What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-03-31 compared with 2021-03-30 · 288 added, 334 removed, 872 unchanged (42% of the section changed)

3 unchanged sentences

Consolidated Financial Statements of Power Solutions International, Inc.

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm ( BDO USA, LLP , Chicago, IL , PCAOB ID# 243 )

Consolidated Balance Sheets as of December 31, 2021 and 2020 43

Consolidated Statements of Operations for 2021 and 2020 44

Consolidated Statements of Stockholders’ Equity for 2020 and 2019 45

Consolidated Statements of Stockholders’ Equity (Deficit) for 2021 and 2020 45

Consolidated Statements of Cash Flows for 2021 and 2020 46

6 unchanged sentences

We have audited the accompanying consolidated balance sheets of Power Solutions International, Inc.

(the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended and the related notes (collectively referred to as the “consolidated financial statements”).

(the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years then ended and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

1 unchanged sentence

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, 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 Second Amended and Restated Credit Agreement or shareholder’s loan agreements in the future.

These factors raise substantial doubt about the Company’s ability to continue as a going concern.

15 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition from Significant Supply Agreements

As more fully described in Note 2.

to the consolidated financial statements, the Company recognized revenue from significant supply agreements with two customers of $70.0 million for the year ended December 31, 2020.

The Company also had contract liabilities of $46.4 million related to these significant supply agreements as of December 31, 2020.

The contracts executed under these two significant supply agreements included complex revenue recognition considerations.

Additionally, during 2020, the Company began licensing its technology to a third-party manufacturer to produce and certify certain products purchased through these contracts, which required additional consideration to determine if the Company remained the principal in the contract.

We identified revenue recognition from contracts executed under these significant customer supply agreements as a critical audit matter.

Significant judgment was required to determine the performance obligations within the contracts, when control of

the performance obligations transfers to the customer, and whether the Company is a principal or agent in satisfying the performance obligations.

Auditing these aspects involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including specialized skill and knowledge needed.

The primary procedures we performed to address this critical audit matter included:

Evaluating the appropriateness of management’s revenue recognition accounting policies and practices applied to these significant supply agreements.

Examining the terms of the contracts executed under the significant supply agreements, including the licensing contract with the third-party manufacturer, and evaluating management’s judgment about:

whether contract promises represented performance obligations

when control of each performance obligation transfers to the customer and

whether the Company was a principal or agent in satisfying the performance obligations.

Testing a sample of revenue transactions for each contract to evaluate whether the revenue recognized and contract liabilities recorded were consistent with management’s accounting policies and practices.

Utilizing personnel with specialized skill and knowledge in evaluating complex revenue transactions to evaluate the application of management’s revenue recognition accounting policies and generally accepted accounting principles specifically related to the identification of performance obligations, the timing of when control of the performance obligation transfers to the customer and whether the Company was a principal or an agent in satisfying the performance obligations in these significant supply agreements.

Transportation Accrued Product Warranty

As more fully described in Note 1.

to the consolidated financial statements, the Company’s consolidated accrued product warranty balance was $31.5 million as of December 31, 2020, which included the transportation accrued product warranty covering new products launched in recent years.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accrued Product Warranty

As more fully described in Note 1 to the consolidated financial statements, the Company’s consolidated accrued product warranty balance was $32.9 million as of December 31, 2021.

The Company offers a standard limited warranty on the workmanship of its products.

3 unchanged sentences

Previous estimates are adjusted as actual warranty claims data becomes available.

We identified the transportation accrued product warranty liability as a critical audit matter.

Auditing management’s estimates and assumptions to determine the transportation accrued product warranty liability involved especially challenging auditor judgment due to the limited availability of historical warranty claims information for new transportation products launched in recent years.

We identified the accrued product warranty liability as a critical audit matter.

Auditing management’s estimates and assumptions to determine the accrued product warranty liability involved especially challenging auditor judgment due to i) the significant judgment by management when determining the accrued product warranty liability estimate;

ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the significant assumptions;

specifically the comparability of new product launches to those of a similar product line for periods when historical claims are not available, and iii) the estimates in frequency and average cost of warranty claims.

The primary procedures we performed to address this critical audit matter included:

Evaluating the reasonableness of management’s assumptions to estimate the future warranty claims for the recently developed and launched transportation products by:

Comparing assumptions used to estimate the transportation accrued product warranty to those of a similar product line for periods when historical claims are not available, including assessing reasonableness of the similarity of such products by understanding their nature and intended use.

Comparing the current transportation product warranty claims estimates to the prior year estimates and investigating significant differences.

Analyzing the trends from historical transportation product sales and claims received from those sales to evaluate changes in the failure rates, repair costs and timing of failures for more recent sales of products and verifying that these trends are reasonably incorporated in management’s current estimates.

Evaluating the reasonableness of management’s assumptions to estimate the future warranty claims for the recently developed and launched products by:

Comparing assumptions used to estimate the accrued product warranty to those of a similar product line for periods when historical claims are not available, including assessing reasonableness of the similarity of such products by understanding their nature and intended use.

Comparing the current product warranty claims estimates to the prior year estimates, and investigating significant differences.

Testing the completeness and accuracy of the underlying historical warranty claims information used to estimate future warranty claims.

Testing the mathematical accuracy of management’s calculation of the transportation product warranty.

Analyzing current period warranty claims data for indicators that historical trends may not be indicative of future warranty claims for the same transportation products.

Testing the mathematical accuracy of management’s calculation of the product warranty.

/s/ BDO USA, LLP

19 unchanged sentences

TOTAL ASSETS $ 300,538 $ 283,977

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:

2 unchanged sentences

Revolving line of credit 130,000 130,000

Other short-term financing 25,000 —

Other accrued liabilities 34,801 77,619

5 unchanged sentences

TOTAL LIABILITIES $ 342,561 $ 277,880

STOCKHOLDERS’ EQUITY

STOCKHOLDERS’ EQUITY (DEFICIT)

Preferred stock – $ 0.001 par value.

9 unchanged sentences

( 1,116 ) ( 1,294 )

TOTAL STOCKHOLDERS’ EQUITY 6,097 28,497

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 283,977 $ 313,672

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) ( 42,023 ) 6,097

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 300,538 $ 283,977

See Notes to Consolidated Financial Statements

10 unchanged sentences

Total operating expenses 82,841 80,172

Operating (loss) income ( 21,724 ) 17,203

Operating loss ( 41,570 ) ( 21,724 )

Other expense, net:

Interest expense 7,307 5,714

Loss from change in value and exercise of warrants — 1,352

Loss on debt extinguishment and modifications — 497

Other income, net ( 1,240 ) ( 677 )

Other expense (income), net 1 ( 1,240 )

Total other expense, net 7,308 4,971

(Loss) income before income taxes ( 26,695 ) 8,657

Income tax (benefit) expense ( 3,713 ) 409

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

Loss before income taxes ( 48,878 ) ( 26,695 )

Income tax benefit ( 406 ) ( 3,713 )

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

Weighted-average common shares outstanding:

1 unchanged sentence

Diluted 22,908 22,872

(Loss) earnings per common share:

Loss per common share:

Basic $ ( 2.12 ) $ ( 1.00 )

2 unchanged sentences

POWER SOLUTIONS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands) Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock Total Stockholders’ Equity

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands) Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock Total Stockholders’ Equity (Deficit)

Balance at December 31, 2019 $ 23 $ 156,727 $ ( 126,912 ) $ ( 1,341 ) $ 28,497

Net income — — 8,248 — 8,248

Net loss — — ( 22,982 ) — ( 22,982 )

Stock-based compensation expense — 535 — 72 607

Common stock issued for stock-based awards, net — — — ( 25 ) ( 25 )

Issuance of common stock to Weichai 4 38,064 — — 38,068

Balance at December 31, 2020 $ 23 $ 157,262 $ ( 149,894 ) $ ( 1,294 ) $ 6,097

7 unchanged sentences

(in thousands) For the Year Ended December 31,

Cash (used in) provided by operating activities

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

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Cash used in operating activities

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

Adjustments to reconcile net loss to net cash used in operating activities:

Amortization of intangible assets 2,535 3,053

Depreciation 4,871 5,147

Change in value and exercise of warrants — 1,352

Stock-based compensation expense 394 607

5 unchanged sentences

Accounts receivable, net ( 4,952 ) 44,611

Inventory, net ( 382 ) ( 3,977 )

Inventory ( 34,840 ) ( 382 )

Prepaid expenses and other assets ( 103 ) 3,958

2 unchanged sentences

Other noncurrent liabilities ( 4,046 ) ( 8,981 )

Net cash (used in) provided by operating activities ( 7,594 ) 18,157

Cash used in investing activities

Net cash used in operating activities ( 61,478 ) ( 7,594 )

Cash provided by (used in) investing activities

Capital expenditures ( 1,968 ) ( 2,402 )

Return of investment in joint venture 2,263 —

Proceeds from corporate-owned life insurance — 930

Other investing activities, net 103 60

Net cash used in investing activities ( 1,412 ) ( 3,658 )

Cash provided by (used in) financing activities

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

Cash provided by financing activities

Repayments of long-term debt and lease liabilities ( 380 ) ( 55,290 )

Payments of deferred financing costs ( 1,970 ) ( 650 )

Proceeds from debt financings 51,309 —

Repayment of short-term financings ( 1,180 ) —

Proceeds from revolving line of credit — 180,298

Repayments of revolving line of credit — ( 89,826 )

Proceeds from Weichai Warrant exercise — 1,616

Payments of deferred financing costs ( 3,162 ) ( 1,970 )

Other financing activities, net ( 42 ) 58

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

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

Net cash provided by financing activities 46,545 33,270

Net (decrease) increase in cash, cash equivalents, and restricted cash ( 14,535 ) 24,264

Cash, cash equivalents, and restricted cash at beginning of the year 24,267 3

34 unchanged sentences

Going Concern Considerations

In March 2021, the Company entered into an amended and restated uncommitted revolving credit agreement between the Company and Standard Chartered Bank (“Standard Chartered”), as administrative agent (the “Amended and Restated Uncommitted Revolving Credit Agreement”).

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 an amendment and restatement of the shareholder’s loan agreement originally executed with Weichai in December 2020 (the “First Amended and Restated Shareholder’s Loan Agreement”).

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.

On March 26, 2021, the Compa ny 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 subject to maturity on March 25, 2022.

The Amended and Restated Credit Agreement was secured by substanti ally 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 o f 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 Agreement provided the Company with a $ 130.0 million secured subordinated loan facility that expires on April 25, 2022.

Under the First Shareholder’s Loan Agreement, 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.

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

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

In order to provide the Company with a more permanent source of liquidity, management plans to seek an extension and amendment and/or replacement of the Amended and Restated Uncommitted Revolving Credit Agreement or additional liquidity from its current or other lenders before March 25, 2022.

There can be no assurance that the Company’s management will be able to successfully complete an extension and amendment of the Amended and Restated Uncommitted Revolving Credit Agreement or obtain new financing on acceptable terms, when required or if at all.

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 waive r fee of $ 0.6 million was remitted to Standard Chartered in November 2021.

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

it received a waiver from Standard Chartered for no additional fee as part of the March 25, 2022 second amendment and restatement of 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 Shareholder’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 Third 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 Note 6.

Debt , for additional information.

On March 25, 2022, the Company amended and restated its $ 130.0 million Amended and Restated Credit Agreement (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 part of the 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.

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.

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 provisions as described above with respect to Standard Chartered’s demand rights and its power of

attorney (POA).

As of March 24, 2022, the Company had $ 130.0 million outstanding under the Second Amended and Restated Uncommitted Revolving Credit Agreement.

In connection with the Second Amended and Restated Uncommitted Revolving Credit Agreement, on March 25, 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 which 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 extended to April 24, 2023 and the maturity of the Amended Second Shareholder’s Loan Agreement was extended to May 20, 2023.

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 A greement.

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 approximately $ 35.7 million under the Third Shareholder’s Loan Agreement.

Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay amounts owing under its existing debt arrangements as they become due.

In order to provide the Company with a more permanent source of liquidity, management plans to seek an extension and amendment and/or replacement of its existing debt agreements 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’s management will be able to successfully complete an extension and amendment of its existing debt agreements or obtain new financing on acceptable terms, when required or if at all.

These consolidated financial statements do not include any adjustments that might result from the outcome of the Company’s efforts to address these issues.

3 unchanged sentences

• respond to competitive pressures or unanticipated working capital requirements.

Additionally, as discussed further below, in January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally.

In March 2020, the WHO classified the COVID-19 outbreak as a global pandemic (the “COVID-19 pandemic”), based on the rapid increase in exposure globally.

Additionally, as discussed further below, the global economy continues to be impacted by the outbreak of the coronavirus (“COVID-19”) that was first declared a global pandemic (the “COVID-19 pandemic”) in March 2020.

The potential for continued disruptions, economic uncertainty, and unfavorable oil and gas market dynamics may continue to have a material adverse impact on the results of operations, financial position and liquidity of the Company.

The Company’s management has concluded that, due to uncertainties surrounding the Company’s future ability to refinance, extend and amend, 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, 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.

The Company’s management has concluded that, due to uncertainties surrounding the Company’s future ability to refinance, extend and amend, 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 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.

The Company’s plans to alleviate the substantial doubt about its ability to continue as a going concern may not be successful, and 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.

The consolidated financial statements included herein have been prepared assuming that the Company will continue as a going concern and contemplating the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

The Company’s ability to continue as a going concern is dependent on generating profitable operating results, having sufficient liquidity, maintaining compliance with the covenants and other requirements under the Amended and Restated Uncommitted Revolving Credit Agreement in the future, and extending and amending, refinancing or repaying the indebtedness outstanding under this agreement.

Recent COVID-19 Outbreak and Oil and Gas Market Price Volatility

The Company’s ability to continue as a going concern is dependent on generating profitable operating results, having sufficient liquidity, maintaining compliance with the covenants and other requirements under the Second Amended and Restated Uncommitted Revolving Credit Agreement in the future, and extending and amending, refinancing or repaying the indebtedness outstanding under the Company’s existing debt arrangements.

COVID-19 and other Recent Business Impacts

The ongoing 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.

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.

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 prices at the end of 2019.

However, since May 2020 and through the issuance date of these consolidated financial statements, 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.

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.

However, capital spending and rig counts in U.S.

oil markets remained below pre-pandemic levels in 2021.

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.

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 has also 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.

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

The Company performs its annual goodwill impairment test as of October 1, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

As of March 31, 2020, the Company determined that a triggering event had occurred as a result of the impacts of the COVID-19 pandemic and the oil and gas market price volatility.

Based on this interim assessment, the Company concluded that goodwill was not impaired as of March 31, 2020.

As further discussed in Note 5., Goodwill and Other Intangibles , the Company completed its annual goodwill impairment assessment as of October 1, 2020 and concluded that goodwill was not impaired.

It is reasonably possible that potential adverse impacts of the factors noted above could result in the recognition of material impairments of goodwill and other long-lived assets or other related charges in future periods as the extent and duration of the impact of the COVID-19 pandemic and resulting effect on the Company’s operations continues to evolve and remains uncertain.

The Company initiated certain contingency actions during 2020 as a result of the significant negative impacts of these factors.

During 2020, the Company took actions to continue to improve its manufacturing operations which included making reductions in its production facility workforce to align with current volume trends.

In addition, the Company implemented various temporary cost reduction measures, including reduced pay for salaried employees, suspension of the 401(k) match program, and deferred spending on certain research and development (“R&D”) programs, among others.

Any additional cost savings initiatives or other cash actions the Company undertakes in response to the COVID-19 pandemic may not achieve the intended results and may result in other adverse impacts, which could be material.

Even after the COVID-19 pandemic has subsided, the Company may continue to experience negative impacts to its business, operations and financial condition as a result of any economic recession or depression that has occurred or may occur in the future.

As further discussed in Item 8., Note 5., Goodwill and Other Intangibles , the Company completed its annual goodwill impairment assessment as of October 1, 2021 and concluded that goodwill was not impaired.

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 United States Attorney’s Office for the Northern District of Illinois (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 Securities and Exchange Commission (the “SEC”) matter involving prior officers and employees.

See Note 10., 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.

Basis of Presentation and Consolidation

9 unchanged sentences

The Company’s CODM reviews consolidated statements of operations to make decisions, allocate resources and assess performance, and the CODM does not evaluate the profit or loss from any separate geography or product line.

Reclassifications

Certain amounts recorded in the prior-period consolidated financial statements presented have been reclassified to conform to the current-period financial statement presentation.

These reclassifications had no effect on previously reported results of operations.

Concentrations

3 unchanged sentences

Customer B 21 % 11 %

The following table presents customers individually accounting for more than 10% of the Company’s accounts receivable:

The following table presents customers individually accounting for more than 10% of the Company’s trade accounts receivable:

As of December 31,

Customer A 24 % 16 %

Customer B ** 49 %

Customer C ** 22 %

10 unchanged sentences

Cash and Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments that mature within three months or less.

Cash equivalents consist of short-term, highly liquid investments that have original maturities of three months or less from the date of purchase.

Such investments are stated at cost, which approximates fair value.

3 unchanged sentences

As discussed in Note 10.

Commitments and Contingencies , the Company had outstanding letters of credit of $ 2.3 million and restricted cash of $ 3.3 million at December 31, 2020.

Commitments and Contingencies , the Company had outstanding letters of credit of $ 2.1 million and $ 2.3 million at December 31, 2021 and 2020, respectively.

The Company had restricted cash of $ 3.5 million and $ 3.3 million at December 31, 2021 and 2020, respectively.

Research and Development

9 unchanged sentences

Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more-likely-than-not threshold.

Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the appropriate taxing authority has completed its examination even though the statute of

limitations remains open, or the statute of limitation has expired.

Interest and penalties related to uncertain tax positions are recognized as part of income tax expense and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.

Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the appropriate taxing authority has completed its examination even though the statute of limitations remains open, or the statute of limitation has expired.

Interest and penalties related to uncertain tax positions are

recognized as part of income tax expense and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.

Accounts Receivable and Allowance for Doubtful Accounts

56 unchanged sentences

As a result of the recent COVID-19 pandemic and its impacts on the global economy, it is reasonably possible that the Company will be adversely impacted in future periods which may result in the recognition of material impairment charges related to its long-lived assets.

Goodwill represents the excess of the cost of an acquired business over the amounts assigned to the net acquired assets.

Goodwill rep resents the excess of the cost of an acquired business over the amounts assigned to the net acquired assets.

Goodwill is not amortized but is tested for impairment at the reporting unit level, on an annual basis or more frequently, if events occur or circumstances change indicating potential impairment.

12 unchanged sentences

The asset approach estimates the selling price the unit could achieve under assumed market conditions.

During the first quarter of 2020, the Company considered the significant changes in the market due to the COVID-19 pandemic and the oil and gas market price volatility in performing its assessment of whether an interim impairment review was required for any reporting units and determined that a triggering event had occurred as of March 31, 2020.

The Company considered

both qualitative and quantitative factors in its assessment including the significant amount of headroom resulting from the prior fiscal year’s impairment test and potential changes in key assumptions, including discount rates, expected profitability and long-term growth rates, used in the last fiscal year’s impairment analysis that may have been impacted by the recent market conditions and economic events.

Based on this interim assessment, the Company concluded that goodwill was not impaired as of March 31, 2020.

The Company has historically had two reporting units:

PSI and Professional Power Products, Inc.

Due to organizational leadership changes as well as operational changes implemented at both PSI and 3PI that further consolidated and integrated operations of the reporting units, the Company concluded that there was only a single reporting unit for purposes of conducting the annual goodwill impairment test as of October 1, 2020.

The single reporting unit represents the consolidated operating segment.

With the change from two reporting units to one , the Company performed a quantitative goodwill impairment test immediately before and after the change.

The Company determined that the estimated fair value exceeded the carrying value of immediate before and after combining the reporting units;

as such, no impairment charges were recognized.

It is reasonably possible that potential adverse impacts of the factors noted above that triggered an interim assessment in the first quarter of 2020 could result in the recognition of material impairments of goodwill and other long-lived assets or other related charges in future periods as the extent and duration of the impact of the COVID-19 pandemic and resulting effect on the Company’s operations continues to evolve and remains uncertain.

During the year ended December 31, 2019, the Company performed a quantitative assessment and determined that the estimated fair value of the reporting units exceeded the carrying value;

During the year ended December 31, 2021 and 2020, the Company performed a quantitative assessment and determined that the estimated fair value of the reporting unit exceeded the carrying value;

as such, no impairment charges were recognized.

12 unchanged sentences

Total $ 34,801 $ 77,619

* As of December 31, 2020, litigation reserves related to various ongoing legal matters including associated legal fees.

As of December 31, 2019, litigation reserves primarily consisted of accruals for the settlement of the SEC and USAO Investigations and the Federal Derivative Litigation.

The Company concluded that insurance recovery was probable related to $ 1.9 million of the litigation reserves as of December 31, 2019, and recognized full recovery of the settlement amounts in Prepaid expenses and other current assets .

Commitments and Contingencies for additional information.

* As of December 31, 2020 and 2021, litigation reserves related to various ongoing legal matters including associated legal fees.

Warranty Costs

18 unchanged sentences

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

Included in accounts receivable is approximately $ 4.5 million of reimbursements of warranty from a significant supplier.

Accrued product warranty activities are presented below:

36 unchanged sentences

The Company adopted the standard effective January 1, 2020 on a prospective basis.

There was no impact on the Company’s Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows or Statement of Stockholders’ Equity as a result of the adoption.

There was no impact on the Company’s Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows or Statement of Stockholders’ Equity (Deficit) as a result of the adoption.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

4 unchanged sentences

The guidance was effective upon issuance and expires after December 31, 2022.

There was no impact on the Company’s Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows or Statement of Stockholders’ Equity as a result of this guidance.

There was no impact on the Company’s Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows or Statement of Stockholders’ Equity (Deficit) as a result of this

The Company continues to monitor contracts potentially impacted by reference rate reform, including the Company’s debt agreements, and will continue to assess the potential impacts of this guidance as reference rates are updated.

33 unchanged sentences

For the years ended December 31, 2021 and 2020, the Company recognized revenue of $ 415.7 million and $ 370.7 million, respectively, related to products shipped or delivered at a point in time.

The Company also recognizes revenue over time primarily when the Company’s performance obligations include enhancing a customer-controlled asset (generally when an engine is provided by the customer), constructing an asset with no alternative future use and the Company has an enforceable right to payment throughout the period as the services are performed, or providing services over time such as an extended warranty beyond the Company’s standard warranty.

future use and the Company has an enforceable right to payment throughout the period as the services are performed, or providing services over time such as an extended warranty beyond the Company’s standard warranty.

The Company recognizes revenue throughout the manufacturing process when constructing an asset based on labor hours incurred because the customer receives the benefit of the asset as the product is constructed.

