What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-24 compared with 2024-03-14 · 94 added, 122 removed, 195 unchanged (53% of the section changed)

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The Company designs, engineers, manufactures, markets and sells a broad range of advanced, emission-certified engines and power systems that run on a wide variety of clean, alternative fuels, including natural gas, propane, and biofuels, as well as gasoline and diesel options, within the power systems, industrial and transportation end markets with primary manufacturing, assembly, engineering, R&D, sales and distribution facilities located in suburban Chicago, Illinois and Darien and Beloit, Wisconsin.

The Company provides highly engineered, comprehensive solutions designed to meet specific customer application requirements and technical specifications, including those imposed by environmental regulatory bodies, such as the EPA, the CARB and the MEE.

The Company’s products are primarily used by global OEM and end-user customers across a wide range of applications and equipment that includes standby and prime power generation, demand response, microgrid, combined heat and power, arbor care, material handling (including forklifts), agricultural and turf, construction, pumps and irrigation, compressors, utility vehicles, light- and medium-duty vocational trucks, school and transit buses, and utility power.

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During 2024, the Company sold over 22,200 engines of which approximately 76% utilized propane or natural gas as their fuel source and 13% utilized gasoline.

The remaining 7% of engines were dual fuel gasoline/propane, diesel and service/base engines.

The remaining 11% of engines were dual fuel gasoline/propane, diesel and service engines.

During 2023 , the Company sold over 33,500 engines of which approximately 76% utilized propane or natural gas as their fuel source and 17% utilized gasoline.

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

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

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

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

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

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

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The Company purchased $21.5 million and $6.2 million of inventory from Weichai during 2024 and 2023, respectively.

PSI also entered into a series of Shareholder Loan agreements with Weichai.

PSI is party to the SLA with Weichai.

Debt , included in Item 8.

Financial Statements and Supplementary Data , for additional information.

Incremental Financial Reporting, Internal Control Remediation, and Government Investigation and Other Legal Matter Expenses

Incremental financial reporting, internal control remediation and government investigation and other legal matter expenses consist of professional services fees related to the Company’s efforts to restate prior period financial statements, prepare, audit and file delinquent financial statements, and remediate internal control material weaknesses as well as fees and reserves related to Company, SEC, and USAO investigations.

Since August 2016, the Company has experienced a substantial and disruptive diversion of management resources to address various accounting, financial reporting and financial issues.

During that time, the Company determined that it was necessary to restate financial results for 2014 and 2015 as well as the first quarter of 2016 and, since then, has also focused on becoming timely on all of its SEC financial reporting requirements, which was achieved with the filing of the Annual Report on Form 10-K for the year ended December 31, 2019.

Additionally, the SEC and the USAO

conducted investigations into the Company’s financial reporting, revenue recognition practices and related conduct.

These investigations were completed and settled in September 2020 (see Note 10.

Legal Settlement Expenses

Legal settlements included in the 2024 operating results, were a benefit of $4.7 million (see Note 11.

Commitments and Contingencies , included in Part II.

Financial Statements and Supplementary Data , for additional information).

Incremental financial reporting, internal control remediation, and government investigation and other legal matter expenses, included in the 2023 and 2022 operating results, were $0.2 million and $3.6 million, respectively.

Recent Trends and Business Outlook

As of the date of this 2023 Annual Report, the Company prudently continues to manage its expenses, including the restriction of all non-essential travel and minimized discretionary expenses and consulting services.

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

Starting in 2021 and throughout 2023, the Company took rightsizing actions to align its staffing with current needs, while also streamlining certain roles.

By the end of 2022, the global economy had mostly recovered after the global pandemic, COVID-19.

The recovery led to challenging market conditions across certain areas of the Company’s business.

Average crude oil prices reached the highest average price in five years in 2022 but has since declined while remaining near atop the 5-year averages through 2023.

Rig counts in the U.S.

oil markets also increased through 2022 but still under pre-pandemic levels as of the end of 2023.

Despite increasing rig counts and crude oil prices, the Company believes that capital spending within the areas of the oil and gas market that it participates in, remains below pre-pandemic levels.

While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during 2023, as compared to the prior year, sales remain below pre-pandemic levels.

A significant portion of the Company’s sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry.

The Company has seen logistical challenges experienced during prior years of port congestion and shipping delays ease and return to a pre-pandemic state and, excluding any unforeseen events, expects this to continue.

However, the Company continues to experience inflationary cost pressures for certain raw materials and other goods which the Company continues to try to mitigate through price increases and other cost reduction measures.

Additionally, the Company continues to experience ongoing tariff costs for products and is trying to mitigate these impacts through price increases and other measures, such as seeking certain tariff exclusions, where possible.

PSI’s growth in net revenue in 2024 was driven by power systems markets, including data center and oil and gas products, partially offset by lower sales from more mature, lower-margin markets such as transportation.

This shift in markets reflects the

Company’s conscious strategic prioritization toward higher growth, higher-margin markets with less emphasis on more mature markets.

The Company is focused on leading the business through a growth phase with a stronger balance sheet while strategically prioritizing products that demonstrate strong demand and higher gross margins.

Consistent with those goals, the Company is actively pursuing several initiatives to enhance and expand manufacturing capacity to meet the increasing demand from data center markets.

Pivoting the focus to these markets is driving current net sales growth and profitability.

Through expanded capacity and strategic partnerships, management expects this positive trend to continue.

PSI’s business is impacted by the current macroeconomic and geopolitical environment, which has contributed to differing levels of recovery in the global economy.

For example, although the oil and gas market, in which the Company has historically operated, has experienced year over year growth from its historic lows, sales levels may not reach their previous higher levels because of rising crude oil prices and lower rig counts.

The Company has been actively navigating these challenges by balancing its investments, expenses, pricing and sales efforts in this market as well as others.

In addition to prioritizing gross profit, the Company is committed to efficiently managing expenses, including streamlining operating expenses and prioritizing certain R&D investments in support of long-term growth objectives.

The Company is committed to focusing on growth opportunities and investment while also optimizing its cost structure to enhance growth and profitability, ultimately delivering sustained value to our shareholders.

The Company continues to experience inflationary cost pressures for certain raw materials and other goods, which the Company continues to try to mitigate through price increases and other cost reduction measures.

Additionally, the Company continues to experience ongoing tariff costs for its supply chain products and is trying to mitigate these impacts through price increases and other measures, such as seeking certain tariff exclusions, where available.

The potential for continued economic uncertainty and unfavorable oil and gas market dynamics may have a material adverse impact on the levels of future customer orders and the Company’s future business operations, financial condition and liquidity.

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

As a result, the Company’s potential future costs for indemnity obligations related to this matter significantly decreased in 2023.

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

The Company is party to several legal contingencies.

Se e Note 11.

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

The Company expects its sales in 2024 to increase by approximately 3% compared to 2023 levels, as a result of expectations for strong growth in the power systems end market paired with flat sales in the industrial end market and a forecasted reduction in the transportation end markets.

Notwithstanding this outlook, which is being driven in part by expectations for stable supply chain dynamics and a continuation of favorable economic conditions within the United States and across the Company’s various markets, the Company cautions that significant uncertainty remains as a result of supply chain challenges, inflationary costs, commodity volatility, and rising interest rates among other factors.

The Company anticipates an increase in sales for 2025 compared to 2024, driven by expected growth in the power systems end market including products supporting data centers , while sales in the industrial and transportation end markets are projected to remain about flat.

N otwithstanding this outlook, which is being driven in part by expectations for stable supply chain dynamics and a continuation of favorable economic conditions within the United States and across the Company’s various markets, the Company cautions that significant uncertainty remains as a result of supply chain challenges, inflationary costs, commodity volatility, ongoing geopolitical and macroeconomic uncertainties, especially with the latest tariff announcements and the possible impact on trade between the USA and the rest of the world, among other factors.

Hyster-Yale Supply Arrangemen t :

Hyster-Yale started sourcing alternative supply beginning in late 2023 for several high-volume engines that the Company currently provides, including the 2.0L and 2.4L engines which was accelerated in part due to supply chain issues from the UFLPA enforcement at the end of 2023.

As a result, the Company expects to see a decline in sales volumes to Hyster-Yale in 2024 but believes it is well positioned to continue its relationship in a moderated capacity with this customer in 2024 and beyond.

In 2023 , Hyster-Yale began using alternative suppliers for several high-volume engines that the Company provides, including the 2.0L and 2.4L engines, due in part to supply chain issues related to UFLPA enforcement.

As a result, the Company experienced a decline in sales volumes to Hyster-Yale in 2024.

Strategic Initiatives/Growth Strategies :

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Central to this plan is the Company’s increased emphasis on power systems product offerings through new product development and investments, in addition to leveraging the Company’s relationship with Weichai.

With the introduction of numerous natural gas and diesel engines over the past few years, coupled with its existing strong product lineup, the Company believes that it has a solid foundation to achieve long-term growth, particularly within the power systems market.

With the recent introduction of numerous natural gas and diesel engines, coupled with its existing strong product lineup, the Company believes that it has a solid foundation to achieve long-term growth, particularly within the power systems market.

Results of Operations

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

Net sales decreased $22.4 million, or 5%, compared to 2022, as a result of sales decreases of $64.3 million and $3.6 million within the industrial and transportation end markets, respectively, partly offset by an increase of $45.6 million in the power systems end market.

Decreased industrial end market sales are primarily due to decreases in demand for products used within the material handling and arbor care market s as well as being directly affected by the enforcement of the UFLPA which limited the Company’s ability to import certain raw materials at the end of 2023.

The decreased sales within the transportation end market were primarily attributable to lower sales in the school bus market as customer products have evolved and new compliance and regulatory requirements have changed engine product offerings .

Higher power systems end market sales are primarily due to increased demand for products across various applications, with the largest increases attributable to products used within the demand response market as well as traditional oil and gas products.

Net sales increased $17.0 million, or 4%, compared to 2023, as a result of sales increases of $100.6 million in the power systems end market, partly offset by decreases of $37.1 million and $46.6 million within the industrial and transportation end markets, respectively.

Higher power systems end market sales were primarily due to increased demand for products across various applications, with the largest increases attributable to products used within the packaging market such as enclosures serving the fast-growing data center market, and oil and gas products.

The Company is strategically prioritizing the rapidly expanding data center sector, improving and increasing our manufacturing capacity and capabilities to meet our customers’ evolving demands for our products.

Decreased industrial end market sales are primarily due to decreases in demand for products used within the material handling and arbor care markets, as well as the direct effects of enforcement of the UFLPA, which limited the Company’s ability to import certain raw materials.

The decreased sales within the transportation end market were primarily attributable to lower sales in the truck and school bus market from ceasing sales of emission-certified engines into this market, and new compliance and regulatory requirements that changed engine product offerings in this market.

Gross profit increased by $34.7 million, or 33%, to $140.5 million in 2024, compared to $105.9 million in 2023.

Gross margin was 23.1% and 18.4% in 2023 and 2022, respectively.

The increase in gross margin is primarily due to improved mix, pricing actions and freight cost management.

For the year ended December 31, 2023, warranty costs were $13.0 million, an increase of

$6.6 million compared to warranty costs of $6.4 million in the same period last year, mainly attributable to changes in estimates for preexisting warranties.

Gross margin was 29.5% and 23.1% in 2024 and 2023, respe ctively.

The increase in gross margin is primarily due to improved sales mix, pricing actions, higher operating efficiencies, and lower warranty costs primarily attributable to the Company’s sales shift away from certain transportation customers.

For the year ended December 31, 2024, warranty costs were $6.5 million, a decrease of $6.5 million compared to warranty costs of $13.0 million in the same period last year, mainly attributable to changes in estimates for preexisting warranties.

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

Research and Development Expenses

R&D expenses in 2023 were $19.5 million, an increase of $0.6 million, or 3%, from 2022 levels as a result of the Company’s continued efforts to customize power systems to meet customers’ needs and meet emission and other certificate requirements.

R&D expenses in 2024 and 2023 were $20.1 million and $19.5 million, respectively.

The increase of $0.6 million, or 3%, was primarily related to the testing of new products.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) decreased in 2024 by $3.0 million , or 7%, compared to 2023.

The decrease is primarily due to lower legal costs during the period.

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

The decrease is primarily due to a decrease in accrued legal settlements of $4.7 million, lower professional fees and the decrease in selling expenses associated with decreased sales in the transportation market.

Interest Expense

Interest expense increased $4.0 million to $17.1 million in 2023 from $13.0 million in 2022 , largely due to lower average outstanding debt, partially offset by higher overall effective interest rates on the Company’s debt.

Interest expense decreased $5.6 million to $11.4 million in 2024 from $17.1 million in 2023, largely due to reduced outstanding debt and lower overall effective interest rates.

Debt , included in Item 8.

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Income Tax Expense

The Company recorded income tax expense of $0.9 million in 2023, an increase of $0.6 million, as compared to an income tax expense of $0.3 million in 2022.

The Company recorded income tax expense of $0.9 million in both 2024 and 2023.

The Company’s pretax income was $70.2 million in 2024, compared to pretax income of $27.2 million in 2023.

Income tax expense for the year ended December 31, 2023 is related primarily to the impact of amended state returns, adjustments to taxes payable, and deferred tax liability related to indefinite lived assets.

The Company continues to record a full valuation allowance against deferred tax assets which offsets the tax expense and tax benefit associated with the pre-tax income and pre-tax loss for both years ended December 31, 2023 and 2022.

The Company continues to utilize NOLs along with other tax credits to lower its effective tax rate.

The Company continues to record a full valuation allowance against deferred tax assets.

Income Taxes , included in Item 8.

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These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S.

GAAP, and non-GAAP financial measures as reported by the Company may not be comparable to similarly titled measures reported by other companies.

The non-GAAP financial measures should be considered in conjunction with the consolidated financial statements, including the related notes, and Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report.

GAAP, and non-GAAP financial amounts as reported by the Company may not be comparable to similarly titled measures reported by other companies.

The non-GAAP financial measures should be considered in conjunction with the consolidated financial statements, including the related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report.

Management does not use these non-GAAP financial measures for any purpose other than the reasons stated below.

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Adjusted net income Net income

Adjusted net income per share Net income per common share – diluted

Adjusted net income per share – diluted Net income per share – diluted

EBITDA Net income

Adjusted EBITDA Net income

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

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

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

Adjusted net income per share is a measure of the Company’s diluted net earnings per share adjusted for the impact of special items.

Adjusted net income per share – diluted is a measure of the Company’s diluted earnings per common share adjusted for the impact of special items.

EBITDA provides the Company with an understanding of earnings before the impact of investing and financing charges and income taxes.

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

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

Adjusted net income, Adjusted net income per share, and Adjusted EBITDA may be useful to an investor because these measures are widely used to evaluate companies’ operating performance without regard to items excluded from the

calculation of such measures, which can vary substantially from company to company depending on the accounting methods, the book value of assets, the capital structure and the method by which the assets were acquired, among other factors.

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

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

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

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

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

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

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Stock-based compensation 1

Internal control remediation 3

Governmental investigations and other legal matters 4

Legal Settlements 2

Insurance proceeds 3

Adjusted net income $ 64,675 $ 26,552

The following table presents a reconciliation from Net income per common share – diluted to Adjusted net income per share – diluted:

The following table presents a reconciliation from Net income per share – diluted to Adjusted net income per share – diluted:

For the Year Ended December 31,

Net income per common share – diluted $ 1.15 $ 0.49

Net income per share – diluted $ 3.01 $ 1.15

Stock-based compensation 1

Internal control remediation 3

Governmental investigations and other legal matters 4

Legal Settlements 2

Adjusted net income per share – diluted $ 2.81 $ 1.17

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Stock-based compensation 1

Internal control remediation 3

Governmental investigations and other legal matters 4

Legal Settlements 2

Insurance proceeds 3

Adjusted EBITDA $ 82,239 $ 50,121

Amounts reflect non-cash stock-based compensation expense.

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

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

Amounts include professional services fees and reserves related to legal matters.

Amounts include insurance recoveries related to a prior year incident and have no material impact on the Adjusted earnings per share for the year ended December 31, 2023 and 2022.

Amounts reflect non-cash stock-based compensation expense and have no material impact on the Adjusted net income per share – diluted for the year ended December 31, 2024 and 2023 .

Amounts include legal settlements f or the year ended December 31, 2024 and 2023 .

Amounts include insurance recoveries related to a prior year incident and have no material impact on the Adjusted net income per share – diluted f or the year ended December 31, 2024 and 2023 .

Cash was impacted as follows:

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2024 2023 Change % Change

Net cash provided by (used in) operating activities $ 70,512 $ (8,845) $ 79,357 NM

Net cash used in investing activities (5,020) (1,354) (3,666) NM

Net cash (used in) provided by financing activities (66,798) 28,367 (95,165) NM

Net (decrease) increase in cash, cash equivalents, and restricted cash $ (1,306) $ 18,168 $ (19,474) (107) %

Capital expenditures $ (5,036) $ (1,354) $ (3,682) NM

Net cash provided by operating activities $ 62,390 $ 70,512 $ (8,122) (12) %

Net cash used in investing activities (4,559) (5,020) 461 (9) %

Net cash used in financing activities (25,934) (66,798) 40,864 (61) %

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 31,897 $ (1,306) $ 33,203 NM

Capital expenditures $ (4,559) $ (5,036) $ 477 (9) %

NM Not meaningful

Cash Flow from Operating Activities

Net cash provided by operations was $70.5 million in 2023 compared to net cash used in operations of $8.8 million in 2022 resulting in an increase of $79.4 million in cash provided by operating activities year-over-year .

The increase in cash provided by operating activities primarily resulted from the $15.0 million increase in earnings, reduction in inventory, increased collections on customer accounts receivable and the Company had less cash paid against accounts payable compared to the prior year due to a catch up on payables in the first nine months of 2022, contributing to a $64.9 million increase of cash provided by working capital accounts.

Net cash provided by operations was $62.4 million in 2024 compared to net cash provided by operations of $70.5 million in 2023, a decrease of $8.1 million in cash provided by operating activities year-over-year .

The decrease in cash provided by operating activities primarily resulted from a $44.5 million decrease of cash provided by working capital accounts, partially offset by an increase in earnings of $43.0 million.

The decrease in cash generated from working capital was primarily related to, purchases of inventory and lower collections on accounts receivable for the year ended December 31, 2024 compared to December 31, 2023 .

Cash Flow from Investing Activities

Net cash used in investing activities was $4.6 million for the year ended December 31, 2024 compared to cash used in investing activities of $5.0 million for year ended December 31, 2023, respectively .

For the years ended December 31, 2023 and 2022, cash used in investing activities primarily related to capital expenditures associated with normal maintenance of the Company’s facilities.

For the years ended December 31, 2024 and 2023, cash used in investing activities related to capital expenditures.

Cash Flow from Financing Activities

The Company used $66.8 million in cash from financing activities in the year ended December 31, 2023 compared to $28.4 million in cash generated by financing activities in the year ended December 31, 2022.

The cash used by financing activities for the year ended December 31, 2023, was a result of repayment of existing debt during the year.

Whereas, cash provided in 2022 was primarily attributable to cash received under the shareholder’s loan agreements with Weichai.

The Company used $25.9 million in cash from financing activities during the year ended December 31, 2024 compared to $66.8 million in cash used by financing activities during the year ended December 31, 2023.

The cash used by financing activities for the year ended December 31, 2024 was due to proceeds from the new Revolving Credit Agreement and payments made on the SLA and other debt.

Cash used in 2023 was primarily attributable to repayment of existing debt during the year.

Se e additional discussion below and in Note 6.

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Liquidity and Capital Resources

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

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

As of December 31, 2023 , the Company’s total outstanding debt obligations under the Credit Agreement , the second Amended Shareholder’s Loan Agreement, the third Amended Shareholder’s Loan Agreement , the fourth Amended Shareholder’s Loan Agreement and for finance leases and other debt were $145.2 million in the aggregate, and its cash and cash equivalents were $22.8 million.

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

Uses of funds include payments of principal on our debt facilities and shareholder’s loan agreements, capital expenditures, and working capital needs.

While the Company has achieved profitability and generated positive cash flows from operating activities in 2024, uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness.

As of December 31, 2024 , the Company’s total outstanding debt obligations under the Revolving Credit Agreement , the SLA, finance leases and other debt, all of which are short-term requirements, were $120.2 million in the aggregate, and its cash and cash equivalents were $55.3 million.

Financial Statements and Supplementary Data , Note 6.

Debt, for additional information.

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

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

Management currently plans to seek an extension and/or replacement of its existing debt arrangements or seek additional liquidity from its current or other lenders before the maturity dates in 2024.

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

By the end of 2022, the global economy had mostly recovered after the global pandemic, COVID-19.

The recovery led to challenging market conditions across certain areas of the Company’s business.

Average crude oil prices reached the highest average price in five years in 2022 but has since declined while remaining near atop the 5-year averages through 2023.

Rig counts in the U.S.

oil markets also increased through 2022 but still under pre-pandemic levels as of the end of 2023.

Despite increasing rig counts and crude oil prices, the Company believes that capital spending within the areas of the oil and gas market

that it participates in, remains below pre-pandemic levels.

While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during 2023, as compared to the prior year, sales remain below pre-pandemic levels.

A significant portion of the Company’s sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry.

The Company’s ability to continue as a going concern is dependent on extending and amending, refinancing or repaying the indebtedness outstanding under the Company’s existing debt arrangements.

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, which raises substantial doubt about the Company’s ability to continue as a going concern within one year from the date of filing.

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 2025.

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.

PSI’s business is impacted by the current macroeconomic and geopolitical environment, which has contributed to differing levels of recovery in the global economy.

because of rising crude oil prices and lower rig counts.

The Company continues to experience inflationary cost pressures for certain raw materials and other goods which the Company continues to try to mitigate through price increases and other cost reduction measures.

Lastly, national inflationary pressures have continued to cause interest rates to remain at elevated levels.

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.

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

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

At December 31, 2024, the Company had four outstanding letters of credit totaling $1.4 million.

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Risk Factors for further discussion of legal risks to the Company.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

The Company’s consolidated financial statements are prepared in accordance with U.S.

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The Company recognizes revenue related to extended warranty programs based on the passage of time over the extended warranty period.

The Company allows product returns on certain products.

The accrued sales returns in the accompanying Consolidated Balance Sheet, included in Accounts Receivable, net, were $0.1 million and $0.3 million as of December 31, 2023 and 2022, respectively.

Estimated sales returns are provided at the time of sale based on historical sales channel return rates.

Estimated future obligations related to these products are provided by a reduction of sales in the period in which the revenue is recognized.

We considered the impact of recoverable salvage value on sales returns by product in determining its estimate of future sales returns.

We recognize a return asset for the right to recover the goods returned by the customer.

The right of return asset is recognized on a gross basis outside of the accrued sales returns and is not material to our Consolidated Balance Sheets.

In the event future sales returns claims are higher than our historical experiences, such as a 50 basis point increase, the impacts would not be material to the Consolidated Financial Statements.

The allowance for credit losses is our best estimate of the amount of estimated lifetime credit losses in our accounts receivable.

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The credit environment in which our customers operate has been relatively stable over the past few years and the Company collections are bolstered by a robust collections department.

Historically, less than 1.0% of net sales ultimately prove to be uncollectible.

Total bad debt expense was less than $0.1 million in both 2024 and 2023.

If circumstances change, for example, due to the occurrence of higher-than-expected defaults or a significant adverse change in a major customer’s ability to meet our financial obligations such as bankruptcies, estimates of the recoverability of receivable amounts due could be reduced.

We have not made any material changes in the accounting methodology we use to measure the estimated liability for sales returns or allowance for credit losses during the past three fiscal years.

If circumstances change, due to the occurrence of higher-than-expected defaults or a significant adverse change in a major customer’s ability to meet our financial obligations such as bankruptcies, estimates of the recoverability of receivable amounts due could be reduced.

Refer to Note 2.

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We have not made any changes in 2024 to our reporting unit or the accounting methodology we use to assess impairment loss on goodwill and indefinite-lived intangible assets.

In 2023, management performed an assessment of the impairment of goodwill for our reporting unit and indefinite-lived intangible assets using a quantitative approach, which indicated that the fair values the reporting unit and indefinite-lived intangible assets were substantially in excess of their carrying values.

In 2024, management performed an assessment of the impairment of

goodwill for our reporting unit and indefinite-lived intangible assets using a quantitative approach, which indicated that the fair values the reporting unit and indefinite-lived intangible assets were substantially in excess of their carrying values.

Therefore, no indications of impairment were identified.

The Company performs its annual impairment test using the discounted cash flow method which involves the Company’s management making estimates with respect to a variety of factors that will significantly impact the future performance of the business, including the following:

• future volume projections;

• estimated margins on sales;

• estimated growth rate for SG&A costs;

• future effective tax rate;

• weighted-average cost of capital (“WACC”) used to discount future performance of the Company.

Because these estimates form a basis for the determination of whether the impairment charge should be recorded, these estimates are considered to be critical accounting estimates.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis