company’s operations and as a basis for strategic planning and forecasting.

Adjusted net loss, Adjusted (loss) earnings per share, and Adjusted EBITDA may be useful to an investor because these measures are widely used to evaluate companies’ operating performance without regard to items excluded from the calculation of such measures, which can vary substantially from company to company depending on the accounting methods, the book value of assets, the capital structure and the method by which the assets were acquired, among other factors.

They are not, however, intended as an alternative measure of operating results or cash flow from operations as determined in accordance with U.S.

During 2020, the Company changed the presentation of certain non-GAAP financial measures to separate incremental financial reporting and government investigation expenses into:

(1) incremental financial reporting, (2) internal control remediation, and (3) government investigations and other legal matters.

In addition, the Company changed the presentation of non-GAAP adjustments for the comparative periods of 2019 in order to align to the current period presentation.

There was no impact to Adjusted net income (loss), Adjusted earnings (loss) per share, EBITDA or Adjusted EBITDA for the year ended December 31, 2019 as a result of this change in presentation.

The Company believes the updated presentation may provide more useful information to investors regarding the Company’s non-GAAP adjustments and better aligns with management’s use of the information.

The following table presents a reconciliation from Net (loss) income to Adjusted net (loss) income:

The following table presents a reconciliation from Net loss to Adjusted net loss:

(in thousands) For the Year Ended December 31,

Net (loss) income $ (22,982) $ 8,248

Changes in value of warrants 1

Net loss $ (48,472) $ (22,982)

Stock-based compensation 1

Asset impairment charges 3

Loss on debt extinguishment 2

Key employee retention program 5

Incremental financial reporting 4

1 unchanged sentence

Governmental investigations and other legal matters 6

18,451 12,193

Life insurance proceeds 7

Discrete income tax items 8

Adjusted net (loss) income $ (11,091) $ 28,112

The following table presents a reconciliation from (Loss) earnings per common share – diluted to Adjusted (loss) earnings per share:

Adjusted net loss $ (26,749) $ (11,091)

The following table presents a reconciliation from Loss per common share – diluted to Adjusted loss per share:

For the Year Ended December 31,

(Loss) earnings per common share – diluted $ (1.00) $ 0.38

Changes in value of warrants 1

Loss per common share – diluted $ (2.12) $ (1.00)

Stock-based compensation 1

Asset impairment charges 3

Loss on debt extinguishment 2

Key employee retention program 5

Incremental financial reporting 4

3 unchanged sentences

Discrete income tax items 8

Adjusted (loss) earnings per share – diluted $ (0.48) $ 1.30

Adjusted loss per share – diluted $ (1.16) $ (0.48)

Diluted shares (in thousands) 22,908 22,872

The following table presents a reconciliation from Net (loss) income to EBITDA and Adjusted EBITDA:

The following table presents a reconciliation from Net loss to EBITDA and Adjusted EBITDA:

(in thousands) For the Year Ended December 31,

Net (loss) income $ (22,982) $ 8,248

Net loss $ (48,472) $ (22,982)

Interest expense 7,307 5,714

3 unchanged sentences

EBITDA (34,165) (12,781)

Changes in value of warrants 1

Stock-based compensation 1

Asset impairment charges 3

Loss on debt extinguishment 2

Key employee retention program 5

Incremental financial reporting 4

1 unchanged sentence

Governmental investigations and other legal matters 6

18,451 12,193

Life insurance proceeds 7

Adjusted EBITDA $ (12,442) $ 3,015

Amounts consist of changes in the value, including the impact of the exercise in April 2019, of the Weichai Warrant.

Amounts reflect non-cash stock-based compensation expense (2019 amounts excludes $0.3 million associated with the retention programs, see note 4 below).

Amounts reflect immaterial assets removed from service in 2019.

Amounts reflect non-cash stock-based compensation expense.

Amount represents the loss on the extinguishment of the Wells Fargo Credit Agreement and the Unsecured Senior Notes in April 2020 as further discussed in Note 6.

1 unchanged sentence

Financial Statements and Supplementary Data .

Amount represents incremental compensation costs (including $0.3 million in 2019 of stock-based compensation) incurred to provide retention benefits to certain employees.

Amounts represent severance and other post-employment costs for certain former employees of the Company.

Amounts represent professional services fees related to the Company’s efforts to restate prior period financial statements, prepare, audit and file delinquent financial statements with the SEC, as well as tax compliance matters impacted by the restatement of prior period financial statements.

The amounts exclu de $2.0 millio n and $1.2 million of recurring audit fees in 2020 and 2019, respectively.

The amount exclu des $2.0 million of recurring audit fees in 2020, respectively.

Amounts represent professional services fees related to the Company’s efforts to remediate internal control material weaknesses including certain costs to upgrade IT systems.

Amounts represent professional services fees and reserves primarily related to the recently settled SEC and USAO investigations of the Company and indemnification of certain former officers and employees.

The amounts include $15.7 million and $7.1 million for 2021 and 2020, respectively, related to indemnification of certain former officers of the Company.

The Company is obligated to pay legal costs of certain former officers and employees in accordance with Company bylaws and certain indemnification agreements.

2 unchanged sentences

Financial Statements and Supplementary Data , the Company fully exhausted its historical primary directors’ and officers’ insurance coverage in connection with these matters during the first quarter of 2020.

The amounts include $7.1 million for 2020 related to indemnification of certain former officers and employees.

Also included are professional services fees and reserves related to certain other legal matters.

Amount represents a life insurance payment to the Company related to the death of a former employee.

3 unchanged sentences

2021 2020 Change % Change

Net cash (used in) provided by operating activities $ (7,594) $ 18,157 $ (25,751) (142) %

Net cash used in investing activities (1,412) (3,658) 2,246 (61) %

Net cash provided by (used in) financing activities 33,270 (14,550) 47,820 NM

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 24,264 $ (51) $ 24,315 NM

Net cash used in operating activities $ (61,478) $ (7,594) $ (53,884) NM

Net cash provided by (used in) investing activities 398 (1,412) 1,810 (128) %

Net cash provided by financing activities 46,545 33,270 13,275 40 %

Net (decrease) increase in cash, cash equivalents, and restricted cash $ (14,535) $ 24,264 $ (38,799) NM

Capital expenditures $ (1,968) $ (2,402) $ 434 (18) %

1 unchanged sentence

Cash Flow from Operating Activities

Net cash used in operations was $7.6 million in 2020 compared to net cash provided by operations of $18.2 million in 2019 resulting in an increase of $25.8 million in cash used in operating activities year-over-year.

This was primarily due to an increase in the net loss of $31.2 million and a decrease in non-cash adjustments of $3.6 million partly offset by an increase in cash generated from working capital of $9.1 million.

During 2020, working capital requirements resulted in a cash inflow of $6.2 million compared to a cash outflow of $2.9 million in 2019.

The net cash inflow from working capital in 2020 was primarily due to lower accounts receivable due to collections during the year partly offset by a net decrease in accounts payable and accrued expenses.

Net cash used in operations was $61.5 million in 2021 compared to net cash used in operations of $7.6 million in 2020 resulting in an increase of $53.9 million in cash used in operating activities year-over-year.

This was primarily due to an increase in the net loss of $25.5 million and a decrease in cash generated from working capital of $30.6 million, partially offset by an increase of $2.4 million in non-cash adjustments.

The decrease in cash generated from working capital in the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily related to lower accou nts receivable collections and an increase in cash outflows associated with inventory purchases and a net increase in liabilities.

The increase in the cash outflow for inventory for the year ended December 31, 2021 compared to the same period in 2020 was largely due to increased purchases of inventory during the year ended December 31, 2021 to support expected growth in 2021, some of which did not occur due to supply chain shortages, coupled with expected sales in 2022.

The net increase in liabilities was largely due to increased accounts payable related to the previously discussed increased inventory purchases as well as due to the timing of management of payables, partly offset by a decline in accrued expenses.

The increase in non-cash adjustments was primarily due to increased amortization of deferred financing fees.