32 unchanged sentences

End Market 2021 2020

Energy $ 149,282 $ 222,779

Power Systems $ 123,132 $ 149,282

Industrial 153,289 131,026

4 unchanged sentences

Geographic Area 2021 2020

United States $ 406,077 $ 366,445

North America 8,616 9,831

12 unchanged sentences

Short-term contract assets (included in Prepaid expenses and other current assets )

$ 2,707 $ 547

Short-term contract liabilities (included in Other accrued liabilities )

4 unchanged sentences

During the year ended December 31, 2021 and 2020, the Company recognized $ 47.2 million and $ 30.8 million of revenue upon satisfaction of performance obligations related to amounts that were included in the net contract liabilities balance as of December 31, 2020 and 2019, respectively.

The increase in the contract liabilities from December 31, 2019 to December 31, 2020 is primarily related to the prepayment for 6.0L gasoline engine by a customer under a long-term supply agreement.

At December 31, 2020 and 2019, the Company had a contract liability related to prepayments of 6.0L gasoline engines of $ 46.4 million and $ 38.0 million, respectively.

The decrease in the contract liabilities from December 31, 2020 to December 31, 2021 is primarily related to the prepayment for 6.0L gasoline engine by a customer under a long-term supply agreement.

At December 31, 2021 the Company had no contract liability related to prepayments of 6.0L gasoline engines, and $ 46.4 million as of December 31, 2020.

Remaining Performance Obligations

1 unchanged sentence

For performance obligations that extend beyond one year, the Company had $ 4.1 million of remaining performance obligations as of December 31, 2021 primarily related to a long-term manufacturing contract with a customer and extended warranties.

The Company expects to recognize revenue related to these remaining performance obligations of approximately $ 46.9 million in 2021, $ 0.7 million in 2022, $ 1.0 million in 2023, $ 1.0 million in 2024 and $ 0.5 million in 2025 and beyond.

The Company expects to recognize revenue related to these remaining performance obligations of approximately $ 0.8 million in 2022, $ 0.8 million in 2023, $ 0.9 million in 2024, $ 0.5 million in 2025, $ 0.8 million in 2026 and $ 0.3 million in 2027 and beyond.

Weichai Transactions

4 unchanged sentences

The Company used proceeds from the sale of the above securities pursuant to the SPA and borrowings under the Credit Agreement to pay off the outstanding TPG Term Loan (the “TPG Term Loan”) with TPG Specialty Lending, Inc.

Weichai Warrant

In September 2018, the Weichai Warrant was amended under the terms of a second amended and restated warrant (“Amended and Restated Warrant”) to defer its exercise date to a 90 -day period commencing April 1, 2019, to adjust the exercise price to a price per share of the Company’s Common Stock equal to the lesser of (i) 50 % of the Volume-Weighted Average Price (“VWAP”) during the 20 consecutive trading day period preceding October 1, 2018 and (ii) 50 % of the VWAP during the 20 consecutive trading day period preceding the date of exercise, subject to an adjustment that could reduce the exercise price by up to $ 15.0 million.

In the event that the adjustment exceeded the exercise price, the excess would be due to the warrant holder.

On April 23, 2019, Weichai exercised the Weichai Warrant resulting in the Company issuing 4,049,759 shares of the Company’s Common Stock and Weichai becoming the owner of 51.5 % of the outstanding shares of the Company’s Common Stock, as of such date.

The exercise proceeds for the warrants of $ 1.6 million were based on 50 % of the VWAP during the 20 consecutive trading day period preceding April 23, 2019 and the $ 15.0 million reduction in the exercise price described above.

The Company recorded net expense of $ 1.4 million related to the Weichai Warrant during 2019 including the impact of the exercise.

Weichai Shareholder’s Loan Agreement

In December 2020, the Company entered into the Shareholder’s Loan Agreement with Weichai.

The Shareholder’s Loan Agreement was amended and restated in March 2021.

See additional discussion in Note 6.

Weichai Shareholder’s Loan Agreements

In December 2020, the Company entered into the $ 130 million First Shareholder’s Loan Agreement with Weichai.

The First Shareholder’s Loan Agreement was amended and restated in March 2021 and again on March 25, 2022.

On July 14, 2021, the Company entered into the $ 25 million Second Shareholder’s Loan Agreement with Weichai, which was amended and restated on March 25, 2022.

On December 10, 2021, the Company entered into the $ 50 million Third Shareholder’s Loan Agreement with Weichai.

See additional discussion of these debt agreements in Note 6.

Weichai Collaboration Arrangement and Other Related Party Transactions

46 unchanged sentences

Revolving credit facility $ 130,000 $ 130,000

Other short-term financing 25,000 —

Total Short-Term Debt $ 155,000 $ 130,000

Long-term debt:

Unsecured senior notes $ — $ 55,000

Long-term financing $ 25,000 $ —

Finance leases and other debt $ 890 $ 1,091

Unamortized debt issuance costs *

Total long-term debt and finance leases 25,890 1,091

3 unchanged sentences

Unamortized debt issuance costs, including gross waiver fees (primarily paid to the lenders), were $ 0.8 million and $ 1.1 million at December 31, 2021 and 2020, respectively.

The Company p aid $ 4.2 million and $ 6.9 million in cash for interest in 2020 and 2019, respectively.

Credit Agreement and Shareholders’ Loan Agreement

On April 2, 2020, the Company closed on its new senior secured revolving credit facility pursuant to the Credit Agreement with Standard Chartered.

The Credit Agreement allows the Company to borrow up to $ 130.0 million and matures on March 26, 2021 with an optional 60 -day extension subject to certain conditions and payment of a 0.25 % extension fee.

Borrowings under the Credit Agreement shall 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 Credit Agreement was terminated in connection with the repayment of the outstanding balance.

The Company recognized a loss on the extinguishment of the Wells Fargo Credit Agreement and the Unsecured Senior Notes of $ 0.5 million related to unamortized debt issuance costs and deferred additional debt issuance costs related to the closing of the Credit Agreement of $ 2.0 million.

As discussed above, 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 and, if not cured or waived, could result in the obligations under the Credit Agreement being accelerated.

On December 28, 2020, the Company entered into the Amendment, which 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 $ 130.0 million aggregate commitment amount of the Credit Agreement, maturity date of March 26, 2021, and applicable interest rate of the Credit Agreement remained unchanged.

At December 31, 2020, the Company was in compliance with the revised covenants.

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 $ 100.0 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.

On March 26, 2021, the Company entered into the Amended and Restated Uncommitted Revolving Credit Agreement with Standard Chartered to amend and restate the Credit Agreement.

The Amended and Restated Uncommitted Revolving Credit Agreement continues to allow the Company to up to $ 130.0 million (all of which has been fully borrowed as December 31,

2020), is uncommitted, and matures on March 25, 2022.

Borrowings under the Amended and Restated Uncommitted Revolving Credit Agreement shall bear 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 Uncommitted Revolving Credit Agreement, which will be deferred and amortized over the term of the Amended and Restated Uncommitted Revolving Credit Agreement.

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

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

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

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

In connection with the Amended and Restated Uncommitted Revolving Credit Agreement, the Company entered into the First Amended and Restated Shareholder’s Loan Agreement with Weichai.

The First Amended and Restated Shareholder’s Loan Agreement provides the Company with a $ 130.0 million secured subordinated loan facility that expires on April 25, 2022.

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

Any potential borrowings under the First Amended and Restated Shareholder’s Loan Agreement would bear interest at LIBOR plus 4.50 % per annum.

The Company paid $ 3.7 million and $ 4.2 million in cash for interest in 2021 and 2020, respectively.

Credit Agreement and Shareholders’ Loan Agreements

On March 26, 2021, the Company entered into the Amended and Restated Credit Agreement with Standard Chartered.

The Amended and Restated Credit Agreement allows the Company to borrow up to $ 130.0 million, is uncommitte d, and was subject 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 fee s of $ 1.9 million related t o 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.

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 day s 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 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 4.5 % per annum.

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

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.

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 the Second Shareholder’s Loan Agreement with Weichai.

Borrowings under the Second Shareholder’s Loan Agreement incurred interest at LIBOR plus 4.5 % 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 the Third Shareholder’s Loan Agreement with Weichai.

Borrowings under the Third Shareholder’s Loan Agreement bear interest at LIBOR plus 4.5 % 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 R estated 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 Note 6.

Debt , for additional information.

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

The Second Amended and Restated 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.

part of the 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.

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 rel ated 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 Credit Agreement continues to be secured by substantially all of the Company’s assets and contains the same provisions as described above with respect to Standard Chartered’s demand rights and its power of attorney (POA).

As of March 24, 2022, the Company had $ 130.0 million outstanding under the Second Amended and Restated Credit Agreement.

In connection with the Second Amended and Restated Credit Agreement, on March 25, 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 continues to provide the Company with a $ 130.0 million subordinated loan under which Weichai is obligated to advance funds solely for purposes of repaying outstanding borrowings under the Second Amended and Restated Credit Agreement if the Company is unable to pay such borrowings.

The Amended Second Shareholder’s Loan Agreement continues to provide the Company with a $ 25.0 million subor dinated loan at the discretion of Weichai.

The maturity of the Amended First Shareholder’s Loan Agreement was extended 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 deemed 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 secu re 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.

As of March 24, 2022, PSI had borrowe d $ 35.7 million under the Third Shareholder’s Loan Agreement.

See Item 8., Note 1.

Summary of Significant Accounting Policies and Other Information for further discussion of the Company’s going concern considerations.

The below schedule of remaining maturities of long-term debt excludes finance leases (refer to Note 7.

The below schedule of remaining maturities of long-term debt excludes finance leases (refer to Item 8., Note 7.

(in thousands)

15 unchanged sentences

These leases have original lease periods expiring between January 2021 and August 2039.

For the year ended December 31, 2020 and 2019, the Company recorded lease expense of $ 6.6 million and $ 6.9 million , respectively, within Cost of sales, $ 0.7 million for both periods within Research, development and engineering expenses , $ 0.3 million for both periods within Selling, general and administrative expenses and less than $ 0.1 million for both periods within Interest expense in the Consolidated Statement of Operations.

For the year ended December 31, 2021 and 2020, the Company recorded lease expense of $ 6.1 million and $ 6.6 million , respectively, within Cost of sales, $ 0.3 million and $ 0.7 million, respectively, within Research, development and engineering expenses , $ 0.2 million and $ 0.3 million, respectively, within Selling, general and administrative expenses and less than $ 0.1 million for both periods within Interest expense in the Consolidated Statement of Operations.

The following table summarizes the components of lease expense:

58 unchanged sentences

Cash and cash equivalents are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments.

The Company measures the Unsecured Senior Notes at original carrying value including accrued interest, net of unamortized deferred financing costs and fees.

The Company measures the Revolving Credit Facility and Other financing at original carrying value including accrued interest, net of unamortized deferred financing costs and fees.

The fair value of the revolving credit facility approximates carrying value, as it consists of short-term variable rate loans.

The fair value measurement of the Unsecured Senior Notes is defined as Level 3 in the three-level fair value hierarchy, as the inputs to their valuation are not all market observable.

(in thousands) As of December 31, 2021

2 unchanged sentences

Revolving credit facility $ 130,000 $ — $ 130,000 $ —

Other financing 50,000 — 50,000

(in thousands) As of December 31, 2020

2 unchanged sentences

Revolving credit facility $ 130,000 $ — $ 130,000 $ —

Unsecured Senior Notes 54,765 — — 54,600

Other Financial Assets and Liabilities

In addition to the methods and assumptions used for the financial instruments discussed above, accounts receivable, net, income tax receivable, and accounts payable and certain accrued expenses are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments.

The following table summarizes changes in the estimated fair value of the Company’s warrant liability:

(in thousands) December 31, 2019

Balance at beginning of year

Change in value of warrants *

Settlement of warrants ( 36,452 )

Balance at end of year

* The change in value of the warrant liability is presented in Loss from change in value and exercise of warrants in the Company’s Consolidated Statements of Operations.

The change in value for the year ended December 31, 2019 includes the impact of Weichai exercising the warrant in April 2019.

Defined Contribution Plans

As of December 31, 2019, the Company made contributions of $ 1.1 million to the plans and recorded a liability of $ 0.5 million for 2019 contribution s.

During 2020, the Company made contributions of $ 0.8 million (primarily related to the contribution for 2019).

As of December 31, 2020, the Company made contributions of $ 0.8 million to the plans (primarily related to the contributions for 2019) .

During 2021, the Company made contributions of $ 0.8 million.

As a result of the COVID-19 pandemic, the Company implemented certain cost savings measures beginning in April 2020 which included, among other things, the discontinuation of the Company’s 401(k) match through December 31, 2020.

14 unchanged sentences

Securities and Exchange Commission and United States Attorney’s Office for the Northern District of Illinois Investigations

In August 2016, the Chicago Regional Office of the SEC commenced an investigation focused on, among other things, the Company’s financial reporting, misapplication of U.S.

GAAP, revenue recognition practices and related conduct, which resulted in the accounting errors giving rise to the financial restatements reported in prior SEC filings.

In 2016, the United States Attorney's Office for the Northern District of Illinois (the “USAO”) began conducting a parallel investigation regarding these matters.

In September 2020, the Company entered into agreements with the SEC and USAO to resolve the investigations into the Company’s past revenue recognition practices.

As part of this resolution, the Company made a payment of $ 1.7 million as a civil penalty to the SEC in October 2020.

Furthermore, under the settled administrative order with the SEC, the Company is committed to remediate the deficiencies in its internal control over financial reporting that constituted material weaknesses identified in its 2017 Form 10-K filed in May 2019 by April 30, 2021 unless an extension is provided by the SEC.

The Company also entered into a Non-Prosecution Agreement (the “NPA”) with the USAO, which contains no further monetary penalty and provides that the USAO will not charge the Company with a crime, provided that the Company complies with the provisions of the NPA, including making enhancements to its corporate compliance program.

The Company also will continue to fully cooperate with the SEC and USAO pursuant to these agreements.

With these agreements, the investigations into the Company by the SEC and USAO have concluded.

The Company had accrued the $ 1.7 million penalty in Other accrued liabilities in the first quarter of 2019.

Federal Derivative Litigation

In February 2017, Travis Dorvit filed a putative stockholder derivative action in the U.S.

District Court for the Northern District of Illinois, captioned Dorvit v.

Winemaster, et a l., No.

1:17-cv-01097 (N.D.

Ill.) (the “Dorvit Action”), against certain of the Company’s current and former officers and directors.

The complaint asserted claims for breach of fiduciary duty and unjust enrichment arising from the same matters at issue in the consolidated case captioned Guinta v.

Power Solutions International, Inc., No.

1:16-cv-09599 (N.D.Ill.), which had alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), arising from public filings, press releases and conference calls between February 2014 and February 2017, and which was settled in May 2019 (hereinafter, the Giunta Action).

In April 2018, Michael Martin filed a second putative stockholder derivative action, captioned Martin v.

Winemaster, et al., No.

18-CV-2386 (N.D.

Ill.) (the “Martin Action”), in the same court against certain of the Company’s current and former officers and directors.

In July 2018, the court consolidated the Martin Action and the Dorvit Action.

In July 2018, the plaintiffs in the consolidated Dorvit and Martin Actions filed an amended consolidated complaint (the “Second Amended Complaint”) against certain of the Company’s current and former officers and directors, who are indemnified by the Company as to their legal fees and defense costs.

The Second Amended Complaint asserts claims for breach of fiduciary duty, unjust enrichment, corporate waste and failure to hold an annual stockholders’ meeting, and it seeks an unspecified amount of damages, an order compelling the Company to hold an annual stockholders’ meeting and an award of costs, including reasonable attorneys’ fees and expenses.

