POWER SOLUTIONS INTERNATIONAL, INC. 10-K

Item 8. Financial Statements and Supplementary Data. The following consolidated financial statements are included in Item 8 of this Form 10-K. Index to Consolidated Financial Statements Page Consolidated Financial Statements of Power Solutions International, Inc. Report of Independent Registered Public Accounting Firm ( BDO USA, LLP , Chicago, IL , PCAOB ID# 243 ) 41 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 (Deficit) for 2021 and 2020 45 Consolidated Statements of Cash Flows for 2021 and 2020 46 Notes to Consolidated Financial Statements 47 40 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors Power Solutions International, Inc. Wood Dale, Illinois Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Power Solutions International, Inc. (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. Going Concern Uncertainty 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. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 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. The Company estimates and records a liability and related charges to income for its warranty program at the time products are sold to customers. These estimates are established using historical warranty claims information including failure rates, repair costs and timing of failures. New product launches require a greater use of judgment in developing estimates, until historical experience becomes available. Previous estimates are adjusted as actual warranty claims data becomes available. 41 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: a. Evaluating the reasonableness of management’s assumptions to estimate the future warranty claims for the recently developed and launched products by: i. 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. ii. Comparing the current product warranty claims estimates to the prior year estimates, and investigating significant differences. b. Testing the completeness and accuracy of the underlying historical warranty claims information used to estimate future warranty claims. c. Testing the mathematical accuracy of management’s calculation of the product warranty. /s/ BDO USA, LLP We have served as the Company’s auditor since 2018. Chicago, Illinois March 31, 2022 42 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par values) As of December 31, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 6,255 $ 20,968 Restricted cash 3,477 3,299 Accounts receivable, net of allowances of $ 3,420 and $ 3,701 as of December 31, 2021 and December 31, 2020, respectively 65,110 60,148 Income tax receivable 4,276 3,708 Inventories, net 142,192 108,213 Prepaid expenses and other current assets 8,918 6,351 Total current assets 230,228 202,687 Property, plant and equipment, net 17,344 20,181 Intangible assets, net 7,784 10,319 Goodwill 29,835 29,835 Other noncurrent assets 15,347 20,955 TOTAL ASSETS $ 300,538 $ 283,977 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable $ 93,256 $ 31,547 Current maturities of long-term debt 254 310 Revolving line of credit 130,000 130,000 Other short-term financing 25,000 — Other accrued liabilities 34,801 77,619 Total current liabilities 283,311 239,476 Deferred income taxes 1,016 886 Long-term debt, net of current maturities 25,636 781 Noncurrent contract liabilities 3,330 3,181 Other noncurrent liabilities 29,268 33,556 TOTAL LIABILITIES $ 342,561 $ 277,880 STOCKHOLDERS’ EQUITY (DEFICIT) Preferred stock – $ 0.001 par value. Shares authorized: 5,000 . No shares issued and outstanding at all dates. $ — $ — Common stock – $ 0.001 par value; 50,000 shares authorized; 23,117 and 23,117 shares issued; 22,926 and 22,892 shares outstanding at December 31, 2021 and December 31, 2020, respectively 23 23 Additional paid-in capital 157,436 157,262 Accumulated deficit ( 198,366 ) ( 149,894 ) Treasury stock, at cost, 191 and 225 shares at December 31, 2021 and December 31, 2020, respectively ( 1,116 ) ( 1,294 ) TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) ( 42,023 ) 6,097 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 300,538 $ 283,977 See Notes to Consolidated Financial Statements 43 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) For the Year Ended December 31, 2021 2020 Net sales $ 456,255 $ 417,639 Cost of sales 414,984 359,191 Gross profit 41,271 58,448 Operating expenses: Research, development and engineering expenses 22,435 25,375 Selling, general and administrative expenses 57,871 51,744 Amortization of intangible assets 2,535 3,053 Total operating expenses 82,841 80,172 Operating loss ( 41,570 ) ( 21,724 ) Other expense, net: Interest expense 7,307 5,714 Loss on debt extinguishment and modifications — 497 Other expense (income), net 1 ( 1,240 ) Total other expense, net 7,308 4,971 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: Basic 22,908 22,872 Diluted 22,908 22,872 Loss per common share: Basic $ ( 2.12 ) $ ( 1.00 ) Diluted $ ( 2.12 ) $ ( 1.00 ) See Notes to Consolidated Financial Statements 44 POWER SOLUTIONS INTERNATIONAL, INC. 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 loss — — ( 22,982 ) — ( 22,982 ) Stock-based compensation expense — 535 — 72 607 Common stock issued for stock-based awards, net — — — ( 25 ) ( 25 ) Balance at December 31, 2020 $ 23 $ 157,262 $ ( 149,894 ) $ ( 1,294 ) $ 6,097 Net loss — — ( 48,472 ) — ( 48,472 ) Stock-based compensation expense — 174 — 220 394 Common stock issued for stock-based awards, net — — — ( 42 ) ( 42 ) Balance at December 31, 2021 $ 23 $ 157,436 $ ( 198,366 ) $ ( 1,116 ) $ ( 42,023 ) See Notes to Consolidated Financial Statements 45 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Year Ended December 31, 2021 2020 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 Stock-based compensation expense 394 607 Amortization of financing fees 2,819 1,594 Deferred income taxes 29 ( 1,452 ) Loss on extinguishment of debt — 497 Other adjustments, net 941 ( 209 ) Changes in operating assets and liabilities: Accounts receivable, net ( 4,952 ) 44,611 Inventory ( 34,840 ) ( 382 ) Prepaid expenses and other assets ( 103 ) 3,958 Accounts payable 62,105 ( 44,161 ) Accrued expenses ( 42,759 ) 11,106 Other noncurrent liabilities ( 4,046 ) ( 8,981 ) 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 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 ) 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 ) Payments of deferred financing costs ( 3,162 ) ( 1,970 ) Other financing activities, net ( 42 ) 58 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 Cash, cash equivalents, and restricted cash at end of the year $ 9,732 $ 24,267 (in thousands) As of December 31, 2021 2020 Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets Cash and cash equivalents 6,255 20,968 Restricted cash 3,477 3,299 Total cash, cash equivalents, and restricted cash $ 9,732 $ 24,267 See Notes to Consolidated Financial Statements 46 POWER SOLUTIONS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies and Other Information Nature of Business Operations Power Solutions International, Inc. (“Power Solutions,” “PSI” or the “Company”), a Delaware corporation, is a global producer and distributor of a broad range of high-performance, certified, low-emission power systems, including alternative-fueled power systems for original equipment manufacturers (“OEMs”) of off-highway industrial equipment and certain on-road vehicles and large custom-engineered integrated electrical power generation systems. The Company’s customers include large, industry-leading and multinational organizations. The Company’s products and services are sold predominantly to customers throughout North America as well as to customers located throughout the Pacific Rim and Europe. The Company’s power systems are highly engineered, comprehensive systems which, through the Company’s technologically sophisticated development and manufacturing processes, including its in-house design, prototyping, testing and engineering capabilities and its analysis and determination of the specific components to be integrated into a given power system (driven in large part by emission standards and cost considerations), allow the Company to provide its customers with power systems customized to meet specific OEM application requirements, other technical customers’ specifications and requirements imposed by environmental regulatory bodies. The Company’s power system configurations range from a basic engine integrated with appropriate fuel system components to completely packaged power systems that include any combination of cooling systems, electronic systems, air intake systems, fuel systems, housings, power takeoff systems, exhaust systems, hydraulic systems, enclosures, brackets, hoses, tubes and other assembled componentry. The Company also designs and manufactures large, custom-engineered integrated electrical power generation systems for both standby and prime power applications. The Company purchases engines from third-party suppliers and produces internally designed engines, all of which are then integrated into its power systems. Of the other components that the Company integrates into its power systems, a substantial portion consist of internally designed components and components for which it coordinates significant design efforts with third-party suppliers, with the remainder consisting largely of parts that are sourced off-the-shelf from third-party suppliers. Some of the key components (including purchased engines) embody proprietary intellectual property of the Company’s suppliers. As a result of its design and manufacturing capabilities, the Company is able to provide its customers with a power system that can be incorporated into a customer’s specified application. In addition to the certified products described above, the Company sells diesel, gasoline and non-certified power systems and aftermarket components. Stock Ownership and Control In March 2017, the Company executed a share purchase agreement (the “SPA”) with Weichai America Corp., a wholly owned subsidiary of Weichai Power Co., Ltd. (HK2338, SZ000338) (herein collectively referred to as “Weichai”). Under the terms of the SPA, Weichai invested $ 60.0 million in the Company purchasing a combination of newly issued Common and Preferred Stock as well as a stock purchase warrant (the “Weichai Warrant”). With the exercise of the Weichai Warrant in April 2019, Weichai owns a majority of the outstanding shares of the Company’s Common Stock. As a result, Weichai is able to exercise control over matters requiring stockholders’ approval, including the election of the directors, amendment of the Company’s Charter and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of the Company or changes in management and will make the approval of certain transactions impractical without the support of Weichai. Weichai also entered into an Investor Rights Agreement (the “Rights Agreement”) with the Company upon execution of the SPA. The Rights Agreement provides Weichai with representation on the Company’s Board of Directors (the “Board”) and management representation rights. Weichai currently has four representatives on the Board, which constitutes the majority of the directors serving on the Board. According to the Rights Agreement, during any period when the Company is a “controlled company” within the meaning of the NASDAQ Stock Market (“NASDAQ”) Listing Rules, it will take such measures as to avail itself of the “controlled company” exemptions available under Rule 5615 of the NASDAQ Listing Rules of Rules 5605(b), (d) and (e). Going Concern Considerations 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 47 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. See Note 6. Debt for further information regarding the terms and conditions of the Company’s debt agreements. 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 ; however. 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 48 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. 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 Company’s debt arrangements. 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. Furthermore, if the Company cannot raise capital on acceptable terms, it may not, among other things, be able to do the following: • continue to expand the Company’s research and product investments and sales and marketing organization; • continue to fund and expand operations both organically and through acquisitions; and • respond to competitive pressures or unanticipated working capital requirements. 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 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 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 49 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 but showed signs of improvement in 2021. 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. 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 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. 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. 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 The consolidated financial statements include the accounts of Power Solutions International, Inc. and its wholly owned subsidiaries. The Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and include the assets, liabilities, sales and expenses of all wholly owned subsidiaries and majority-owned subsidiaries in which the Company exercises control. All intercompany balances and transactions have been eliminated in consolidation. The Company operates as one business and geographic operating segment. Operating segments are defined as components of a business that can earn revenues and incur expenses for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker (“CODM”). The Company’s CODM is its principal executive officer, who decides how to allocate resources and assess performance. A single management team reports to the CODM, who manages the entire business. 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. Concentrations The following table presents customers individually accounting for more than 10% of the Company’s net sales: For the Year Ended December 31, 2021 2020 Customer A 17 % 14 % Customer B 21 % 11 % 50 The following table presents customers individually accounting for more than 10% of the Company’s trade accounts receivable: As of December 31, 2021 2020 Customer A 24 % 16 % Customer C ** 22 % ** Less than 10% of the total The following table presents suppliers individually accounting for more than 10% of the Company’s purchases: For the Year Ended December 31, 2021 2020 Supplier A ** 22 % Supplier B 12 % ** Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions include the valuation of allowances for uncollectible receivables, inventory reserves, warranty reserves, stock-based compensation, evaluation of goodwill, other intangibles, plant and equipment for impairment, and determination of useful lives of long-lived assets. Actual results could materially differ from those estimates. Cash and Cash Equivalents 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. Restricted Cash The Company is required to maintain minimum levels of cash collateral to support the letters of credit. The cash collateral is held in a separate bank account which the Company is restricted from accessing. As discussed in Note 10. 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 R&D expenses are expensed when incurred. R&D expenses consist primarily of wages, materials, testing and consulting related to the development of new engines, parts and applications. These costs were $ 21.4 million and $ 24.3 million for 2021 and 2020, respectively. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be settled or realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company records net deferred tax assets to the extent that it believes these assets will more likely than not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. The Company records uncertain tax positions in accordance with accounting guidance, on the basis of a two-step process whereby (i) it determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. 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 51 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 Trade accounts receivable represent amounts billed to customers and not yet collected. Trade accounts receivable are recorded at the invoiced amount, which approximates net recoverable value, and generally do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable and is established through a charge to selling, general and administrative expenses. The allowance is primarily determined based on historical collection experience and reviews of customer creditworthiness. Trade accounts receivable and the allowance for doubtful accounts are reviewed on a regular basis. When necessary, an allowance for the full amount of specific accounts deemed uncollectible is recorded. Accounts receivable losses are deducted from the allowance and the account balance is written off when the customer receivable is deemed uncollectible. Recoveries of previously written off balances are recognized when received. An allowance associated with anticipated future sales returns is also included in the allowance for doubtful accounts. Inventories The Company’s inventories consist primarily of engines and parts. Engines are valued at the lower of cost plus estimated freight-in or net realizable value. Parts are valued at the lower of cost or net realizable value. Net realizable value approximates replacement cost. Cost is principally determined using the first-in, first-out method and includes material, labor and manufacturing overhead. It is the Company’s policy to review inventories on a continuing basis for obsolete, excess and slow-moving items and to record valuation adjustments for such items in order to eliminate non-recoverable costs from inventory. Valuation adjustments are recorded in an inventory reserve account and reduce the cost basis of the inventory in the period in which the reduced valuation is determined. Inventory reserves are established based on quantities on hand, usage and sales history, customer orders, projected demand and utilization within a current or future power system. Specific analysis of individual items or groups of items is performed based on these same criteria, as well as on changes in market conditions or any other identified conditions. Inventories consist of the following: (in thousands) As of December 31, Inventories 2021 2020 Raw materials $ 120,130 $ 89,684 Work in process 8,923 2,482 Finished goods 16,509 19,375 Total inventories 145,562 111,541 Inventory allowance ( 3,370 ) ( 3,328 ) Inventories, net $ 142,192 $ 108,213 Activity in the Company’s inventory allowance was as follows: (in thousands) For the Year Ended December 31, Inventory Allowance 2021 2020 Balance at beginning of period $ 3,328 $ 2,964 Charged to expense 1,035 1,436 Write-offs ( 993 ) ( 1,072 ) Balance at end of period $ 3,370 $ 3,328 Property, Plant and Equipment Property, plant and equipment is carried at cost and presented net of accumulated depreciation and impairments. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Property, plant and equipment is evaluated periodically to determine if an adjustment to depreciable lives is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets. Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. 52 Estimated useful lives by each type of asset category are as follows: Years Buildings Up to 39 Leasehold improvements Lesser of (i) expected useful life of improvement or (ii) life of lease (including likely extension thereof) Machinery and equipment 1 to 10 Intangible Assets The Company’s intangible assets include customer relationships, developed technology, trade names and trademarks. Intangible assets are amortized on an accelerated basis over a period of time that approximates the pattern over which the Company expects to gain the estimated economic benefits, and such period generally ranges between three years and 15 years. Impairment of Long-Lived Assets The Company assesses potential impairments to its long-lived assets or asset groups, excluding goodwill which is separately tested for impairment, whenever events indicate that the carrying amount of such assets may not be recoverable. Long-lived assets are evaluated for impairment by comparing the carrying value of the asset or asset group with the estimated future net undiscounted cash flows expected to result from the use of the asset or asset group, including cash flows from disposition. If the future net undiscounted cash flows are less than the carrying value, an impairment loss is calculated. An impairment loss is determined by the amount that the asset’s or asset group’s carrying value exceeds its estimated fair value. Estimated fair value is generally measured by discounting estimated future cash flows. If an impairment loss is recognized, the adjusted balance becomes the new cost basis and is depreciated (amortized) over the remaining useful life. The Company also periodically reassesses the useful lives of its long-lived assets due to advances and changes in technologies. 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 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. The Company annually tests goodwill for impairment on October 1. In evaluating goodwill for impairment, the Company may first assess qualitative factors to determine whether it is more likely than not (i.e., there is a likelihood of more than 50%) that the Company’s fair value is less than its carrying amount. Qualitative factors that the Company considers include, but are not limited to, macroeconomic and industry conditions, overall financial performance and other relevant entity-specific events. If the Company bypasses the qualitative assessment, or if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs a quantitative goodwill impairment test to identify potential goodwill impairment and measures the amount of goodwill impairment it will recognize, if any. In the quantitative goodwill impairment test, the Company compares the estimated fair value of the reporting unit with its related carrying value. If the estimated fair value exceeds the carrying amount, no further analysis is needed. If, however, the reporting unit’s estimated fair value is less than its carrying amount, the Company records an impairment for the difference between the estimated fair value and the carrying value. The Company calculates its estimated fair value using the income and market approaches when feasible, or an asset approach when neither the income nor the market approach has sufficient data. For the income approach, a discounted cash flow method, the Company uses internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses and related cash flows based on assumed long-term growth rates and demand trends, expected future investments to grow new units, and estimated discount rates. The Company based these assumptions on its historical data and experience, industry projections, and micro and macro general economic condition projections and expectations. The market approach, also called the Guideline Public Company Approach, compares the value of an entity to similar publicly traded companies. The asset approach estimates the selling price the unit could achieve under assumed market conditions. 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. 53 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 goodwill impairment charges. Other Accrued Liabilities Other accrued liabilities consisted of the following: (in thousands) As of December 31, Other Accrued Liabilities 2021 2020 Accrued product warranty $ 15,830 $ 14,928 Litigation reserves * 894 3,128 Contract liabilities 1,819 47,960 Accrued compensation and benefits 4,397 3,124 Operating lease liabilities 3,978 3,793 Accrued interest expense 625 895 Other 7,258 3,791 Total $ 34,801 $ 77,619 * As of December 31, 2020 and 2021, litigation reserves related to various ongoing legal matters including associated legal fees. Warranty Costs The Company offers a standard limited warranty on the workmanship of its products that in most cases covers defects for a defined period. Warranties for certified emission products are mandated by the U.S. Environmental Protection Agency (the “EPA”) and / or the California Air Resources Board (the “CARB”) and are longer than the Company’s standard warranty on certain emission-related products. The Company’s products also carry limited warranties from suppliers. The Company’s warranties generally apply to engines fully manufactured by the Company and to the modifications the Company makes to supplier base products. Costs related to supplier warranty claims are generally borne by the supplier and passed through to the end customer. Warranty estimates are based on historical experience and represent the projected cost associated with the product. A liability and related expense are recognized at the time products are sold. The Company adjusts estimates when it is determined that actual costs may differ from initial or previous estimates. The Company’s warranty liability is generally affected by failure rates, repair costs and the timing of failures. Future events and circumstances related to these factors could materially change the estimates and require adjustments to the warranty liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available. The Company records adjustments to preexisting warranties for changes in its estimate of warranty costs for products sold in prior fiscal years in the period in which new information is received and the information indicates that actual costs may differ from the Company’s initial or previous estimates. Such adjustments typically occur when claims experience deviates from historic and expected trends. When the Company identifies cost effective opportunities to address issues in products sold or corrective actions for safety issues, it initiates product recalls or field campaigns. As a result of the uncertainty surrounding the nature and frequency of product recalls and field campaigns, the liability for such actions is generally recorded when the Company commits to a product recall or field campaign. In each subsequent quarter after a recall or field campaign is initiated, the recorded warranty liability balance is analyzed, reviewed and adjusted, if necessary, to reflect any changes in the anticipated average cost of repair or number of repairs to be completed prospectively. When collection is reasonably assured, the Company also estimates the amount of warranty claim recoveries to be received from its suppliers. 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. 54 Accrued product warranty activities are presented below: (in thousands) For the Year Ended December 31, Accrued Product Warranty 2021 2020 Balance at beginning of year $ 31,542 $ 25,501 Current year provision * 18,242 18,272 Changes in estimates for preexisting warranties ** 9,397 8,738 Payments made during the period ( 26,233 ) ( 20,969 ) Balance at end of year 32,948 31,542 Less: Current portion 15,830 14,928 Noncurrent accrued product warranty $ 17,118 $ 16,614 * Warranty costs, net of supplier recoveries , were $ 22.8 million and $ 19.5 million for the year ended December 31, 2021 and 2020 , respectively. Supplier recoveries were $ 4.8 million and $ 7.5 million for the year ended December 31, 2021 and 2020 , respectively. ** Change in estimates for preexisting warranties reflect changes in the Company’s estimate of warranty costs for products sold in prior periods. Such adjustments typically occur when claims experience deviates from historic and expected trends. The Company’s warranty liability is generally affected by failure rates, repair costs and the timing of failures. Future events and circumstances related to these factors could materially change the estimates and require adjustments to the warranty liability. In addition, new product launches require a greater use of judgment in developing estimates u ntil historical experience becomes available. The Company recorded charges for changes in estimates for preexisting warranties of $ 9.4 million, or $ 0.41 per diluted share, and $ 8.7 million, or $ 0.38 per diluted share, for th e years ended December 31, 2021 and 2020, respectively. Revenue Recognition See Note 2. Revenue for additional information the Company’s policy related to revenue recognition. Recently Issued Accounting Pronouncements – Adopted In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . This guidance requires the use of existing accounting guidance applicable to software developed for internal use to be applied to cloud computing service contracts’ implementation costs. The costs capitalized would be amortized over the life of the agreement, including renewal option periods likely to be used. The Company adopted the standard effective January 1, 2020 on a prospective basis. There was no impact on the Company’s financial statements including the related notes as a result of adopting the guidance. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which both reduces and expands selected disclosure requirements. The principal changes expected to impact the Company’s disclosure are requirements to disclose the range and weighted average of each of the significant unobservable items and the way the weighted average of a range is calculated for items in the “table of significant unobservable inputs.” The guidance also requires disclosure of changes in unrealized gains and losses in other comprehensive income and removes requirements regarding, among other items, disclosure of the valuation process for Level 3 measurements. The Company adopted the standard effective January 1, 2020. There was no impact on the Company’s financial statements including the related notes as a result of adopting the guidance. In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment , which eliminated the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019; early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. 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 (Deficit) as a result of the adoption. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting , which provided optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendment allows entities to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. 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 (Deficit) as a result of this 55 guidance. 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. Recently Issued Accounting Pronouncements – Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which applies primarily to the Company’s accounts receivable impairment loss allowances. The guidance provides a revised model whereby the current expected credit losses are used to compute impairment of financial instruments. The new model requires evaluation of historical experience and various current and expected factors, which may affect the estimated amount of losses and requires determination of whether the affected financial instruments should be grouped in units of account. The guidance, as originally issued, was effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates , which deferred the effective dates of these standards for certain entities. Based on the guidance, the effective date of ASU 2016-13 is deferred for the Company until fiscal year 2023. The Company currently plans to adopt the guidance on January 1, 2023 when it becomes effective. The Company is continuing to assess the impact of the standard on its financial statements. Note 2. Revenue Revenue Recognition The Company determines the amount of revenue to be recognized through the following steps: • identification of the contract, or contracts with a customer; • identification of the performance obligations in the contract; • determination of the transaction price; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue when, or as, the Company satisfies the performance obligations. Revenue for the Company is generated from contracts that may include a single performance obligation (generally, a single type of engine) or multiple performance obligations (which may include an engine with aftermarket parts, different types of engines, etc.). A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. Revenue is measured at the transaction price which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised goods or services to the customer. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company is required to estimate the total consideration expected to be received from contracts with customers. The consideration expected to be received may be variable based on the specific terms of the contract and the Company’s past practices. For contracts with multiple performance obligations, the Company allocates the total transaction price to distinct performance obligations based on directly observable data, if available, or the Company’s best estimate of the stand-alone selling price of each distinct performance obligation. The primary method used to estimate stand-alone selling price is the cost plus a margin approach. The Company applies significant judgment in order to identify and determine the number of performance obligations, determine the total transaction price, allocate the transaction price to each performance obligation, and determine the appropriate timing of revenue recognition. Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenues. The Company’s payment terms are generally 60 days or less and its sales arrangements do not contain any significant financing components. Timing of revenue recognition. The Company recognizes revenue related to performance obligations in its contracts with customers when control passes to the customer. Control passes to the customer when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. For the majority of the Company’s products, revenue is recognized at a point in time when the products are shipped or delivered to the customer based on the shipping terms as that is the point in time when control passes to the customer. 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 56 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. The Company believes labor hours incurred relative to total estimated labor hours at completion faithfully depicts the transfer of control to the customer. The Company recognizes revenue related to extended warranty programs based on the passage of time over the extended warranty period. For the years ended December 31, 2021 and 2020, the Company recognized revenue of $ 40.6 million and $ 46.9 million, respectively, for products manufactured and services provided over time. Shipping and handling costs. The Company accounts for shipping and handling costs as fulfillment costs which are recorded in Cost of sales in the Consolidated Statements of Operations. This includes shipping and handling costs incurred after control of the asset has transferred to the customer as the Company has elected the practical expedient in ASC 606. Principal vs. agent considerations. For transactions that involve more than one party when providing goods or services to a customer, the Company determines whether it is the principal or agent in these transactions by evaluating the nature of its promise to the customer. The analysis of whether the Company is a principal or an agent in a transaction is performed for each good or services provided to the customer. The Company determines whether it controls the good or service before it is transferred to the customer by considering the following factors: a. Whether the Company is primarily responsible for fulfilling the promise to provide the specified good or service. b. Whether the Company has inventory risk before the specified good or service has been transferred to the customer or after transfer of control to the customer. c. Whether the Company has discretion in establishing the price for the specified good or service. If the Company determines that it is the principal in the transaction, it recognizes revenues at the gross transaction price for the good or service. If the Company determines that is an agent in the transaction, it recognizes revenue at the net amount of the transaction price. The Company has two significant supply agreements with multiple performance obligations related to the sale of 6.0L engines. As a result of the Weichai ownership change in April 2019 (see additional discussion in Note 3. Weichai Transactions) , the Company was required to be compliant with Phase 1 GHG standards beginning January 1, 2020 for its 6.0L and 8.8L engines. In order to address the impact of the transition of its emission regulation requirements in 2020 and 2021, the Company licensed its technology to a third-party small manufacturer to produce and certify the 6.0L gasoline engine and utilized averaging, banking, and trading compliance provisions for the sale of its 8.8L gasoline engine. As a result of outsourcing the production of the 6.0L gasoline engine, the Company considered whether it was the principal or agent in the transactions with its customers related to the 6.0L gasoline engine. With the exception of certain parts sold directly to customers, the Company concluded that it remained the principal in the transactions. The Company recognized revenue related to contracts with customers for 6.0L engines of $ 103.7 million in 2021. Variable consideration . Variable consideration primarily includes rebates and discounts. The Company estimates the projected amount of rebates and discounts based on current assumptions, customer-specific information and historical experience. Variable consideration is recorded as a reduction of revenue to the extent that it is probable that there will not be significant changes to the Company’s estimate of variable consideration when any uncertainties are settled. Costs to obtain and fulfill a contract. The Company has elected the practical expedient to recognize incremental costs to obtain a contract (primarily commissions) as expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less. Disaggregation of Revenue The following table summarizes net sales by end market: (in thousands) For the Year Ended December 31, End Market 2021 2020 Power Systems $ 123,132 $ 149,282 Industrial 153,289 131,026 Transportation 179,834 137,331 Total $ 456,255 $ 417,639 57 The following table summarizes net sales by geographic area: (in thousands) For the Year Ended December 31, Geographic Area 2021 2020 United States $ 406,077 $ 366,445 North America 8,616 9,831 Pacific Rim 25,457 25,869 Europe 7,457 9,339 Other 8,648 6,155 Total $ 456,255 $ 417,639 Contract Balances Most of the Company’s contracts are for a period of less than one year; however, certain long-term manufacturing and extended warranty contracts extend beyond one year. The timing of revenue recognition may differ from the time of invoicing to customers and these timing differences result in contract assets, or contract liabilities on the Company’s Consolidated Balance Sheet. Contract assets include amounts related to the contractual right to consideration for completed performance when the right to consideration is conditional. The Company records contract liabilities when cash payments are received or due in advance of performance. Contract assets and contract liabilities are recognized at the contract level. (in thousands) As of December 31, 2021 2020 Short-term contract assets (included in Prepaid expenses and other current assets ) $ 2,707 $ 547 Short-term contract liabilities (included in Other accrued liabilities ) ( 1,819 ) ( 47,960 ) Long-term contract liabilities (included in Noncurrent contract liabilities ) ( 3,330 ) ( 3,181 ) Net contract liabilities $ ( 2,442 ) $ ( 50,594 ) 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 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 The Company has elected the practical expedient to not disclose remaining performance obligations that have expected original durations of one year or less. 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 $ 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. Note 3. Weichai Transactions In March 2017, the Company and Weichai executed the SPA in which the Company issued stock and a warrant to Weichai for aggregate proceeds of $ 60.0 million (the “Weichai Transactions”), composed of the following: • 2,728,752 shares of Common Stock; • 2,385,624 shares of Series B Redeemable Convertible Preferred Stock (“Series B Convertible Preferred Stock”) that was converted into 4,771,248 shares of Common Stock in November 2017; and • the Weichai Warrant as discussed further below. 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. (“TPG”). Weichai Shareholder’s Loan Agreements 58 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. Debt. Weichai Collaboration Arrangement and Other Related Party Transactions The Company and Weichai executed a strategic collaboration agreement (the “Collaboration Agreement”) on March 20, 2017, in order to achieve their respective strategic objectives and enhance the strategic cooperation alliance to share experiences, expertise and resources. Among other things, the collaboration arrangement established a joint steering committee, permitted Weichai to second a limited number of certain technical, marketing, sales, procurement and finance personnel to work at the Company and established several collaborations, related to stationary natural-gas applications and Weichai diesel engines. The collaboration arrangement provided for the steering committee to create various sub-committees with operating roles and otherwise governs the treatment of intellectual property of parties prior to the collaboration and the intellectual property developed during the collaboration. The Collaboration Agreement had a term of three years that was set to expire in March 2020. On March 26, 2020, the Collaboration Agreement was extended for an additional term of three years . The Company evaluates whether an arrangement is a collaborative arrangement at its inception based on the facts and circumstances specific to the arrangement. The Company also reevaluates whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards dependent on the ultimate commercial success of the endeavor. For those collaborative arrangements where it is determined that the Company is the principal participant, costs incurred and revenue generated from third parties are recorded on a gross basis in the financial statements. For the years ended December 31, 2021 and 2020, the Company’s sales to and outstanding receivables from Weichai were immaterial. The Company purchased $ 12.4 million and $ 18.6 million of inventory from Weichai during 2021 and 2020, respectively. As of December 31, 2021 and 2020, the Company had outstanding payables to Weichai of $ 12.5 million and $ 4.0 million, respectively. Note 4. Property, Plant and Equipment Property, plant and equipment by type were as follows: (in thousands) As of December 31, Property, Plant and Equipment 2021 2020 Leasehold improvements $ 7,107 $ 6,725 Machinery and equipment 44,358 43,030 Construction in progress 1,125 1,670 Total property, plant and equipment, at cost 52,590 51,425 Accumulated depreciation ( 35,246 ) ( 31,244 ) Property, plant and equipment, net $ 17,344 $ 20,181 Note 5. Goodwill and Other Intangibles Goodwill The carrying amount of goodwill at both December 31, 2021 and 2020 was $ 29.8 million. Accumulated impairment losses at both December 31, 2021 and 2020 were $ 11.6 million. Other Intangible Assets 59 Components of intangible assets are as follows: (in thousands) As of December 31, 2021 Gross Carrying Value Accumulated Amortization Net Book Value Customer relationships $ 34,940 $ ( 27,514 ) $ 7,426 Developed technology 700 ( 680 ) 20 Trade names and trademarks 1,700 ( 1,362 ) 338 Total $ 37,340 $ ( 29,556 ) $ 7,784 (in thousands) As of December 31, 2020 Gross Carrying Value Accumulated Amortization Net Book Value Customer relationships $ 34,940 $ ( 25,117 ) $ 9,823 Developed technology 700 ( 650 ) 50 Trade names and trademarks 1,700 ( 1,254 ) 446 Total $ 37,340 $ ( 27,021 ) $ 10,319 Estimated future amortization expense for intangible assets as of December 31, 2021 is as follows: (in thousands) Year Ending December 31, Estimated Amortization 2022 $ 2,124 2023 1,746 2024 1,459 2025 1,219 2026 997 2027 and beyond 239 Total $ 7,784 Note 6. Debt The Company’s outstanding debt consisted of the following: (in thousands) As of December 31, 2021 2020 Short-term financing: Revolving credit facility $ 130,000 $ 130,000 Other short-term financing 25,000 — Total Short-Term Debt $ 155,000 $ 130,000 Long-term debt: Long-term financing $ 25,000 $ — Finance leases and other debt $ 890 $ 1,091 Total long-term debt and finance leases 25,890 1,091 Less: Current maturities of long-term debt and finance leases 254 310 Long-term debt $ 25,636 $ 781 * Unamortized financing costs and deferred fees on the Revolving Credit Facility are not presented in the above table as they are classified in Prepaid expenses and other current assets on the Consolidated Balance Sheets. 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 paid $ 3.7 million and $ 4.2 million in cash for interest in 2021 and 2020, respectively. Credit Agreement and Shareholders’ Loan Agreements 60 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. 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 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. As discussed above, the Amended and Restated Credit Agreement included financial covenants which were effective for the Company beginning with the three months ended June 30, 2021 and each of the third and fourth quarters of 2021. The financial covenants include an interest coverage ratio and a minimum EBITDA threshold as further defined in the Amended and Restated Credit Agreement. For the three months ended June 30, 2021 and September 30, 2021, the Company did not meet the defined minimum interest coverage nor EBITDA requirements. A breach of the financial covenants under the Amended and Restated Credit Agreement constitutes an event of default which, if not cured or waived, could result in the obligations under the Amended and Restated Uncommitted Revolving Credit Agreement being accelerated. On November 9, 2021, the Company entered into a waiver with Standard Chartered, which waived the financial covenant defaults for the quarters ended June 30 and September 30, 2021. In connection with the waiver, a waiver fee of $ 0.6 million was remitted to Standard Chartered in November 2021. Further, the Company breached the financial covenants for the three months ended December 31, 2021; however. 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. 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 4.5 % 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. 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 4.5 % 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. As 61 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. The Second Amended and Restated Uncommitted Revolving Credit Agreement is subject to customary events of default and covenants, including minimum consolidated EBITDA and Consolidated Interest Coverage Ratio covenants for the second and third quarters of 2022. Borrowings under the Second Amended and Restated Credit Agreement will incur interest at either the alternate base rate or the Secured Overnight Financing Rate (“SOFR”) plus 2.95 % per annum. In addition, the Company paid fees of $ 1.8 million 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 Item 8., Note 7. Leases ). (in thousands) Year Ending December 31, Maturities of Long-Term Debt 2022 $ 104 2023 112 2024 120 2025 33 2026 9 Total $ 378 Note 7. Leases Lease Policies The Company determines if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term while lease liabilities represent the obligation to make lease payments arising from the lease. All leases with an expected term greater than twelve months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the lease commencement date to determine the present value of the lease payments unless the implicit rate in the lease is readily determinable. The incremental borrowing rate is determined considering factors such as the lease term, the Company’s credit standing and the economic environment of the location of the lease. 62 The lease term includes all non-cancellable periods and may include options to extend (or to not terminate) the lease when it is reasonably certain that the Company will exercise the option. Leases that have a term of 12 months or less at the commencement date are expensed on a straight-line basis over the lease term and do not result in the recognition of a ROU asset or lease liability. The Company classifies leases as finance leases when (i) there is a transfer of ownership of the underlying asset by the end of the lease term, (ii) the lease contains an option to purchase the asset that the Company is reasonably certain will be exercised, (iii) the lease term is for the majority of the remaining economic life of the asset, or (iv) the present value of the lease payments and any residual value guarantee equals or substantially exceeds the fair value of the asset. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense for finance leases is generally front-loaded as the finance lease ROU asset is depreciated on a straight-line basis, but interest expense on the lease liability is recognized using the interest method which results in more expense during the early years of the lease. Variable lease payments are expensed in the period in which the obligation for those payments is incurred. The Company has elected to combine lease and non-lease components, such as fixed maintenance costs, as a single lease component in calculating ROU assets and lease liabilities for all classes of leased assets. Leases The Company has obligations under lease arrangements primarily for facilities, equipment and vehicles. These leases have original lease periods expiring between January 2021 and August 2039. 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: (in thousands) For the Year Ended December 31, 2021 2020 Operating lease cost $ 4,855 $ 5,452 Finance lease cost: Amortization of ROU asset 192 208 Interest expense 33 48 Short-term lease cost 267 410 Variable lease cost 1,276 1,493 Total lease cost $ 6,623 $ 7,611 The following table presents supplemental cash flow information related to leases: (in thousands) For the Year Ended December 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows paid for operating leases $ 4,959 $ 5,405 Operating cash flows paid for interest portion of finance leases 33 48 Financing cash flows paid for principal portion of finance leases 194 195 Right-of-use assets obtained in exchange for lease obligations Operating leases 137 299 Finance leases — 11 As of December 31, 2021 and 2020, the weighted-average remaining lease term was 5.8 years and 6.2 years for operating leases and 3.4 years and 3.8 years for finance leases, respectively. The weighted-average discount rate was 7.1 % and 7.1 % for operating leases as of December 31, 2021 and 2020, respectively, and 6.5 % and 6.7 % for finance leases as of December 31, 2021 and 2020, respectively. 63 The following table presents supplemental balance sheet information related to leases: (in thousands) As of December 31, 2021 2020 Operating lease ROU assets, net 1 $ 13,545 $ 17,104 Operating lease liabilities, current 2 3,978 3,793 Operating lease liabilities, non-current 3 10,304 14,156 Total operating lease liabilities $ 14,282 $ 17,949 Finance lease ROU assets, net 1 $ 364 $ 568 Finance lease liabilities, current 2 147 200 Finance lease liabilities, non-current 3 260 413 Total finance lease liabilities $ 407 $ 613 1. Included in Other noncurrent assets for operating leases and Property, plant and equipment , net for finance leases on the Consolidated Balance Sheets. 2. Included in Other accrued liabilities for operating leases and Current maturities of long-term debt for finance leases on the Consolidated Balance Sheets. 3. Included in Other noncurrent liabilities for operating leases and Long-term debt, net of current maturities for finance leases on the Consolidated Balance Sheets. The following table presents maturity analysis of lease liabilities as of December 31, 2021: (in thousands) Year Ending December 31, Operating Leases Finance Leases 2022 $ 4,859 $ 168 2023 3,347 103 2024 1,815 84 2025 1,851 82 2026 1,515 17 Thereafter 4,023 — Total undiscounted lease payments 17,410 454 Less: imputed interest 3,128 47 Total lease liabilities $ 14,282 $ 407 Note 8. Fair Value of Financial Instruments For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, the Company classifies each fair-value measurement as follows: • Level 1 – based on quoted prices in active markets for identical assets or liabilities; • Level 2 – based on other significant observable inputs for the assets or liabilities through corroborations with market data at the measurement date; and • Level 3 – based on significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date. Financial Instruments Measured at Carrying Value Current Assets Cash and cash equivalents are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments. 64 Debt 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. (in thousands) As of December 31, 2021 Carrying Value Fair Value Level 1 Level 2 Level 3 Revolving credit facility $ 130,000 $ — $ 130,000 $ — Other financing 50,000 — 50,000 (in thousands) As of December 31, 2020 Carrying Value Fair Value Level 1 Level 2 Level 3 Revolving credit facility $ 130,000 $ — $ 130,000 $ — 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. Note 9. Defined Contribution Plans 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. The 401(k) match was reimplemented effective January 1, 2021. Note 10. Commitments and Contingencies Legal Contingencies The legal matters discussed below and others could result in losses, including damages, fines, civil penalties and criminal charges, which could be substantial. The Company records accruals for these contingencies to the extent the Company concludes that a loss is both probable and reasonably estimable. Regarding the matters disclosed below, unless otherwise disclosed, the Company has determined that liabilities associated with these legal matters are reasonably possible; however, unless otherwise stated, the possible loss or range of possible loss cannot be reasonably estimated. Given the nature of the litigation and investigations and the complexities involved, the Company is unable to reasonably estimate a possible loss for all such matters until the Company knows, among other factors the following: • what claims, if any, will survive dispositive motion practice; • the extent of the claims, particularly when damages are not specified or are indeterminate; • how the discovery process will affect the litigation; • the settlement posture of the other parties to the litigation; and • any other factors that may have a material effect on the litigation or investigation. However, the Company could incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on the Company’s results of operations in the period in which the amounts are accrued and/or liquidity in the period in which the amounts are paid. Securities and Exchange Commission and United States Attorney’s Office for the Northern District of Illinois Investigations 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 65 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. the Company In October 2018, a putative class-action complaint was filed against the Company and NOVAtime Technology, Inc. (“NOVAtime”) in the Circuit Court of Cook County, Illinois. In December 2018, NOVAtime removed the case to the U.S. District Court for the Northern District of Illinois, Eastern Division under the Class Action Fairness Act. Plaintiff has since voluntarily dismissed NOVAtime from the lawsuit without prejudice and filed an amended complaint in April 2019. The operative, amended complaint asserts violations of the Illinois Biometric Information Privacy Act (“BIPA”) in connection with employees’ use of the time clock to clock in and clock out using a finger scan and seeks statutory damages, attorneys’ fees, and injunctive and equitable relief. An aggrieved party under BIPA may recover (i) $ 1,000 per violation if the Company is found to have negligently violated BIPA or (ii) $ 5,000 per violation if the Company is found to have intentionally or recklessly violated BIPA plus reasonable attorneys’ fees. In May 2019, the Company filed its motion to dismiss the plaintiff’s amended complaint. In December 2019, the court denied the Company’s motion to dismiss. In January 2020, the Company moved for reconsideration of the court’s order denying the motion to dismiss, or in the alternative, to stay the case pending the Illinois Appellate Court’s ruling in McDonald v. Symphony Healthcare on a legal question that would be potentially dispositive in this matter. 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 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 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. the Company In February 2020, the Company received a demand for arbitration from Mast Powertrain, LLC (“Mast”) pursuant to a development agreement entered into in November 2011 (the “Development Agreement”). 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 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. The Company 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. v. 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 66 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 Under the Company’s bylaws and certain indemnification agreements, the Company has obligations to indemnify current and former officers and directors and certain current and former employees. 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 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, 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 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. As discussed in Note 1. 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. 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. 67 Note 11. Income Taxes Income tax benefit was as follows: (in thousands) For the Year Ended December 31, 2021 2020 Current tax benefit Federal $ ( 418 ) $ ( 2,299 ) State ( 17 ) 25 Foreign — 13 Total current tax benefit $ ( 435 ) $ ( 2,261 ) Deferred tax expense (benefit) Federal $ ( 106 ) $ ( 1,710 ) State 135 258 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: (in thousands) For the Year Ended December 31, 2021 2020 Amount Percent Amount Percent 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 % Other permanent differences 1 — % ( 185 ) 0.7 % Research and development tax credits ( 551 ) 1.1 % ( 551 ) 2.1 % Other tax credits 291 ( 0.6 ) % ( 555 ) 2.1 % Tax reserve reassessment 157 ( 0.3 ) % ( 7 ) — % Impact of CARES Act — — % ( 1,390 ) 5.2 % Change in valuation allowance 12,361 ( 25.3 ) % 6,348 ( 23.8 ) % Return adjustment ( 278 ) 0.6 % 213 ( 0.8 ) % Stock-based compensation 74 ( 0.2 ) % 104 ( 0.4 ) % Other, net ( 12 ) — % ( 105 ) 0.4 % 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, 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. In general, these credits are general business credits and may be carried forward up to 20 years to be offset against future taxable income. 68 Significant components of deferred income tax assets and liabilities consisted of the following: (in thousands) As of December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 30,967 $ 19,167 Research and development credits 5,168 4,982 Other state credits 3,090 3,372 Inventory 2,511 2,693 Allowances and bad debts 1,146 1,356 Accrued warranty 9,492 8,441 Accrued wages and benefits 107 240 Other accrued expenses 4,533 1,789 Stock-based compensation 182 223 Capitalized research and development costs 160 210 163(j) disallowed interest 1,634 2,305 Intangible amortization 668 1,357 Contract liabilities 1,005 3,307 Operating lease liability 3,862 4,934 Other 752 612 Total deferred tax assets 65,277 54,988 Valuation allowance ( 60,177 ) ( 48,056 ) Total deferred tax assets, net of valuation allowance $ 5,100 $ 6,932 Deferred tax liabilities: ROU operating lease asset $ ( 3,537 ) $ ( 4,545 ) Tax depreciation in excess of book depreciation on property, plant and equipment ( 2,579 ) ( 3,273 ) Total deferred tax liabilities $ ( 6,116 ) $ ( 7,818 ) Net deferred tax liability $ ( 1,016 ) $ ( 886 ) The Company’s net deferred tax liability is presented as a separate line item in the Consolidated Balance Sheets. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset. The Company evaluated the need to maintain a valuation allowance for deferred tax assets based on an assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessi ng the need for a valuation allowance. As a result of this evaluation, the Company concluded that the negative evidence outweighed the positive evidence and that a full valuation allowance should be maintained against its net deferred tax assets as of December 31, 2021 and 2020. The Company’s net deferred tax liability of $ 1.0 million and $ 0.9 million as of December 31, 2021 and 2020, respectively, represents the deferred tax liability related to indefinite-lived assets which cannot serve as a source of income for the realization of deferred tax assets. As of December 31, 2021, the Company has, on a tax-effected basis, $ 8.3 million in R&D and state tax credit carryforwards which begin to expire in 2022. The Company has $ 22.8 million and $ 8.2 million of federal and state (tax effected, net of federal tax benefit) net operating loss carryforwards that are available to offset taxable income in the future. The federal and state net operating loss carryforwards begin to expire in 2037 and 2026, respectively. 69 The change in unrecognized tax benefits excluding interest and penalties were as follows: (in thousands) For the Year Ended December 31, 2021 2020 Balance at beginning of year $ 1,431 $ 1,430 Additions based on tax positions related to the current year 102 103 Additions (reductions) for tax positions of prior years 55 ( 102 ) Balance at end of year $ 1,588 $ 1,431 The Company recognizes interest and penalties related to unrecognized tax benefits in Income tax expense . As of December 31, 2021 and 2020, the amount accrued for interest and penalties was not material. The Company reflects the liability for unrecognized tax benefits as Other noncurrent liabilities in its Consolidated Balance Sheets. The amounts included in “reductions for tax positions of prior years” represent decreases in the unrecognized tax benefits relating to expiration of the statutes during each year shown. As of December 31, 2021, the Company believes the liability for unrecognized tax benefits, excluding interest and penalties, could decrease by an immaterial amount in 2022 due to lapses in the statute of limitations. Due to the various jurisdictions in which the Company files tax returns, it is possible that there could be other significant changes in the amount of unrecognized tax benefits in 2022, but the amount cannot be estimated. With few exceptions, the major jurisdictions subject to examination by the relevant tax authorities and open tax years, stated as the Company’s fiscal years, are as follows: Jurisdiction Open Tax Years U.S. Federal 2014 to 2021 U.S. States 2013 to 2021 Canada 2018 to 2020 The Company is currently under federal income tax audit for tax years 2014, 2015 and 2016. The Company is currently under Illinois income tax audit for tax years 2013, 2014, 2015 and 2016. Coronavirus Aid, Relief, and Economic Security 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 $ 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. Note 12. Stockholders’ Equity (Deficit) Common and Treasury Stock The changes in shares of Common and Treasury Stock are as follows: (in thousands) Common Shares Issued Treasury Stock Shares Common Shares Outstanding Balance as of December 31, 2019 23,117 260 22,857 Net shares issued for stock awards — ( 35 ) 35 Balance as of December 31, 2020 23,117 225 22,892 Net shares issued for stock awards — ( 34 ) 34 Balance as of December 31, 2021 23,117 191 22,926 Preferred Stock The Company is authorized to issue 5,000,000 shares of Preferred stock, par value $ 0.001 per share. The Preferred stock may be designated into one or more series as determined by the Board. As of December 31, 2021, the Board had authorized two series of Preferred stock. At December 31, 2021 and 2020, there were no shares of Preferred stock outstanding. 70 Note 13. Stock-Based Compensation The Company has an incentive compensation plan (the “2012 Plan”), which authorizes the granting of a variety of different types of awards including, but not limited to, non-qualified stock options, incentive stock options, Stock Appreciation Rights (“SARs”), Restricted Stock Awards (“RSAs”), deferred stock and performance units to its executive officers, employees, consultants and Directors. The 2012 Plan is administered by the Compensation Committee of the Board. Under the 2012 Plan, 830,925 shares were initially made available for awards, with 700,000 additional shares added to the 2012 Plan in 2013. Forfeited shares are added back to the pool of shares available for future awards. As of December 31, 2021, the Company had 417,024 shares available for issuance of future awards. To date, the Company’s granted awards have generally been either RSAs or SARs. SAR awards entitle the recipients to receive, upon exercise, a number of shares of Common Stock equal to (i) the number of shares for which the SAR is being exercised multiplied by the value of one share of Common Stock on the date of exercise (determined as provided in the SAR award agreement), less (ii) the number of shares for which the SAR is being exercised multiplied by the applicable exercise price, divided by (iii) the value of one share of Common Stock on the date of exercise (determined as provided in the SAR award agreement). The exercised SAR is to be settled only in whole shares of Common Stock, and the value of any fractional share of Common Stock is forfeited. RSA grants represent Common Stock issued subject to forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Both SAR awards and RSA grants are time-based awards that generally vest over a 2 to 3 -year vesting schedule (except grants to members of the Board which have a 1 -year vesting schedule). SAR awards generally have a term of 10 years. Compensation expense for recipients of these time-based awards is recognized on a straight-line basis over the vesting period from the date of grant. The Company accounts for forfeitures as they occur rather than apply an estimated forfeiture rate. Stock-based compensation expense is primarily recorded is Selling, general and administrative expenses in the Consolidated Statements of Operations. RSAs are valued based on the fair value of the common stock at grant date. For all SAR award assumptions, the Company used rates on the grant date of zero-coupon government bonds with maturities over periods covering the term of the awards. The Company considered the historical volatility of its stock price over a term similar to the expected life of the awards in determining expected volatility. The expected term is the period that the awards granted are expected to remain outstanding. The Company has never declared or paid a cash dividend on its Common Stock and has no plans to pay cash dividends in the foreseeable future. The following table represents stock-based compensation expense and the related income tax benefits: (in thousands) For the Year Ended December 31, 2021 2020 Stock-based compensation expense $ 394 $ 607 Income tax benefit $ 74 $ 104 SAR Awards 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: For the Year Ended December 31, 2021 2020 Market closing price of the Common Stock $ — $ 4.83 Exercise price $ — $ 4.83 Risk-free interest rate — % 1.8 % Estimated price volatility — % 71.9 % Expected term 0.00 years 7.00 years Dividend yield — % — % Weighted average fair value $ — $ 3.28 71 SAR activity consisted of the following: Number of Shares under SARs Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2019 130,070 $ 9.41 7.21 $ 11 Granted 50,000 4.83 — Exercised — — — Forfeited — — — Expired ( 4,500 ) 11.25 — Outstanding at December 31, 2020 175,570 8.06 7.04 — Granted — 4.83 — Exercised — — — Forfeited — — — Expired ( 45,050 ) 8.60 — Outstanding at December 31, 2021 130,520 7.87 6.18 — Exercisable at December 31, 2020 119,569 $ 9.00 6.46 $ — Exercisable at December 31, 2021 111,853 $ 8.32 5.91 $ — 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, 2021, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 1.0 year. Restricted Stock Awards Restricted stock activity consisted of the following: Shares Weighted-Average Grant Date Fair Value December 31, 2019 65,686 $ 18.58 Granted 12,500 4.49 Forfeited — — Vested ( 40,814 ) 12.92 Balance as of December 31, 2020 37,372 $ 20.05 Granted 38,263 3.45 Forfeited ( 1,503 ) 36.00 Vested ( 40,886 ) 9.70 Balance as of December 31, 2021 33,246 $ 12.96 The total grant date fair value of restricted stock that vested during 2021 and 2020 was $ 0.4 million and $ 0.5 million, respectively. Unrecognized compensation expense related to RSAs as of December 31, 2021 and 2020 was $ 0.3 million and $ 0.5 million, respectively. As of December 31, 2021, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 1.4 years . Note 14. Earnings (Loss) Per Share 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. Weighted-average diluted common shares outstanding primarily reflect the additional shares that would be issued upon the assumed exercise of stock options and the assumed vesting of unvested share awards. The treasury stock method has been used to compute diluted earnings (loss) per share for 2021 and 2020. 72 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, 2021 2020 Numerator: Net loss – basic and diluted $ ( 48,472 ) $ ( 22,982 ) Denominator: Shares used in computing net loss per share Weighted-average common shares outstanding - basic 22,908 22,872 Effect of dilutive securities — — Weighted-average common shares outstanding – diluted 22,908 22,872 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. Note 15. Related Party Transactions Weichai Transactions See Note 3. Weichai Transactions for information regarding the Weichai SPA, Shareholder’s Loan Agreement and Collaboration Agreement . Transactions with Joint Ventures MAT-PSI Holdings, LLC In December 2012, the Company and MAT Holdings, Inc. (“MAT”) entered into an agreement to create MAT-PSI Holdings, LLC (“MAT-PSI”), which was intended to be a holding company of its 100 % Chinese wholly-owned foreign entity, referred to as Green Power. The Company invested $ 0.9 million for its 50 % share of MAT-PSI, which was formed to manufacture, assemble and supply natural gas, gas and alternative-fueled power systems to Chinese and Asian forklift customers. The venture established a production facility in Dalian and also sourced base engines from a local Chinese factory. As MAT-PSI was not profitable, the venture was closed in 2017; however, the Company had previously been in dispute with Green Power related to the wind up of the joint venture and outstanding receivables. On March 29, 2021, the Company executed a settlement agreement with MAT and Green Power which resolved the dispute. The final settlement agreement did not have a material impact on the Company’s consolidated financial statements. Doosan-PSI, LLC In 2015, the Company and Doosan Infracore Co., Ltd. (“Doosan”), a subsidiary of Doosan Group, entered into an agreement to form Doosan-PSI, LLC. The Company invested $ 1.0 million to acquire 50 % of the venture, which was formed to operate in the field of developing, designing, testing, manufacturing, assembling, branding, marketing, selling, distributing and providing support for industrial gas engines and all components and materials required for assembly of the gas engines to the global power generation market outside of North America and South Korea. In the fourth quarter of 2019, Doosan and the Company agreed to wind down and dissolve the joint venture. 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. 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 See Note 10. Commitments and Contingencies for information regarding the Company’s indemnification obligations related to certain former directors and officers of the Company. 73 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None.