POWER SOLUTIONS INTERNATIONAL, INC. 10-K

Item 8. Financial Statements and Supplementary Data. The following consolidated financial statements are included in Item 8 of this Form 10-K. Index to Consolidated Financial Statements Page Consolidated Financial Statements of Power Solutions International, Inc. Report of Independent Registered Public Accounting Firm ( BDO USA, LLP , Chicago, IL , PCAOB ID# 243 ) 38 Consolidated Balance Sheets as of December 31, 2022 and 2021 40 Consolidated Statements of Operations for 2022 and 2021 41 Consolidated Statements of Stockholders’ Equity (Deficit) for 2022 and 2021 42 Consolidated Statements of Cash Flows for 2022 and 2021 43 Notes to Consolidated Financial Statements 44 37 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors Power Solutions International, Inc. Wood Dale, Illinois Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Power Solutions International, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern Uncertainty The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, significant uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Company’s debt arrangements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Accrued Product Warranty As more fully described in Note 1 to the consolidated financial statements, the Company’s consolidated accrued product warranty balance was $21.6 million as of December 31, 2022. The Company offers a standard limited warranty on the workmanship of its products. The Company estimates and records a liability and related charges to income for its warranty program at the time products are sold to customers. These estimates are established using historical warranty claims information including failure rates, repair costs and timing of failures. New product launches require a greater use of judgment in developing estimates, until historical experience becomes available. Previous estimates are adjusted as actual warranty claims data becomes available. 38 We identified the accrued product warranty liability as a critical audit matter. Auditing management’s estimates and assumptions to determine the accrued product warranty liability involved especially challenging auditor judgment due to i) the significant judgment by management when determining the accrued product warranty liability estimate; ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the significant assumptions, specifically the 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: a. 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. b. Testing the completeness and accuracy of the underlying historical warranty claims information used to estimate future warranty claims. c. Testing the mathematical accuracy of management’s calculation of the product warranty. /s/ BDO USA, LLP We have served as the Company’s auditor since 2018. Chicago, Illinois April 14, 2023 39 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par values) As of December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 24,296 $ 6,255 Restricted cash 3,604 3,477 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 Income tax receivable 555 4,276 Inventories, net 120,560 142,192 Prepaid expenses and other current assets 16,364 8,918 Total current assets 255,273 230,228 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 Goodwill 29,835 29,835 Other noncurrent assets 2,019 1,802 TOTAL ASSETS $ 319,913 $ 300,538 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: 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 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 (from related parties $ 4,800 and $ 25,000 as of December 31, 2022 and December 31, 2021, respectively) 5,029 25,376 Finance lease liability, long-term 170 260 Operating lease liability, long-term 10,971 10,304 Noncurrent contract liabilities 3,199 3,330 Other noncurrent liabilities 10,371 18,964 TOTAL LIABILITIES $ 350,285 $ 342,561 STOCKHOLDERS’ DEFICIT Preferred stock – $ 0.001 par value. Shares authorized: 5,000 . No shares issued and outstanding at all dates. $ — $ — Common stock – $ 0.001 par value; 50,000 shares authorized; 23,117 and 23,117 shares issued; 22,951 and 22,926 shares outstanding at December 31, 2022 and December 31, 2021, respectively 23 23 Additional paid-in capital 157,673 157,436 Accumulated deficit ( 187,096 ) ( 198,366 ) Treasury stock, at cost, 166 and 191 shares at December 31, 2022 and December 31, 2021, respectively ( 972 ) ( 1,116 ) TOTAL STOCKHOLDERS’ DEFICIT ( 30,372 ) ( 42,023 ) TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $ 319,913 $ 300,538 See Notes to Consolidated Financial Statements 40 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) For the Year Ended December 31, 2022 2021 Net sales (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 Operating expenses: Research, development and engineering expenses 18,896 22,435 Selling, general and administrative expenses 42,941 57,871 Amortization of intangible assets 2,124 2,535 Total operating expenses 63,961 82,841 Operating income (loss) 24,602 ( 41,570 ) Other expense, net: Interest expense 13,028 7,307 Other expense, net — 1 Total other expense, net 13,028 7,308 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: Basic 22,938 22,908 Diluted 22,948 22,908 Earnings (Loss) per common share: Basic $ 0.49 $ ( 2.12 ) Diluted $ 0.49 $ ( 2.12 ) See Notes to Consolidated Financial Statements 41 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands) Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock Total Stockholders’ Equity (Deficit) Balance at December 31, 2020 $ 23 $ 157,262 $ ( 149,894 ) $ ( 1,294 ) $ 6,097 Net loss — — ( 48,472 ) — ( 48,472 ) Stock-based compensation expense — 174 — 220 394 Common stock issued for stock-based awards, net — — — ( 42 ) ( 42 ) Balance at December 31, 2021 $ 23 $ 157,436 $ ( 198,366 ) $ ( 1,116 ) $ ( 42,023 ) Net income — — 11,270 — 11,270 Stock-based compensation expense — 237 — 148 385 Common stock issued for stock-based awards, net — — — ( 4 ) ( 4 ) Balance at December 31, 2022 $ 23 $ 157,673 $ ( 187,096 ) $ ( 972 ) $ ( 30,372 ) See Notes to Consolidated Financial Statements 42 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Year Ended December 31, 2022 2021 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 Depreciation 4,566 4,871 Stock-based compensation expense 385 394 Amortization of financing fees 2,178 2,819 Deferred income taxes 189 29 Other adjustments, net 1,746 941 Changes in operating assets and liabilities: Accounts receivable ( 24,796 ) ( 4,952 ) Inventory 20,426 ( 34,840 ) 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 ) Other noncurrent liabilities ( 11,506 ) ( 4,046 ) Net cash used in operating activities ( 8,845 ) ( 61,478 ) Cash (used in) provided by investing activities Capital expenditures ( 1,354 ) ( 1,968 ) Return of investment in joint venture — 2,263 Other investing activities, net — 103 Net cash (used in) provided by investing activities ( 1,354 ) 398 Cash provided by financing activities Repayments of long-term debt and lease liabilities ( 256 ) ( 380 ) Proceeds from debt financings 31,582 51,309 Repayment of short-term financings ( 1,168 ) ( 1,180 ) Payments of deferred financing costs ( 1,787 ) ( 3,162 ) Other financing activities, net ( 4 ) ( 42 ) Net cash provided by financing activities 28,367 46,545 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 Cash, cash equivalents, and restricted cash at end of the year $ 27,900 $ 9,732 (in thousands) As of December 31, 2022 2021 Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets Cash and cash equivalents 24,296 6,255 Restricted cash 3,604 3,477 Total cash, cash equivalents, and restricted cash $ 27,900 $ 9,732 See Notes to Consolidated Financial Statements 43 POWER SOLUTIONS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies and Other Information Nature of Business Operations Power Solutions International, Inc. (“Power Solutions,” “PSI” or the “Company”), a Delaware corporation, is a global producer and distributor of a broad range of high-performance, certified, low-emission power systems, including alternative-fueled power systems for original equipment manufacturers (“OEMs”) of off-highway industrial equipment and certain on-road vehicles and large custom-engineered integrated electrical power generation systems. The Company’s customers include large, industry-leading and multinational organizations. The Company’s products and services are sold predominantly to customers throughout North America as well as to customers located throughout the Pacific Rim and Europe. The Company’s power systems are highly engineered, comprehensive systems which, through the Company’s technologically sophisticated development and manufacturing processes, including its in-house design, prototyping, testing and engineering capabilities and its analysis and determination of the specific components to be integrated into a given power system (driven in large part by emission standards and cost considerations), allow the Company to provide its customers with power systems customized to meet specific OEM application requirements, other technical customers’ specifications and requirements imposed by environmental regulatory bodies. The Company’s power system configurations range from a basic engine integrated with appropriate fuel system components to completely packaged power systems that include any combination of cooling systems, electronic systems, air intake systems, fuel systems, housings, power takeoff systems, exhaust systems, hydraulic systems, enclosures, brackets, hoses, tubes and other assembled componentry. The Company also designs and manufactures large, custom-engineered integrated electrical power generation systems for both standby and prime power applications. The Company purchases engines from third-party suppliers and produces internally designed engines, all of which are then integrated into its power systems. Of the other components that the Company integrates into its power systems, a substantial portion consist of internally designed components and components for which it coordinates significant design efforts with third-party suppliers, with the remainder consisting largely of parts that are sourced off-the-shelf from third-party suppliers. Some of the key components (including purchased engines) embody proprietary intellectual property of the Company’s suppliers. As a result of its design and manufacturing capabilities, the Company is able to provide its customers with a power system that can be incorporated into a customer’s specified application. In addition to the certified products described above, the Company sells diesel, gasoline and non-certified power systems and aftermarket components. Stock Ownership and Control In 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. This control could have the effect of delaying or preventing a change of control of the Company or changes in management and will make the approval of certain transactions impractical without the support of Weichai. Weichai also entered into an Investor Rights Agreement (the “Rights Agreement”) with the Company upon execution of the SPA. The Rights Agreement provides Weichai with representation on the Company’s Board and management representation rights. Weichai currently has four representatives on the Board, which constitutes the majority of the directors serving on the Board. According to the Rights Agreement, during any period when the Company is a “controlled company” within the meaning of the NASDAQ Stock Market (“NASDAQ”) Listing Rules, it will take such measures as to avail itself of the “controlled company” exemptions available under Rule 5615 of the NASDAQ Listing Rules of Rules 5605(b), (d) and (e). Going Concern Considerations 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. See Note 6. 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 44 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. These consolidated financial statements do not include any adjustments that might result from the outcome of the Company’s efforts to address these issues. Furthermore, if the Company cannot raise capital on acceptable terms, it may not, among other things, be able to do the following: • continue to expand the Company’s research and product investments and sales and marketing organization; • continue to fund and expand operations both organically and through acquisitions; and • respond to competitive pressures or unanticipated working capital requirements. 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 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 The consolidated financial statements include the accounts of Power Solutions International, Inc. and its wholly-owned subsidiaries. The Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and include the assets, liabilities, sales and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries in which the Company exercises control. All intercompany balances and transactions have been eliminated in consolidation. The Company operates as one business and geographic operating segment. Operating segments are defined as components of a business that can earn revenues and incur expenses for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker (“CODM”). The Company’s CODM is its principal executive officer, who decides how to allocate resources and assess performance. A single management team reports to the CODM, who manages the entire business. The Company’s CODM reviews consolidated statements of operations to make decisions, allocate resources and assess performance, and the CODM does not evaluate the profit or loss from any separate geography or product line. Concentrations The following table presents customers individually accounting for more than 10% of the Company’s net sales: For the Year Ended December 31, 2022 2021 Customer A 19 % 17 % Customer B ** 21 % 45 The following table presents customers individually accounting for more than 10% of the Company’s trade accounts receivable: As of December 31, 2022 2021 Customer A 30 % 24 % The following table presents suppliers individually accounting for more than 10% of the Company’s purchases: For the Year Ended December 31, 2022 2021 Supplier B ** 12 % Supplier C 10 % ** ** Less than 10% of the total Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions include the valuation of allowances for uncollectible receivables, inventory reserves, warranty reserves, stock-based compensation, evaluation of goodwill, other intangibles, property, plant and equipment for impairment, and determination of useful lives of long-lived assets. Actual results could materially differ from those estimates. Cash and Cash Equivalents Cash equivalents consist of short-term, highly liquid investments that have original maturities of three months or less from the date of purchase. Such investments are stated at cost, which approximates fair value. Restricted Cash 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 R&D expenses are expensed when incurred. R&D expenses consist primarily of wages, materials, testing and consulting related to the development of new engines, parts and applications. These costs were $ 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. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be settled or realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company records net deferred tax assets to the extent that it believes these assets will more likely than not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. The Company records uncertain tax positions in accordance with accounting guidance, on the basis of a two-step process whereby (i) it determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such 46 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. Accounts Receivable and Allowance for Doubtful Accounts Trade accounts receivable represent amounts billed to customers and not yet collected. Trade accounts receivable are recorded at the invoiced amount, which approximates net recoverable value, and generally do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable and is established through a charge to selling, general and administrative expenses. The allowance is primarily determined based on historical collection experience and reviews of customer creditworthiness. Trade accounts receivable and the allowance for doubtful accounts are reviewed on a regular basis. When necessary, an allowance for the full amount of specific accounts deemed uncollectible is recorded. Accounts receivable losses are deducted from the allowance and the account balance is written off when the customer receivable is deemed uncollectible. Recoveries of previously written off balances are recognized when received. An allowance associated with anticipated future sales returns is also included in the allowance for doubtful accounts. Inventories The Company’s inventories consist primarily of engines and parts. Engines are valued at the lower of cost plus estimated freight-in or net realizable value. Parts are valued at the lower of cost or net realizable value. Net realizable value approximates replacement cost. Cost is principally determined using the first-in, first-out method and includes material, labor and manufacturing overhead. It is the Company’s policy to review inventories on a continuing basis for obsolete, excess and slow-moving items and to record valuation adjustments for such items in order to eliminate non-recoverable costs from inventory. Valuation adjustments are recorded in an inventory reserve account and reduce the cost basis of the inventory in the period in which the reduced valuation is determined. Inventory reserves are established based on quantities on hand, usage and sales history, customer orders, projected demand and utilization within a current or future power system. Specific analysis of individual items or groups of items is performed based on these same criteria, as well as on changes in market conditions or any other identified conditions. Inventories consist of the following: (in thousands) As of December 31, Inventories 2022 2021 Raw materials $ 101,566 $ 120,130 Work in process 3,073 8,923 Finished goods 19,825 16,509 Total inventories 124,464 145,562 Inventory allowance ( 3,904 ) ( 3,370 ) Inventories, net $ 120,560 $ 142,192 Activity in the Company’s inventory allowance was as follows: (in thousands) For the Year Ended December 31, Inventory Allowance 2022 2021 Balance at beginning of period $ 3,370 $ 3,328 Charged to expense 1,159 1,035 Write-offs ( 625 ) ( 993 ) Balance at end of period $ 3,904 $ 3,370 Property, Plant and Equipment Property, plant and equipment is carried at cost and presented net of accumulated depreciation and impairments. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Property, plant and equipment is evaluated periodically to determine if an adjustment to depreciable lives is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets. 47 Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. Estimated useful lives by each type of asset category are as follows: Years Buildings Up to 39 Leasehold improvements Lesser of (i) expected useful life of improvement or (ii) life of lease (including likely extension thereof) Machinery and equipment 1 to 10 Intangible Assets The Company’s intangible assets include customer relationships, developed technology, trade names and trademarks. Intangible assets are amortized on an accelerated basis over a period of time that approximates the pattern over which the Company expects to gain the estimated economic benefits, and such period generally ranges between three years and 15 years. Impairment of Long-Lived Assets The Company assesses potential impairments to its long-lived assets or asset groups, excluding goodwill which is separately tested for impairment, whenever events indicate that the carrying amount of such assets may not be recoverable. Long-lived assets are evaluated for impairment by comparing the carrying value of the asset or asset group with the estimated future net undiscounted cash flows expected to result from the use of the asset or asset group, including cash flows from disposition. If the future net undiscounted cash flows are less than the carrying value, an impairment loss is calculated. An impairment loss is determined by the amount that the asset’s or asset group’s carrying value exceeds its estimated fair value. Estimated fair value is generally measured by discounting estimated future cash flows. If an impairment loss is recognized, the adjusted balance becomes the new cost basis and is depreciated (amortized) over the remaining useful life. The Company also periodically reassesses the useful lives of its long-lived assets due to advances and changes in technologies. Goodwill Goodwill rep resents the excess of the cost of an acquired business over the amounts assigned to the net acquired assets. Goodwill is not amortized but is tested for impairment at the reporting unit level, on an annual basis or more frequently, if events occur or circumstances change indicating potential impairment. The Company annually tests goodwill for impairment on October 1. In evaluating goodwill for impairment, the Company 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. If the Company bypasses the qualitative assessment, or if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs a quantitative goodwill impairment test to identify potential goodwill impairment and measures the amount of goodwill impairment it will recognize, if any. In the quantitative goodwill impairment test, the Company compares the estimated fair value of the reporting unit with its related carrying value. If the estimated fair value exceeds the carrying amount, no further analysis is needed. If, however, the reporting unit’s estimated fair value is less than its carrying amount, the Company records an impairment for the difference between the estimated fair value and the carrying value. The Company calculates its estimated fair value using the income and market approaches when feasible, or an asset approach when neither the income nor the market approach has sufficient data. For the income approach, a discounted cash flow method, the Company uses internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses and related cash flows based on assumed long-term growth rates and demand trends, expected future investments to grow new units, and estimated discount rates. The Company based these assumptions on its historical data and experience, industry projections, and micro and macro general economic condition projections and expectations. The market approach, also called the Guideline Public Company Approach, compares the value of an entity to similar publicly traded companies. The asset approach estimates the selling price the unit could achieve under assumed market conditions. During the 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. 48 Other Accrued Liabilities Other accrued liabilities consisted of the following: (in thousands) As of December 31, Other Accrued Liabilities 2022 2021 Accrued product warranty $ 13,037 $ 15,830 Litigation reserves * 2,102 894 Contract liabilities 2,256 1,819 Accrued compensation and benefits 7,299 4,397 Accrued interest expense 5,257 625 Other 4,158 7,258 Total $ 34,109 $ 30,823 * As of December 31, 2021 and 2022, litigation reserves related to various ongoing legal matters including associated legal fees. Warranty Costs The Company offers a standard limited warranty on the workmanship of its products that in most cases covers defects for a defined period. Warranties for certified emission products are mandated by the U.S. Environmental Protection Agency (the “EPA”) and / or the California Air Resources Board (the “CARB”) and are longer than the Company’s standard warranty on certain emission-related products. The Company’s products also carry limited warranties from suppliers. The Company’s warranties generally apply to engines fully manufactured by the Company and to the modifications the Company makes to supplier base products. Costs related to supplier warranty claims are generally borne by the supplier and passed through to the end customer. Warranty estimates are based on historical experience and represent the projected cost associated with the product. A liability and related expense are recognized at the time products are sold. The Company adjusts estimates when it is determined that actual costs may differ from initial or previous estimates. The Company’s warranty liability is generally affected by failure rates, repair costs and the timing of failures. Future events and circumstances related to these factors could materially change the estimates and require adjustments to the warranty liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available. The Company records adjustments to preexisting warranties for changes in its estimate of warranty costs for products sold in prior fiscal years in the period in which new information is received and the information indicates that actual costs may differ from the Company’s initial or previous estimates. Such adjustments typically occur when claims experience deviates from historic and expected trends. When the Company identifies cost effective opportunities to address issues in products sold or corrective actions for safety issues, it initiates product recalls or field campaigns. As a result of the uncertainty surrounding the nature and frequency of product recalls and field campaigns, the liability for such actions is generally recorded when the Company commits to a product recall or field campaign. In each subsequent quarter after a recall or field campaign is initiated, the recorded warranty liability balance is analyzed, reviewed and adjusted, if necessary, to reflect any changes in the anticipated average cost of repair or number of repairs to be completed prospectively. When collection is reasonably assured, the Company also estimates the amount of warranty claim recoveries to be received from its suppliers. Warranty costs and recoveries are included in Cost of sales in the Consolidated Statements of Operations. As of December 31, 2022, included in accounts receivable is approximately $ 1.0 million of reimbursements of warranty costs due from a significant supplier. 49 Accrued product warranty activities are presented below: (in thousands) For the Year Ended December 31, Accrued Product Warranty 2022 2021 Balance at beginning of year $ 32,948 $ 31,542 Current year provision * 6,258 18,242 Changes in estimates for preexisting warranties ** 4,576 9,397 Payments made during the period ( 22,232 ) ( 26,233 ) Balance at end of year 21,550 32,948 Less: Current portion 13,037 15,830 Noncurrent accrued product warranty $ 8,513 $ 17,118 * 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. ** 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 See Note 2. Revenue for additional information the Company’s policy related to revenue recognition. Recently Issued Accounting Pronouncements – Adopted In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting , which provided optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendment allows entities to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. The guidance was effective upon issuance and expires after December 31, 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) 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. Note 2. Revenue Revenue Recognition The Company determines the amount of revenue to be recognized through the following steps: • identification of the contract, or contracts with a customer; • identification of the performance obligations in the contract; • determination of the transaction price; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue when, or as, the Company satisfies the performance obligations. Revenue for the Company is generated from contracts that may include a single performance obligation (generally, a single type of engine) or multiple performance obligations (which may include an engine with aftermarket parts, different types of engines, 50 etc.). A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. Revenue is measured at the transaction price which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised goods or services to the customer. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company is required to estimate the total consideration expected to be received from contracts with customers. The consideration expected to be received may be variable based on the specific terms of the contract and the Company’s past practices. For contracts with multiple performance obligations, the Company allocates the total transaction price to distinct performance obligations based on directly observable data, if available, or the Company’s best estimate of the stand-alone selling price of each distinct performance obligation. The primary method used to estimate stand-alone selling price is the cost plus a margin approach. The Company applies significant judgment in order to identify and determine the number of performance obligations, determine the total transaction price, allocate the transaction price to each performance obligation, and determine the appropriate timing of revenue recognition. Taxes collected from customers and remitted to governmental authorities are presented on a net basis; that is, such taxes are excluded from revenues. The Company’s payment terms are generally 60 days or less and its sales arrangements do not contain any significant financing components. Timing of revenue recognition. The Company recognizes revenue related to performance obligations in its contracts with customers when control passes to the customer. Control passes to the customer when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. For the majority of the Company’s products, revenue is recognized at a point in time when the products are shipped or delivered to the customer based on the shipping terms as that is the point in time when control passes to the customer. For the years ended December 31, 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. 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. The Company believes labor hours incurred relative to total estimated labor hours at completion faithfully depicts the transfer of control to the customer. The Company recognizes revenue related to extended warranty programs based on the passage of time over the extended warranty period. For 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. The Company accounts for shipping and handling costs as fulfillment costs which are recorded in Cost of sales in the Consolidated Statements of Operations. This includes shipping and handling costs incurred after control of the asset has transferred to the customer as the Company has elected the practical expedient in ASC 606. Principal vs. agent considerations. For transactions that involve more than one party when providing goods or services to a customer, the Company determines whether it is the principal or agent in these transactions by evaluating the nature of its promise to the customer. The analysis of whether the Company is a principal or an agent in a transaction is performed for each good or services provided to the customer. The Company determines whether it controls the good or service before it is transferred to the customer by considering the following factors: a. Whether the Company is primarily responsible for fulfilling the promise to provide the specified good or service. b. Whether the Company has inventory risk before the specified good or service has been transferred to the customer or after transfer of control to the customer. c. Whether the Company has discretion in establishing the price for the specified good or service. If the Company determines that it is the principal in the transaction, it recognizes revenues at the gross transaction price for the good or service. If the Company determines that is an agent in the transaction, it recognizes revenue at the net amount of the transaction price. The Company 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 51 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 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 . Variable consideration primarily includes rebates and discounts. The Company estimates the projected amount of rebates and discounts based on current assumptions, customer-specific information and historical experience. Variable consideration is recorded as a reduction of revenue to the extent that it is probable that there will not be significant changes to the Company’s estimate of variable consideration when any uncertainties are settled. Costs to obtain and fulfill a contract. The Company has elected the practical expedient to recognize incremental costs to obtain a contract (primarily commissions) as expense when incurred since the amortization period of the asset that the Company otherwise would have recognized is one year or less. Disaggregation of Revenue The following table summarizes net sales by end market: (in thousands) For the Year Ended December 31, End Market 2022 2021 Power Systems $ 179,491 $ 123,132 Industrial 224,669 153,289 Transportation 77,173 179,834 Total $ 481,333 $ 456,255 The following table summarizes net sales by geographic area: (in thousands) For the Year Ended December 31, Geographic Area 2022 2021 United States $ 349,488 $ 406,077 North America (outside of United States) 16,437 8,616 Pacific Rim 80,681 25,457 Europe 18,452 7,457 Other 16,275 8,648 Total $ 481,333 $ 456,255 Contract Balances Most of the Company’s contracts are for a period of less than one year; however, certain long-term manufacturing and extended warranty contracts extend beyond one year. The timing of revenue recognition may differ from the time of invoicing to customers and these timing differences result in contract assets, or contract liabilities on the Company’s Consolidated Balance Sheet. Contract assets include amounts related to the contractual right to consideration for completed performance when the right to consideration is conditional. The Company records contract liabilities when cash payments are received or due in advance of performance. Contract assets and contract liabilities are recognized at the contract level. (in thousands) As of December 31, 2022 2021 Short-term contract assets (included in Prepaid expenses and other current assets ) $ 3,620 $ 2,707 Short-term contract liabilities (included in Other accrued liabilities ) ( 2,256 ) ( 1,819 ) Long-term contract liabilities (included in Noncurrent contract liabilities ) ( 3,199 ) ( 3,330 ) Net contract liabilities $ ( 1,835 ) $ ( 2,442 ) 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 52 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 The Company has elected the practical expedient to not disclose remaining performance obligations that have expected original durations of one year or less. For performance obligations that extend beyond one year, the Company had $ 4.6 million of remaining performance obligations as of December 31, 2022 primarily related to a long-term manufacturing contract with a customer and extended warranties. The Company expects to recognize revenue related to these remaining performance obligations of approximately $ 1.4 million in 2023, $ 1.0 million in 2024, $ 0.5 million in 2025, $ 0.2 million in 2026, $ 1.0 million in 2027 and $ 0.5 million in 2028 and beyond. Note 3. Weichai Transactions Weichai Shareholder’s Loan Agreements 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. Debt. Weichai Collaboration Arrangement and Other Related Party Transactions The Company and Weichai executed a strategic collaboration agreement (the “Collaboration Agreement”) on March 20, 2017, in order to achieve their respective strategic objectives and enhance the strategic cooperation alliance to share experiences, expertise and resources. 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 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. 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. Note 4. Property, Plant and Equipment Property, plant and equipment by type were as follows: (in thousands) As of December 31, Property, Plant and Equipment 2022 2021 Leasehold improvements $ 7,107 $ 7,107 Machinery and equipment 45,747 44,358 Construction in progress 467 1,125 Total property, plant and equipment, at cost 53,321 52,590 Accumulated depreciation ( 39,477 ) ( 35,246 ) Property, plant and equipment, net $ 13,844 $ 17,344 Note 5. Goodwill and Other Intangibles 53 Goodwill The carrying amount of goodwill at both December 31, 2022 and 2021 was $ 29.8 million. Other Intangible Assets Components of intangible assets are as follows: (in thousands) As of December 31, 2022 Gross Carrying Value Accumulated Amortization Net Book Value Customer relationships $ 34,940 $ ( 29,527 ) $ 5,413 Developed technology 700 ( 700 ) — Trade names and trademarks 1,700 ( 1,453 ) 247 Total $ 37,340 $ ( 31,680 ) $ 5,660 (in thousands) As of December 31, 2021 Gross Carrying Value Accumulated Amortization Net Book Value Customer relationships $ 34,940 $ ( 27,514 ) $ 7,426 Developed technology 700 ( 680 ) 20 Trade names and trademarks 1,700 ( 1,362 ) 338 Total $ 37,340 $ ( 29,556 ) $ 7,784 Estimated future amortization expense for intangible assets as of December 31, 2022 is as follows: (in thousands) Year Ending December 31, Estimated Amortization 2023 $ 1,746 2024 1,459 2025 1,219 2026 997 2027 230 2028 and beyond 9 Total $ 5,660 Note 6. Debt 54 The Company’s outstanding debt consisted of the following: (in thousands) As of December 31, 2022 2021 Short-term financing: Revolving credit facility $ 130,000 $ 130,000 Other short-term financing 75,614 25,000 Total Short-Term Debt $ 205,614 $ 155,000 Long-term debt: Long-term financing $ 4,800 $ 25,000 Finance leases and other debt $ 619 $ 890 Total long-term debt and finance leases 5,419 25,890 Less: Current maturities of long-term debt and finance leases 220 254 Long-term debt $ 5,199 $ 25,636 * 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, 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 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. 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 %. The third 55 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. 56 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, 2022 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. Summary of Significant Accounting Policies and Other Information for further discussion of the Company’s going concern considerations. The below schedule of remaining maturities of long-term debt excludes finance leases (refer to Item 8., Note 7. Leases ). (in thousands) Year Ending December 31, Maturities of Long-Term Debt 2024 4,953 2025 67 2026 9 Total $ 5,029 Note 7. Leases Lease Policies The Company determines if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term while lease liabilities represent the obligation to make lease payments arising from the lease. All leases with an expected term greater than twelve months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the lease commencement date to determine the present value of the lease payments unless the implicit rate in the lease is readily determinable. The incremental borrowing rate is determined considering factors such as the lease term, the Company’s credit standing and the economic environment of the location of the lease. The lease term includes all non-cancellable periods and may include options to extend (or to not terminate) the lease when it is reasonably certain that the Company will exercise the option. Leases that have a term of 12 months or less at the commencement date are expensed on a straight-line basis over the lease term and do not result in the recognition of a ROU asset or lease liability. The Company classifies leases as finance leases when (i) there is a transfer of ownership of the underlying asset by the end of the lease term, (ii) the lease contains an option to purchase the asset that the Company is reasonably certain will be exercised, (iii) the lease term is for the majority of the remaining economic life of the asset, or (iv) the present value of the lease payments and any residual value guarantee equals or substantially exceeds the fair value of the asset. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense for finance leases is generally front-loaded as the finance lease ROU asset is depreciated on a straight-line basis, but interest expense on the lease liability is recognized using the interest method which results in more expense during the early years of the lease. Variable lease payments are expensed in the period in which the obligation for those payments is incurred. The Company has elected to combine lease and non-lease components, such as fixed maintenance costs, as a single lease component in calculating ROU assets and lease liabilities for all classes of leased assets. 57 Leases The Company has obligations under lease arrangements primarily for facilities, equipment and vehicles. 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, 2022 2021 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: (in thousands) For the Year Ended December 31, 2022 2021 Operating lease cost $ 4,706 $ 4,855 Finance lease cost: Amortization of ROU asset 148 192 Interest expense 21 33 Short-term lease cost 100 267 Variable lease cost 1,782 1,276 Sublease income ( 1,062 ) — Total lease cost $ 5,695 $ 6,623 The following table presents supplemental cash flow information related to leases: (in thousands) For the Year Ended December 31, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows paid for operating leases $ 4,859 $ 4,959 Operating cash flows paid for interest portion of finance leases 21 33 Financing cash flows paid for principal portion of finance leases 157 194 Right-of-use assets obtained in exchange for lease obligations Operating leases 3,540 137 Finance leases — — 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. 58 The following table presents supplemental balance sheet information related to leases: (in thousands) As of December 31, 2022 2021 Operating lease ROU assets, net 1 $ 13,282 $ 13,545 Operating lease liabilities, current 2,894 3,978 Operating lease liabilities, non-current 10,971 10,304 Total operating lease liabilities $ 13,865 $ 14,282 Finance lease ROU assets, net 1 $ 225 $ 364 Finance lease liabilities, current 90 147 Finance lease liabilities, non-current 170 260 Total finance lease liabilities $ 260 $ 407 1. Included in Other noncurrent assets for operating leases and Property, plant and equipment , net for finance leases on the Consolidated Balance Sheets. The following table presents maturity analysis of lease liabilities as of December 31, 2022: (in thousands) Year Ending December 31, Operating Leases Finance Leases 2023 $ 3,767 $ 103 2024 2,668 85 2025 2,731 82 2026 2,421 17 2027 2,413 — Thereafter 3,015 — Total undiscounted lease payments 17,015 286 Less: imputed interest 3,150 26 Total lease liabilities $ 13,865 $ 260 Note 8. Fair Value of Financial Instruments For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, the Company classifies each fair-value measurement as follows: • Level 1 – based on quoted prices in active markets for identical assets or liabilities; • Level 2 – based on other significant observable inputs for the assets or liabilities through corroborations with market data at the measurement date; and • Level 3 – based on significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date. Financial Instruments Measured at Carrying Value Current Assets Cash and cash equivalents are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments. Debt 59 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 and other financing approximates carrying value, as it consists of short-term variable rate loans. (in thousands) As of December 31, 2022 Carrying Value Fair Value Level 1 Level 2 Level 3 Revolving credit facility $ 130,000 $ — $ 130,000 $ — Other financing 75,614 — 75,614 (in thousands) As of December 31, 2021 Carrying Value Fair Value Level 1 Level 2 Level 3 Revolving credit facility $ 130,000 $ — $ 130,000 $ — Unsecured Senior Notes 50,000 — 50,000 Other Financial Assets and Liabilities In addition to the methods and assumptions used for the financial instruments discussed above, accounts receivable, net, income tax receivable, and accounts payable and certain accrued expenses are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments. Note 9. Defined Contribution Plans For the years ending December 31, 2022 and 2021, the Company incurred plan costs of $ 0.8 million. Note 10. Commitments and Contingencies Legal Contingencies The legal matters discussed below and others could result in losses, including damages, fines, civil penalties and criminal charges, which could be substantial. The Company records accruals for these contingencies to the extent the Company concludes that a loss is both probable and reasonably estimable. Regarding the matters disclosed below, unless otherwise disclosed, the Company has determined that liabilities associated with these legal matters are reasonably possible; however, unless otherwise stated, the possible loss or range of possible loss cannot be reasonably estimated. Given the nature of the litigation and investigations and the complexities involved, the Company is unable to reasonably estimate a possible loss for all such matters until the Company knows, among other factors the following: • what claims, if any, will survive dispositive motion practice; • the extent of the claims, particularly when damages are not specified or are indeterminate; • how the discovery process will affect the litigation; • the settlement posture of the other parties to the litigation; and • any other factors that may have a material effect on the litigation or investigation. However, the Company could incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on the Company’s results of operations in the period in which the amounts are accrued and/or liquidity in the period in which the amounts are paid. Securities and Exchange Commission and United States Attorney’s Office for the Northern District of Illinois Investigations In September 2020, the Company entered into agreements with the SEC and the USAO to resolve the investigations into the Company’s past revenue recognition practices. Under the settled administrative order with the SEC, the Company committed to remediate the deficiencies in its internal control over financial reporting that constituted material weaknesses identified in its 2017 Form 10-K filed in May 2019 by April 30, 2021 unless an extension was provided by the SEC. On April 12, 2021, the SEC granted the Company’s request for an extension of time until March 31, 2022 in which to comply with the requirements of 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. 60 Jerome Treadwell v. the Company In October 2018, a putative class-action complaint was filed against the Company and NOVAtime Technology, Inc. (“NOVAtime”) in the Circuit Court of Cook County, Illinois. In December 2018, NOVAtime removed the case to the U.S. District Court for the Northern District of Illinois, Eastern Division under the Class Action Fairness Act. Plaintiff has since voluntarily dismissed NOVAtime from the lawsuit without prejudice and filed an amended complaint in April 2019. The operative, amended complaint asserts violations of the Illinois Biometric Information Privacy Act (“BIPA”) in connection with employees’ use of the time clock to clock in and clock out using a finger scan and seeks statutory damages, attorneys’ fees, and injunctive and equitable relief. An aggrieved party under BIPA may recover (i) $ 1,000 per violation if the Company is found to have negligently violated BIPA or (ii) $ 5,000 per violation if the Company is found to have intentionally or recklessly violated BIPA plus reasonable attorneys’ fees. In May 2019, the Company filed its motion to dismiss the plaintiff’s amended complaint. In December 2019, the court denied the Company’s motion to dismiss. In January 2020, the Company moved for reconsideration of the court’s order denying the motion to dismiss, or in the alternative, to stay the case pending the Illinois Appellate Court’s ruling in McDonald v. Symphony Healthcare on a legal question that would be potentially dispositive in this matter. In February 2020, the court denied the Company’s motion for reconsideration, but required the parties to submit additional briefing on the Company’s motion to stay. In April 2020, the court granted the Company’s motion to stay and stayed the case pending the Illinois Appellate Court’s ruling in McDonald v. Symphony Healthcare . In October 2020, after the McDonald ruling, the court granted the parties’ joint request to continue the stay of the case f or 60 days . The court also ordered the parties to schedule a settlement conference with the Magistrate Judge in May 2021 which went forward without a settlement being reached. The stay remains in place pending further guidance from the Court. As of December 31, 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. the Company In February 2020, the Company received a demand for arbitration from Mast Powertrain, LLC (“Mast”) pursuant to a development agreement entered into in November 2011 (the “Development Agreement”). Mast claimed that it is owed more than $ 9.0 million in past royalties and other damages for products sold by the Company pursuant to the Development Agreement. The Company disputed Mast’s damages, denied that any royalties are owed to Mast, denied any liability, and counterclaimed for overpayment on invoices paid to Mast. Mast subsequently clarified its claim for past royalties owed to be approximately $ 4.5 million. In July 2021, the Company reached a settlement with Mast to resolve past claims for royalties owed for $ 1.5 million which the Company had previously recorded within Selling, general and administrative expenses in the Statement of Operations for the year-ended December 31, 2020 . 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. Gary Winemaster Litigation v. The Company In August 2021, the Company’s former Chairman of the Board and former Chief Executive Officer and President, Gary Winemaster (“Winemaster”) filed suit in the Court of Chancery of the State of Delaware against the Company and Travelers Casualty and Surety Company of America (“Travelers”) alleging the Company’s breach of its advancement obligations under Winemaster’s indemnification agreement and Travelers’ breach of the side A policy between Traveler’s and the Company of which Winemaster is a beneficiary. In his complaint, Winemaster is seeking reimbursement under his indemnification agreement in excess of $ 7.2 million of attorney’s fees plus interest incurred by Winemaster in his defense of the Department of Justice (“DOJ”) case, U.S. v. Winemaster et al. . Since the filing of the complaint, Travelers has paid approximately $ 8.8 million to Winemaster’s attorneys, Latham and Watkins, under the Company’s side A policy to settle existing outstanding attorney’s fees. 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 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. 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 lett er. 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 61 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 Under the Company’s bylaws and certain indemnification agreements, the Company has obligations to indemnify current and former officers and directors and certain current and former employees. As a result of cumulative legal fees and settlements previously paid, the Company fully exhausted its primary directors’ and officers’ insurance coverage of $ 30.0 million during the first quarter of 2020. Additional expenses currently expected to be incurred and that will occur in the future and/or liabilities that may be imposed in connection with actions against certain of the Company’s past directors and officers and certain former employees who are entitled to indemnification will be funded by the Company with its existing cash resources. The Company accrues for such costs as incurred within Selling, general and administrative expenses in the Company’s Consolidated Statements of Operations. For the year ended December 31, 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. Other Commitments At December 31, 2022, the Company had five outstanding letters of credit totaling $ 2.1 million . The letters of credit primarily serve as collateral for the Company for certain facility leases and insurance policies. As discussed in Note 1. Summary of Significant Accounting Policies and Other Information , the Company had restricted cash of $ 3.6 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. Note 11. Income Taxes Income tax expense (benefit) was as follows: (in thousands) For the Year Ended December 31, 2022 2021 Current tax expense (benefit) Federal $ 204 $ ( 418 ) State ( 89 ) ( 17 ) Total current tax expense (benefit) $ 115 $ ( 435 ) Deferred tax expense Federal $ ( 71 ) $ ( 106 ) State 260 135 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: 62 (in thousands) For the Year Ended December 31, 2022 2021 Amount Percent Amount Percent 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 — % 1 — % Research and development tax credits ( 393 ) ( 3.4 ) % ( 551 ) 1.1 % Other tax credits ( 612 ) ( 5.3 ) % 291 ( 0.6 ) % Tax reserve reassessment 79 0.7 % 157 ( 0.3 ) % Change in valuation allowance ( 497 ) ( 4.3 ) % 12,361 ( 25.3 ) % Return adjustment ( 1,147 ) ( 9.9 ) % ( 278 ) 0.6 % Stock-based compensation 87 0.7 % 74 ( 0.2 ) % Other, net 216 1.9 % ( 12 ) — % 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. The Company generates R&D tax credits as a result of its R&D activities, which reduce the Company’s effective income tax rate. In general, these credits are general business credits and may be carried forward up to 20 years to be offset against future taxable income. The income tax expense for 2022 is primarily related to the R&D, state credit and valuation allowance against the deferred tax assets. 63 Significant components of deferred income tax assets and liabilities consisted of the following: (in thousands) As of December 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 25,541 $ 30,967 Capital loss carryforwards 194 — Research and development credits 5,565 5,168 Other state credits 3,671 3,090 Inventory 2,407 2,511 Allowances and bad debts 1,195 1,146 Accrued warranty 6,048 9,492 Accrued wages and benefits 1,294 107 Other accrued expenses 5,749 4,533 Stock-based compensation 188 182 Capitalized research and development costs 4,658 160 163(j) disallowed interest 1,343 1,634 Intangible amortization — 668 Contract liabilities 1,057 1,005 Operating lease liability 2,820 3,862 Other 1,685 752 Total deferred tax assets 63,415 65,277 Valuation allowance ( 59,680 ) ( 60,177 ) Total deferred tax assets, net of valuation allowance $ 3,735 $ 5,100 Deferred tax liabilities: 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 ) Total deferred tax liabilities $ ( 5,013 ) $ ( 6,116 ) Net deferred tax liability $ ( 1,278 ) $ ( 1,016 ) The Company’s net deferred tax liability is presented as a separate line item in the Consolidated Balance Sheets. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset. The Company evaluated the need to maintain a valuation allowance for deferred tax assets based on an assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessi ng the need for a valuation allowance. As a result of this evaluation, the Company concluded that the negative evidence outweighed the positive evidence and that a full valuation allowance should be maintained against its net deferred tax assets as of December 31, 2022 and 2021. 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. The Company has $ 17.5 million and $ 8.1 million of federal and state (tax effected, net of federal tax benefit) net operating loss carryforwards that are available to offset taxable income in the future. The federal and state net operating loss carryforwards begin to expire in 2037 and 2026, respectively. 64 The change in unrecognized tax benefits excluding interest and penalties were as follows: (in thousands) For the Year Ended December 31, 2022 2021 Balance at beginning of year $ 1,588 $ 1,431 Additions based on tax positions related to the current year 74 102 Additions for tax positions of prior years 5 56 Reduction for tax positions of prior years ( 7 ) $ ( 1 ) Balance at end of year $ 1,660 $ 1,588 The Company recognizes interest and penalties related to unrecognized tax benefits in Income tax expense . As of December 31, 2022 and 2021, the amount accrued for interest and penalties was not material. The Company reflects the liability for unrecognized tax benefits as Other noncurrent liabilities in its Consolidated Balance Sheets. The amounts included in “reductions for tax positions of prior years” represent decreases in the unrecognized tax benefits relating to expiration of the statutes during each year shown. As of December 31, 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 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: Jurisdiction Open Tax Years U.S. Federal 2014 to 2022 U.S. States 2013 to 2022 Canada 2019 to 2020 The Company is currently under federal income tax audit for tax years 2014, 2015 and 2016. The Company is currently under Illinois income tax audit for tax years 2013, 2014, 2015 and 2016. 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. Note 12. Stockholders’ Equity (Deficit) Common and Treasury Stock The changes in shares of Common and Treasury Stock are as follows: (in thousands) Common Shares Issued Treasury Stock Shares Common Shares Outstanding Balance as of December 31, 2020 23,117 225 22,892 Net shares issued for stock awards — ( 34 ) 34 Balance as of December 31, 2021 23,117 191 22,926 Net shares issued for stock awards — ( 25 ) 25 Balance as of December 31, 2022 23,117 166 22,951 Preferred Stock The Company is authorized to issue 5,000,000 shares of Preferred stock, par value $ 0.001 per share. The Preferred stock may be designated into one or more series as determined by the Board. As of December 31, 2022, the Board had authorized two series of Preferred stock. At December 31, 2022 and 2021, there were no shares of Preferred stock outstanding. 65 Note 13. Stock-Based Compensation The Company has an incentive compensation plan (the “2012 Plan”), which authorizes the granting of a variety of different types of awards including, but not limited to, non-qualified stock options, incentive stock options, Stock Appreciation Rights (“SARs”), Restricted Stock Awards (“RSAs”), deferred stock and performance units to its executive officers, employees, consultants and Directors. The 2012 Plan is administered by the Compensation Committee of the Board. Under the 2012 Plan, 830,925 shares were initially made available for awards, with 700,000 additional shares added to the 2012 Plan in 2013. Forfeited shares are added back to the pool of shares available for future awards. As of December 31, 2022, the Company had 399,432 shares available for issuance of future awards. To date, the Company’s granted awards have generally been either RSAs or SARs. SAR awards entitle the recipients to receive, upon exercise, a number of shares of Common Stock equal to (i) the number of shares for which the SAR is being exercised multiplied by the value of one share of Common Stock on the date of exercise (determined as provided in the SAR award agreement), less (ii) the number of shares for which the SAR is being exercised multiplied by the applicable exercise price, divided by (iii) the value of one share of Common Stock on the date of exercise (determined as provided in the SAR award agreement). The exercised SAR is to be settled only in whole shares of Common Stock, and the value of any fractional share of Common Stock is forfeited. RSA grants represent Common Stock issued subject to forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Both SAR awards and RSA grants are time-based awards that generally vest over a 2 to 3 -year vesting schedule (except grants to members of the Board which have a 1 -year vesting schedule). SAR awards generally have a term of 10 years. Compensation expense for recipients of these time-based awards is recognized on a straight-line basis over the vesting period from the date of grant. The Company accounts for forfeitures as they occur rather than apply an estimated forfeiture rate. Stock-based compensation expense is primarily recorded 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. For all SAR award assumptions, the Company used rates on the grant date of zero-coupon government bonds with maturities over periods covering the term of the awards. The Company considered the historical volatility of its stock price over a term similar to the expected life of the awards in determining expected volatility. The expected term is the period that the awards granted are expected to remain outstanding. The Company has never declared or paid a cash dividend on its Common Stock. The following table represents stock-based compensation expense and the related income tax benefits: (in thousands) For the Year Ended December 31, 2022 2021 Stock-based compensation expense $ 385 $ 394 Income tax benefit $ 87 $ 74 SAR Awards 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: For the Year Ended December 31, 2022 2021 Market closing price of the Common Stock $ 3.00 $ — Exercise price $ 3.00 $ — 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 grant date fair value $ 1.40 $ — 66 SAR activity consisted of the following: Number of Shares under SARs Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2020 175,570 $ 8.06 7.04 $ — Granted — 4.83 — Exercised — — — Forfeited — — — Expired ( 45,050 ) 8.60 — Outstanding at December 31, 2021 130,520 7.87 6.18 — Granted 159,217 4.83 — Exercised — — — Forfeited ( 78,074 ) 5.74 — Expired ( 83,551 ) 6.58 — Outstanding at December 31, 2022 128,112 6.22 7.07 $ 52 Exercisable at December 31, 2021 111,853 $ 8.32 5.91 — Exercisable at December 31, 2022 58,217 $ 9.78 4.49 — The total fair value of SARs that vested during 2022 and 2021 w as $ 0.2 million and $ 0.1 million, respectively. 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, 2022, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 2.03 years. Restricted Stock Awards Restricted stock activity consisted of the following: Shares Weighted-Average Grant Date Fair Value December 31, 2020 37,372 $ 18.58 Granted 38,263 3.45 Forfeited ( 1,503 ) 36.00 Vested ( 40,886 ) 9.70 Balance as of December 31, 2021 33,246 $ 12.96 Granted 20,000 1.80 Forfeited — $ — Vested ( 26,623 ) 8.83 Balance as of December 31, 2022 26,623 $ 8.70 The total grant date fair value of restricted stock that vested during 2022 and 2021 was $ 0.2 million and $ 0.4 million, respectively. Unrecognized compensation expense related to RSAs as of December 31, 2022 and 2021 was $ 0.1 million and $ 0.3 million, respectively. As of December 31, 2022, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 0.69 years . Note 14. Earnings (Loss) Per Share The Company computes basic earnings (loss) per share by dividing net income (loss) by the weighted-average common shares outstanding during the year. Diluted earnings (loss) per share is calculated to give effect to all potentially dilutive common shares that were outstanding during the year. Weighted-average diluted common shares outstanding primarily reflect the additional shares that would be issued upon the assumed exercise of stock options and the assumed vesting of unvested share awards. The treasury stock method has been used to compute diluted earnings (loss) per share for 2022 and 2021. 67 The computations of basic and diluted earnings (loss) per share are as follows: (in thousands, except per share basis) For the Year Ended December 31, 2022 2021 Numerator: Net income (loss) – basic and diluted $ 11,270 $ ( 48,472 ) Denominator: Shares used in computing net income (loss) per share Weighted-average common shares outstanding - basic 22,938 22,908 Effect of dilutive securities 10 — Weighted-average common shares outstanding – diluted 22,948 22,908 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. Note 15. Related Party Transactions Weichai Transactions See Note 3. Weichai Transactions for information regarding the Weichai SPA, Shareholder’s Loan Agreements and Collaboration Agreement . Transactions with Joint Ventures MAT-PSI Holdings, LLC In December 2012, the Company and MAT Holdings, Inc. (“MAT”) entered into an agreement to create MAT-PSI Holdings, LLC (“MAT-PSI”), which was intended to be a holding company of its 100 % Chinese wholly-owned foreign entity, referred to as Green Power. The Company invested $ 0.9 million for its 50 % share of MAT-PSI, which was formed to manufacture, assemble and supply natural gas, gas and alternative-fueled power systems to Chinese and Asian forklift customers. The venture established a production facility in Dalian and also sourced base engines from a local Chinese factory. As MAT-PSI was not profitable, the venture was closed in 2017; however, the Company had previously been in dispute with Green Power related to the wind up of the joint venture and outstanding receivables. On March 29, 2021, the Company executed a settlement agreement with MAT and Green Power which resolved the dispute. The final settlement agreement did not have a material impact on the Company’s consolidated financial statements. Doosan-PSI, LLC In 2015, the Company and Doosan entered into an agreement to form Doosan-PSI, LLC. The Company invested $ 1.0 million to acquire 50 % of the venture, which was formed to operate in the field of developing, designing, testing, manufacturing, assembling, branding, marketing, selling, distributing and providing support for industrial gas engines and all components and materials required for assembly of the gas engines to the global power generation market outside of North America and South Korea. In the fourth quarter of 2019, Doosan and the Company agreed to wind down and dissolve the joint venture. In the second quarter of 2021, the Company received a cash distribution from the joint venture of $ 2.2 million as a result of the final wind down and dissolution of the joint venture. Joint Venture Operating Results The Company’s investments in joint ventures are accounted for under the equity method of accounting. 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. 68 Other Related Party Transactions See Note 10. Commitments and Contingencies for information regarding the Company’s indemnification obligations related to certain former directors and officers of the Company. Note 16. 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. 69 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None.