In April 2019, the parties reached an agreement in principle to settle the litigation for approximately $ 1.9 million (“Settlement Amount”), half of which will be used to pay certain defense costs on behalf of the Company, and the remaining half of which the plaintiffs sought as an award of their attorneys’ fees and expenses in connection with the benefit conferred by the settlement.

The settlement was approved by the court in August 2019 over two objections, including from the plaintiffs in the McClenney Action (defined below).

Plaintiffs in the McClenney Action appealed the court’s order approving the settlement.

In February 2020, the U.S.

Court of Appeals for the Seventh Circuit affirmed the district court’s approval of the settlement.

The deadline for the plaintiffs in the McClenney Action to seek further review in the U.S.

Supreme Court elapsed in July 2020 and the settlement is a final judgement.

The Company’s insurers made a payment of half of the Settlement Amount in September 2019 toward the fulfillment of the plaintiff’s award of attorneys’ fees and expenses, and the insurers allocated the remaining half of the Settlement Amount toward the payment of certain defense costs consistent with the terms of the settlement.

The Company had accrued for the settlement in Other accrued liabilities and for the full insurance recovery of the Settlement Amount in Prepaid expenses and other current assets as of December 31, 2019.

State Derivative Litigation

In May 2017, Lewis McClenney filed a putative stockholder derivative action in the Chancery Division of the Circuit Court of Cook County, Illinois, captioned McClenney v.

Winemaster, et al.

2017-CH-06481 (the “ McClenney Action”), against certain of the Company’s current and former officers and directors.

The McClenney Action asserted claims for breach of

fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and corporate waste arising from the same matters at issue in the Giunta Action.

On the same day that the McClenney Action was filed, Sara Rebscher also filed a putative stockholder derivative action in the same court, captioned Rebscher v.

Winemaster, et al.

2017-CH-06517 (the “ Rebscher Action”).

The Rebscher Action asserts claims for breach of fiduciary duty and unjust enrichment against certain of the Company’s current and former officers and directors, arising from the same matters at issue in the Giunta Action.

Additionally, the complaint in the Rebscher Action asserts a claim for professional negligence and accounting malpractice against the Company’s former auditor, RSM U.S.

In July 2017, the court consolidated the McClenney Action and the Rebscher Action.

Subsequently, the court appointed Rebscher as lead plaintiff and designated the Rebscher Action as the operative complaint.

In November 2018, the court granted the Company’s motion to dismiss the consolidated case with prejudice on the grounds that it is duplicative of the Dorvit and Martin Actions.

Plaintiffs moved for reconsideration of the court’s decision, which the court denied in January 2019.

In February 2019, plaintiffs filed a notice of appeal from the court’s order dismissing the case.

In December 2019, the Illinois Appellate Court affirmed the dismissal of the McClenney Action.

Plaintiffs did not seek rehearing in the Illinois Appellate Court and did not petition for leave to appeal to the Illinois Supreme Court.

In September 2020, the Company entered into agreements with the SEC and the USAO to resolve the investigations into the Company’s past revenue recognition practices.

Under the settled administrative order with the SEC, the Company committed to remediate the deficiencies in its internal control over financial reporting that constituted material weaknesses identified in its 2017 Form 10-K filed in May 2019 by April 30, 2021 unless an extension was provided by the SEC.

On April 12, 2021, the SEC granted the Company’s request for an extension of time until March 31, 2022 in which to comply with the requirements of

the administrative order to remediate the remaining outstanding material weaknesses.

Due to the progress achieved in remediating the material weaknesses, in March 2022 the Company formally requested an additional extension from the SEC.

To the extent that the Company’s request for an extension from the SEC, or other actions are not successful and completed in accordance with the provisions of the settlement with the SEC and USAO, the Company may be required to incur additional time and expense towards further remediation efforts and incremental substantive procedures, which could have a material adverse effect on its results of operations.

In addition, failure to comply with the provisions of the settlement agreements with the SEC and USAO could result in further actions by one or both governmental agencies which could have a material adverse effect on the Company’s results of operations.

Jerome Treadwell v.

11 unchanged sentences

In February 2020, the court denied the Company’s motion for reconsideration, but required the parties to submit additional briefing on the Company’s motion to stay.

In April 2020, the Court granted the Com pany ’s motion to stay and stayed the case pending the Illinois Appellate Court’s ruling in McDonald v.

In April 2020, the court granted the Company’s motion to stay and stayed the case pending the Illinois Appellate Court’s ruling in McDonald v.

Symphony Healthcare .

In October 2020, after the McDonald ruling, the court granted the parties’ joint request to continue the stay of the case for 60 days.

The court also ordered the parties to schedule a settlement conference with the Magistrate Judge which has been scheduled for early April 2021.

The stay remains in place through the scheduled settlement conference.

The parties have engaged in preliminary settlement discussions in advance of the settlement conference.

As of December 31, 2020, the Company recorded an estimated liability of $ 0.3 million related to the potential settlement of this matter.

Don Wilkins v.

In April 2017, Don Wilkins, former VP of Advanced Product Development for the Company, filed a two-count complaint alleging breach of contract by the Company and violation of the Illinois Wage Payment and Collections Act (“IWPCA”) by the Company and its former CEO, Gary Winemaster (the “Wilkins Complaint”).

The Wilkins Complaint claims the Company did not have cause to terminate Mr.

Wilkins’ Employment and Confidentiality Agreement (the “Wilkins Agreement”), executed January 6, 2012, and that the Company and Mr.

Winemaster violated the IWPCA by failing to pay him accrued but unpaid vacation and earned commissions.

The Wilkins Complaint seeks damages including a $ 2.0 million bonus entitlement in the Wilkins Agreement, guaranteed annual salary to increase at 1.5 times the Consumer Price Index per year from the termination date to the end-date of the Wilkins Agreement, December 31, 2020, and 20,000 shares of restricted stock granted to him in 2013 with a vesting schedule through 2020.

In June 2017, the Company and Mr.

Winemaster answered the complaint and asserted numerous defenses.

The Company also asserted counterclaims against Mr.

Wilkins including violation of the Illinois Trade Secrets Act, breach of the Wilkins Agreement, breach of fiduciary duty, and spoliation.

In January 2019, Wilkins voluntarily dismissed with prejudice his claims for unpaid commissions and vacation against the Company and Mr.

Winemaster, subject to the parties’ confidential settlement agreement of those claims.

In February 2020, the Company filed a motion for protective order to stay the litigation, which the court denied in April 2020.

In May 2020, the parties reached an agreement to settle all remaining claims for a $ 1.1 million payment (“Wilkins Settlement Amount”) to Mr.

The Company paid $ 0.9 million of the Wilkins Settlement Amount which was reserved as of the first quarter of 2019.

The Company’s insurance provider contributed the remainder of the Wilkins Settlement Amount.

In June 2020, the court dismissed the Wilkins Complaint with prejudice and with each party to bear their own costs and attorneys’ fees.

In October 2020, after the McDonald ruling, the court granted the parties’ joint request to continue the stay of the case f or 60 days .

The court also ordered the parties to schedule a settlement conference with the Magistrate Judge in May 2021 which went forward without a settlement being reached.

The stay remains in place pending further guidance from the Court.

As of December 31, 2021 and December 31, 2020, the Company had recorded an estimated liabili ty of $ 0.3 million, recorded within Other accrued liabilities on the Consolidated Balance Sheet related to the settlement of this matter, related t o the potential settlement of this matter.

Mast Powertrain v.

1 unchanged sentence

Mast claimed that it is owed more than $ 9.0 million in past royalties and other damages for products sold by the Company pursuant to the Development Agreement.

The Company has disputed Mast’s damages, denied that any royalties are owed to Mast, denied any liability, and counterclaimed for overpayment on invoices paid to Mast.

Mast has subsequently clarified its claim for past royalties owed to be approximately $ 4.5 million.

Arbitration is anticipated to occur in the Fall of 2021;

however, the Company has engaged in preliminary settlement negotiations with Mast.

As of December 31, 2020, the Company had recognized an estimated liability of $ 1.5 million within Other accrued liabilities related to the potential settlement of this matter.

The Company disputed Mast’s damages, denied that any royalties are owed to Mast, denied any liability, and counterclaimed for overpayment on invoices paid to Mast.

Mast subsequently clarified its claim for past royalties owed to be approximately $ 4.5 million.

In July 2021, the Company reached a settlement with Mast to resolve past claims for royalties owed for $ 1.5 million which the Company had previously recorded within Selling, general and administrative expenses in the Statement of Operations for the year-ended December 31, 2020 .

As of December 31, 2021 and December 31, 2020, the Company had recognized a liability of $ 0.5 million and $ 1.5 million , respectively, within Other accrued liabilities on the Consolidated Balance Sheet related to the settlement of this matter.

In addition, the Company entered into an agreement with Mast under which Mast will provide various technical services.

Gary Winemaster Litigation v.

In August 2021, the Company’s former Chairman of the Board and former Chief Executive Officer and President, Gary Winemaster (“Winemaster”) filed suit in the Court of Chancery of the State of Delaware against the Company and Travelers Casualty and Surety Company of America (“Travelers”) alleging the Company’s breach of its advancement obligations under Winemaster’s indemnification agreement and Travelers’ breach of the side A policy between Traveler’s and the Company of which Winemaster is a beneficiary.

In his complaint, Winemaster is seeking reimbursement under his indemnification agreement in excess of $ 7.2 million of attorney’s fees plus interest incurred by Winemaster in his defense of the Department of Justice (“DOJ”) case, U.S.

Winemaster et al.

Since the filing of the complaint, Travelers has paid approximately $ 7.5 million to Winemaster’s attorneys, Latham and Watkins, under the Company’s side A policy to settle existing outstanding attorney’s fees.

The Company expects Travelers to seek reimbursement from it for those costs pursuant to the terms of the side A policy.

In October 2021, the Company and Gary Winemaster entered into a Stipulation and Advancement Order to handle all future attorney’s fees relating to his DOJ case and his pending SEC case, SEC v.

Winemaster et al.

to the extent not reimbursed by Travelers under the side A policy.

Jeffrey Ehlers and Rick Lulloff Litigation

In September 2021 Jeffrey Ehlers and Rick Lulloff (“Lulloff”), former employees of the Company, made demand against the Company for approximately $ 2.4 million and $ 1.2 million, respectively, for alleged wages due and owing under each employee’s employment contract related to “Incentive Bonuses” for revenues generated in the Company’s transportation end market.

In November 2021, Lulloff and Ehlers separately filed complaints against the Company in the Circuit Court of Cook County, Illinois, alleging breach of contract and violations of the Illinois Wage and Payment Collection Act incorporating their claims in the above referenced demand letter.

The Company filed a notice of removal from the Circuit Court of Cook County, Illinois and have also moved to consolidate the cases which is still being considered.

Given the preliminary stage of the matter, the Company cannot predict the outcome of this matter, the reasonable possibility or range of loss, or meaningfully quantify how the final resolution of this matter may impact its results of operations, financial condition or cash flow and therefore no accrual has been made as of December 31, 2021

Indemnification Agreements

1 unchanged sentence

As a result of cumulative legal fees and settlements previously paid, the Company fully exhausted its primary directors’ and officers’ insurance coverage of $ 30.0 million during the first quarter of 2020.

Additional expenses currently expected to be incurred and that will occur in the future and/or liabilities that may be imposed in connection with actions against certain of the Company’s past and present directors and officers and certain current and former employees who are entitled to indemnification will be funded by the Company with its existing cash resources.

Additional expenses currently expected to be incurred and that will occur in the future and/or liabilities that may be imposed in connection with actions against certain of the Company’s past directors and officers and certain former employees who are entitled to indemnification will be funded by the Company with its existing cash resources.

The Company accrues for such costs as incurred within Selling, general and administrative expenses in the Company’s Consolidated Statements of Operations.

For the year ended December 31, 2020, the Company incurred $ 7.1 million of costs related to these indemnification obligations.

At this time, the Company is not able to estimate the impact of these obligations due to the actions ongoing;

however, the impact may be material to the Company’s results of operations, financial condition, and cash flows.

At the end of June 2020, the Company entered into a new directors’ and officers’ liability insurance policy.

For the year ended December 31, 2021, the Company incurred $ 15.7 million of costs related to these indemnification obligations and $ 7.1 million for the twelve months ended December 31, 2020.

Included in the total indemnification obligations incurred for the year ended December 31, 2021 are costs of $ 9.8 million that the Company incurred on behalf of Gary Winemaster, former Chairman of the Board and former Chief Executive Officer and President, who is also a related party.

For the year ended December 31, 2020 these costs were $ 3.6 million.

In June 2020, the Company entered into a new directors’ and officers’ liability insurance policy, which was renewed in June 2021.

The insurance policy includes standard exclusions including for any ongoing or pending litigation such as the previously disclosed investigations by the SEC and USAO.

Other Commitments

Letters of Credit

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.

The letters of credit primarily serve as collateral for the Company for certain facility leases and insurance policies.

1 unchanged sentence

Summary of Significant Accounting Policies and Other Information , the Company had restricted cash of $ 3.5 million at December 31, 2021 related to these letters of credit.

Supply Agreements

In October 2019, the Company entered into an addendum (the “Addendum”) to a supply agreement (the “Supply Agreement”), dated December 11, 2007, with a key supplier.

The Addendum extends the Supply Agreement to December 31, 2023 with automatic annual extensions thereafter unless notice of termination is provided.

The Addendum extends the Company’s exclusivity for the prescribed territory, but carves out of the restriction the competing engine products supplied by General Motors Company and Weichai.

The Company committed to maximize sales and service opportunities on both the key supplier and Weichai engine products, recognizing their different value proposition and target markets.

The Addendum also updates the minimum product purchase commitments for the period 2019 through 2023 to $ 40.0 million per year, subject to reductions based on market declines in oil prices and defined prescribed payments to the key supplier triggered by shortfalls in purchases made by the Company during each annual calendar period.

The Company made product purchases of $ 19.0 million and $ 47.2 million in 2020 and 2019, respectively.

Given the significant decline in oil prices in early 2020 and the impact on demand for many of the Companies products, the Company did not meet the minimum purchase commitments for 2020.

As of December 31, 2020, the Company accrued a liability of $ 0.4 million related to the 2020 purchasing shortfall.

Given the ongoing impacts of the COVID-19 pandemic on the Company and the global economy, the Company continues to monitor and evaluate the impact of potential future purchase volume reductions.

Income tax (benefit) expense was as follows:

The Company has arrangements with certain suppliers that require it to purchase minimum volumes or be subject to monetary penalties.

As discussed in Note 1.

Summary of Significant Accounting Policies and Other Information , oil prices have increased from their lows reached in April 202 0.

However, U.S.

rig counts have been slower to return and average rig counts remain significantly below the full year average during 2019.

Meanwhile, capital spending within the U.S.

oil markets remains well below 2019 levels.

Thi s has impacted the demand for the Company’s products sold into the oil and gas market.

Based on current and forecasted demand of the Company’s product s, and the significant lead time for the Company to order and acquire certain materials, the Company does not expect to meet the minimum purchase commitment for 2021 related to one of its supply agreements and recorded an expense of $ 1.6 million within Cost of sales in the Consolidated Statement of Operations for the twelve months ended December 31, 2021.

Income tax benefit was as follows:

(in thousands) For the Year Ended December 31,

1 unchanged sentence

Federal $ ( 418 ) $ ( 2,299 )

Foreign 13 99

State ( 17 ) 25

Total current tax benefit $ ( 435 ) $ ( 2,261 )

Deferred tax (benefit) expense

Deferred tax expense (benefit)

Federal $ ( 106 ) $ ( 1,710 )

State 135 258

Total deferred tax (benefit) expense ( 1,452 ) 457

Total tax (benefit) expense $ ( 3,713 ) $ 409

The Company made net cash payments for income taxes o f $ 0.2 million in 2020 while it received net cash refunds for income taxes of $ 0.3 million in 2019.

Total deferred tax expense (benefit) 29 ( 1,452 )

Total tax benefit $ ( 406 ) $ ( 3,713 )

The Company made net cash payments for income taxes o f less than $ 0.1 million in 2021 while it received net cash refunds for income taxes of $ 0.2 million in 2020.

A reconciliation between the Company’s effective tax rate on income (loss) before income taxes and the statutory tax rate is as follows:

1 unchanged sentence

Amount Percent Amount Percent

Income tax (benefit) expense at federal statutory rate $ ( 5,606 ) 21.0 % $ 1,818 21.0 %

Income tax benefit at federal statutory rate $ ( 10,264 ) 21.0 % $ ( 5,606 ) 21.0 %

State income tax, net of federal benefit ( 2,185 ) 4.5 % ( 1,979 ) 7.4 %

Non-deductible warrant expense — — % 284 3.3 %

Other permanent differences

15 unchanged sentences

( 12 ) — % ( 105 ) 0.4 %

Income tax (benefit) expense $ ( 3,713 ) 13.9 % $ 409 4.7 %

Income tax benefit $ ( 406 ) 0.8 % $ ( 3,713 ) 13.9 %

For the year ended December 31, 2021, the Company recognized a pretax loss of $ 48.9 million.

For the year ended December 31, 2019, the Company recognized pretax income of $ 8.7 million, which included $ 1.4 million of permanently excludable loss associated with the change in the valuation and exercise of the Weichai Warrant.

For the year ended December 31, 2020, the Company recognized a pretax loss of $ 26.7 million.

The Company generates R&D tax credits as a result of its R&D activities, which reduce the Company’s effective income tax rate.

38 unchanged sentences

The federal and state net operating loss carryforwards begin to expire in 2037 and 2026, respectively.

The Company believes that this constituted an “ownership change” as defined in Section 382 of the Internal Revenue Code.

Consequently, all pre-ownership

change tax attributes are subject to an annual Section 382 limitation.

Based on the current estimated annual Section 382 limitation, the Company believes all tax attributes subject to Section 382 will be utilized prior to their expiration dates, if any.

The change in unrecognized tax benefits excluding interest and penalties were as follows:

3 unchanged sentences

Additions based on tax positions related to the current year

Reductions for tax positions of prior years ( 102 ) ( 135 )

Additions (reductions) for tax positions of prior years 55 ( 102 )

Balance at end of year

14 unchanged sentences

Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

On March 27, 2020, President Trump signed into law the CARES Act.

Among the changes to the U.S.

federal income tax rules, the CARES Act modified net operating loss carryback rules that were eliminated by the 2017 Tax Cuts and Jobs Act , restored 100% bonus depreciation for qualified improvement property, increased the limit on the deduction for net interest expense and accelerated the time frame for refunds of alternative minimum tax credits.

The Company’s ability to carryback the net operating losses to earlier years is expected to result in a tax benefit of $ 2.2 million.

The Company’s ability to carryback the net operating losses to earlier years is expected to result in a tax benefit of $ 0.6 million and $ 2.2 million in 2021 and 2020 , respectively.

There is no net impact to the Company’s deferred tax assets due to the full valuation allowance.

Stockholders’ Equity

Stockholders’ Equity (Deficit)

Common and Treasury Stock

3 unchanged sentences

Net shares issued for stock awards — ( 35 ) 35

Shares issued to Weichai *

4,050 — 4,050

Balance as of December 31, 2020 23,117 225 22,892

6 unchanged sentences

At December 31, 2021 and 2020, there were no shares of Preferred stock outstanding.

Weichai Warrant

Weichai Transactions for additional information.

Stock-Based Compensation

22 unchanged sentences

Income tax benefit $ 74 $ 104

The Company gr anted 50,000 and 9,000 SAR awards in 2020 and 2019, respectively.

The Company did not grant SAR awards in 2021, and granted 50,000 SAR awards in 2020.

The assumptions used for determining the fair value of the SARs included the following:

22 unchanged sentences

Exercisable at December 31, 2021 111,853 $ 8.32 5.91 $ —

The total fair value of SARs that vested during 2020 and 2019 was $ 0.2 million and $ 0.1 million, respectively.

The total fair value of SARs that vested during 2021 and 2020 w as $ 0.1 million and $ 0.2 million, respectively.

Unrecognized compensation expense related to SARs as of December 31, 2021 and 2020 was $ 0.1 million and $ 0.1 million, respectively.

As of December 31, 2020, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 1.7 years.

As of December 31, 2021, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 1.0 year.

Restricted Stock Awards

3 unchanged sentences

( 40,814 ) 12.92

( 230,374 ) 9.83

Balance as of December 31, 2020 37,372 $ 20.05

( 1,503 ) 36.00

( 40,886 ) 9.70

Balance as of December 31, 2021 33,246 $ 12.96

3 unchanged sentences

Earnings (Loss) Per Share

The Company computes basic earnings (loss) per share by dividing net income (loss) by the weighted-average common shares outstanding during the year.

The Company computes basic earnings (loss) per share by dividing net loss by the weighted-average common shares outstanding during the year.

Diluted earnings (loss) per share is calculated to give effect to all potentially dilutive common shares that were outstanding during the year.

1 unchanged sentence

The treasury stock method has been used to compute diluted earnings (loss) per share for 2021 and 2020.

The Company issued warrants that represent the right to purchase shares of Common Stock, SARs and RSAs, all of which have been evaluated for their potentially dilutive effect under the treasury stock method.

Weichai Transactions for additional information on the Weichai Warrants and Note 13.

Stock-Based Compensation for additional information on the SARs and the RSAs.

The computations of basic and diluted earnings (loss) per share are as follows:

(in thousands, except per share basis) For the Year Ended December 31,

Net (loss) income – basic and diluted $ ( 22,982 ) $ 8,248

Shares used in computing net income (loss) per share

Net loss – basic and diluted $ ( 48,472 ) $ ( 22,982 )

Shares used in computing net loss per share

Weighted-average common shares outstanding - basic

3 unchanged sentences

22,908 22,872

(Loss) earnings per common share

(Loss) earnings per share of common stock – basic $ ( 1.00 ) $ 0.38

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

Loss per common share

Loss per share of common stock – basic $ ( 2.12 ) $ ( 1.00 )

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

The aggregate number of shares excluded from the diluted earnings (loss) per share calculations because they would have been anti-dilutive were 0.2 million and 0.2 million shares in 2021 and 2020, respectively.

17 unchanged sentences

In the fourth quarter of 2019, Doosan and the Company agreed to wind down and dissolve the joint venture.

This is expected to be completed in 2021.

In the second quarter of 2021, the Company received a cash distribution from the joint venture of $ 2.2 million as a result of the final wind down and dissolution of the joint venture.

Joint Venture Operating Results

The Company’s investments in joint ventures are accounted for under the equity method of accounting.

The Company’s Consolidated Statement of Operations included income from these investments of $ 0.3 million in 2020 related to the Company’s portion of the joint ventures earnings for the year.

In 2019, the earnings were $ 0.7 million.

The joint venture operating results are presented in Other income, net in the Company’s Consolidated Statements of Operations.

Expense from this investment for the twelve months ended December 31, 2021 was less than $ 0.1 million .

Income from this investment $ 0.3 million for the twelve months ended December 31, 2020 The joint venture operating results are presented in Other income, net in the Company’s Consolidated Statements of Operations.

Other Related Party Transactions

Commitments and Contingencies for information regarding the Company’s indemnification obligations related to certain former directors and officers of the Company.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.

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 8. Financial Statements and Supplementary Data