What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-04-14 compared with 2022-03-31 · 133 added, 232 removed, 268 unchanged (58% of the section changed)

10 unchanged sentences

The Company manages the business as a single reporting segment.

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

For 2022, net sales increased $25.1 million, or 5%, compared to 2021, as a result of sales increases of $56.4 million and $71.4 million within the power systems and industrial end markets, respectively, partly offset by a decrease of $102.7 million in the transportation end market.

Gross margin was 18.4% and 9.0% during 2022 and 2021, respectively.

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

Gross profit increased during 2022 by $47.3 million compared to 2021, while operating expenses decreased by $18.9 million as compared to 2021.

Interest expense increased by $5.7 million in 2022 versus 2021.

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

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

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

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

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

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

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

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

Also, the Company recorded an income tax expense of $0.3 million for 2022 versus a benefit of $0.4 million for 2021.

Collectively, these factors contributed to a $59.7 million increase in the net income, which totaled $11.3 million in 2022 compared to net loss of $48.5 million in 2021.

Diluted earnings per share was $0.49 in the 2022 period compared to diluted loss per share of $2.12 in 2021.

Adjusted net income, which excludes certain items described below that the Company believes are not indicative of its ongoing operating performance, was $15.7 million in 2022 compared to Adjusted net loss of $26.7 million in 2021.

Adjusted income per share was $0.69 in 2022 compared to Adjusted loss per share of $1.16 in 2021.

Adjusted earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) was an income of $35.8 million in 2022 compared to Adjusted EBITDA loss of $12.4 million in 2021.

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

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

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United States $ 349,488 73 % $ 406,077 89 %

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

North America (outside of United States) 16,437 3 % 8,616 2 %

Pacific Rim 80,681 17 % 25,457 5 %

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Total $ 481,333 100 % $ 456,255 100 %

During 2022, t he Company sold over 47,000 engines of which approximately 70% utilized propane or natural gas as their fuel source and 12% utilized gasoline.

The remaining 18% of engines were dual fuel gasoline/propane, diesel and service/base engines.

During 2021, the Company sold over 49,000 engines of which approximately 52% utilized propane or natural gas as their fuel source and 39% utilized gasoline.

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

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

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

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

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

The Collaboration Agreement had a term of three years that was set to expire in March 2020.

The Collaboration Agreement was extended for three years in March 2020 and was set to expire in March 2023 .

On March 22, 2023, the Collaboration Agreement was extended for an additional term of three years.

For the years ended December 31, 2021 and 2020, sales to Weichai were not material.

The Company’s sales to Weichai were $0.6 million and $0.5 million during 2022 and 2021, respectively.

The Company purchased $13.3 million and $12.4 million of inventory from Weichai during 2022 and 2021, respectively.

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Recent Trends and Business Outlook

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

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

COVID-19 Update and Recent Business Impacts

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

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

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

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

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

suspended the Company’s 401-(k) plan match;

deferred spending on certain R&D programs;

and minimized discretionary expenses and consulting services.

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

As of the date of this 2022 Annual Report, the Company continues to judiciously manage its expenses through the continuation of certain measures, including the restriction of all non-essential travel and minimized discretionary expenses and consulting services.

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

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

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

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

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

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

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

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.

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

However, U.S.

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

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

oil markets during 2021 remained well below 2019 levels.

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

Starting in 2021 and throughout 2022, the Company took rightsizing actions to align its staffing with current needs, while also streamlining certain roles.

During 2021, the glo bal economy began recovering after the global pandemic that led to challenging market conditions across certain areas of the Company’s business and continued to improve during 2022.

Average crude oil prices began to improve in 2021 after the unprecedented decreases seen during the global pandemic and reached the highest average price in five years during 2022.

R ig counts in the U.S.

oil markets increased during 2021 and through 2022, however the average rig counts remain slightly below pre-pandemic levels.

The Company also believes that capital spending within the areas of the oil and gas market that it participates in, remains below pre-pandemic levels.

While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during 2022, as compared to the prior year, sales remain below pre-pandemic levels.

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.

In addition, the Company continued to experience delays in its supply chain during 2022 due to temporary shortages of raw materials and container delays of overseas materials as bottlenecks occurred at ports in Asia and North America.

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

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

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

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

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

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

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

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

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

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

Additionally, the Company continues to experience ongoing tariff costs for products that did not receive 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 supply chain 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.

During 2022, the Company experienced a significant reduction in 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, these legal costs were significantly higher in 2020 and 2021.

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

With a verdict reached in the USAO trial matter involving former officers and employees in September 2021, the Company’s costs related to the matter ceased.

Accordingly, the Company saw a substantial decline in these costs during 2022.

Additionally, in June 2022, the SEC matter concerning former officers and employees was settled.

As a result, the Company’s potential future costs for indemnity obligations related to this matter should cease.

Meanwhile, the Company continues to be party to several legal contingencies.

Se e 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.

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

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

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

The Company expects its sales in 2023 to increase by about 3% versus 2022 levels, a result of expectations for strong growth in the power systems end markets paired with a less significant increase of sales in the industrial and transportation end markets.

Gross profit as a percentage of sales is targeted to remain relatively consistent in 2023, a result of the lower warranty expense, pricing actions, improved cost recovery and cost savings initiatives set forth in 2022.

GM 6.0L Engine Off ering :

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

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

At December 31, 2021, the Company had fully exhausted its stock of engines where prepayment was provided.

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

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

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

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

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

Hyster-Yale Supply Arrangement :

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

Hyster-Yale has indicated that it will be obtaining some alternative supply beginning in late 2023 for several high-volume engines that the Company currently provides, including the 2.0L and 2.4L engines.

As a result of this, the Company expects to see a decline in sales volumes to Hyster-Yale beginning in 2024.

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2022 2021 Change % Change

Net sales $ 456,255 $ 417,639 $ 38,616 9 %

(from related parties $2,749 and $493 for the year ended December 31, 2022 and December 31, 2021, respectively)

$ 481,333 $ 456,255 $ 25,078 5 %

Cost of sales

(from related parties $2,262 and $346 for the year ended December 31, 2022 and December 31, 2021, respectively)

392,770 414,984 (22,214) (5) %

Gross profit 88,563 41,271 47,292 115 %

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Total operating expenses 63,961 82,841 (18,880) (23) %

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

Operating income (loss) 24,602 (41,570) 66,172 159 %

Other expense, net:

Interest expense 13,028 7,307 5,721 78 %

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

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

Other expense, net — 1 (1) NM

Total other expense, net 13,028 7,308 5,720 78 %

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

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

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

Loss per common share:

Income (Loss) before income taxes 11,574 (48,878) 60,452 124 %

Income tax expense (benefit) 304 (406) 710 NM

Net income (loss) $ 11,270 $ (48,472) $ 59,742 123 %

Earnings (Loss) per common share:

Basic $ 0.49 $ (2.12) $ 2.61 123 %

1 unchanged sentence

Non-GAAP Financial Measures:

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

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

Adjusted net income (loss) * $ 15,735 $ (26,749) $ 42,484 159 %

Adjusted income (loss) per share * $ 0.69 $ (1.16) $ 1.85 159 %

EBITDA * $ 31,292 $ (34,165) $ 65,457 192 %

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

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

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

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

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

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

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

Net sales increased $25.1 million, or 5%, compared to 2021, as a result of sales increases of $56.4 million and $71.4 million within the power systems and industrial end markets, respectively, partly offset by a decrease of $102.7 million in the transportation end market , which was expected during the year as the Company focuses on driving improved long-term profitability.

Further, overall sales in 2022 continued to reflect supply chain challenges that impacted the Company’s ability to timely meet certain orders.

Higher power systems end market sales were attributable to increased sales across various categories, including within demand response, standby, and to customers that have traditionally served the oil and gas market.

Higher industrial end market sales are primarily due to increased demand for products across various applications, with the largest increase attributable to products used within the material handling/forklift market.

The decreased sales within the transportation end market were primarily attributable to lower sales in the medium duty truck market, coupled with lower sales of school bus products.

Gross profit increased by $47.3 million, or 115%, to $88.6 million in 2022, compared to $41.3 million in 2021.

Gross margin was 18.4% and 9.0% in 2022 and 2021, respectively.

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

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

The increase in gross margin is primarily due to lower warranty expense, improved mix and pricing actions.

For the year ended December 31, 2022, warranty costs were $6.4 million, a decrease of $16.4 million compared to warranty costs of $22.8 million last year, due largely to lower charges for transportation end market engines during the year ended December 31, 2022 in part attributable to a contract revision.

A majority of the warranty activity is attributable to products sold within the transportation end market.

Research, Development and Engineering Expenses

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

R&D expenses in 2022 were $18.9 million, a decrease of $3.5 million, or 16%, from 2021 levels, primarily due to lower wages and benefits driven by reduced headcount and the timing of projects.

Selling, General and Administrative Expenses

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

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

Selling, general and administrative (“SG&A”) decreased in 2022 by $14.9 million, or 26%, compared to 2021.

The decrease w as primarily due to lower legal costs related to the Company’s indemnification obligations of former officers and employees, due largely to decreased spending activity during the year ended December 31, 2022 in relation to the USAO’s trial involving former officers and employees, which concluded in September 2021 (see additional discussion in Note 10.

Commitments and Contingencies of Item 8.

Financial Statements and Supplementary Data).

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

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

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

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

These decreased costs were partially offset by an increase in incentive compensation expense.

Interest Expense

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Financial Statements and Supplementary Data for additional information.

Loss on Extinguishment of Debt

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

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

Debt, included in Item 8.

Financial Statements and Supplementary Data , for additional information.

Other Expense (Income), Net

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

Refer to Note 15.

Related Party Transactions , in Item 8.

Financial Statements and Supplementary Data , for further discussion of the Company’s joint venture.

Income Tax (Benefit) Expense

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

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

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

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

Income Tax Expense

The Company recorded an income tax expense of $0.3 million in 2022, a decrease of $0.7 million, as compared to an income tax benefit of $0.4 million in 2021.

The Company’s pretax income was $11.6 million in 2022, compared to pretax loss of $48.9 million in 2021.

The Company continues to record a full valuation allowance against deferred tax assets, which offsets the tax expense associated with the pre-tax income for the 2022 period and the tax benefits associated with the pre-tax loss for the 2021 period.

The income tax expense for 2022 is primarily related to the Company’s deferred tax liability related to indefinite-lived assets which cannot serve as a source of income for the realization of deferred tax assets .

The income tax benefit for 2021 is primarily attributable to the ability to carry back 2013 R&D credits back to 2012 under the CARES Act.

Income Taxes , included in Item 8.

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Adjusted EBITDA Net income (loss)

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

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

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

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

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

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

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

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

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

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

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

(in thousands) For the Year Ended December 31,

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

Net income (loss) $ 11,270 $ (48,472)

Stock-based compensation 1

Loss on debt extinguishment 2

Incremental financial reporting 4

Internal control remediation 3

Governmental investigations and other legal matters 4

18,451 12,193

Life insurance proceeds 7

Discrete income tax items 8

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

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

Adjusted net income (loss) $ 15,735 $ (26,749)

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

For the Year Ended December 31,

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

Income (loss) per common share – diluted $ 0.49 $ (2.12)

Stock-based compensation 1

Loss on debt extinguishment 2

Incremental financial reporting 4

Internal control remediation 3

Governmental investigations and other legal matters 4

Life insurance proceeds 7

Discrete income tax items 8

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

Adjusted income (loss) per share – diluted $ 0.69 $ (1.16)

Diluted shares (in thousands) 22,948 22,908

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

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

(in thousands) For the Year Ended December 31,

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

Net income (loss) $ 11,270 $ (48,472)

Interest expense 13,028 7,307

Income tax (benefit) expense (406) (3,713)

Income tax expense (benefit) 304 (406)

Depreciation 4,566 4,871

2 unchanged sentences

Stock-based compensation 1

Loss on debt extinguishment 2

Incremental financial reporting 4

Internal control remediation 3

Governmental investigations and other legal matters 4

18,451 12,193

Life insurance proceeds 7

Adjusted EBITDA $ 35,757 $ (12,442)

Amounts reflect non-cash stock-based compensation expense.

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

Debt of Item 8.

Financial Statements and Supplementary Data .

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

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

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

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

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

The amounts include an expense of $0.1 million and $15.7 million, for the years ended December 31, 2022 and 2021, respectively, for professional services fees related to costs to indemnify certain former officers and employees of the Company.

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

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

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

Amount consists of the impact of the CARES Act and a change in the deferred tax liability related to an indefinite-lived intangible asset.

Cash was impacted as follows:

(in thousands) For the Year Ended December 31,

(in thousands) For the Year Ended

2022 2021 Change % Change

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

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

Net cash used in operating activities $ (8,845) $ (61,478) $ 52,633 86 %

Net cash (used in) provided by investing activities (1,354) 398 (1,752) NM

Net cash provided by financing activities 28,367 46,545 (18,178) 39 %

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

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 18,168 $ (14,535) $ 32,703 NM

Capital expenditures $ (1,354) $ (1,968) $ 614 31 %

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Cash Flow from Operating Activities

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

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

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

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

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

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

Net cash used in operations was $8.8 million in 2022 compared to net cash used in operations of $61.5 million in 2021 resulting in a decrease of $52.6 million in cash used in operating activities year-over-year.

The decrease in cash used by operating activities primarily resulted from the $59.7 million increase in earnings while collections of customer accounts receivable were lower than the prior year, and the Company had higher cash paid against accounts payable contributing to a $6.7 million increase of cash used by working capital accounts.

Cash outflows associated with other noncurrent liabilities have increased, and are offset by the decrease in inventory purchases and the decrease in non-cash adjustments.

Cash Flow from Investing Activities

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

Net cash used in investing activities was $1.4 million for the year ended December 31, 2022 compared to cash provided by investing activities of $0.4 million for year ended December 31, 2021, respectively.

For the year ended December 31, 2022 , capital expenditures associated with the Company’s facilities were lower by $0.6 million versus the prior year.

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

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

Cash Flow from Financing Activities

The Company generated $28.4 million in cash from financing activities in the year ended December 31, 2022 compared to $46.5 million in cash generated by financing activities in the year ended December 31, 2021.

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

The cash generated by financing activities for the year ended December 31, 2022 and 2021 was primarily attributable to cash received under the series of Shareholder’s Loan Agreements with Weichai .

See additional discussion below and in Note 6.

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Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company’s sources of funds are cash flows from operations, borrowings made pursuant to our credit facilities, shareholder’s loan agreements, and cash and cash equivalents on hand.

Principal uses of funds consist of payments of principal interest on our debt facilities and shareholder’s loan agreements, capital expenditures, and working capital needs.

As of December 31, 2022 , the Company’s total outstanding debt obligations under the Second Amended and Restated Credit Agreement, the second Amended Shareholder’s Loan Agreement, the third Amended Shareholder's Loan Agreement , the fourth Amended Shareholder's Loan Agreement and for finance leases and other debt were $211.0 million in the aggregate, and its cash and cash equivalents were $24.3 million.

Financial Statements and Supplementary Data , Note 6.

Debt, for additional information.

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

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

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

No additional fee was incurred with this waiver.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

However, U.S.

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

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

oil markets during 2021 remained well below 2019 levels.

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

As of December 31, 2022 and 2021 , Accounts Payable were approximately $76.4 million and $93.3 million, respectively, reflective of less inventory and costs incurred related to the Company’s indemnification obligations.

Average crude oil prices began to improve in 2021 after the unprecedented decreases seen during the global pandemic and reached the highest average price in five years during 2022.

R ig counts in the U.S.

oil markets increased during 2021 and through 2022, however the average rig counts remains slightly below pre-pandemic levels.

The Company also believes that capital spending within the areas of the oil and gas market that it participates in, remains below pre-pandemic levels.

While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during 2022, as compared to the prior year, sales remain below pre-pandemic levels.

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 continued to experience delays in its supply chain during all of 2022 due to temporary shortages of raw materials and container delays of overseas materials as bottlenecks occurred at ports in Asia and North America.

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

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

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

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

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

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

Additionally, the Company continues to experience ongoing tariff costs for products that did not receive 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.

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

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

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

However, at this time, the

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

With a verdict reached in the USAO trial matter involving former officers and employees in September 2021, the Company’s costs related to the matter ceased .

Accordingly, the Company saw a substantial decline in these costs during 2022.

Additionally, in June 2022, the SEC matter concerning former officers and employees was settled.

As a result, the Company’s potential future costs for indemnity obligations related to this matter should cease.

Financial Statements and Supplementary Data, Note 10.

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

Lastly, in addition to incurring higher total debt levels during 2022, the Company’s debt is tied to the London Inter-Bank Offered Rate (“LIBOR”) and the Secured Overnight Financing Rate (“SOFR”), both of which have seen significant increases during the year.

As a result of these factors, the Company’s interest expense has increased and is subject to further increases.

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

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

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

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

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Preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

The Company’s most critical accounting policies and estimates are those most important to the portrayal of its financial condition and results of operations and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.

The Company’s most critical accounting policies and estimates are those most important to the portrayal of its financial condition and results of operations which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.

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

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Revenue for the Company is generated from contracts that may include a single performance obligation or multiple performance obligations.

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.

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.

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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 the 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.

For contracts with customers that include multiple performance obligations, judgment is required to determine whether performance obligations specified in these contracts are distinct and should be accounted for as separate revenue transactions for recognition purposes.

For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price.

Standalone selling prices are generally determined based on the prices charged to customers or using expected cost plus margin.

The Company’s payment terms are less than one year, and its sales arrangements do not contain any significant financing components.

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Because these estimates form a basis for the determination of whether or not the impairment charge should be recorded, these estimates are considered to be critical accounting estimates .

The Company completed its 2021 annual impairment test as of October 1, 2021 and concluded that there were no impairments.

Summary of Significant Accounting Policies and Other Information , included in Item 8.

Financial Statements and Supplementary Data for further discussion.

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

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

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

Impairment of Long-Lived Assets

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

Potential indicators of impairment may include a

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

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

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

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The Company’s impairment loss calculations contain critical estimates because they require the Company’s management to make assumptions and to apply judgment to estimate future cash flows and long-lived asset fair values, including forecasting useful lives of the long-lived assets and selecting discount rates.

If actual results are not consistent with the assumptions used, the Company could experience an impairment triggering event and be exposed to losses that could be material.

The Company offers a standard limited warranty on the workmanship of its products that in most cases covers defects for a defined period.

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

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

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

Such adjustments typically occur when new information received by the Company indicates claims experience deviates from historical and expected trends.

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

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

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis