What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-04-14 compared with 2022-03-31 · 241 added, 335 removed, 825 unchanged (41% of the section changed)

19 unchanged sentences

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.

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 Company’s debt arrangements.

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

18 unchanged sentences

(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.

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 a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accrued Product Warranty

7 unchanged sentences

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.

ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the significant assumptions, specifically the applicability of historical claims experience including failure rates and repair costs per unit;

and iii) the estimates in frequency and average cost of warranty claims.

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

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

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

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

Evaluating the reasonableness of management’s assumptions to estimate the future warranty claims by (i) comparing the current product warranty claims estimates to the prior year estimates, and investigating significant differences and (ii) reviewing recent trends, specific issues, and agreements to evaluate the applicability of the historic claims experience, including failure rates and repair costs per unit, being used in this estimate.

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

3 unchanged sentences

Chicago, Illinois

March 31, 2022

April 14, 2023

POWER SOLUTIONS INTERNATIONAL, INC.

5 unchanged sentences

Accounts receivable, net of allowances of $ 4,308 and $ 3,420 as of December 31, 2022 and December 31, 2021, respectively;

(from related parties $ 2,325 and $ 168 as of December 31, 2022 and December 31, 2021, respectively)

89,894 65,110

4 unchanged sentences

Property, plant and equipment, net 13,844 17,344

Right-of-use assets, net 13,282 13,545

Intangible assets, net 5,660 7,784

2 unchanged sentences

TOTAL ASSETS $ 319,913 $ 300,538

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities:

Accounts payable $ 93,256 $ 31,547

Accounts payable (to related parties $ 23,358 and $ 12,548 as of December 31, 2022 and December 31, 2021, respectively)

$ 76,430 $ 93,256

Current maturities of long-term debt 130 107

Revolving line of credit 130,000 130,000

Other short-term financing 25,000 —

Other accrued liabilities 34,801 77,619

Finance lease liability, current 90 147

Operating lease liability, current 2,894 3,978

Other short-term financing (from related parties $ 75,020 and $ 25,000 as of December 31, 2022 and December 31, 2021, respectively)

75,614 25,000

Other accrued liabilities (from related parties $ 5,232 and $ 385 as of December 31, 2022 and December 31, 2021, respectively)

34,109 30,823

Total current liabilities 319,267 283,311

Deferred income taxes 1,278 1,016

Long-term debt, net of current maturities 25,636 781

Long-term debt, net of current maturities (from related parties $ 4,800 and $ 25,000 as of December 31, 2022 and December 31, 2021, respectively)

Finance lease liability, long-term 170 260

Operating lease liability, long-term 10,971 10,304

Noncurrent contract liabilities 3,199 3,330

1 unchanged sentence

TOTAL LIABILITIES $ 350,285 $ 342,561

STOCKHOLDERS’ EQUITY (DEFICIT)

STOCKHOLDERS’ DEFICIT

Preferred stock – $ 0.001 par value.

9 unchanged sentences

( 972 ) ( 1,116 )

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

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

TOTAL STOCKHOLDERS’ DEFICIT ( 30,372 ) ( 42,023 )

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $ 319,913 $ 300,538

See Notes to Consolidated Financial Statements

2 unchanged sentences

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

Net sales $ 456,255 $ 417,639

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

$ 481,333 $ 456,255

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

Gross profit 88,563 41,271

4 unchanged sentences

Total operating expenses 63,961 82,841

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

Operating income (loss) 24,602 ( 41,570 )

Other expense, net:

Interest expense 13,028 7,307

Loss on debt extinguishment and modifications — 497

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

Other expense, net — 1

Total other expense, net 13,028 7,308

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

Income tax benefit ( 406 ) ( 3,713 )

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

Income (Loss) before income taxes 11,574 ( 48,878 )

Income tax expense (benefit) 304 ( 406 )

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

Weighted-average common shares outstanding:

1 unchanged sentence

Diluted 22,948 22,908

Loss per common share:

Earnings (Loss) per common share:

Basic $ 0.49 $ ( 2.12 )

9 unchanged sentences

Balance at December 31, 2021 $ 23 $ 157,436 $ ( 198,366 ) $ ( 1,116 ) $ ( 42,023 )

Net loss — — ( 48,472 ) — ( 48,472 )

Net income — — 11,270 — 11,270

Stock-based compensation expense — 237 — 148 385

6 unchanged sentences

Cash used in operating activities

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

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

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

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

Amortization of intangible assets 2,124 2,535

3 unchanged sentences

Deferred income taxes 189 29

Loss on extinguishment of debt — 497

Other adjustments, net 1,746 941

Changes in operating assets and liabilities:

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

Accounts receivable ( 24,796 ) ( 4,952 )

Inventory 20,426 ( 34,840 )

Prepaid expenses and other assets ( 103 ) 3,958

Prepaid expenses, right-of-use assets and other assets ( 4,251 ) ( 103 )

Accounts payable ( 17,004 ) 62,105

Income taxes receivable 3,721 —

Accrued expenses 2,107 ( 42,759 )

1 unchanged sentence

Net cash used in operating activities ( 8,845 ) ( 61,478 )

Cash provided by (used in) investing activities

Cash (used in) provided by investing activities

Capital expenditures ( 1,354 ) ( 1,968 )

Return of investment in joint venture — 2,263

Proceeds from corporate-owned life insurance — 930

Other investing activities, net — 103

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

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

Cash provided by financing activities

2 unchanged sentences

Repayment of short-term financings ( 1,168 ) ( 1,180 )

Proceeds from revolving line of credit — 180,298

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

Payments of deferred financing costs ( 1,787 ) ( 3,162 )

1 unchanged sentence

Net cash provided by financing activities 28,367 46,545

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

Net increase (decrease) in cash, cash equivalents, and restricted cash 18,168 ( 14,535 )

Cash, cash equivalents, and restricted cash at beginning of the year 9,732 24,267

23 unchanged sentences

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.

In April 2019, Weichai America Corp., a wholly-owned subsidiary of Weichai Power Co., Ltd.

(HK2338, SZ000338) (herein collectively referred to as “Weichai”), exercised the stock purchase warrant (the “Weichai Warrant”) and 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.

1 unchanged sentence

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.

The Rights Agreement provides Weichai with representation on the Company’s Board and management representation rights.

Weichai currently has four representatives on the Board, which constitutes the majority of the directors serving on the Board.

1 unchanged sentence

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

applicable to the first quarter of 2021.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

See Item 8 Note 6.

Debt , for additional information.

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

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

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

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

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

attorney (POA).

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

In connection with the Second Amended and Restated Uncommitted Revolving Credit Agreement, on March 25, 2022, the Company also amended two of the three shareholder’s loan agreements with Weichai, to among other things, extend the maturities thereof.

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

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

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

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

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

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

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

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.

As of December 31, 2022, the Company’s total outstanding debt obligations under the Third 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.

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

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.

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 2023 and 2024.

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.

4 unchanged sentences

• 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.

Macroeconomic volatility and uncertainties further increase the potential for continued supply chain disruptions, economic uncertainty, and unfavorable oil and gas market dynamics which may continue to have a material adverse impact on the results of operations, financial position and liquidity of the Company.

Lastly, in addition to incurring higher total debt levels during 2022, the Company’s debt is tied to LIBOR and 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.

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 Third Amended and Restated Credit Agreement and other outstanding debt, 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

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.

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 Third Amended and Restated Credit Agreement and other outstanding debt, in the future, and extending and amending, refinancing or repaying the indebtedness outstanding under the Company’s existing debt arrangements.

Basis of Presentation and Consolidation

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Customer A 30 % 24 %

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,

Supplier A ** 22 %

Supplier B ** 12 %

Supplier C 10 % **

** Less than 10% of the total

Use of Estimates

1 unchanged sentence

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.

Significant estimates and assumptions include the valuation of allowances for uncollectible receivables, inventory reserves, warranty reserves, stock-based compensation, evaluation of goodwill, other intangibles, property, plant and equipment for impairment, and determination of useful lives of long-lived assets.

Actual results could materially differ from those estimates.

3 unchanged sentences

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.

Restricted cash consists of funds that are contractually restricted as to usage or withdrawal due to required minimum levels of cash collateral for letters of credits and contractual agreements with customers.

As of December 31, 2022 and 2021, the Company had restricted cash of $ 3.6 million and $ 3.5 million, respectively, which includes $ 1.1 million restricted cash held in escrow which could be required to be refunded to the customer if conditions occur as defined in the agreement with the customer.

The Company has not recognized revenue associated with the restricted cash.

The liability is included within Noncurrent Contract Liabilities on the Consolidated Balance Sheet.

Research and Development

2 unchanged sentences

These costs were $ 18.9 million and $ 21.4 million for 2022 and 2021, respectively.

From time to time, the Company enters into agreements with its customers to fund a portion of the research, development and engineering costs of a particular project.

These reimbursements are accounted for as a reduction of the related research, development and engineering expenditure.

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.

4 unchanged sentences

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.

Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such

benefits meet a more-likely-than-not threshold.

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

Interest and penalties related to uncertain tax positions are

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

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

Accounts Receivable and Allowance for Doubtful Accounts

55 unchanged sentences

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

1 unchanged sentence

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.

In evaluating goodwill for impairment, the Company first assesses 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.

9 unchanged sentences

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;

During the years ended December 31, 2022 and 2021, 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.

Other Accrued Liabilities

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Accrued compensation and benefits 7,299 4,397

Operating lease liabilities 3,978 3,793

Accrued interest expense 5,257 625

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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.

As of December 31, 2022, included in accounts receivable is approximately $ 1.0 million of reimbursements of warranty costs due from a significant supplier.

Accrued product warranty activities are presented below:

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Noncurrent accrued product warranty $ 8,513 $ 17,118

* Warranty costs, net of supplier recoveries , were $ 22.8 million and $ 19.5 million for the year ended December 31, 2021 and 2020 , respectively.

* Warranty costs, net of supplier recoveries , and other adjustments, were $ 6.4 million and $ 22.8 million for the year ended December 31, 2022 and 2021 , respectively.

Supplier recoveries were $ 4.1 million and $ 4.8 million for the year ended December 31, 2022 and 2021 , 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.

** Changes 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 historical and expected trends.

As of December 31, 2022 , the Company recorded a cost for changes in estimates of preexisting warranties of $ 4.6 million, or $ 0.20 per diluted share, for the year ended December 31, 2022 , which includes a favorable experience for preexisting warranties attributable to a contract revision during the quarter ended March 31, 2022, and costs of $ 9.4 million, or $ 0.41 per diluted share, for the year ended December 31, 2021.

Revenue Recognition

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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):

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The guidance was effective upon issuance and expires after December 31, 2024.

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

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

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.

There was no impact on the Company’s Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows or Statement of Stockholders’ Equity (Deficit) since the third Shareholder's Loan Agreement that referenced LIBOR was amended in November 2022 and refers to an alternative reference rate other than LIBOR.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) .

The standard replaces the incurred loss impairment methodology under current U.S.

GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments.

The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

The new standard is effective for non-public companies, and public business entities that meet the definition of a smaller reporting company as defined by the SEC, for interim and annual periods beginning after December 15, 2022.

The Company will adopt this guidance effective January 1, 2023.

The adoption of the standard is not expected to have a material impact on the Company’s consolidated financial statements.

Revenue Recognition

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• 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.

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For the years ended December 31, 2022 and 2021, the Company recognized revenue of $ 434.0 million and $ 415.7 million, respectively, related to products shipped or delivered at a point in time.

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

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.

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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.

For both years ended December 31, 2022 and 2021, the Company recognized revenue of $ 47.3 million and $ 40.6 million, respectively, for products manufactured and services provided over time.

Shipping and handling costs.

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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.

The Company had two significant supply agreements with multiple performance obligations related to the sale of 6.0L engines in 2021.

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.

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 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.

The Company ended the program to outsource and sell the certified 6.0L engines effective December 31, 2021 and recognized revenue related to contracts with customers for 6.0L engines of $ 103.7 million in 2021.

Variable consideration .

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United States $ 349,488 $ 406,077

North America 8,616 9,831

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

Pacific Rim 80,681 25,457

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Net contract liabilities $ ( 1,835 ) $ ( 2,442 )

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.

During the year ended December 31, 2022 and 2021, the Company recognized $ 1.6 million and $ 47.2 million of revenue upon satisfaction of performance obligations related to amounts that were included in the net contract liabilities balance as of

December 31, 2021 and 2020, respectively.

The decrease in the net contract liabilities from December 31, 2021 to December 31, 2022 is primarily related to the prepayment for 6.0L gasoline engine by a customer under a long-term supply agreement.

At both December 31, 2022 and 2021 the Company had no contract liability related to prepayments of 6.0L gasoline engines.

Remaining Performance Obligations

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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;

• 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.

Weichai Shareholder’s Loan Agreements

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

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

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

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

The Company is party to four shareholder’s loan agreements with Weichai, including the $ 130.0 million first Amended Shareholder's Loan Agreement, the $ 25.0 million second Amended Shareholder’s Loan Agreement, the $ 50.0 million third Amended Shareholder's Loan Agreement, and the $ 30.0 million fourth Amended Shareholder's Loan Agreement.

See additional discussion of these debt agreements in Note 6.

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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.

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 .

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 evaluates whether an arrangement is a collaborative arrangement at its inception ba sed 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’s sales to Weichai were $ 0.6 million and $ 0.5 million during 2022 and 2021, respectively.

As of December 31, 2022 and 2021, the Company had outstanding receivables from Weichai of $ 0.4 million and $ 0.2 million , respectively.

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

As of December 31, 2022 and 2021, the Company had outstanding payables to Weichai of $ 23.4 million and $ 12.5 million, respectively.

In January 2022, PSI and Baudouin, a subsidiary of Weichai, entered into an international distribution and sales agreement which enables Baudouin to bring PSI’s power systems line of products into the European, Middle Eastern, and African markets.

In addition to sales, Baudouin will manage service, support, warranty claims, and technical requests.

The Company’s sales to Baudouin were $ 2.2 million for the year ended December 31, 2022 .

As of December 31, 2022 and 2021 , the Company had $ 1.9 million and no receivables from Baudouin, respectively.

Property, Plant and Equipment

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The carrying amount of goodwill at both December 31, 2022 and 2021 was $ 29.8 million.

Accumulated impairment losses at both December 31, 2021 and 2020 were $ 11.6 million.

Other Intangible Assets

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* 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.

Unamortized debt issuance costs, were $ 0.4 million and $ 0.8 million at December 31, 2022 and 2021, respectively.

The Company paid $ 6.1 million and $ 3.7 million in cash for interest in 2022 and 2021, respectively.

Credit Agreement and Shareholders’ Loan Agreements

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

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

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

In addition, the Company paid fee s of $ 1.9 million related t o the Amended and Restated Credit Agreement, which were deferred and amortized over the term of the Amended and Restated Credit Agreement.

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

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

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

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

In connection with the Amended and Restated Credit Agreement, on March 26, 2021, the Company entered into the First Shareholder’s Loan Agreement.

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

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

Any potential borrowings under the First Shareholder’s Loan Agreement were to be at LIBOR plus 4.5 % per annum.

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

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

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

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

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

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

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

On July 14, 2021, the Company entered into the Second Shareholder’s Loan Agreement with Weichai.

Borrowings under the Second Shareholder’s Loan Agreement incurred interest at LIBOR plus 4.5 % and were to be used for general corporate purposes, except for certain legal expenditures which required additional approval from Weichai.

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

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

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

Borrowings under the Third Shareholder’s Loan Agreement bear interest at LIBOR plus 4.5 % and can be used for general corporate purposes, except for certain legal expenditures which require additional approval from Weichai.

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

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

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

See Item 8 Note 6.

Debt , for additional information.

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

On March 25, 2022, the Company amended and restated its $ 130.0 million uncommitted senior secured revolving credit agreement with Standard Chartered by entering into the Second Amended and Restated Credit Agreement.

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

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

No additional fee was incurred with this waiver.

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

In addition, the Company paid fees of $ 1.8 million rel ated to the Second Amended and Restated Uncommitted Revolving Credit Agreement, which will be deferred and amortized over the term of the Second Amended and Restated Uncommitted Revolving Credit Agreement.

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

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

In connection with the Second Amended and Restated Credit Agreement, on March 25, 2022, the Company also amended two of the three shareholder’s loan agreements with Weichai, to among other things, extend the maturities thereof.

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

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

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

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

The Second Amended and Restated Credit Agreement is subject to customary events of default and covenants, as well as financial covenants, including minimum consolidated EBITDA and Consolidated Interest Coverage Ratio covenants, as further defined in the Second Amended and Restated Credit Agreement, required only for the second and third quarters of 2022.

The Company was in compliance with these financial covenants for the second and third quarter of 2022.

Borrowings under the Second Amended and Restated Credit Agreement will incur interest at either the alternate base rate or the SOFR plus 2.95 % per annum .

The Second Amended and Restated Credit Agreement continues to be secured by substantially all of the Company’s assets and provides Standard Chartered the right to demand payment of any and all of the outstanding borrowings and other amounts owed under the Second Amended and Restated Credit Agreement at any point in time prior to the maturity date at Standard Chartered’s discretion.

Furthermore, the Second Amended and Restated Credit Agreement grants Standard Chartered a power of attorney to submit a borrowing request to Weichai under the first 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, 2022 , the Company had $ 130.0 million outstanding under the 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 its shareholder’s loan agreements with Weichai, to among other things, extend the maturities thereof.

The first Amended 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 second Amended 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 first Amended Shareholder's Loan Agreement was extended to April 24, 2023 and the maturity of the second Amended 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 Credit Agreement.

As of December 31, 2022 , there were no borrowings under the first Amended Shareholder's Loan Agreement and $ 25.0 million under the second Amended Shareholder’s Loan Agreement .

The Company is also party to the third Shareholder's Loan Agreement with Weichai, which was entered into on December 10, 2021.

The third Shareholder's Loan Agreement provides the Company with a $ 50.0 million uncommitted facility that is subordinated to the Third 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 will incur interest at the applicable SOFR, plus 4.65 % per annum and can be used for general corporate purposes, except for certain legal expenditures which require additional approval from Weichai.

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.

Shareholder's Loan Agreement was amended on November 29, 2022 and expires on November 30, 2023 with any outstanding principal and accrued interest due upon maturity.

As of December 31, 2022 , the Company had $ 50.0 million outstanding under the third Shareholder's Loan Agreement .

On April 20, 2022, the Company entered into the fourth Shareholder's Loan Agreement (the "fourth Shareholder's Loan Agreement") with Weichai.

The fourth Shareholder's Loan Agreement which matures on March 31, 2023, provides the Company with access to up to $ 30.0 million of credit at the discretion of Weichai to supplement the Company’s working capital.

The fourth Shareholder's Loan Agreement is subordinated in all respects to the Third Amended and Restated Credit Agreement.

Borrowings under the first Amended Shareholder's Loan Agreement , the second Amended Shareholder’s Loan Agreement and the fourth Shareholder's Loan Agreement will incur interest at the applicable 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 %.

As of December 31, 2022 , the Company had $ 4.8 million outstanding under the fourth Shareholder's Loan Agreement .

As of December 31, 2022 , the Company’s total outstanding debt obligations under the Third 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 .

The Company's total accrued interest for all shareholder loans was $ 5.3 million and $ 0.6 million as of December 31, 2022 and December 31, 2021, respectively.

Accrued interest is included within Other Accrued Liabilities on the Consolidated Balance Sheet.

On March 24, 2023, the Company amended and restated its $ 130.0 million Second Amended and Restated Uncommitted Revolving Credit Agreement with Standard Chartered.

The Third Amended and Restated Credit Agreement extends the maturity date of loans outstanding under its previous credit facility to the earlier of March 22, 2024 or the demand of Standard Chartered.

The Third 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 2023.

Borrowings under the Third Amended and Restated Credit Agreement will incur interest at either the alternate base rate or the SOFR plus 3.35 % per annum.

In addition, the Company paid fees of $ 1.0 million related to the Third Amended and Restated Uncommitted Revolving Credit Agreement, which will be deferred and amortized over the term of the Third Amended and Restated Uncommitted Revolving Credit Agreement.

The Third 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 April 12, 2023, the Company had $ 130.0 million outstanding under the Third Amended and Restated Credit Agreement.

In connection with this Third Amended and Restated Uncommitted Revolving Credit Agreement, on March 24, 2023, the Company also amended two of the four shareholder’s loan agreements with Weichai, to among other things, extend the maturities thereof.

The first Amended 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 $ 130.0 million Third Amended and Restated Uncommitted Revolving Credit Agreement if the Company is unable to pay such borrowings.

The fourth Amended Shareholder's Loan Agreement continues to provide the Company with access to up to $ 30 million of credit at the discretion of Weichai.

The maturity of the first Amended Shareholder's Loan Agreement was extended t o April 24, 2024 and the maturity of the fourth Amended Shareholder's Loan Agreement was extended to March 31, 2024 .

Borrowings under the first Amended Shareholder's Loan Agreement and the fourth Amended Shareholder's Loan Agreement will bear interest at an annual rate equal to SOFR plus 4.05 % per annum.

Further, if the applicable term SOFR is negative, the interest rate per annum shall be deemed as 4.05 % 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%.

All of the amended shareholder loan agreements with Weichai 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 $ 130.0 million Third Amended and Restated Uncommitted Revolving Credit Agreement.

The following table summarizes the Company’s total outstanding debt obligations under all Credit Agreements and Shareholders’ Loan Agreements:

(in thousands) As of December 31,

Third Amended and Restated Credit Agreement $ 130,000

second Amended Shareholder’s Loan Agreement 50,000

third Amended Shareholder's Loan Agreement 25,000

fourth Amended Shareholder's Loan Agreement 4,820

Other debt 1,213

Total $ 211,033

See Item 8., Note 1.

3 unchanged sentences

Year Ending December 31, Maturities of Long-Term Debt

Total $ 5,029

Lease Policies

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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.

These leases have original lease periods expiring between April 2023 and July 2034.

The following table summarizes the lease expense by category in the Consolidated Statement of Operations:

(in thousands) For the Year Ended December 31,

Cost of sales $ 6,300 $ 6,079

Research, development and engineering expenses 267 326

Selling, general and administrative expenses 169 174

Interest expense 21 44

Total $ 6,757 $ 6,623

The following table summarizes the components of lease expense:

7 unchanged sentences

Variable lease cost

Sublease income ( 1,062 ) —

Total lease cost $ 5,695 $ 6,623

8 unchanged sentences

Finance leases — —

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.

As of December 31, 2022 and 2021, the weighted-average remaining lease term for both periods was 5.8 years for operating leases and 3.0 years and 3.4 years for finance leases, respectively.

As of December 31, 2022 and 2021, the weighted-average discount rate for both periods was 7.1 % for operating leases, and 6.6 % and 6.5 % for finance leases, respectively.

The following table presents supplemental balance sheet information related to leases:

4 unchanged sentences

Operating lease liabilities, non-current 10,971 10,304

10,304 14,156

Total operating lease liabilities

5 unchanged sentences

Included in Other noncurrent assets for operating leases and Property, plant and equipment , net for finance leases on the Consolidated Balance Sheets.

Included in Other accrued liabilities for operating leases and Current maturities of long-term debt for finance leases on the Consolidated Balance Sheets.

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, 2022:

5 unchanged sentences

2026 2,421 17

2026 1,515 17

Thereafter 3,015 —

14 unchanged sentences

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

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

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

(in thousands) As of December 31, 2022

7 unchanged sentences

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

Unsecured Senior Notes 50,000 — 50,000

Other Financial Assets and Liabilities

1 unchanged sentence

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.

For the years ending December 31, 2022 and 2021, the Company incurred plan costs of $ 0.8 million.

Commitments and Contingencies

14 unchanged sentences

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

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

the administrative order to remediate the remaining outstanding material weaknesses.

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

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

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

On April 12, 2021, the SEC granted the Company’s request for an extension of time until March 31, 2022 in which to comply with the requirements of the administrative order to remediate the remaining outstanding material weaknesses.

In April 2022, the SEC granted a further extension of time until March 31, 2023 for the Company to remediate any outstanding material weaknesses in accordance with the administrative order.

Subsequent to the filing of this Form 10-K, the Company will submit documentation to the SEC for its review to assess the Company’s compliance with the administrative order.

Jerome Treadwell v.

16 unchanged sentences

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.

As of December 31, 2022 and December 31, 2021, the Company had recorded an estimated liabili ty of $ 2.0 million and $ 0.3 million, respectively , recorded within Other accrued liabilities on the Consolidated Balance Sheet related to the settlement of this matter.

Mast Powertrain v.

4 unchanged sentences

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.

The Company fully paid the settlement and had no recognized liability as of December 31, 2022 and $ 0.5 million was outstanding as of December 31, 2021.

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

4 unchanged sentences

Since the filing of the complaint, Travelers has paid approximately $ 8.8 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.

Travelers is seeking reimbursement from the Company for those advances pursuant to the terms of the side A policy.

In October 2021, the Company and Winemaster entered into a Stipulation and Advancement Order to handle all future attorney’s fees relating to his DOJ and SEC cases, to the extent not reimbursed by Travelers under the side A po licy.

As of December 31, 2022 , the Company has approximately $ 8.8 million accrued for the reimbursement to Travelers recorded within Accounts payable on the Consolidated Balance Sheet.

Jeffrey Ehlers and Rick Lulloff Litigation

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

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

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

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

In September 2021 Jeffrey Ehlers and Rick Lulloff (“Lulloff”), former employees of the Company, made demands 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.

The Company filed a notice of removal from the Circuit Court of Cook County, Illinois and has also moved to consolidate the cases which has been granted by the Court.

In December 2022, the Company reached a settlement with both Jeffrey Ehlers and Rick Lulloff, for $ 0.8 million and $ 0.5 million , respectively.

As of December

31, 2022 , the Company has recorded the aforementioned settlement liabilities within Other accrued liabilities on the Consolidated Balance Sheet and will pay the settlement amounts in installments.

No estimated liability was recorded for the year ended December 31, 2021 .

Indemnification Agreements

3 unchanged sentences

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.

For the year ended December 31, 2022, the Company incurred $ 0.1 million of costs related to these indemnification obligations and $ 15.7 million for the year ended December 31, 2021.

In June 2020, the Company entered into a new directors’ and officers’ liability insurance policy, which was renewed in June 2021, and again in June 2022.

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

3 unchanged sentences

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.

Income tax benefit was as follows:

Summary of Significant Accounting Policies and Other Information , the Company had restricted cash of $ 3.6 million at December 31, 2022 related to these letters of credit and cash held in escrow due to a customer agreement.

The Company had arrangements with Doosan that required the Company to purchase minimum volumes or be subject to monetary penalties.

On July 7, 2022, the Company entered into a revised supply agreement with Doosan, which among other things, removed the Company’s exclusivity to purchase and distribute specified engines within the territory of the United States, Canada and Mexico, and removed the minimum product purchase commitments and related performance penalties imposed on the Company.

The liability was fully settled in 2022.

The Company was also party to a supply agreement with SAME through December 31, 2022 for the exclusive purchase and distribution of engines around the world, with the exception of China (including Hong Kong, Macao and Taiwan), within the forklift and marine markets.

The agreement included minimum purchase commitments which has no financial impact or monetary penalties for not meeting minimum purchases.

Income tax expense (benefit) was as follows:

(in thousands) For the Year Ended December 31,

Current tax benefit

Current tax expense (benefit)

Federal $ 204 $ ( 418 )

State ( 89 ) ( 17 )

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

Deferred tax expense (benefit)

Total current tax expense (benefit) $ 115 $ ( 435 )

Deferred tax expense

Federal $ ( 71 ) $ ( 106 )

State 260 135

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.

Total deferred tax expense 189 29

Total tax expense (benefit) $ 304 $ ( 406 )

The Company received net cash refunds for income taxes of $ 3.0 million in 2022 and $ 0.1 million in 2021.

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

1 unchanged sentence

Amount Percent Amount Percent

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

Income tax expense (benefit) at federal statutory rate $ 2,430 21.0 % $ ( 10,264 ) 21.0 %

State income tax, net of federal benefit 140 1.2 % ( 2,185 ) 4.5 %

Other permanent differences

1 — % ( 185 ) 0.7 %

Research and development tax credits

4 unchanged sentences

79 0.7 % 157 ( 0.3 ) %

Impact of CARES Act

— — % ( 1,390 ) 5.2 %

Change in valuation allowance

5 unchanged sentences

216 1.9 % ( 12 ) — %

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.

Income tax expense (benefit) $ 304 2.6 % $ ( 406 ) 0.8 %

For the year ended December 31, 2022, the Company recognized pretax income of $ 11.6 million.

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

1 unchanged sentence

In general, these credits are general business credits and may be carried forward up to 20 years to be offset against future taxable income.

The income tax expense for 2022 is primarily related to the R&D, state credit and valuation allowance against the deferred tax assets.

Significant components of deferred income tax assets and liabilities consisted of the following:

2 unchanged sentences

Net operating loss carryforwards $ 25,541 $ 30,967

Capital loss carryforwards 194 —

Research and development credits 5,565 5,168

18 unchanged sentences

ROU operating lease asset $ ( 2,612 ) $ ( 3,537 )

Intangible amortization ( 110 ) —

Tax depreciation in excess of book depreciation on property, plant and equipment ( 2,291 ) ( 2,579 )

8 unchanged sentences

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, 2022 and 2021.

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.

The Company’s net deferred tax liability of $ 1.3 million and $ 1.0 million as of December 31, 2022 and 2021, 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 that are not indefinite-lived .

As of December 31, 2022, the Company has, on a tax-effected basis, $ 9.2 million in R&D and state tax credit carryforwards which begin to expire in 2023.

6 unchanged sentences

Additions based on tax positions related to the current year

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

Additions for tax positions of prior years 5 56

Reduction for tax positions of prior years ( 7 ) $ ( 1 )

Balance at end of year

5 unchanged sentences

As of December 31, 2022, the Company believes the liability for unrecognized tax benefits, excluding interest and penalties, could decrease by an immaterial amount in 2023 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.

Due to the various jurisdictions in which the Company files tax returns, it is possible that there could be other changes in the amount of unrecognized tax benefits in 2023, but the amount cannot be estimated.

Unrecognized tax benefits that, if recognized, would affect the effective tax rate are not expected to be material.

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:

5 unchanged sentences

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.

Inflation Reduction Act

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law.

The IRA contains several revisions to the Internal Revenue Code, including a 15% corporate minimum income tax and a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022.

While these tax law changes have no immediate effect and are not expected to have a material adverse effect on our results of operations going forward, the Company will continue to evaluate its impact as further information becomes available.

Stockholders’ Equity (Deficit)

26 unchanged sentences

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.

Stock-based compensation expense is primarily recorded in 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.

2 unchanged sentences

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 Company has never declared or paid a cash dividend on its Common Stock.

The following table represents stock-based compensation expense and the related income tax benefits:

2 unchanged sentences

Income tax benefit $ 87 $ 74

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

The Company granted 159,217 SAR awards in 2022, and did not grant SAR awards in 2021.

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

2 unchanged sentences

Exercise price $ 3.00 $ —

Risk-free interest rate — % 1.8 %

Estimated price volatility — % 71.9 %

Range of risk-free interest rates 2.1 % - 3.3 %

Weighted-average volatility 88.4 % — %

Range of volatilities 84.6 % - 89.0 %

Expected term 5.00 years 0.00 years

Dividend yield — % — %

Weighted average fair value $ — $ 3.28

Weighted-average grant date fair value $ 1.40 $ —

SAR activity consisted of the following:

15 unchanged sentences

Unrecognized compensation expense related to SARs as of December 31, 2022 and 2021 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.

As of December 31, 2022, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 2.03 years.

Restricted Stock Awards

3 unchanged sentences

( 1,503 ) 36.00

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

( 40,886 ) 9.70

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

( 26,623 ) 8.83

4 unchanged sentences

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.

The Company computes basic earnings (loss) per share by dividing net income (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.

3 unchanged sentences

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

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

Shares used in computing net loss per share

Net income (loss) – basic and diluted $ 11,270 $ ( 48,472 )

Shares used in computing net income (loss) per share

Weighted-average common shares outstanding - basic

3 unchanged sentences

22,948 22,908

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 )

Earnings (Loss) per common share

Earnings (Loss) per share of common stock – basic $ 0.49 $ ( 2.12 )

Earnings (Loss) per share of common stock – diluted $ 0.49 $ ( 2.12 )

The aggregate number of shares excluded from the diluted earnings (loss) per share calculations because they would have been anti-dilutive were 0.1 million and 0.2 million shares in 2022 and 2021, respectively.

For the twelve months ended December 31, 2022 and 2021, SARs and RSAs were not included in the diluted earnings (loss) per share calculations as they would have been anti-dilutive (1) due to the losses reported in the Consolidated Statements of Operations or (2) the Company’s average stock price was less than the exercise price of the SARs or the grant price of the RSAs.

Related Party Transactions

Weichai Transactions

Weichai Transactions for information regarding the Weichai SPA, Shareholder’s Loan Agreement and Collaboration Agreement .

Weichai Transactions for information regarding the Weichai SPA, Shareholder’s Loan Agreements and Collaboration Agreement .

Transactions with Joint Ventures

9 unchanged sentences

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.

In 2015, the Company and Doosan 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.

3 unchanged sentences

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.

The Company had no income or expense from the investment for the twelve months December 31, 2022 as a result of the liquidation of the Joint venture in 2021 and an expense of less than $ 0.1 million for the twelve months ended December 31, 2021.

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

Other Related Party Transactions

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

Subsequent Events

In March 2023, the Company amended its uncommitted senior secured revolving credit agreement with Standard Chartered and two Shareholder’s Loan agreements with Weichai which extends maturity dates to 2024.

An amendment also changed approximately $ 4.8 million short-term classification to long-term classification which has been reflected in the consolidated balance sheet for the year ended December 31, 2022.

In addition, the Company amended the Weichai Collaboration Arrangement which extends the maturity date to March 2026.

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

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data