Cash Flow from Investing Activities

Net cash used in investing activities was $1.4 million in 2020 compared to net cash used in investing activities of $3.7 million in 2019 resulting in a decrease of $2.3 million of net cash used in investing activities year-over-year.

Cash flows from investing activities in 2020 primarily consisted of capital expenditures of $2.4 million compared to capital expenditures of $3.7 million in 2019.

Cash used for capital expenditures in 2020 was partially offset by cash receipts from a corporate-owned life insurance policy which did not occur in 2019.

Net cash provided by investing activities was $0.4 million for the year ended December 31, 2021 compared to cash used in investing activities of $1.4 million for year ended December 31, 2020, respectively.

For the year ended December 31, 2021 , cash provided by investing activities primarily related to a return of investment upon the liquidation of a joint venture partly offset by capital expenditures associated with normal maintenance of the Company’s facilities.

For the year ended December 31, 2020 , cash used in investing activities was primarily related to capital expendit ures associated with normal maintenance of the Company’s facilities, partly offset by proceeds from corporate-owned life insurance.

Cash Flow from Financing Activities

The Company generated $33.3 million in cash for financing activities in 2020 compared to $14.6 million in cash used by financing activities in 2019, resulting in an increase of $47.8 million in cash generated by financing activities year over year.

Primary cash inflows in 2020 were $90.5 million in net borrowings of the revolving line of credit partly offset by $57.3 million related to repayments of long-term debt and financing costs.

The Company generated $46.5 million in cash from financing activities in the year ended December 31, 2021 compared to $33.3 million in cash generated by financing activities in the year ended December 31, 2020.

The cash generated by financing activities for the year ended December 31, 2021 was primarily attributable to cash received under the series of Shareholder’s Loan Agreements with Weichai, compared to net borrowing s under the Company’s revolving credit facility for the year ended December 31, 2020 partly offset by repayment of the Company’s senior secured notes.

See additional discussion below and in Note 6.

Debt in Item 8.

Financial Statements and Supplementary Data for additional discussion.

Cash used in financing activities in 2019 primarily related to net repayments of the revolving line credit of $15.1 million.

Financial Statements and Supplementary Data related to the amendments of the Company’s debt arrangements .

Liquidity and Capital Resources

On April 2, 2020, the Company closed on its new senior secured revolving credit facility pursuant to the Credit Agreement with Standard Chartered, which allowed the Company to borrow up to $130.0 million, and matures on March 26, 2021.

Borrowings under the Credit Agreement bear interest at either the alternate base rate or LIBOR plus 2.00%, and the Company is required to pay a 0.25% commitment fee on the average daily unused portion of the revolving credit facility under the Credit Agreement.

The Credit Agreement is secured by substantially all of the Company’s assets and includes certain financial covenants as well as a change of control provision.

On April 2, 2020, the Company borrowed $95.0 million under the Credit Agreement and utilized the funds to (i) repay the outstanding balance of $16.8 million under the Wells Fargo Credit Agreement, (ii) fully redeem and discharge $55.0 million in aggregate principal amount of the Unsecured Senior Notes and pay related interest, and (iii) for general corporate purposes.

The Wells Fargo Credit Agreement was terminated in connection with the repayment of the outstanding balance.

On April 29, 2020, the Company borrowed an additional $35.0 million under the Credit Agreement, which is the remaining portion of availability, providing the Company with greater financial flexibility.

As of December 31, 2020, the Company had borrowings outstanding of $130.0 million under the Credit Agreement and a cash balance of $21.0 million.

These amounts reflect a net positive cash impact from customer prepayments of $9.3 million.

As discussed further in Item 8.

Debt , the Credit Agreement includes financial covenants which were effective for the Company beginning with the six months ended June 30, 2020.

The financial covenants include an interest coverage ratio and a minimum EBITDA threshold as further defined in the Credit Agreement.

For the six months ended June 30, 2020 and the nine months ended September 30, 2020, the Company did not meet the defined minimum EBITDA requirement.

A breach of the financial covenants under the Credit Agreement constitutes an event of default.

On December 28, 2020, the Company entered into the First Amendment to Credit Agreement and Limited Waiver (the “Amendment”) to the Credit Agreement.

The Amendment waived the financial covenant defaults noted herein and, among other things, removed the 60-day extension option, amended the calculation of the interest coverage ratio and minimum EBITDA and adjusted the interest coverage ratio and minimum EBITDA levels.

The $130 million aggregate commitment amount of the Credit Agreement, maturity date of March 26, 2021, and applicable interest rate of the Credit Agreement remained unchanged.

In connection with the Amendment, the Company also entered into the Shareholder’s Loan Agreement between the Company and Weichai.

Pursuant to the Shareholder’s Loan Agreement, Weichai has established an unsecured and uncommitted loan facility in favor of the Company in a maximum principal amount of $130.0 million.

The Shareholder’s Loan Agreement matures on April 20, 2021.

Loans may be made to the Company pursuant to the Shareholder’s Loan Agreement at Weichai’s sole discretion.

The proceeds of any loans made under the Shareholder’s Loan Agreement shall be used to repay existing obligations under the Credit Agreement.

Any potential borrowings under the Shareholder’s Loan Agreement would bear interest at an annual rate equal to LIBOR plus 3.50% per annum.

In March 2021, the Company entered into an Amended and Restated Uncommitted Revolving Credit Agreement between the Company and Standard Chartered, as administrative agent.

The Amended and Restated Uncommitted Revolving Credit Agreement continues to allow the Company to borrow up to $130.0 million and matures on March 25, 2022.

Under the Amended and Restated Uncommitted Revolving Credit Agreement, Standard Chartered has the right to demand payment of any and all outstanding borrowings and other amounts outstanding under the Amended and Restated Uncommitted Revolving Credit Agreement at any point in time at its discretion.

In connection with the execution of the Amended and Restated Uncommitted Revolving Credit Agreement, the Company entered into the First Amended and Restated Shareholder’s Loan Agreement, that is an amendment to the agreement originally executed with Weichai in December 2020.

The First Amended and Restated Shareholder’s Loan Agreement provides the Company with access to $130.0 million of credit solely for purposes of repaying outstanding borrowings under the Amended and Restated Uncommitted Revolving Credit Agreement.

The First Amended and Restated Shareholder’s Loan Agreement expires on April 25, 2022.

The Amended and Restated Uncommitted Revolving Credit Agreement provides Standard Chartered with a power of attorney (“POA”) to submit a borrowing request to Weichai under the First Amended and Restated Shareholder’s Loan Agreement if the Company fails to submit a borrowing request within five business days of receiving a request from Standard Chartered.

As of December 31, 2020, the Company had $130.0 million outstanding under the Credit Agreement.

Debt for further information regarding the terms and conditions of the Company’s debt agreements.

Significant uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Amended and Restated Uncommitted Revolving Credit Agreement.

Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay the Amended and Restated Uncommitted Revolving Credit Agreement as it becomes due.

Management currently plans to seek additional liquidity from its current or other lenders before March 25, 2022.

On March 26, 2021, the Company amended its $130.0 million uncommitted senior secured revolving credit agreement with Standard Chartered (the “Amended and Restated Credit Agreement”).

The Amended and Restated Credit Agreement allows the Company to borrow up to $130.0 million, is uncommitted, and was su bject to maturity on March 25, 2022.

Borrowings under the Amended and Restated Credit Agreement incurred interest at either the alternate base rate or LIBOR plus 2.70%.

In addition, the Company paid fees of $1.9 million related to the Amended and Restated Credit Agreement, which were deferred and amortized over the term of the Amended and Restated Credit Agreement.

The Amended and Restated Credit Agreement was secured by substantially all of the Company’s assets and included financial covenants related to the Company’s financial performance for the second, third, and fourth quarters of 2021.

There were no financial covenants applicable to the first quarter of 2021.

The Amended and Restated Credit Agreement provided Standard Chartered the right to demand payment of any and

all of the outstanding borrowings and other amounts owed under the Amended and Restated Credit Agreement at any point in time prior to the maturity date at Standard Chartered’s discretion.

Furthermore, the Amended and Restated Credit Agreement granted Standard Chartered a power of attorney (POA) to submit a borrowing request to Weichai under the amended Shareholder’s Loan Agreement (see discussion below) if the Company did not submit a borrowing request to Weichai within five business days of receiving a request from Standard Chartered to submit said borrowing request.

As of December 31, 2021, the Company had $130.0 million outstanding under the Amended and Restated Credit Agreement.

In connection with the Amended and Restated Credit Agreement, on March 26, 2021, the Company entered into the First Amended and Restated Shareholder’s Loan Agreement with Weichai (the “First Shareholder’s Loan Agreement.”) The First Shareholder’s Loan provided the Company with a $130.0 million secured subordinated loan facility that expires on April 25, 2022.

Under the First Shareholder’s Loan, Weichai is obligated to advance funds solely for purposes of repaying outstanding borrowings under the Amended and Restated Credit Agreement if the Company is unable to repay such borrowings.

Any potential borrowings under the First Shareholder’s Loan Agreement were to be at LIBOR plus 4.50% per annum.

As of December 31, 2021, there were no borrowings under the First Shareholder’s Loan Agreement.

As discussed above, the Amended and Restated Credit Agreement included financial covenants which were effective for the Company beginning with the three months ended June 30, 2021 and each of the third and fourth quarters of 2021.

The financial covenants include an interest coverage ratio and a minimum EBITDA threshold as further defined in the Amended and Restated Credit Agreement.

For the three months ended June 30, 2021 and September 30, 2021, the Company did not meet the defined minimum interest coverage nor EBITDA requirements.

A breach of the financial covenants under the Amended and Restated Credit Agreement constitutes an event of default which, if not cured or waived, could result in the obligations under the Amended and Restated Uncommitted Revolving Credit Agreement being accelerated.

On November 9, 2021, the Company entered into a waiver with Standard Chartered, which waived the financial covenant defaults for the quarters ended June 30 and September 30, 2021.

In connection with the waiver, a waiver fee of $0.6 million was remitted to Standard Chartered in November 2021.

Further, the Company breached the financial covenants for the three months ended December 31, 2021;

it received a waiver from Standard Chartered for no additional fee as part of the March 25, 2022 amendment and restatement to the Amended and Restated Credit Agreement as described below.

On July 14, 2021, the Company entered into an additional Shareholder’s Loan Agreement (the “Second Shareho lder’s Loan Agreement”) with Weichai.

The Second Shareholder’s Loan Agreement provided the Company with a $25.0 million uncommitted facility that is subordinated to the Amended and Restated Credit Agreement and any borrowing requests made under the Second Shareholder’s Loan Agreement are subject to Weichai’s discretionary approval.

Borrowings under the Second Shareholder’s Loan Agreement incurred interest at LIBOR plus 4.50% and were to be used for general corporate purposes, except for certain legal expenditures which required additional approval from Weichai.

The Second Shareholder’s Loan Agreement expires on May 20, 2022 with any outstanding principal and accrued interest due upon maturity.

As of December 31, 2021 , the Company had $25.0 million outstanding under the Second Shareholder’s Loan Agreement.

On December 10, 2021, the Company entered into an additional Shareholder’s Loan Agreement (the “Third Shareholder’s Loan Agreement”) with Weichai.

The Third Shareholder’s Loan Agreement provides the Company with a $50.0 million uncommitted facility that is subordinated to the Amended and Restated Credit Agreement and any borrowing requests made under the Third Shareholder’s Loan Agreement are subject to Weichai’s discretionary approval.

Borrowings under the Third Shareholder’s Loan Agreement bear interest at LIBOR plus 4.50% and can be used for general corporate purposes, except for certain legal expenditures which require additional approval from Weichai.

The Third Shareholder’s Loan Agreement expires on November 30, 2022 with any outstanding principal and accrued interest due upon maturity.

As of December 31, 2021, the Company had $25.0 million outstanding under the Second Shareholder’s Loan Agreement.

As of December 31, 2021, the Company’s total outstanding debt obligations under the Amended and Restated Credit Agreement, the Second Shareholder’s Loan Agreement and the Third Shareholder’s Loan Agreement were $180.9 million in the aggregate, and its cash and cash equivalents were $6.3 million .

See Item 8 Financial Statements and Supplementary Data , Note 6.

Debt , for additional information.

On March 25, 2022, the Company amended and restated its $130.0 million Amended and Restated Credit Agreement by entering into the Second Amended and Restated Uncommitted Revolving Credit Agreement with Standard Chartered.

The Second Amended and Restated Uncommitted Revolving Credit Agreement extends the maturity date of loans outstanding under its previous credit facility to the earlier of March 24, 2023 or the demand of Standard Chartered.

As of the second amendment and restatement, Standard Chartered agreed to waive any existing event of default under the existing credit agreement, resulting from the breach of the financial covenants for the quarter ended December 31, 2021.

No additional fee was incurred with this waiver.

The Second Amended and Restated Uncommitted Revolving Credit Agreement is subject to customary events of default and covenants, including minimum consolidated EBITDA and Consolidated Interest Coverage Ratio covenants for the second and third quarters of 2022.

Borrowings under the Second Amended and Restated Credit Agreement will incur interest at either the alternate base rate or the Secured Overnight Financing Rate (“SOFR”) plus 2.95% per annum.

In addition, the Company paid fees of $1.8 million related to the Second Amended and Restated Uncommitted Revolving Credit Agreement,

which will be deferred and amortized over the term of the Second Amended and Restated Uncommitted Revolving Credit Agreement.

The Second Amended and Restated Uncommitted Revolving Credit Agreement continues to be secured by substantially all of the Company’s assets and contains the same prov isions as described above with respect to Standard Chartered’s demand rights and its power of attorney (POA).

As of March 25, 2022, the Company had $130.0 million outstanding under the Second Amended and Restated Credit Agreement.

In connection with the Second Amended and Restated Uncommitted Revolving Credit Agreement, on March 24, 2022, the Company also amended two of the three shareholder’s loan agreements with Weichai, to among other things, extend the maturities thereof.

The amended First Shareholder’s Loan Agreement (the “Amended First Shareholder’s Loan Agreement”) continues to provide the Company with a $130.0 million subordinated loan under w hich Weichai is obligated to advance funds solely for purposes of repaying outstanding borrowings under the Second Amended and Restated Uncommitted Revolving Credit Agreement if the Company is unable to pay such borrowings.

The amended second shareholder’s loan agreement (the “Amended Second Shareholder’s Loan Agreement”) continues to provide the Company with a $25.0 million subordinated loan at the discretion of Weichai.

The maturity of the Amended First Shareholder’s Loan Agreement was extende d to April 24, 2023 and the maturity of the Amended Second Shareholder’s Loan Agreement was extended to May 20, 2023.

Borrowings under both agreements will bear interest at an annual rate equal to SOFR plus 4.65% per annum.

Further, if the applicable term SOFR is negative, the interest rate per annum shall be deeme d as 4.65% per annum.

If the interest rate for any loan is lower than Weichai’s borrowing cost, the interest rate for such loan shall be equal to Weichai’s borrowing cost plus 1%.

Both of the agreements are subject to customary events of default and covenants.

The Company has covenanted to secure any amounts borrowed under either of the agreements upon payment in full of all amounts outstanding under the Second Amended and Restated Uncommitted Revolving Credit Agreement.

As of March 24, 2022, there were no borrowings under the Amended First Shareholder’s Loan Agreement and $25.0 million under the Amended Second Shareholder’s Loan Agreement.

The Company intends to work with Weichai to extend the Third Shareholder’s Loan Agreement as the maturity date approaches.

As of March 24, 2022, PSI had borrowed $35.7 million unde r the Third Shareholder’s Loan Agreement.

As of December 31, 2021, Accounts Payable were approximately $93.3 million reflective of elevated inventory, costs incurred related to the Company’s indemnification obligations and the management of timing of payables.

Significant uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness under its existing debt arrangements, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Second Amended and Restated Credit Agreement or shareholder’s loan agreements in the future.

Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay the outstanding indebtedness under the Company’s existing debt arrangements as they become due.

Management currently plans to seek an extension and/or replacement of its existing debt arrangements or seek additional liquidity from its current or other lenders before the maturity dates in 2022 and 2023 as discussed above.

There can be no assurance that the Company will be able to successfully complete a refinancing on acceptable terms or repay this outstanding indebtedness when required or if at all.

Additionally, due to the onset of the COVID-19 pandemic in early 2020, the global economy experienced substantial turmoil including impacts from the world financial markets which have experienced a period of significant volatility and overall declines.

In addition, due to unprecedented decreases in demand, an oil price war, and economic uncertainty resulting from the COVID-19 pandemic, crude oil prices declined considerably during 2020 compared to the end of 2019.

A significant portion of the Company’s sales and profitability is derived from the sale of products that are used within the oil and gas industry.

While the Company did not experience significant supply chain interruptions or material cancellations of orders during 2020, the Company did see a decline in orders and lower volumes compared to the prior year.

The potential for continued disruptions, economic uncertainty, and unfavorable oil and gas market dynamics may have a material adverse impact that may result in the recognition of impairments or other related charges.

Moreover, the full impact of the COVID-19 pandemic on the Company’s operations and liquidity continues to evolve.

Due to uncertainties surrounding the Company’s future ability to refinance, extend, or repay its outstanding indebtedness, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Amended and Restated Uncommitted Revolving Credit Agreement in the future, substantial doubt exists as to its ability to continue as a going concern within one year after the date that these financial statements are issued.

Additionally, during 2020, as a result of the COVID-19 pandemic, the global economy experienced substantial turmoil, which led to challenging market conditions across certain areas of the Company’s business.

At year-end 2021, crude oil prices were 55% above prices at year-end 2020, a meaningful improvement.

However, U.S.

rig counts have been slower to return as the average count for 2021 was up 10% versus 2020 and average rig counts remain significantly below the full year average during 2019.

Meanwhile, the Company believes that capital spending within the U.S.

oil markets during 2021 remained well below 2019 levels.

These factors have contributed to a continued challenging environment for the sale of the Company’s oil and gas related products during 2021.

A significant portion of the Company’s sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry.

This, in turn, caused delivery delays to some of the Company’s customers.

The Company also experienced inflationary cost pressures for certain materials and shipping-related costs.

Additionally, the Company experienced higher tariff costs as a result of the non-renewal of certain tariff exclusions.

The Company is working to mitigate the impact of these matters through price increases and other measures, such as seeking certain tariff exclusions, where possible.

The potential for continued disruptions, economic uncertainty, and unfavorable oil and gas market dynamics may have a material adverse impact on the timing of delivery of customer orders and the levels of future customer orders.

Lastly, during 2021, the Company incurred significantly higher legal costs due to its obligation to indemnify certain former officers and employees as a result of exhaustion of its directors and officers insurance during the early part of 2020.

In particular, spending activity was elevated during the first nine months of 2021 as a result of the USAO trial involving former officers and employees of the Company.

With a verdict reached in the USAO trial matter involving former officers and employees in September 2021, the Company believes its costs related to the matter will cease.

However, at this time, the

Company is not able to estimate the potential future amount of its indemnity obligations related to the pending SEC matter involving prior officers and employees.

Commitments and Contingencies for further discussion of the Company’s indemnification obligations.

Accordingly, the above challenges may continue to have a material adverse impact on the Company’s future results of operations, financial position, and liquidity.

Due to uncertainties surrounding the Company’s future ability to refinance, extend, or repay its outstanding indebtedness under its existing debt arrangements, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Second Amended and Restated Credit Agreement or shareholder’s loan agreements in the future, substantial doubt exists as to its ability to continue as a going concern within one year after the date that these financial statements are issued.

If the Company does not have sufficient liquidity to fund its business activities, it may be forced to limit its business activities or be unable to continue as a going concern, which would have a material adverse effect on its results of operations and financial condition.

Off-Balance Sheet Arrangements

At December 31, 2020, the Company had six outstanding letters of credit totaling $2.3 million.

At December 31, 2021, the Company had five outstanding letters of credit totaling $2.1 million.

Financial Statements and Supplementary Data, Note 10.

10 unchanged sentences

The Company has identified the following as its most critical accounting policies and judgments.

Although management believes that its estimates and assumptions are reasonable, they are

based on information available when they are made and, therefore, may differ from estimates made under different assumptions or conditions.

Although management believes that its estimates and assumptions are reasonable, they are based on information available when they are made and, therefore, may differ from estimates made under different assumptions or conditions.

The Company’s significant accounting policies are discussed in Note 1.

34 unchanged sentences

Additionally, an inventory reserve is provided based upon the Company’s estimate of future demand for the quantity of inventory on hand.

In determining an estimate of future demand, multiple factors are taken into consideration, including (i) customer purchase orders and customer projected demand, (ii) historical sales/usage for each inventory item and (iii) utilization

within a current or anticipated future power system.

These factors are primarily based upon quantifiable information, and therefore the Company has not experienced significant differences in inventory valuation due to variances in the Company’s estimation of future demand.

13 unchanged sentences

As of December 31, 2021, the Company has $29.8 million of goodwill.

Significant adverse changes to the Company’s business environment and future cash flows could cause the recognition of impairment charges, which could be material, in future periods.

Significant adverse changes to the Com pany’s business environment and future cash flows could cause the recognition of impairment charges, which could be material, in future periods.

As a result of the ongoing COVID-19 pandemic and its impacts on the global economy, it is reasonably possible that the Company will continue to be adversely impacted which may result in the recognition of material goodwill impairment charges.

1 unchanged sentence

Long-lived assets, other than goodwill which is separately tested for impairment, are evaluated for impairment whenever events indicate that the carrying amount of such assets may not be recoverable.

Potential indicators of impairment may include a deteriorating business climate, an asset remaining idle for more than a short period of time, advances in technology, or plans to discontinue use of, or change, in the business model for the operation in which a long-lived asset is used.

Potential indicators of impairment may include a

deteriorating business climate, an asset remaining idle for more than a short period of time, advances in technology, or plans to discontinue use of, or change, in the business model for the operation in which a long-lived asset is used.

The Company evaluates long-lived assets for impairment by comparing the carrying value of the long-lived assets with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition.

14 unchanged sentences

Future events and circumstances related to these factors could materially change the estimates and require adjustments to the warranty liability.

In addition, new product

launches require a greater use of judgment in developing estimates until historical experience becomes available.

As of December 31, 2020, the Company had warranty reserves of $31.5 million.

In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.

As of December 31, 2021 and 2020, the Company had warranty reserves of $32.9 million and $31.5 million, respectively.

The Company records adjustments to preexisting warranties for changes in its estimate of warranty costs for products sold in prior fiscal years in the period in which it is determined that actual costs may differ from the Company’s initial or previous estimates.

1 unchanged sentence

During 2021, the Company recognized a charge for adjustments to preexisting warranties of $9.4 million compared to a charge of $8.7 million in 2020.

Warranty costs may differ from those estimated if actual claim rates are higher or lower than historical rates.

For example if claims are 10% higher this would result in $3.3 million of additional warranty expense.

When the Company identifies cost effective opportunities to address issues in products sold or corrective actions for safety issues, it initiates product recalls or field campaigns.

3 unchanged sentences

Warranty costs and recoveries are included in Cost of sales in the Consolidated Statements of Operations.

Deferred Tax Asset Valuation Allowance

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.

Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be settled or realized.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company records net deferred tax assets to the extent that the Company believes the assets will more likely than not be realized.

In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations.

Valuation allowances are established when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized.

The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income and other factors such as the taxing jurisdiction in which the asset is to be recovered.

A high degree of judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets.

As of December 31, 2020 and 2019, the Company recorded a deferred tax asset valuation allowance of $48.1 million and $41.7 million, respectively.

Although the Company believes that its approach to estimates and judgments as described herein is reasonable, actual res ults could differ, and the Company may be exposed to increases or decreases in income taxes that could be material.

Income Taxes , included in Item 8.

Financial Statements and Supplementary Data , for additional information regarding the deferred tax valuation allowance.

Impact of New Accounting Standards

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis