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, P.C. , Chicago, IL , PCAOB ID# 243 ) 36 Consolidated Balance Sheets as of December 31, 2023 and 2022 38 Consolidated Statements of Income for 2023 and 2022 39 Consolidated Statements of Stockholders’ Deficit for 2023 and 2022 40 Consolidated Statements of Cash Flows for 2023 and 2022 41 Notes to Consolidated Financial Statements 42 35 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, 2023 and 2022, the related consolidated statements of income, stockholders’ 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, 2023 and 2022, and the results of its operations and its cash flows for each of 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 especially challenging, subjective, or complex judgments. The communication of a critical audit matter 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 described in Note 1 to the consolidated financial statements, the Company’s consolidated accrued product warranty balance was $19.3 million as of December 31, 2023. 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. Previous estimates are adjusted as actual warranty claims data becomes available. We identified the estimation of certain accrued product warranties as a critical audit matter. The principal consideration for this determination was the significant judgment used by management when determining the accrued product warranty estimates. Auditing management’s estimates and assumptions to determine certain accrued product warranties involved especially 36 challenging auditor judgment due to the significant audit effort in performing procedures related to the significant assumptions, specifically the applicability of historical claims experience. The primary procedures we performed to address this critical audit matter included: a. Evaluating the reasonableness of management’s assumptions to estimate certain future warranty claims by comparing the current product warranty claims estimates to the prior year estimates and investigating significant differences to evaluate the applicability of the historical claims experience. b. Testing the completeness and accuracy of certain underlying historical warranty claims information used to estimate future warranty claims. c. Testing the mathematical accuracy of management’s calculation of certain accrued product warranties. /s/ BDO USA, P.C. We have served as the Company’s auditor since 2018. Chicago, Illinois March 14, 2024 37 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par values) As of December 31, 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 22,758 $ 24,296 Restricted cash 3,836 3,604 Accounts receivable, net of allowances of $ 5,975 and $ 4,308 as of December 31, 2023 and 2022, respectively; (from related parties $ 777 and $ 2,325 as of December 31, 2023 and 2022, respectively) 66,979 89,894 Income tax receivable 550 555 Inventories, net 84,947 120,560 Prepaid expenses and other current assets 26,312 16,364 Total current assets 205,382 255,273 Property, plant and equipment, net 14,928 13,844 Operating lease right-of-use assets, net 27,145 13,282 Intangible assets, net 3,914 5,660 Goodwill 29,835 29,835 Other noncurrent assets 3,099 2,019 TOTAL ASSETS $ 284,303 $ 319,913 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable (to related parties $ 24,496 and $ 23,358 as of December 31, 2023 and 2022, respectively) $ 67,355 $ 76,430 Current maturities of long-term debt 139 130 Revolving line of credit 50,000 130,000 Finance lease liability, current 76 90 Operating lease liability, current 3,912 2,894 Other short-term financing (from related parties $ 94,820 and $ 75,020 as of December 31, 2023 and 2022, respectively) 94,820 75,614 Other accrued liabilities (from related parties $ 1,833 and $ 5,232 as of December 31, 2023 and 2022, respectively) 31,999 34,109 Total current liabilities 248,301 319,267 Deferred income taxes 1,478 1,278 Long-term debt, net of current maturities (from related parties $ 0 and $ 4,800 as of December 31, 2023 and 2022, respectively) 90 5,029 Finance lease liability, long-term 94 170 Operating lease liability, long-term 25,070 10,971 Noncurrent contract liabilities 2,401 3,199 Other noncurrent liabilities 10,786 10,371 TOTAL LIABILITIES $ 288,220 $ 350,285 Commitments and Contingencies (Note 10) 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 shares issued; 22,968 and 22,951 shares outstanding at December 31, 2023 and 2022, respectively 23 23 Additional paid-in capital 157,770 157,673 Accumulated deficit ( 160,790 ) ( 187,096 ) Treasury stock, at cost, 149 and 166 shares at December 31, 2023 and 2022, respectively ( 920 ) ( 972 ) TOTAL STOCKHOLDERS’ DEFICIT ( 3,917 ) ( 30,372 ) TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $ 284,303 $ 319,913 See Notes to Consolidated Financial Statements 38 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) For the Year Ended December 31, 2023 2022 Net sales (from related parties $ 2,449 and $ 2,749 for the year ended December 31, 2023 and 2022, respectively) $ 458,973 $ 481,333 Cost of sales (from related parties $ 1,790 and $ 2,262 for the year ended December 31, 2023 and 2022, respectively) 353,109 392,770 Gross profit 105,864 88,563 Operating expenses: Research and development expenses 19,457 18,896 Selling, general and administrative expenses 40,386 42,941 Amortization of intangible assets 1,746 2,124 Total operating expenses 61,589 63,961 Operating income 44,275 24,602 Interest expense (from related parties $ 7,729 and $ 4,680 for the year ended December 31, 2023 and 2022, respectively) 17,069 13,028 27,206 11,574 Income tax expense 900 304 Net income $ 26,306 $ 11,270 Weighted-average common shares outstanding: Basic 22,960 22,938 Diluted 22,973 22,948 Earnings per common share: Basic $ 1.15 $ 0.49 Diluted $ 1.15 $ 0.49 See Notes to Consolidated Financial Statements 39 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (in thousands) Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock Total Stockholders’ Deficit 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 ) Net income — — 26,306 — 26,306 Stock-based compensation expense — 202 — ( 51 ) 151 Common stock issued for stock-based awards, net — — — ( 2 ) ( 2 ) Restricted Stock Awards — ( 105 ) — 105 — Balance at December 31, 2023 $ 23 $ 157,770 $ ( 160,790 ) $ ( 920 ) $ ( 3,917 ) See Notes to Consolidated Financial Statements 40 POWER SOLUTIONS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Year Ended December 31, 2023 2022 Cash provided by (used in) operating activities Net income $ 26,306 $ 11,270 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of intangible assets 1,746 2,124 Depreciation 3,854 4,566 Stock-based compensation expense 151 385 Amortization of financing fees 1,188 2,178 Deferred income taxes 200 189 Provision for losses in accounts receivable 1,668 888 Increase in allowance for inventory obsolescence 1,826 533 Other adjustments, net 229 529 Changes in operating assets and liabilities: Accounts receivable 21,248 ( 25,672 ) Inventory 33,787 21,098 Prepaid expenses, right-of-use assets and other assets ( 7,043 ) ( 4,251 ) Accounts payable ( 9,237 ) ( 17,004 ) Income taxes receivable 5 3,721 Accrued expenses ( 2,162 ) 2,107 Other noncurrent liabilities ( 3,254 ) ( 11,506 ) Net cash provided by (used in) operating activities 70,512 ( 8,845 ) Cash (used in) provided by investing activities Capital expenditures ( 5,036 ) ( 1,354 ) Proceeds from disposal of assets 16 — Net cash used in investing activities ( 5,020 ) ( 1,354 ) Cash (used in) provided by financing activities Repayment of debt ( 80,000 ) — Repayment of long-term debt and lease liabilities ( 215 ) ( 256 ) Proceeds from short-term financings 15,000 31,582 Repayment of short-term financings ( 594 ) ( 1,168 ) Payments of deferred financing costs ( 987 ) ( 1,787 ) Other financing activities, net ( 2 ) ( 4 ) Net cash (used in) provided by financing activities ( 66,798 ) 28,367 Net (decrease) increase in cash, cash equivalents, and restricted cash ( 1,306 ) 18,168 Cash, cash equivalents, and restricted cash at beginning of the year 27,900 9,732 Cash, cash equivalents, and restricted cash at end of the year $ 26,594 $ 27,900 (in thousands) As of December 31, 2023 2022 Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets Cash and cash equivalents 22,758 24,296 Restricted cash 3,836 3,604 Total cash, cash equivalents, and restricted cash $ 26,594 $ 27,900 See Notes to Consolidated Financial Statements 41 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 Weichai America Corp., a wholly-owned subsidiary of Weichai Power Co., Ltd. (HK2338, SZ000338) (herein collectively referred to as “Weichai”), owns a majority of the outstanding shares of the Company’s Common Stock. As a result, Weichai is able to exercise control over matters requiring stockholders’ approval, including the election of the directors, amendment of the Company’s Charter and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of the Company or changes in management and will make the approval of certain transactions impractical without the support of Weichai. Weichai also entered into an Investor Rights Agreement (the “Rights Agreement”) with the Company upon execution of the share purchase agreement (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, 2023, the Company’s total outstanding debt obligations under the Third Amended and Restated Uncommitted Revolving Credit Agreement (the "Credit Agreement")” , the second amended Shareholder’s Loan Agreement (the “second Amended Shareholder’s Loan Agreement”) , the third amended Shareholder’s Loan Agreement (the “third Amended Shareholder’s Loan Agreement”) , the fourth amended Shareholder’s Loan Agreement (the “fourth Amended Shareholder’s Loan Agreement”) and for finance leases and other debt were $ 145.2 million in the aggregate, and its cash and cash equivalents were $ 22.8 million. See Note 6. Debt , for further information regarding the terms and conditions of the Company’s debt agreements. 42 Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay amounts owed under its existing debt arrangements as they become due. In order to provide the Company with a more permanent source of liquidity, management plans to seek an extension and amendment and/or replacement of its existing debt agreements or seek additional liquidity from its current or other lenders before the maturity dates in 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, national inflationary pressures have continued to cause interest rates to remain elevated. As a result, 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 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 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 income 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, 2023 2022 Customer A 14 % 19 % 43 The following table presents customers individually accounting for more than 10% of the Company’s trade accounts receivable: As of December 31, 2023 2022 Customer A 12 % 30 % Customer B 13 % ** The following table presents suppliers individually accounting for more than 10% of the Company’s purchases: For the Year Ended December 31, 2023 2022 Supplier A 13 % ** Supplier B 14 % ** 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, income tax valuation allowances 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, 2023 and 2022, the Company had restricted cash of $ 3.8 million and $ 3.6 million, respectively, which includes $ 1.3 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. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be settled or realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company records net deferred tax assets to the extent that it believes these assets will more likely than not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. The Company records uncertain tax positions in accordance with accounting guidance, on the basis of a two-step process whereby (i) it determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more-likely-than-not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the appropriate taxing authority has completed its examination even though the statute of limitations remains open, or the statute of limitation has expired. Interest and penalties related to uncertain tax positions are 44 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 Allowances 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 credit losses 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. We estimate losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding and the geographic region. Other factors considered include historical write-off experience, current economic conditions and also factors such as customer credit, past transaction history with the customer and changes in customer payment terms. Trade accounts receivable and the allowance for credit losses 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 means of collection have been exhausted and the potential for recovery is considered remote. Recoveries of previously written off balances are recognized when received. An allowance associated with anticipated future sales returns and accrued pricing adjustments are also included in the accounts receivable, net. 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 2023 2022 Raw materials $ 68,273 $ 101,566 Work in process 1,166 3,073 Finished goods 21,238 19,825 Total inventories 90,677 124,464 Inventory allowance ( 5,730 ) ( 3,904 ) Inventories, net $ 84,947 $ 120,560 Activity in the Company’s inventory allowance was as follows: (in thousands) For the Year Ended December 31, Inventory Allowance 2023 2022 Balance at beginning of period $ 3,904 $ 3,370 Charged to expense 2,796 1,159 Write-offs ( 970 ) ( 625 ) Balance at end of period $ 5,730 $ 3,904 Property, Plant and Equipment Property, plant and equipment is carried at cost and presented net of accumulated depreciation and impairments. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Property, plant and equipment is evaluated periodically to determine if an adjustment to depreciable lives is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets. Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. 45 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. No impairment losses were recorded during the periods ended December 31, 2023 and 2022. 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. The Company used the income and market approaches when determining its estimated fair value as of October 1, 2023 and 2022 . During the years ended December 31, 2023 and 2022, 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. 46 Other Accrued Liabilities Other accrued liabilities consisted of the following: (in thousands) As of December 31, Other Accrued Liabilities 2023 2022 Accrued product warranty $ 11,290 $ 13,037 Litigation reserves * 3,929 2,102 Contract liabilities 2,741 2,256 Accrued compensation and benefits 8,469 7,299 Accrued interest expense 1,913 5,257 Other 3,657 4,158 Total $ 31,999 $ 34,109 * As of December 31, 2023 and 2022 , litigation reserves related to various ongoing legal matters including associated legal fees. See Note 10. Commitments and Contingencies for further information regarding the various ongoing legal matters. 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 Income. As of December 31, 2023 and 2022, included in accounts receivable is approximately $ 1.3 million and $ 1.0 million , respectively, of reimbursements of warranty costs due from a significant supplier. 47 Accrued product warranty activities included in Other noncurrent liabilities on the Consolidated Balance Sheet are presented below: (in thousands) For the Year Ended December 31, Accrued Product Warranty 2023 2022 Balance at beginning of year $ 21,550 $ 32,948 Current year provision * 6,635 6,258 Changes in estimates for preexisting warranties ** 7,550 4,576 Payments made during the period ( 16,472 ) ( 22,232 ) Balance at end of year 19,263 21,550 Less: Current portion 11,290 13,037 Noncurrent accrued product warranty $ 7,973 $ 8,513 * Warranty costs, net of supplier recoveries , and other adjustments, were $ 13.0 million and $ 6.4 million for the years ended December 31, 2023 and 2022 , respectively. Supplier recoveries were $ 1.1 million and $ 4.1 million for the years ended December 31, 2023 and 2022 , 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. For the year December 31, 2023 , the Company recorded a cost for changes in estimates of preexisting warranties of $ 7.6 million, or $ 0.33 per diluted share, and costs 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 executed during the quarter ended March 31, 2022. Revenue Recognition See Note 2. Revenue for additional information the Company’s policy related to revenue recognition. Recently Issued Accounting Pronouncements – Adopted 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 adopted this guidance effective January 1, 2023. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements. Recently Issued Accounting Pronouncements – Not Yet Adopted In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures – Segment Reporting (Topic 280). The amendments to this standard require public entities to disclose more detailed information about their reportable segments’ significant expenses on an interim and annual basis. The amendments to this standard do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The amendments to this standard apply to all public entities that are required to report segment information in accordance with Topic 280, Segment Reporting and are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company plans to adopt this guidance in its annual reporting for the year ending December 31, 2024 and subsequent interim periods. The Company is continuing to assess the impact of the amendment to this standard on its consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures - Income Taxes (Topic 740) . The amendments to this standard enhance the transparency and decision usefulness of income tax disclosures, primarily related to rate reconciliation and income taxes paid information as well as effectiveness of overall income tax disclosures. 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, 2024, early adoption is permitted. The Company currently plans to adopt this guidance on December 15, 2024 when it becomes effective. The Company is continuing to assess the impact of the amendment to this standard on its 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; 48 • determination of the transaction price; • allocation of the transaction price to the performance obligations in the contract; and • recognition of revenue when, or as, the Company satisfies the performance obligations. Revenue for the Company is generated from contracts that may include a single performance obligation (generally, a single type of engine) or multiple performance obligations (which may include an engine with aftermarket parts, different types of engines, etc.). A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. Revenue is measured at the transaction price which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised goods or services to the customer. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company is required to estimate the total consideration expected to be received from contracts with customers. The consideration expected to be received may be variable based on the specific terms of the contract and the Company’s past practices. For contracts with multiple performance obligations, the Company allocates the total transaction price to distinct performance obligations based on directly observable data, if available, or the Company’s best estimate of the stand-alone selling price of each distinct performance obligation. The primary methods used to determine stand-alone selling price are directly observable prices and the cost plus a margin approach. The Company applies 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, 2023 and 2022, the Company recognized revenue of $ 385.5 million and $ 434.0 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 the years ended December 31, 2023 and 2022, the Company recognized revenue of $ 73.4 million and $ 47.3 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 Income. 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. From time to time, the Company may 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. 49 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. 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 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 2023 2022 Power Systems $ 225,106 $ 179,491 Industrial 160,334 224,669 Transportation 73,533 77,173 Total $ 458,973 $ 481,333 The following table summarizes net sales by geographic area: (in thousands) For the Year Ended December 31, Geographic Area 2023 2022 United States $ 378,886 $ 349,488 North America (outside of United States) 21,265 16,437 Pacific Rim 39,822 80,681 Europe 13,815 18,452 Other 5,185 16,275 Total $ 458,973 $ 481,333 Contract Balances Most of the Company’s contracts are for a period of less than one year; however, 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, 2023 2022 2021 Short-term contract assets (included in Prepaid expenses and other current assets ) $ 15,554 $ 3,620 $ 2,707 Short-term contract liabilities (included in Other accrued liabilities ) ( 2,741 ) ( 2,256 ) ( 1,819 ) Long-term contract liabilities (included in Noncurrent contract liabilities ) ( 2,401 ) ( 3,199 ) ( 3,330 ) Net contract assets (liabilities) $ 10,412 $ ( 1,835 ) $ ( 2,442 ) During the years ended December 31, 2023 and 2022, the Company recognized $ 1.4 million and $ 1.6 million of revenue upon satisfaction of performance obligations related to amounts that were included in the net contract liabilities balance as of December 31, 2022 and 2021, respectively. 50 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 $ 3.9 million of remaining performance obligations as of December 31, 2023 primarily related to extended warranties. The Company expects to recognize revenue related to these remaining performance obligations of approximately $ 1.5 million in 2024, $ 0.5 million in 2025, $ 0.2 million in 2026, $ 1.0 million in 2027, $ 0.6 million in 2028 and $ 0.1 million in 2029 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 purchased $ 6.2 million and $ 13.3 million of inventory from Weichai during 2023 and 2022, 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. Refer to the Consolidated Balance Sheet and Statements of Income for detailed related party information. 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 2023 2022 Leasehold improvements $ 6,987 $ 7,107 Machinery and equipment 46,964 45,747 Construction in progress 1,654 467 Total property, plant and equipment, at cost 55,605 53,321 Accumulated depreciation ( 40,677 ) ( 39,477 ) Property, plant and equipment, net $ 14,928 $ 13,844 Note 5. Goodwill and Other Intangibles Goodwill The carrying amount of goodwill at both December 31, 2023 and 2022 was $ 29.8 million. Accumulated impairment losses at both December 31, 2023 and 2022 were $ 11.6 million. 51 Other Intangible Assets Components of intangible assets are as follows: (in thousands) As of December 31, 2023 Gross Carrying Value Accumulated Amortization Net Book Value Customer relationships $ 34,940 $ ( 31,195 ) $ 3,745 Developed technology 700 ( 700 ) — Trade names and trademarks 1,700 ( 1,531 ) 169 Total $ 37,340 $ ( 33,426 ) $ 3,914 (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 Estimated future amortization expense for intangible assets as of December 31, 2023 is as follows: (in thousands) Year Ending December 31, Estimated Amortization 2024 $ 1,459 2025 1,219 2026 997 2027 230 2028 3 2029 and beyond 6 Total $ 3,914 52 Note 6. Debt The Company’s outstanding debt consisted of the following: (in thousands) As of December 31, 2023 As of December 31, 2022 Amount Rate (1) Amount Rate (1) Maturity Date Short-term financing: Revolving credit facility * $ 50,000 8.71 % $ 130,000 7.04 % March 22, 2024 Amended Shareholder’s Loan Agreement (second) 25,000 9.44 % 25,000 9.10 % May 20, 2024 Amended Shareholder's Loan Agreement (third) 50,000 9.44 % 50,000 9.01 % November 30, 2024 Amended Shareholder's Loan Agreement (fourth) 19,820 9.41 % — March 31, 2024 Other short-term financing — 614 Various Total short-term debt $ 144,820 $ 205,614 Long-term debt: Amended Shareholder's Loan Agreement (fourth) $ — $ 4,800 9.00 % March 31, 2024 Finance leases and other debt 399 ** 619 ** Various Total long-term debt and finance leases 399 5,419 Less: Current maturities of long-term debt and finance leases 215 220 Long-term debt $ 184 $ 5,199 * 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 Sheet. Unamortized debt issuance costs, were $ 0.2 million and $ 0.4 million at December 31, 2023 and 2022 , respectively. ** Finance lease obligations are a non-cash financing activity. See Note 7. Leases . (1) Includes the weighted average interest rate. The Company paid $ 19.9 million and $ 6.1 million in cash for interest in 2023 and 2022, respectively. Credit Agreement and Shareholder’s Loan Agreements 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 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 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 Credit Agreement will incur interest at either the alternate base rate or the Secured Overnight Financing Rate (“SOFR”) plus applicable rate of 3.35 % per annum. In addition, the Company paid fees of $ 1.0 million related to the Credit Agreement which will be deferred and amortized over the term of the Credit Agreement. The 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 Credit Agreement at any point in time prior to the maturity date at Standard Chartered’s discretion. The Company made payments totaling $ 80.0 million related to the Credit Agreement with no additional borrowings during 2023. As of December 31, 2023 , the Company had $ 50.0 million outstanding under the Credit Agreement . In connection with this 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 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 $ 30.0 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 SOFR rate 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 53 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 Credit Agreement. As of December 31, 2023 , there were no borrowings under the first Amended Shareholder’s Loan Agreement. On May 12, 2023, the Company amended and extended the maturity of its second Amended Shareholder’s Loan Agreement with Weichai to May 20, 2024 . The second Amended Shareholder’s Loan Agreement continues to provide the Company with a $ 25.0 million subordinated loan. Borrowings under the second Amended Shareholder’s Loan Agreement will incur interest at the applicable SOFR rate, 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 under the second Amended Shareholder’s Loan Agreement is lower than Weichai’s borrowing cost, the interest rate for such loan shall be equal to Weichai’s borrowing cost plus 1 % . The Company is also party to a third Amended Shareholder’s Loan Agreement with Weichai, which was entered into on December 10, 2021. The third Amended Shareholder’s Loan Agreement provides the Company with a $ 50.0 million uncommitted facility that is subordinated to the Credit Agreement and any borrowing requests made under the third Amended Shareholder’s Loan Agreement are subject to Weichai’s discretionary approval. Borrowings under the third Amended Shareholder’s Loan Agreement will incur interest at the applicable SOFR, plus 4.05 % 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 4.05 % 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 % . Borrowings under the third Amended Shareholder’s Loan Agreement can be used for general corporate purposes, except for certain legal expenditures which require additional approval from Weichai. The third Amended Shareholder’s Loan Agreement was amended on November 29, 2023 and expires on November 30, 2024 with any outstanding principal and accrued interest due upon maturity. As of December 31, 2023, the Company’s total outstanding debt obligations under the Credit Agreement , its second Amended Shareholder’s Loan Agreement , its third Amended Shareholder’s Loan Agreement , its fourth Amended Shareholder’s Loan Agreement and for finance leases and other debt were $ 145.2 million in the aggregate, and its cash and cash equivalents were $ 22.8 million . The Company's total accrued interest for all shareholder loans was $ 1.9 million and $ 5.3 million as of December 31, 2023 and 2022 , respectively. Accrued interest is included within Other Accrued Liabilities on the Consolidated Balance Sheet. 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 2025 $ 81 2026 9 Total $ 90 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. 54 The Company classifies leases as finance leases when (i) there is a transfer of ownership of the underlying asset by the end of the lease term, (ii) the lease contains an option to purchase the asset that the Company is reasonably certain will be exercised, (iii) the lease term is for the majority of the remaining economic life of the asset, or (iv) the present value of the lease payments and any residual value guarantee equals or substantially exceeds the fair value of the asset. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense for finance leases is generally front-loaded as the finance lease ROU asset is depreciated on a straight-line basis, but interest expense on the lease liability is recognized using the interest method which results in more expense during the early years of the lease. Variable lease payments are expensed in the period in which the obligation for those payments is incurred. The Company has elected to combine lease and non-lease components, such as fixed maintenance costs, as a single lease component in calculating ROU assets and lease liabilities for all classes of leased assets. Leases The Company has obligations under lease arrangements primarily for facilities, equipment and vehicles. These leases have original lease periods expiring between May 2024 and July 2034. The following table summarizes the lease expense by category in the Consolidated Statements of Income: (in thousands) For the Year Ended December 31, 2023 2022 Cost of sales $ 8,111 $ 6,300 Research, development and engineering expenses 295 267 Selling, general and administrative expenses 180 169 Interest expense 14 21 Total $ 8,600 $ 6,757 The following table summarizes the components of lease expense and income: (in thousands) For the Year Ended December 31, 2023 2022 Operating lease cost $ 5,885 $ 4,706 Finance lease cost: Amortization of ROU asset 82 148 Interest expense 14 21 Short-term lease cost 1,005 100 Variable lease cost 1,614 1,782 Sublease income ( 619 ) ( 1,062 ) Total lease cost, net $ 7,981 $ 5,695 The following table presents supplemental cash flow information related to leases: (in thousands) For the Year Ended December 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows paid for operating leases $ 4,719 $ 4,859 Operating cash flows paid for interest portion of finance leases 14 21 Financing cash flows paid for principal portion of finance leases 90 157 Right-of-use assets obtained in exchange for lease obligations Operating leases 18,095 3,540 Finance leases — — As of December 31, 2023 and 2022, t he weighted-average remaining lease term was 6.2 years and 5.8 years for operating leases and 2.2 years and 3.0 years for finance leases, respectively. As of December 31, 2023 and 2022, the weighted-average discount rate was 7.6 % and 7.1 % for operating leases, and 6.5 % and 6.6 % for finance leases, respectively. 55 The following table presents supplemental balance sheet information related to leases: (in thousands) As of December 31, 2023 2022 Operating lease ROU assets, net $ 27,145 $ 13,282 Operating lease liabilities, current 3,912 2,894 Operating lease liabilities, non-current 25,070 10,971 Total operating lease liabilities $ 28,982 $ 13,865 Finance lease ROU assets, net 1 $ 144 $ 225 Finance lease liabilities, current 76 90 Finance lease liabilities, non-current 94 170 Total finance lease liabilities $ 170 $ 260 1. Included in 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, 2023: (in thousands) Year Ending December 31, Operating Leases Finance Leases 2024 $ 5,981 $ 84 2025 6,161 81 2026 5,931 17 2027 5,950 — 2028 4,973 — Thereafter 7,534 — Total undiscounted lease payments 36,530 182 Less: imputed interest 7,548 12 Total lease liabilities $ 28,982 $ 170 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 (Level 1) are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments. 56 Debt The Company measured its revolving credit facility and other short-term financing at original carrying value. Unamortized financing costs and deferred f ees of $ 0.2 million and $ 0.4 million as of December 31, 2023 and 2022 , respec tively, on the revolving credit facility are classified in Prepaid expenses and other current assets on the Consolidated Balance Sheet. The fair value of the revolving credit facility and other short-term financing approximated carrying value, as it consisted primarily of short-term variable rate loans. The Company measures its material debt obligations using Level 2 inputs: (in thousands) As of December 31, 2023 Carrying Value Fair Value Level 1 Level 2 Level 3 Revolving credit facility $ 50,000 $ — $ 50,000 $ — Other financing 94,820 — 94,820 (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 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 (Level 1) because of the short-term maturities of these instruments. Note 9. Defined Contribution Plans The Company sponsors a defined contribution plan for its current employees. For the years ended December 31, 2023 and 2022, the Company incurred plan costs of $ 1.2 million and $ 0.8 million, respectively. 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 57 extension of time until March 31, 2023 to fully comply with the administrative orde r. In May 2023, the Company submitted documentation to the SEC for its review to assess the Company’s compliance with the administrative order. In July 2023, the Company was notified by the SEC that no additional information was required with respect to the administrative order. 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. On May 22, 2023, the Company filed its answer to the amended complaint. As of December 31, 2023 and 2022, the Company had recorded an estimated liabili ty of $ 2.4 million and $ 2.0 million, respectively , recorded within Other accrued liabilities on the Consolidated Balance Sheet related to the potential settlement of this matter. Mast Powertrain v. the Company In February 2020, the Company received a demand for arbitration from Mast Powertrain, LLC (“Mast”) pursuant to a development agreement entered into in November 2011 (the “Development Agreement”). Mast claimed that it is owed more than $ 9.0 million in past royalties and other damages for products sold by the Company pursuant to the Development Agreement. The Company disputed Mast’s damages, denied that any royalties are owed to Mast, denied any liability, and counterclaimed for overpayment on invoices paid to Mast. Mast subsequently clarified its claim for past royalties owed to be approximately $ 4.5 million. In July 2021, the Company reached a settlement with Mast to resolve past claims for royalties owed for $ 1.5 million which the Company had previously recorded within Selling, general and administrative expenses in the Statements of Income for the year-ended December 31, 2020 . The Company fully paid the settlement and had no recognized liability as of both December 31, 2023 and 2022. In September 2023, Mast filed a lawsuit against the Company in the Eastern District of Texas Federal Court, alleging, among other things, damages of approximately $ 6.0 million for fraudulent inducement leading to the 2021 arbitration settlement agreement and breach of said settlement agreement. As of December 31, 2023 the Company had recorded an estimated liabili ty of $ 0.9 million , recorded within Other accrued liabilities on the Consolidated Balance Sheet related to the potential settlement of this matter. 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 was 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, the Company estimates that 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. The Company is negotiating the amount and payment terms of the reimbursement with Travelers. 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 both December 31, 2023 and 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 (“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 58 each employee’s employment contract related to “Incentive Bonuses” for revenues generated in the Company’s transportation end market. In November 2021, Ehlers and Lulloff 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 Ehlers and Lulloff, for $ 0.8 million and $ 0.5 million , respectively. As of December 31, 2022 , the Company recorded the aforementioned settlement liabilities within Other accrued liabilities on the Consolidated Balance Sheet. As of December 31, 2023, the Company paid the settlement in full to both Ehlers and Lulloff. Indemnification Agreements In June 2020, the Company entered into a new directors’ and officers’ liability insurance policy, which has been renewed annually and expires in July 2024. 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, 2023, the Company had four outstanding letters of credit totaling $ 1.9 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 $ 3.8 million at December 31, 2023 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 Company was also party to a supply agreement with SAME which expired effective 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 market. The agreement included minimum purchase commitments which has no financial impact or monetary penalties for not meeting minimum purchases. 59 Note 11. Income Taxes Income tax expense was as follows: (in thousands) For the Year Ended December 31, 2023 2022 Current tax expense Federal $ 61 $ 204 State 639 ( 89 ) Total current tax expense $ 700 $ 115 Deferred tax expense Federal $ 64 $ ( 71 ) State 136 260 Total deferred tax expense 200 189 Total tax expense $ 900 $ 304 The Com pany made net cash payments for income taxes of $ 0.6 million in 2023, while it received net cash refunds for income taxes of $ 3.0 million in 2022. A reconciliation between the Company’s effective tax ra te on income before income taxes and the statutory tax rate is as follows: (in thousands) For the Year Ended December 31, 2023 2022 Amount Percent Amount Percent Income tax expense at federal statutory rate $ 5,713 21.0 % $ 2,430 21.0 % State income tax, net of federal benefit 1,486 5.5 % 140 1.2 % Other permanent differences 22 0.1 % 88 0.7 % Research and development tax credits ( 601 ) ( 2.2 ) % ( 393 ) ( 3.4 ) % Other tax credits 277 1.0 % ( 612 ) ( 5.3 ) % Tax reserve reassessment 158 0.6 % 79 0.7 % Change in valuation allowance ( 5,366 ) ( 19.7 ) % ( 497 ) ( 4.3 ) % Return adjustment ( 673 ) ( 2.5 ) % ( 1,147 ) ( 9.9 ) % Other, net ( 116 ) ( 0.5 ) % 216 1.9 % Income tax expense $ 900 3.3 % $ 304 2.6 % For the years ended December 31, 2023 and 2022, the Company recognized pretax income of $ 27.2 million and $ 11.6 million, respectively. 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 2023 primarily related to federal and state income taxes offset by R&D credits and a reduction in the valuation allowance against deferred tax assets. 60 Significant components of deferred income tax assets and liabilities consisted of the following: (in thousands) As of December 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 18,067 $ 25,541 Capital loss carryforwards 195 194 Research and development credits 6,167 5,565 Other state credits 2,244 3,671 Inventory 2,569 2,407 Allowances and bad debts 1,646 1,195 Accrued warranty 5,165 6,048 Accrued wages and benefits 353 1,294 Other accrued expenses 6,505 5,749 Stock-based compensation 240 188 Capitalized research and development costs 8,078 4,658 163(j) disallowed interest 2,868 1,343 Contract liabilities 698 1,057 Operating lease liability 7,917 2,820 Other 804 1,685 Total deferred tax assets 63,516 63,415 Valuation allowance ( 54,314 ) ( 59,680 ) Total deferred tax assets, net of valuation allowance $ 9,202 $ 3,735 Deferred tax liabilities: ROU operating lease asset $ ( 7,274 ) $ ( 2,612 ) Intangible amortization ( 1,006 ) ( 110 ) Depreciation on property, plant and equipment ( 2,400 ) ( 2,291 ) Total deferred tax liabilities $ ( 10,680 ) $ ( 5,013 ) Net deferred tax liability $ ( 1,478 ) $ ( 1,278 ) 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, 2023 and 2022. The Company’s net deferred tax liability of $ 1.5 million and $ 1.3 million as of December 31, 2023 and 2022, 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, 2023, the Company has, on a tax-effected basis, $ 8.4 million in R&D and state tax credit carryforwards which begin to expire in 2024. The Company has $ 10.3 million and $ 7.6 million of federal and state (tax effected, net of federal tax benefit) net operating loss carryforwards, respectively, that are available to offset taxable income in the future. The state net operating loss carryforwards begin to expir e in 2026 . The federal net operating loss carryforwards do not expire. 61 The change in unrecognized tax benefits excluding interest and penalties were as follows: (in thousands) For the Year Ended December 31, 2023 2022 Balance at beginning of year $ 1,660 $ 1,588 Additions based on tax positions related to the current year 117 74 Additions for tax positions of prior years 43 5 Reduction for tax positions of prior years ( 1 ) $ ( 7 ) Balance at end of year $ 1,819 $ 1,660 The Company recognizes interest and penalties related to unrecognized tax benefits in Income tax expense . As of December 31, 2023 and 2022, 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, 2023, the Company believes the liability for unrecognized tax benefits, excluding interest and penalties, could decrease by an immaterial amount in 2024 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 2024, 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 2023 U.S. States 2013 to 2023 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. Note 12. Stockholders’ 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, 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 Net shares issued for stock awards — ( 17 ) 17 Balance as of December 31, 2023 23,117 149 22,968 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, 2023, the Board had authorized two series of Preferred stock. At December 31, 2023 and 2022, there were no shares of Preferred stock outstanding. 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. 62 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, 2023, the Company had 394,516 shares available for issuance of future awards. To date, the Company’s granted awards have generally been either RSAs or SARs. SAR awards are typically share settled except for certain executives which are settled in cash. Share settlement entitles 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. Cash settled awards are recognized in the Consolidated Statement of Financial Position as a liability and adjusted each reporting period for changes in share value until the settlement of the award. 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 Income. 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, 2023 2022 Stock-based compensation expense $ 151 $ 385 Income tax benefit $ — $ 87 SAR Awards The Company granted 101,663 SAR awards in 2023, and granted 159,217 SAR awards in 2022. T he SAR awards granted for the year ended December 31, 2023 were all liability classified awards and remained outstanding. As of December 31, 2023, the weighted-average remaining contractual term for these awards was 9.32 years, the aggregate intrinsic value was zero and the unrecognized compensation expense was $ 0.1 million . The assumptions used for determining the fair value of the SARs included the following: For the Year Ended December 31, 2023 2022 Market closing price of the Common Stock $ 2.05 $ 3.00 Exercise price $ 2.99 $ 3.00 Range of risk-free interest rates 3.8 % 2.1 % - 3.3 % Weighted-average volatility 88.5 % 88.4 % Range of volatilities 88.5 % - 89.4 % 84.6 % - 89.0 % Expected term 5.00 years 5.00 years Dividend yield — % — % Weighted-average grant date fair value $ 1.33 $ 1.40 63 SAR activity for awards classified in equity 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, 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 Granted — — — Exercised — — — Forfeited — — — Expired ( 2,250 ) 11.25 — Outstanding at December 31, 2023 125,862 6.13 6.14 $ 3 Exercisable at December 31, 2022 58,217 $ 9.78 4.49 — Exercisable at December 31, 2023 94,914 $ 7.04 5.45 1 The total fair value of SARs that vested during 2023 and 2022 w as $ 0.1 million and $ 0.2 million, respectively. The total aggregate intrinsic value of SARs that vested during both 2023 and 2022 w as $ 0.1 million. Unrecognized compensation expense related to SARs as of both December 31, 2023 and 2022 was $ 0.1 million. As of December 31, 2023, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 2.17 years. Restricted Stock Awards Restricted stock activity consisted of the following: Shares Weighted-Average Grant Date Fair Value 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 Granted 15,000 2.27 Forfeited ( 7,834 ) 3.63 Vested ( 18,389 ) 9.63 Balance as of December 31, 2023 15,400 $ 3.91 The total grant date fair value of restricted stock that vested during 2023 and 2022 was $ 0.1 million and $ 0.2 million, respectively. The total aggregate intrinsic value of restricted stock that vested during both 2023 and 2022 was less than $ 0.1 million. Unrecognized compensation expense related to RSAs as of December 31, 2023 and 2022 was less than $ 0.1 million and $ 0.1 million, respectively. As of December 31, 2023, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 0.53 years . Note 14. Earnings Per Share The Company computes basic earnings per share by dividing net income by the weighted-average common shares outstanding during the year. Diluted earnings 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 per share for 2023 and 2022. 64 The computations of basic and diluted earnings per share are as follows: (in thousands, except per share basis) For the Year Ended December 31, 2023 2022 Numerator: Net income – basic and diluted $ 26,306 $ 11,270 Denominator: Shares used in computing net income per share Weighted-average common shares outstanding - basic 22,960 22,938 Effect of dilutive securities 13 10 Weighted-average common shares outstanding – diluted 22,973 22,948 Earnings per common share Earnings per share of common stock – basic $ 1.15 $ 0.49 Earnings per share of common stock – diluted $ 1.15 $ 0.49 The aggregate number of shares excluded from the diluted earnings per share calculations because they would have been anti-dilutive were 0.1 million shares in both 2023 and 2022. For the twelve months ended December 31, 2023 and 2022, SARs and RSAs were not included in the diluted earnings per share calculations as they would have been anti-dilutive because the Company’s average stock price was less than or equal to 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 . 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. 65 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None.