Power Solutions International, Inc 10-Q for FY2021 Q3
Power Solutions International, Inc. (PSIX)
10-Q
2021-11-12
For: 2021-09-30
View Original
Added on
April 06, 2026
About this 10-Q
Power Solutions International, Inc filed this 10-Q on November 12, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $117.63M
- up 2.8% from $114.45M a year earlier
- Net loss
- $7.18M
- compared with a net loss of $1.47M a year earlier
- Diluted EPS
- -$0.31
- compared with -$0.06 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ________to________
Commission file number 001-35944
(Exact Name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||
( | ||||||||
| (Registrant’s Telephone Number, Including Area Code) | ||||||||
| Securities Registered Pursuant to Section 12(b) of the Act: | ||||||||
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
| None | — | — | ||||||
| Securities Registered Pursuant to Section 12(g) of the Act: | ||||||||
| Common Stock, par value $0.001 per share | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||||||||||||||
☒ | Smaller reporting company | ||||||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 1, 2021, there were 22,925,807 outstanding shares of the Common Stock of the registrant.
1
TABLE OF CONTENTS
| Page | ||||||||
| PART I – FINANCIAL INFORMATION | ||||||||
| Forward-Looking Statements | ||||||||
| Item 1. | Financial Statements | |||||||
| Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020 | ||||||||
| Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (Unaudited) | ||||||||
| Consolidated Statements of Stockholders’ (Deficit) Equity for the three and nine months ended September 30, 2021 and 2020 (Unaudited) | ||||||||
| Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (Unaudited) | ||||||||
| Notes to Consolidated Financial Statements (Unaudited) | ||||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| Item 4. | Controls and Procedures | |||||||
| PART II – OTHER INFORMATION | ||||||||
| Item 1. | Legal Proceedings | |||||||
| Item 1A. | Risk Factors | |||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
| Item 3. | Defaults Upon Senior Securities | |||||||
| Item 4. | Mine Safety Disclosures | |||||||
| Item 5. | Other Information | |||||||
| Item 6. | Exhibits | |||||||
| Signatures | ||||||||
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2021 (the “Quarterly Report”) that are not historical facts are intended to constitute “forward-looking statements” entitled to the safe-harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may involve risks and uncertainties. These statements often include words such as “anticipate,” “believe,” “budgeted,” “contemplate,” “estimate,” “expect,” “forecast,” “guidance,” “may,” “outlook,” “plan,” “projection,” “should,” “target,” “will,” “would” or similar expressions, but these words are not the exclusive means for identifying such statements. These forward-looking statements include statements regarding Power Solutions International, Inc.’s, a Delaware corporation (“Power Solutions,” “PSI” or the “Company”), projected sales, potential profitability and liquidity, strategic initiatives, future business strategies, warranty mitigation efforts and market opportunities, improvements in its business, remediation of internal controls, improvement of product margins, and product market conditions and trends. These statements are not guarantees of performance or results, and they involve risks, uncertainties and assumptions. Although the Company believes that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect the Company’s results of operations and liquidity and could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the Company’s forward-looking statements.
The Company cautions that the risks, uncertainties and other factors that could cause its actual results to differ materially from those expressed in, or implied by, the forward-looking statements include, without limitation, the factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and from time to time in the Company’s subsequent filings with the United States Securities and Exchange Commission (the “SEC”); the impact of the ongoing COVID-19 pandemic could have on the Company’s business and financial results; the Company’s ability to continue as a going concern; the Company’s ability to raise additional capital when needed and its liquidity; uncertainties around the Company’s ability to meet funding conditions under its financing arrangements and access to capital thereunder; the potential acceleration of the maturity at any time of the loans under the Company’s uncommitted senior secured revolving credit facility through the exercise by Standard Chartered Bank of its demand right; the timing of completion of steps to address, and the inability to address and remedy, material weaknesses; the identification of additional material weaknesses or significant deficiencies; risks related to complying with the terms and conditions of the settlements with the SEC and the United States Attorney's Office for the Northern District of Illinois (the “USAO”); variances in non-recurring expenses; risks relating to the substantial costs and diversion of personnel’s attention and resources deployed to address the internal control matters; the Company’s obligations to indemnify past and present directors and officers and certain current and former employees with respect to the investigations conducted by the SEC and the criminal division of the USAO, which will be funded by the Company with its existing cash resources due to the exhaustion of its historical primary directors’ and officers’ insurance coverage; the ability of the Company to accurately forecast sales, and the extent to which sales result in recorded revenues; changes in customer demand for the Company’s products; volatility in oil and gas prices; the impact of U.S. tariffs on imports from China on the Company’s supply chain; disruptions to the Company’s supply chain; the potential for increased warranty costs and the Company’s ability to mitigate such costs; any delays and challenges in recruiting and retaining key employees consistent with the Company’s plans; any negative impacts from delisting of the Company’s common stock par value $0.001 (the “Common Stock”) from the NASDAQ Stock Market (“NASDAQ”) and any delays and challenges in obtaining a re-listing on a stock exchange.
The Company’s forward-looking statements are presented as of the date hereof. Except as required by law, the Company expressly disclaims any intention or obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
AVAILABLE INFORMATION
The Company is subject to the reporting and information requirements of the Exchange Act, and as a result, it is obligated to file annual, quarterly and current reports, proxy statements and other information with the SEC. The Company makes these filings available free of charge on its website (http://www.psiengines.com) as soon as reasonably practicable after it electronically files them with, or furnishes them to, the SEC. Information on the Company’s website does not constitute part of this Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains the annual, quarterly and current reports, proxy and information statements, and other information the Company electronically files with, or furnishes to, the SEC.
3
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
POWER SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| (in thousands, except par values) | As of September 30, 2021 | As of December 31, 2020 | ||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
Accounts receivable, net of allowances of $ | ||||||||||||||
| Income tax receivable | ||||||||||||||
| Inventories, net | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Other noncurrent assets | ||||||||||||||
| TOTAL ASSETS | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Current maturities of long-term debt | ||||||||||||||
| Revolving line of credit | ||||||||||||||
| Other short-term financing | ||||||||||||||
| Other accrued liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Long-term debt, net of current maturities | ||||||||||||||
| Noncurrent contract liabilities | ||||||||||||||
| Other noncurrent liabilities | ||||||||||||||
| TOTAL LIABILITIES | $ | $ | ||||||||||||
| STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||||||||
Preferred stock – $ | $ | $ | ||||||||||||
Common stock – $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
Treasury stock, at cost, | ( | ( | ||||||||||||
| TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY | ( | |||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | $ | $ | ||||||||||||
See Notes to Consolidated Financial Statements
4
POWER SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| (in thousands, except per share amounts) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Research, development and engineering expenses | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | ||||||||||||||||||||||
| Other expense, net: | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Loss on debt extinguishment and modifications | ||||||||||||||||||||||||||
| Other expense (income), net | ( | ( | ||||||||||||||||||||||||
| Total other expense, net | ||||||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | ||||||||||||||||||||||
| Income tax benefit | ( | ( | ( | ( | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Weighted-average common shares outstanding: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
| Loss per common share: | ||||||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
See Notes to Consolidated Financial Statements
5
POWER SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(UNAUDITED)
| (in thousands) | For the Three Months Ended | |||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Treasury Stock | Total Stockholders’ (Deficit) Equity | ||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| Net loss | — | — | ( | — | ( | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Common stock issued for stock-based awards, net | — | — | — | ( | ( | |||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||
| Net loss | — | — | ( | — | ( | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | ||||||||||||||||||||||||||||||
| Common stock issued for stock-based awards, net | — | ( | — | ( | ( | |||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||
| (in thousands) | For the Nine Months Ended | |||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Treasury Stock | Total Stockholders’ (Deficit) Equity | ||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||
| Net loss | — | — | ( | — | ( | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | ||||||||||||||||||||||||||||||
| Common stock issued for stock-based awards, net | — | — | — | ( | ( | |||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||
| Net loss | — | — | ( | — | ( | |||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | ||||||||||||||||||||||||||||||
| Common stock issued for stock-based awards, net | — | — | — | ( | ( | |||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||
6
POWER SOLUTIONS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| (in thousands) | For the Nine Months Ended September 30, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Cash used in operating activities | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| Depreciation | ||||||||||||||
| Stock-based compensation expense | ||||||||||||||
| Amortization of financing fees | ||||||||||||||
| Deferred income taxes | ( | |||||||||||||
| Loss on extinguishment of debt | ||||||||||||||
| Other adjustments, net | ( | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Accounts receivable, net | ||||||||||||||
| Inventory, net | ( | ( | ||||||||||||
| Prepaid expenses and other assets | ( | ( | ||||||||||||
| Accounts payable | ( | |||||||||||||
| Accrued expenses | ( | |||||||||||||
| Other noncurrent liabilities | ( | ( | ||||||||||||
| Net cash used in operating activities | ( | ( | ||||||||||||
| Cash provided by (used in) investing activities | ||||||||||||||
| Capital expenditures | ( | ( | ||||||||||||
| Return of investment in joint venture | ||||||||||||||
| Proceeds from corporate-owned life insurance | ||||||||||||||
| Other investing activities, net | ||||||||||||||
| Net cash provided by (used in) investing activities | ( | |||||||||||||
| Cash provided by financing activities | ||||||||||||||
| Repayments of long-term debt and lease liabilities | ( | ( | ||||||||||||
| Proceeds from short-term financings | ||||||||||||||
| Repayment of short-term financings | ( | |||||||||||||
| Proceeds from revolving line of credit | ||||||||||||||
| Repayments of revolving line of credit | ( | |||||||||||||
| Payments of deferred financing costs | ( | ( | ||||||||||||
| Other financing activities, net | ( | |||||||||||||
| Net cash provided by financing activities | ||||||||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | ( | |||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of the period | ||||||||||||||
| Cash, cash equivalents, and restricted cash at end of the period | $ | $ | ||||||||||||
| (in thousands) | As of September 30, | |||||||||||||
| 2021 | 2020 | |||||||||||||
| Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | ||||||||||||
See Notes to Consolidated Financial Statements
7
POWER SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies and Other Information
Nature of Business Operations
Power Solutions International, Inc. (“Power Solutions,” “PSI” or the “Company”), a Delaware corporation, is a global producer and distributor of a broad range of high-performance, certified, low-emission power systems, including alternative-fueled power systems for original equipment manufacturers (“OEMs”) of off-highway industrial equipment and certain on-road vehicles and large custom-engineered integrated electrical power generation systems.
The Company’s customers include large, industry-leading and multinational organizations. The Company’s products and services are sold predominantly to customers throughout North America as well as to customers located throughout the Pacific Rim and Europe. The Company’s power systems are highly engineered, comprehensive systems which, through the Company’s technologically sophisticated development and manufacturing processes, including its in-house design, prototyping, testing and engineering capabilities and its analysis and determination of the specific components to be integrated into a given power system (driven in large part by emission standards and cost considerations), allow the Company to provide its customers with power systems customized to meet specific OEM application requirements, other technical customers’ specifications and requirements imposed by environmental regulatory bodies.
The Company’s power system configurations range from a basic engine integrated with appropriate fuel system components to completely packaged power systems that include any combination of cooling systems, electronic systems, air intake systems, fuel systems, housings, power takeoff systems, exhaust systems, hydraulic systems, enclosures, brackets, hoses, tubes and other assembled componentry. The Company also designs and manufactures large, custom-engineered integrated electrical power generation systems for both standby and prime power applications. The Company purchases engines from third-party suppliers and produces internally designed engines, all of which are then integrated into its power systems.
Of the other components that the Company integrates into its power systems, a substantial portion consist of internally designed components and components for which it coordinates significant design efforts with third-party suppliers, with the remainder consisting largely of parts that are sourced off-the-shelf from third-party suppliers. Some of the key components (including purchased engines) embody proprietary intellectual property of the Company’s suppliers. As a result of its design and manufacturing capabilities, the Company is able to provide its customers with a power system that can be incorporated into a customer’s specified application. In addition to the certified products described above, the Company sells diesel, gasoline and non-certified power systems and aftermarket components.
Stock Ownership and Control
In March 2017, the Company executed a share purchase agreement (the “SPA”) with Weichai America Corp., a wholly-owned subsidiary of Weichai Power Co., Ltd. (HK2338, SZ000338) (herein collectively referred to as “Weichai”). Under the terms of the SPA, Weichai invested $60.0 million in the Company purchasing a combination of newly issued Common and Preferred Stock as well as a stock purchase warrant (the “Weichai Warrant”).
With the exercise of the Weichai Warrant in April 2019, Weichai owns a majority of the outstanding shares of the Company’s common stock par value $0.001 (“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 Certificate of Incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of the Company or changes in management and will make the approval of certain transactions impractical without the support of Weichai.
Weichai also entered into an Investor Rights Agreement (the “Rights Agreement”) with the Company upon execution of the SPA. The Rights Agreement provides Weichai with representation on the Company’s Board of Directors (the “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
In March 2021, the Company entered into an amended and restated uncommitted revolving credit agreement between the Company and Standard Chartered Bank (“Standard Chartered”), as administrative agent (the “Amended and Restated Uncommitted Revolving Credit Agreement”). The Amended and Restated Uncommitted Revolving Credit Agreement continues to allow the Company to borrow up to $130.0 million and matures on March 25, 2022. Under the Amended and
8
Restated Uncommitted Revolving Credit Agreement, Standard Chartered has the right to demand payment of any and all outstanding borrowings and other amounts outstanding under the Amended and Restated Uncommitted Revolving Credit Agreement at any point in time at its discretion. In connection with the execution of the Amended and Restated Uncommitted Revolving Credit Agreement, the Company entered into an amendment and restatement of the shareholder’s loan agreement originally executed with Weichai in December 2020 (the “First Amended and Restated Shareholder’s Loan Agreement”). The First Amended and Restated Shareholder’s Loan Agreement provides the Company with access to $130.0 million of credit solely for purposes of repaying outstanding borrowings under the Amended and Restated Uncommitted Revolving Credit Agreement. The First Amended and Restated Shareholder’s Loan Agreement expires on April 25, 2022. The Amended and Restated Uncommitted Revolving Credit Agreement provides Standard Chartered with a power of attorney (“POA”) to submit a borrowing request to Weichai under the First Amended and Restated Shareholder’s Loan Agreement if the Company fails to submit a borrowing request within five business days of receiving a request from Standard Chartered. As of September 30, 2021, the Company had $130.0 million outstanding under the Amended and Restated Uncommitted Revolving Credit Agreement.
On July 14, 2021, the Company entered into an additional Shareholder’s Loan Agreement (the “Second Shareholder’s Loan Agreement”) with Weichai. The Second Shareholder’s Loan Agreement provides the Company with a $25 million uncommitted facility that is subordinated to the Amended and Restated Uncommitted Revolving Credit Agreement and any borrowing requests made under the Second Shareholder’s Loan Agreement are subject to Weichai’s discretionary approval. Borrowings under the Second Shareholder’s Loan Agreement bear interest at LIBOR plus 4.50 % and can be used for general corporate purposes, except for certain legal expenditures which require additional approval from Weichai. The Second Shareholder’s Loan Agreement expires on May 20, 2022 with any outstanding principal and accrued interest due upon maturity. As of November 12, 2021, the Company had $25.0 million outstanding under the Second Shareholder’s Loan Agreement.
See Note 6. Debt for further information regarding the terms and conditions of the Company’s debt agreements.
The Amended and Restated Uncommitted Revolving Credit Agreement includes financial covenants which were effective for the Company beginning with the three months ended June 30, 2021. The financial covenants include an interest coverage ratio and a minimum threshold for earnings before interest, taxes, depreciation and amortization (“EBITDA”) as further defined in the Amended and Restated Uncommitted Revolving Credit Agreement. For both the three months ended June 30, 2021 and September 30, 2021, the Company did not meet the defined minimum interest coverage ratio nor the minimum EBITDA threshold. A breach of the financial covenants under the Amended and Restated Uncommitted Revolving Credit Agreement constitutes an event of default and, if not cured or waived, could result in the obligations under the Amended and Restated Uncommitted Revolving Credit Agreement being accelerated. On November 9, 2021, the Company entered into a waiver with Standard Chartered, which waived the financial covenant defaults for the quarters ended June 30 and September 30, 2021 in exchange for the payment of a $0.6 million fee by the Company to Standard Chartered.
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 Amended and Restated Uncommitted Revolving Credit Agreement in the future. Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay amounts owing under its existing debt arrangements as they become due. In order to provide the Company with a more permanent source of liquidity, management plans to seek an extension and amendment and/or replacement of its existing debt agreements or seek additional liquidity from its current or other lenders before the maturity dates in 2022 as discussed above. 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.
Additionally, as discussed further below, the global economy continues to be impacted by the outbreak of the coronavirus (“COVID-19”) that was first declared a global pandemic (the “COVID-19 pandemic”) in March 2020. The potential for continued disruptions, economic uncertainty, and unfavorable oil and gas market dynamics may continue to have a material adverse impact on the results of operations, financial position and liquidity of the Company.
The Company’s management has concluded that, due to uncertainties surrounding the Company’s future ability to refinance, extend and amend, or repay its outstanding indebtedness under its existing debt arrangements, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Amended and
9
Restated Uncommitted Revolving Credit Agreement in the future, substantial doubt exists as to its ability to continue as a going concern within one year after the date that these financial statements are issued. 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 Amended and Restated Uncommitted Revolving Credit Agreement in the future, and extending and amending, refinancing or repaying the indebtedness outstanding under the Company’s existing debt arrangements.
COVID-19 Pandemic and Other Recent Business Impacts
During 2020, as a result of the COVID-19 pandemic, the global economy experienced substantial turmoil, which led to challenging market conditions across certain areas of the Company’s business. In addition, due to unprecedented decreases in demand, an oil price war, and economic uncertainty resulting from the COVID-19 pandemic, average crude oil prices were considerably lower in 2020 as compared to prices at the end of 2019. Since May 2020, crude oil prices increased considerably from their lows reached in April 2020. However, U.S. rig counts have been slower to return as the average count during the first nine months of 2021 remains below the average for the first nine months of 2020 and significantly below the full year average during 2019. Meanwhile, capital spending within the U.S. oil markets remains well below 2019 levels. These factors have contributed to a challenging environment for the sale of the Company’s oil and gas related products through the first nine months of 2021. A significant portion of the Company’s sales and profitability is derived from the sale of products that are used within the oil and gas industry. In addition, the Company has experienced delays in its supply chain during the first nine months of 2021 due to temporary shortages of raw materials and container delays of overseas materials as bottlenecks occurred at ports in Asia and North America. This, in turn, caused delivery delays to some of the Company’s customers. The Company also experienced inflationary cost pressures for certain materials and shipping-related costs. Additionally, the Company has also experienced higher tariff costs as a result of the non-renewal of certain tariff exclusions. The Company is working to mitigate the impact of these matters through price increases and other measures, such as obtaining certain tariff exclusions, where possible. The potential for continued disruptions, economic uncertainty, and unfavorable oil and gas market dynamics may have a material adverse impact on the timing of delivery of customer orders and the levels of future customer orders.
Additionally, during the first nine months of 2021, the Company incurred significantly higher legal costs due to its obligation to indemnify certain former officers and employees as a result of exhaustion of its directors and officers insurance during the early part of 2020. In particular, spending activity was elevated in the first nine months of 2021 as a result of the United States Attorney’s Office for the Northern District of Illinois (the “USAO”) trial involving former officers and employees of the Company. With a verdict reached in the USAO trial matter involving former officers and employees, the Company believes its costs related to the matter will cease. However, at this time, the Company is not able to estimate the potential future amount of its indemnity obligations related to the pending U.S. Securities and Exchange Commission (“SEC”) matter involving prior officers and employees. See Note 9. Commitments and Contingencies for further discussion of the Company’s indemnification obligations. Accordingly, the above challenges may continue to have a material adverse impact on the Company’s future results of operations, financial position, and liquidity.
Basis of Presentation and Consolidation
The Company is filing this Form 10-Q for the three and nine months ended September 30, 2021, which contains unaudited consolidated financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020.
10
The Company operates as one business and geographic operating segment. Operating segments are defined as components of a business that can earn revenue and incur expenses for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker (“CODM”). The Company’s CODM is its principal executive officer, who decides how to allocate resources and assess performance. A single management team reports to the CODM, who manages the entire business. The Company’s CODM reviews consolidated statements of operations to make decisions, allocate resources and assess performance, and the CODM does not evaluate the profit or loss from any separate geography or product line.
Concentrations
The following table presents customers individually accounting for more than 10% of the Company’s net sales:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Customer A | % | % | % | % | ||||||||||||||||||||||
| Customer B | % | % | % | % | ||||||||||||||||||||||
| Customer C | ** | % | ** | % | ||||||||||||||||||||||
The following table presents customers individually accounting for more than 10% of the Company’s accounts receivable:
| As of September 30, 2021 | As of December 31, 2020 | |||||||||||||
| Customer B | % | % | ||||||||||||
| Customer C | % | ** | ||||||||||||
| Customer D | ** | % | ||||||||||||
The following table presents suppliers individually accounting for more than 10% of the Company’s purchases:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Supplier A | % | % | ** | % | ||||||||||||||||||||||
| Supplier B | % | ** | % | ** | ||||||||||||||||||||||
**Less than 10% of the total
Use of Estimates
Research and Development
Restricted Cash
As of September 30, 2021, the Company had restricted cash of $0.1 million related to a customer agreement executed in July 2021. The restricted cash is held in an escrow account and could be required to be refunded to the customer if conditions occur
11
as defined in the agreement with the customer. The Company has not recognized revenue associated with the restricted cash and has recorded a liability in September 2021 within Noncurrent Contract Liabilities on the Consolidated Balance Sheet of $0.3 million.
Inventories
Inventories consisted of the following:
(in thousands) Inventories | As of September 30, 2021 | As of December 31, 2020 | ||||||||||||
Raw materials * | $ | $ | ||||||||||||
| Work in process | ||||||||||||||
| Finished goods | ||||||||||||||
| Total inventories | ||||||||||||||
| Inventory allowance | ( | ( | ||||||||||||
| Inventories, net | $ | $ | ||||||||||||
*As of September 30, 2021 and December 31, 2020, raw materials included $12.0 million and $36.6 million, respectively, of 6.0L engines that were purchased for a customer under a long-term supply agreement. See Note 2. Revenue for additional information related to contract liabilities and remaining performance obligations related to these engines.
Activity in the Company’s inventory allowance was as follows:
| (in thousands) | For the Nine Months Ended September 30, | |||||||||||||
| Inventory Allowance | 2021 | 2020 | ||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||
| Charged to expense | ||||||||||||||
| Write-offs | ( | ( | ||||||||||||
| Balance at end of period | $ | $ | ||||||||||||
Other Accrued Liabilities
Other accrued liabilities consisted of the following:
(in thousands) Other Accrued Liabilities | As of September 30, 2021 | As of December 31, 2020 | ||||||||||||
| Accrued product warranty | $ | $ | ||||||||||||
Litigation reserves * | ||||||||||||||
| Contract liabilities | ||||||||||||||
| Accrued compensation and benefits | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Accrued interest expense | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
*As of September 30, 2021 and December 31, 2020 litigation reserves related to various ongoing legal matters including associated legal fees as well as accrued indemnification costs related to former officers and employees of the Company. See Note 9. Commitments and Contingencies for additional information.
12
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.
Accrued product warranty activities are presented below:
| (in thousands) | For the Nine Months Ended September 30, | |||||||||||||
| Accrued Product Warranty | 2021 | 2020 | ||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||
Current year provision * | ||||||||||||||
Changes in estimates for preexisting warranties ** | ||||||||||||||
| Payments made during the period | ( | ( | ||||||||||||
| Balance at end of period | ||||||||||||||
| Less: current portion | ||||||||||||||
| Noncurrent accrued product warranty | $ | $ | ||||||||||||
*Warranty costs, net of supplier recoveries, were $14.8 million and $18.2 million for the nine months ended September 30, 2021 and 2020, respectively. Supplier recoveries were $3.3 million and $4.6 million for the nine months ended September 30, 2021 and 2020, respectively.
Recently Issued Accounting Pronouncements – Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting, which provided optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendment allows entities to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. The guidance was effective upon issuance and expires after December 31, 2022. There was no impact on the Company’s Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows or Statement of Stockholders’ (Deficit) Equity as a result of this guidance. The Company continues to monitor contracts potentially impacted by reference rate reform, including the Company’s debt agreements, and will continue to assess the potential impacts of this guidance as reference rates are updated.
Recently Issued Accounting Pronouncements – Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which applies primarily to the Company’s accounts receivable impairment loss allowances. The guidance provides a revised model whereby the current expected credit losses are used to compute impairment of financial instruments. The new model requires evaluation of historical experience and various current and expected factors, which may affect the estimated amount of losses and requires determination of whether the affected financial instruments should be grouped in units of account. The guidance, as originally issued, was effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates of these standards for certain entities. Based on the guidance, the effective date of ASU 2016-13 is deferred for the Company until fiscal year 2023. The Company currently plans to adopt the guidance on January 1, 2023 when it becomes effective. The Company is continuing to assess the impact of the standard on its consolidated financial statements.
13
Note 2. Revenue
Disaggregation of Revenue
The following table summarizes net sales by end market:
| (in thousands) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| End Market | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Energy | $ | $ | $ | $ | ||||||||||||||||||||||
| Industrial | ||||||||||||||||||||||||||
| Transportation | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
The following table summarizes net sales by geographic area:
| (in thousands) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| Geographic Area | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||||||||||||
| Pacific Rim | ||||||||||||||||||||||||||
| Europe | ||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
Contract Balances
| (in thousands) | As of September 30, 2021 | As of December 31, 2020 | ||||||||||||
Short-term contract assets (included in Prepaid expenses and other current assets) | $ | $ | ||||||||||||
Short-term contract liabilities (included in Other accrued liabilities) | ( | ( | ||||||||||||
Long-term contract liabilities (included in Noncurrent contract liabilities) | ( | ( | ||||||||||||
| Net contract liabilities | $ | ( | $ | ( | ||||||||||
During the nine months ended September 30, 2021 and 2020, the Company recognized $32.5 million and $18.4 million, respectively, of revenue upon satisfaction of performance obligations related to amounts that were included in the net contract liabilities balance as of December 31, 2020 and 2019, respectively. The increase in the contract asset during the nine months ended September 30, 2021 is related to the Company’s right to consideration being conditional at the end of the period. The decrease in the contract liabilities during the nine months ended September 30, 2021 was primarily related to revenue recognized upon satisfaction of performance obligations related to 6.0L engines that were previously prepaid by a customer under a long-term supply agreement.
Remaining Performance Obligations
For performance obligations that extend beyond one year, the Company had $19.0 million of remaining performance obligations as of September 30, 2021 primarily related to a long-term manufacturing contract with a customer and extended warranties. The Company expects to recognize revenue related to these remaining performance obligations of approximately $15.6 million in the remainder of 2021, $0.8 million in 2022, $0.9 million in 2023, $0.9 million in 2024, $0.3 million in 2025 and less than $0.5 million in 2026 and beyond.
Note 3. Weichai Transactions
14
In December 2020, the Company entered into the Shareholder’s Loan Agreement with Weichai. The Shareholder’s Loan Agreement was amended and restated in March 2021. On July 14, 2021, the Company entered into the Second Shareholder’s Loan Agreement with Weichai. See additional discussion of these debt agreements in Note 6. Debt.
Weichai Collaboration Arrangement and Related Party Transactions
The Company and Weichai executed a strategic collaboration agreement (the “Collaboration Agreement”) in March 2017, in order to achieve their respective strategic objectives and enhance the strategic cooperation alliance to share experiences, expertise and resources. Among other things, the Collaboration Agreement established a joint steering committee, permitted Weichai to second a limited number of certain technical, marketing, sales, procurement and finance personnel to work at the Company and established several collaborations related to stationary natural-gas applications and Weichai diesel engines. The Collaboration Agreement provided for the steering committee to create various sub-committees with operating roles and otherwise governs the treatment of intellectual property of parties prior to the collaboration and the intellectual property developed during the collaboration. The Collaboration Agreement is set to expire in March 2023.
The Company evaluates whether an arrangement is a collaborative arrangement at its inception based on the facts and circumstances specific to the arrangement. The Company also reevaluates whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards dependent on the ultimate commercial success of the endeavor. For those collaborative arrangements where it is determined that the Company is the principal participant, costs incurred, and revenue generated from third parties are recorded on a gross basis in the financial statements. For the three and nine months ended September 30, 2021 and 2020, the Company’s sales to Weichai were immaterial in all periods. Purchases of inventory from Weichai were $3.2 million and $9.9 million for the three and nine months ended September 30, 2021, respectively. Purchases of inventory from Weichai were $4.1 million and $16.3 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021 and December 31, 2020, the Company had immaterial receivables from Weichai and outstanding accounts payables to Weichai of $10.1 million and $4.0 million, respectively.
Note 4. Property, Plant and Equipment
Property, plant and equipment by type were as follows:
| (in thousands) | As of September 30, 2021 | As of December 31, 2020 | ||||||||||||
| Property, Plant and Equipment | ||||||||||||||
| Leasehold improvements | $ | $ | ||||||||||||
| Machinery and equipment | ||||||||||||||
| Construction in progress | ||||||||||||||
| Total property, plant and equipment, at cost | ||||||||||||||
| Accumulated depreciation | ( | ( | ||||||||||||
| Property, plant and equipment, net | $ | $ | ||||||||||||
Note 5. Goodwill and Other Intangibles
Goodwill
The carrying amount of goodwill at both September 30, 2021 and December 31, 2020 was $29.8 11.6
15
Other Intangible Assets
Components of intangible assets are as follows:
| (in thousands) | As of September 30, 2021 | |||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Book Value | ||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||
| Developed technology | ( | |||||||||||||||||||
| Trade names and trademarks | ( | |||||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||
| (in thousands) | As of December 31, 2020 | |||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Book Value | ||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ||||||||||||||||
| Developed technology | ( | |||||||||||||||||||
| Trade names and trademarks | ( | |||||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||
Note 6. Debt
The Company’s outstanding debt consisted of the following:
| (in thousands) | As of September 30, 2021 | As of December 31, 2020 | ||||||||||||
| Short-term financing: | ||||||||||||||
| Revolving credit facility * | $ | $ | ||||||||||||
| Other short-term financing | ||||||||||||||
| Total Short-Term Debt | $ | $ | ||||||||||||
| Long-term debt: | ||||||||||||||
| Finance leases and other debt | ||||||||||||||
| Total long-term debt and finance leases | ||||||||||||||
| Less: Current maturities of long-term debt and finance leases | ||||||||||||||
| Long-term debt | $ | $ | ||||||||||||
*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 $1.0 million and $1.1 million as of September 30, 2021 and December 31, 2020, respectively.
Credit Agreement and Shareholders’ Loan Agreement
On March 26, 2021, the Company entered into the Amended and Restated Uncommitted Revolving Credit Agreement with Standard Chartered. The Amended and Restated Uncommitted Revolving Credit Agreement allows the Company to borrow up to $130 million (all of which has been fully borrowed as of September 30, 2021), is uncommitted, and matures on March 25, 2022. Borrowings under the Amended and Restated Uncommitted Revolving Credit Agreement shall bear interest at either the alternate base rate or LIBOR plus 2.70 %. In addition, the Company paid fees of $1.9 million related to the Amended and Restated Uncommitted Revolving Credit Agreement, which were deferred and are being amortized over the term of the Amended and Restated Uncommitted Revolving Credit Agreement. The Amended and Restated Uncommitted Revolving Credit Agreement is secured by substantially all of the Company’s assets and includes financial covenants related to the Company’s financial performance for the second, third, and fourth quarters of 2021. There were no financial covenants applicable to the first quarter of 2021. The Amended and Restated Uncommitted Revolving Credit Agreement gives Standard Chartered the right to demand payment of any and all of the outstanding borrowings and other amounts owed under the Amended and Restated Uncommitted Revolving Credit Agreement at any point in time prior to the maturity date at Standard Chartered’s discretion. Furthermore, the Amended and Restated Uncommitted Revolving Credit Agreement grants Standard Chartered a power of attorney (POA) to submit a borrowing request to Weichai under the amended Shareholder’s Loan
16
Agreement (see discussion below) if the Company does not submit a borrowing request to Weichai within five business days of receiving a request from Standard Chartered to submit said borrowing request.
In connection with the Amended and Restated Uncommitted Revolving Credit Agreement, the Company entered into the First Amended and Restated Shareholder’s Loan Agreement with Weichai. The First Amended and Restated Shareholder’s Loan Agreement provides the Company with a $130 million secured subordinated loan facility that expires on April 25, 2022. Under the First Amended and Restated Shareholder’s Loan Agreement, Weichai is obligated to advance funds solely for purposes of repaying outstanding borrowings under the Amended and Restated Uncommitted Revolving Credit Agreement if the Company is unable to repay such borrowings. Any potential borrowings under the First Amended and Restated Shareholder’s Loan Agreement would bear interest at LIBOR plus 4.50 % per annum.
As discussed above, the Amended and Restated Uncommitted Revolving Credit Agreement includes financial covenants which were effective for the Company beginning with the three months ended June 30, 2021 and each of the third and fourth quarters of 2021. The financial covenants include an interest coverage ratio and a minimum EBITDA threshold as further defined in the Amended and Restated Credit Agreement. For both the three months ended June 30, 2021 and September 30, 2021, the Company did not meet the defined minimum interest coverage nor EBITDA requirements. A breach of the financial covenants under the Amended and Restated Uncommitted Revolving Credit Agreement constitutes an event of default which, if not cured or waived, could result in the obligations under the Amended and Restated Uncommitted Revolving Credit Agreement being accelerated. On November 9, 2021, the Company entered into a waiver with Standard Chartered, which waived the financial covenant defaults for the quarters ended June 30 and September 30, 2021. In connection with the waiver, a waiver fee of $0.6 million will be remitted to Standard Chartered on or before November 15, 2021.
On July 14, 2021, the Company entered into an additional Shareholder’s Loan Agreement (the “Second Shareholder’s Loan Agreement”) with Weichai. The Second Shareholder’s Loan Agreement provides the Company with a $25 million uncommitted facility that is subordinated to the Amended and Restated Uncommitted Revolving Credit Agreement and any borrowing requests made under the Second Shareholder’s Loan Agreement are subject to Weichai’s discretionary approval. Borrowings under the Second Shareholder’s Loan Agreement bear interest at LIBOR plus 4.50 % and can be used for general corporate purposes, except for certain legal expenditures which require additional approval from Weichai. The Second Shareholder’s Loan Agreement expires on May 20, 2022 with any outstanding principal and accrued interest due upon maturity. As of November 12, 2021, the Company had $25.0 million outstanding under the Second Shareholder’s Loan Agreement.
Note 7. Leases
Leases
The Company has obligations under lease arrangements primarily for facilities, equipment and vehicles. These leases have original lease periods expiring between November 2021 and July 2034. For the three and nine months ended September 30, 2021, the Company recorded lease expense of $1.4 million and $4.4 million within Cost of sales, $0.1 million and $0.3 million within Research, development, and engineering expenses, less than $0.1 0.1 1.4 million and $4.9 million within Cost of sales, $0.4 million and $0.5 million within Research, development and engineering expenses, $0.1 million and $0.2 million within Selling, general and administrative expenses and less than $0.1
The following table summarizes the components of lease expense:
| (in thousands) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Finance lease cost | ||||||||||||||||||||||||||
| Amortization of right-of-use (“ROU”) asset | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
Short-term lease cost | ||||||||||||||||||||||||||
Variable lease cost | ||||||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
17
The following table presents supplemental cash flow information related to leases:
| (in thousands) | For the Nine Months Ended September 30, | |||||||||||||
| 2021 | 2020 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Operating cash flows paid for operating leases | $ | $ | ||||||||||||
| Operating cash flows paid for interest portion of finance leases | ||||||||||||||
| Financing cash flows paid for principal portion of finance leases | ||||||||||||||
Right-of-use assets obtained in exchange for lease obligations | ||||||||||||||
Operating leases | ||||||||||||||
| Finance leases | ||||||||||||||
As of September 30, 2021 and December 31, 2020, the weighted-average remaining lease term was 5.9 years and 6.2 years for operating leases and 3.5 years and 3.8 years for finance leases, respectively. The weighted-average discount rate was 7.1 6.7
The following table presents supplemental balance sheet information related to leases:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
Operating lease ROU assets, net 1 | $ | $ | ||||||||||||
Operating lease liabilities, current 2 | ||||||||||||||
Operating lease liabilities, non-current 3 | ||||||||||||||
Total operating lease liabilities | $ | $ | ||||||||||||
Finance lease ROU assets, net 1 | $ | $ | ||||||||||||
Finance lease liabilities, current 2 | ||||||||||||||
Finance lease liabilities, non-current 3 | ||||||||||||||
Total finance lease liabilities | $ | $ | ||||||||||||
1.Included in for operating leases and for finance leases on the Consolidated Balance Sheets.
2.Included in for operating leases and for finance leases on the Consolidated Balance Sheets.
3.Included in for operating leases and for finance leases on the Consolidated Balance Sheets.
18
The following table presents maturity analysis of lease liabilities as of September 30, 2021:
| (in thousands) | Operating Leases | Finance Leases | ||||||||||||
| Three months ending December 31, 2021 | $ | $ | ||||||||||||
| Year ending December 31, 2022 | ||||||||||||||
| Year ending December 31, 2023 | ||||||||||||||
| Year ending December 31, 2024 | ||||||||||||||
| Year ending December 31, 2025 | ||||||||||||||
| Thereafter | ||||||||||||||
Total undiscounted lease payments | ||||||||||||||
Less: imputed interest | ||||||||||||||
Total lease liabilities | $ | $ | ||||||||||||
Note 8. Fair Value of Financial Instruments
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, the Company classifies each fair-value measurement as follows:
•Level 1 – based on quoted prices in active markets for identical assets or liabilities;
•Level 2 – based on other significant observable inputs for the assets or liabilities through corroborations with market data at the measurement date; and
•Level 3 – based on significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.
Financial Instruments Measured at Carrying Value
Current Assets
Cash and cash equivalents are measured at carrying value, which approximates fair value because of the short-term maturities of these instruments.
Debt
| (in thousands) | As of September 30, 2021 | |||||||||||||||||||||||||
| Carrying Value | Fair Value | |||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Revolving credit facility | $ | $ | $ | $ | ||||||||||||||||||||||
| Other short-term financing | 25,459 | |||||||||||||||||||||||||
| (in thousands) | As of December 31, 2020 | |||||||||||||||||||||||||
| Carrying Value | Fair Value | |||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Revolving credit facility | $ | $ | $ | $ | ||||||||||||||||||||||
Note 9. 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,
19
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. As further discussed in Part II. Item 8. Financial Statements and Supplementary Data., Note 10. Commitments and Contingencies of the Company’s 2020 Form 10-K, 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.
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 for 60 days. The court also ordered the parties to schedule a settlement conference with the Magistrate Judge in May 2021 which went forward without a settlement being reached. The stay remains in place pending further guidance from the Court. As of September 30, 2021 and December 31, 2020, the Company had recorded an estimated liability of $0.3
Mast Powertrain v. the Company
In February 2020, the Company received a demand for arbitration from Mast Powertrain, LLC (“Mast”) pursuant to a development agreement entered into in November 2011 (the “Development Agreement”). Mast claimed that it is owed more than $9.0 million in past royalties and other damages for products sold by the Company pursuant to the Development Agreement. The Company disputed Mast’s damages, denied that any royalties are owed to Mast, denied any liability, and counterclaimed for overpayment on invoices paid to Mast. Mast subsequently clarified its claim for past royalties owed to be approximately $4.5 million. In July 2021, the Company reached a settlement with Mast to resolve past claims for royalties owed for $1.5 million which the Company had previously recorded within Selling, general and administrative expenses in the Statement of Operations for the year-ended December 31, 2020. As of September 30, 2021 and December 31, 2020, the Company had recognized a liability of $1.0 million and $1.5 million, respectively, within Other accrued liabilities on the Consolidated Balance Sheet related to the settlement of this matter. In addition, the Company entered into an agreement with Mast under which Mast will provide various technical services.
Gary Winemaster Litigation v. The Company
20
In August 2021, the Company’s former Chairman of the Board and former Chief Executive Officer and President, Gary Winemaster (“Winemaster”) filed suit in the Court of Chancery of the State of Delaware against the Company and Travelers Casualty and Surety Company of America (“Travelers”) alleging the Company’s breach of its advancement obligations under Winemaster’s indemnification agreement and Travelers’ breach of the side A policy between Traveler’s and the Company of which Winemaster is a beneficiary. In his complaint, Winemaster is seeking reimbursement under his indemnification agreement in excess of $7.2 million of attorney’s fees plus interest incurred by Winemaster in his defense of the Department of Justice (“DOJ”) case, U.S. v. Winemaster et al.. Since the filing of the complaint, Travelers has paid approximately $7.5 million to Winemaster’s attorneys, Latham and Watkins, under the Company’s side A policy to settle existing outstanding attorney’s fees. The Company expects Travelers to seek reimbursement from it for those costs pursuant to the terms of the side A policy. In addition, the Company has recorded an accrued liability for these legal fees with the bulk of these accrued for in periods prior to the quarter ended September 30, 2021. In October 2021, the Company and Gary Winemaster entered into a Stipulation and [Proposed] Advancement Order to handle all future attorney’s fees relating to his DOJ case and his pending SEC case, SEC v. Winemaster et al. to the extent not reimbursed by Travelers under the side A policy.
Jeffrey Ehlers and Rick Lulloff Litigation
In September 2021 Jeffrey Ehlers and Rick Lulloff (“Lulloff”), former employees of the Company, made demand against the Company for approximately $2.4 million and $1.2 million, respectively, for alleged wages due and owing under each employee’s employment contract related to “Incentive Bonuses” for revenues generated in the Company’s transportation end market. In November 2021, Lulloff filed a complaint 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 his claims in the above referenced demand letter. Given the preliminary stage of the matter, the Company cannot predict the outcome of this matter, the reasonable possibility or range of loss, or meaningfully quantify how the final resolution of this matter may impact its results of operations, financial condition or cash flow and therefore no accrual has been made as of September 30, 2021.
Indemnification Agreements
Under the Company’s bylaws and certain indemnification agreements, the Company has obligations to indemnify current and former officers and directors and certain current and former employees. As a result of cumulative legal fees and settlements previously paid, the Company fully exhausted its primary directors’ and officers’ insurance coverage of $30 million during the first quarter of 2020. Additional expenses currently expected to be incurred and that will occur in the future and/or liabilities that may be imposed in connection with actions against certain of the Company’s past directors and officers and certain former employees who are entitled to indemnification will be funded by the Company with its existing cash resources. The Company accrues for such costs as incurred within Selling, general and administrative expenses in the Company’s Consolidated Statements of Operations. For the three and nine months ended September 30, 2021, the Company incurred $1.6 million and $15.2 million, respectively, of costs related to these indemnification obligations and $1.7 million and $5.5 million for the three and nine months ended September 30, 2020. Included in the total indemnification obligations incurred for the three and nine months ended September 30, 2021 are costs of $1.7 million and $9.6 million, respectively, that the Company incurred on behalf of Gary Winemaster, former Chairman of the Board and former Chief Executive Officer and President, who is also a related party. For the three and nine months ended September 30, 2020 these costs were $1.2 million and $3.6 million, respectively.
In June 2020, the Company entered into a new directors’ and officers’ liability insurance policy, which was renewed in June 2021. 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 September 30, 2021, the Company had five outstanding letters of credit totaling $2.1 million. The letters of credit primarily serve as collateral for the Company for certain facility leases and insurance policies. As discussed in Note 1. Summary of Significant Accounting Policies and Other Information, the Company had restricted cash of $3.1 million as of September 30, 2021 related to these letters of credit.
21
Note 10. Income Taxes
On a quarterly basis, the Company computes an estimated annual effective tax rate considering ordinary income and related income tax expense. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs.
The Company has assessed 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 assessing the need for a valuation allowance. In assessing the realizability of the Company’s deferred tax assets, the Company considered whether it is more likely than not that some or all deferred tax assets will be realized through the generation of future taxable income. In making this determination, the Company assessed all evidence available at the time, including recent earnings, forecasted income projections and historical performance. The Company determined that the negative evidence outweighed the objectively verifiable positive evidence and continues to maintain a full valuation allowance against deferred tax assets.
Note 11. Stockholders’ Equity
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 at December 31, 2020 | ||||||||||||||||||||
| Net shares issued for Stock awards | — | ( | ||||||||||||||||||
| Balance as of September 30, 2021 | ||||||||||||||||||||
Note 12. Loss Per Share
The Company computes basic loss per share by dividing net loss by the weighted-average common shares outstanding during the year. Diluted loss per share is calculated to give effect to all potentially dilutive common shares that were outstanding during the year. Weighted-average diluted common shares outstanding primarily reflect the additional shares that would be issued upon the assumed exercise of stock options and the assumed vesting of unvested share awards. The treasury stock method has been used to compute diluted loss per share for the three and nine months ended September 30, 2021 and 2020.
The Company issued Stock Appreciation Rights (“SARs”) and Restricted Stock Awards (“RSAs”), all of which have been evaluated for their potentially dilutive effect under the treasury stock method. See Note 13. Stock-Based Compensation in the Company’s 2020 Annual Report for additional information on the SARs and the RSAs.
22
The computations of basic and diluted loss per share are as follows:
| (in thousands, except per share basis) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Numerator: | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Denominator: | |||||||||||||||||||||||
| Shares used in computing net loss per share: | |||||||||||||||||||||||
Weighted-average common shares outstanding – basic | |||||||||||||||||||||||
Effect of dilutive securities | |||||||||||||||||||||||
Weighted-average common shares outstanding – diluted | |||||||||||||||||||||||
| Loss per common share: | |||||||||||||||||||||||
| Loss per share of common stock – basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Loss per share of common stock – diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The aggregate number of shares excluded from the diluted loss per share calculations, because they would have been anti-dilutive, were 0.1 million and 0.2 million shares for the three and nine months ended September 30, 2021 and 0.2 no
Note 13. Related Party Transactions
Weichai Transactions
See Note 3. Weichai Transactions for information regarding the Amended and Restated Shareholder’s Loan Agreement, the Second Shareholder’s Loan Agreement and the Collaboration Agreement with Weichai.
Transactions with Joint Ventures
MAT-PSI Holdings, LLC
In December 2012, the Company and MAT Holdings, Inc. (“MAT”) entered into an agreement to create MAT-PSI Holdings, LLC (“MAT-PSI”), which was intended to be a holding company of its 100 % Chinese wholly-owned foreign entity, referred to as Green Power. The Company invested $0.9 million for its 50 % share of MAT-PSI, which was formed to manufacture, assemble and supply natural gas, gas and alternative-fueled power systems to Chinese and Asian forklift customers. The venture established a production facility in Dalian and also sourced base engines from a local Chinese factory. As MAT-PSI was not profitable, the venture was closed in 2017; however, the Company had previously been in dispute with Green Power related to the wind up of the joint venture and outstanding receivables. On March 29, 2021, the Company executed a settlement agreement with MAT and Green Power which resolved the dispute. The final settlement agreement did not have a material impact on the Company’s consolidated financial statements.
Doosan-PSI, LLC
In 2015, the Company and Doosan Infracore Co., Ltd. (“Doosan”), a subsidiary of Doosan Group, entered into an agreement to form Doosan-PSI, LLC. The Company invested $1.0 million to acquire 50 % of the venture, which was formed to operate in the field of developing, designing, testing, manufacturing, assembling, branding, marketing, selling, distributing and providing support for industrial gas engines and all components and materials required for assembly of the gas engines to the global power generation market outside of North America and South Korea. In the fourth quarter of 2019, Doosan and the Company agreed to wind down and dissolve the joint venture. In the second quarter of 2021, the Company received a cash distribution from the joint venture of $2.2 million as a result of the final wind down and dissolution of the joint venture.
23
Joint Venture Operating Results
The Company’s investments in joint ventures are accounted for under the equity method of accounting. Expense from this investment for the nine months ended September 30, 2021 was less than $0.1 million. Income from this investment was less than $0.1 million and $0.3 million for the three and nine months ended September 30, 2020, respectively. The joint venture operating results are presented in Other income, net in the Company’s Consolidated Statements of Operations.
Other Related Party Transactions
See Note 9. Commitments and Contingencies for information regarding the Company’s indemnification obligations related to certain former directors and officers of the Company.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis includes forward-looking statements about the Company’s business and consolidated results of operations for the three and nine months ended September 30, 2021 and 2020, including discussions about management’s expectations for the Company’s business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and are made in light of recent events and trends. These statements should not be construed either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause the Company’s actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. See “Forward-Looking Statements.” The following discussion should also be read in conjunction with the Company’s unaudited consolidated financial statements and the related Notes included in this Quarterly Report.
Executive Overview
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 energy, industrial and transportation end markets with primary manufacturing, assembly, engineering, research and development (“R&D”), sales and distribution facilities located in suburban Chicago, Illinois and Darien, 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 U.S. Environment Protection Agency (“EPA”), the California Air Resource Board (“CARB”) and the People’s Republic of China’s Ministry of Ecology and Environment (“MEE”).
The Company’s products are primarily used by global original equipment manufacturers (“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. The Company manages the business as a single reporting segment.
For the three months ended September 30, 2021, the Company’s net sales increased $3.2 million, or 3%, from the three months ended September 30, 2020 to $117.6 million, the result of increased sales of $10.7 million in the industrial end market, partly offset by decreases of $5.5 million and $2.0 million within the transportation and energy end markets, respectively. Gross margin for the three months ended September 30, 2021 was 9.6%, a decrease of 630 basis points versus 15.9% in the comparable 2020 period. Gross profit decreased by $6.8 million for the three months ended September 30, 2021, while operating expenses decreased by $2.3 million, versus the comparable period in 2020. Other expense (income), net increased by $1.1 million during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The Company recorded an income tax benefit of $0.1 million during the three months ended September 30, 2021 compared to a benefit of $0.2 million in the prior year. Collectively, these factors contributed to a $5.7 million increase in the net loss, which totaled $7.2 million in the 2021 period compared to net loss of $1.5 million in the same period in 2020. Diluted loss per share was $0.31 in the 2021 period compared to diluted loss per share of $0.06 in the comparable 2020 period. Adjusted net loss, which excludes certain items described below that the Company believes are not indicative of its ongoing operating performance, was $4.8 million in the 2021 period, compared to Adjusted net income of $0.7 million in 2020. Adjusted loss per share was $0.21 in 2021 compared to Adjusted earnings per share of $0.03 in 2020. Adjusted earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) was a loss of $1.5 million in 2021 compared to Adjusted EBITDA of $4.3 million in 2020. Adjusted net loss (income), Adjusted loss (income) per share and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of each of these measures to the nearest applicable GAAP financial measure, as well as additional information about these non-GAAP measures, see the section entitled Non-GAAP Financial Measures in this Item 2.
For the nine months ended September 30, 2021, the Company’s net sales increased $16.7 million, or 5%, compared to the nine months ended September 30, 2020, as a result of sales increases across the transportation and industrial end markets of $34.3 million and $14.4 million, respectively, partly offset by a $31.9 million decrease in the energy end market. Gross margin was 9.6% and 12.7% during the nine months ended September 30, 2021 and 2020, respectively. Gross profit decreased during the nine months ended September 30, 2021 by $8.1 million compared to the nine months ended September 30, 2020, while operating expenses increased by $7.7 million as compared to the comparable period in 2020. Interest expense increased by $1.0 million for the nine months ended September 30, 2021 versus the comparable period in 2020. Loss on the extinguishment of debt decreased by $0.5 million. Other expense (income), net increased by $1.2 million during the nine months ended September 30, 2021. Also, the Company recorded an income tax benefit of $0.3 million for the nine months ended September 30, 2021 versus a benefit of $3.8 million for the same period last year. Collectively, these factors contributed to a $21.0 million increase in the net loss, which totaled $40.9 million in the 2021 period compared to a net loss of $19.9 million in the same period of 2020. Diluted loss per share was $1.79 in the 2021 period compared to diluted loss per share of $0.87 in the comparable 2020 period. Adjusted net loss, which excludes certain items described below that the Company believes are not indicative of its ongoing operating performance, was $21.6 million in the 2021 period compared to Adjusted net loss of $12.2 million in 2020.
25
Adjusted loss per share was $0.95 in 2021 compared to Adjusted loss per share of $0.53 in 2020. Adjusted EBITDA was a loss of $10.5 million in 2021 compared to an Adjusted EBITDA loss of $1.6 million in 2020. Adjusted net loss (income), Adjusted loss (earnings) per share and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of each of these measures to the nearest applicable GAAP financial measure, as well as additional information about these non-GAAP measures, see the section entitled Non-GAAP Financial Measures in this Item 2.
Net sales by geographic area and by end market for the three and nine months ended September 30, 2021 and 2020 are presented below:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||
| Geographic Area | % of Total | % of Total | % of Total | % of Total | ||||||||||||||||||||||||||||||||||
| North America | $ | 105,766 | 89 | % | $ | 104,840 | 92 | % | $ | 299,550 | 91 | % | $ | 281,339 | 90 | % | ||||||||||||||||||||||
| Pacific Rim | 7,914 | 7 | % | 5,466 | 5 | % | 18,862 | 5 | % | 18,215 | 6 | % | ||||||||||||||||||||||||||
| Europe | 1,729 | 2 | % | 2,395 | 2 | % | 5,297 | 2 | % | 7,630 | 2 | % | ||||||||||||||||||||||||||
| Others | 2,221 | 2 | % | 1,749 | 1 | % | 5,570 | 2 | % | 5,419 | 2 | % | ||||||||||||||||||||||||||
| Total | $ | 117,630 | 100 | % | $ | 114,450 | 100 | % | $ | 329,279 | 100 | % | $ | 312,603 | 100 | % | ||||||||||||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||
| End Market | % of Total | % of Total | % of Total | % of Total | ||||||||||||||||||||||||||||||||||
| Energy | $ | 31,801 | 27 | % | $ | 33,813 | 30 | % | $ | 81,611 | 25 | % | $ | 113,546 | 36 | % | ||||||||||||||||||||||
| Industrial | 40,576 | 34 | % | 29,843 | 26 | % | 111,796 | 34 | % | 97,437 | 31 | % | ||||||||||||||||||||||||||
| Transportation | 45,253 | 39 | % | 50,794 | 44 | % | 135,872 | 41 | % | 101,620 | 33 | % | ||||||||||||||||||||||||||
| Totals | $ | 117,630 | 100 | % | $ | 114,450 | 100 | % | $ | 329,279 | 100 | % | $ | 312,603 | 100 | % | ||||||||||||||||||||||
26
Results of Operations
Results of operations for the three and nine months ended September 30, 2021 compared with the three and nine months ended September 30, 2020:
| (in thousands, except per share amounts) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | 2021 | 2020 | Change | % Change | |||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 117,630 | $ | 114,450 | $ | 3,180 | 3 | % | $ | 329,279 | $ | 312,603 | $ | 16,676 | 5 | % | ||||||||||||||||||||||||||||||||||
| Cost of sales | 106,288 | 96,281 | 10,007 | 10 | % | 297,673 | 272,943 | 24,730 | 9 | % | ||||||||||||||||||||||||||||||||||||||||
| Gross profit | 11,342 | 18,169 | (6,827) | (38) | % | 31,606 | 39,660 | (8,054) | (20) | % | ||||||||||||||||||||||||||||||||||||||||
| Gross margin % | 9.6 | % | 15.9 | % | (6.3) | % | 9.6 | % | 12.7 | % | (3.1) | % | ||||||||||||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Research, development and engineering expenses | 5,437 | 6,555 | (1,118) | (17) | % | 17,772 | 19,121 | (1,349) | (7) | % | ||||||||||||||||||||||||||||||||||||||||
| Research, development and engineering expenses as a % of sales | 4.6 | % | 5.7 | % | (1.1) | % | 5.4 | % | 6.1 | % | (0.7) | % | ||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 10,958 | 11,964 | (1,006) | (8) | % | 47,858 | 38,434 | 9,424 | 25 | % | ||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses as a % of sales | 9.3 | % | 10.5 | % | (1.2) | % | 14.5 | % | 12.3 | % | 2.2 | % | ||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 634 | 763 | (129) | (17) | % | 1,901 | 2,290 | (389) | (17) | % | ||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 17,029 | 19,282 | (2,253) | (12) | % | 67,531 | 59,845 | 7,686 | 13 | % | ||||||||||||||||||||||||||||||||||||||||
| Operating loss | (5,687) | (1,113) | (4,574) | NM | (35,925) | (20,185) | (15,740) | 78 | % | |||||||||||||||||||||||||||||||||||||||||
| Other expense, net: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | 1,623 | 1,510 | 113 | 7 | % | 5,253 | 4,211 | 1,042 | 25 | % | ||||||||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | — | % | — | 497 | (497) | (100) | % | ||||||||||||||||||||||||||||||||||||||||
| Other expense (income), net | — | (947) | 947 | (100) | % | 1 | (1,202) | 1,203 | (100) | % | ||||||||||||||||||||||||||||||||||||||||
| Total other expense, net | 1,623 | 563 | 1,060 | 188 | % | 5,254 | 3,506 | 1,748 | 50 | % | ||||||||||||||||||||||||||||||||||||||||
| Loss before income taxes | (7,310) | (1,676) | (5,634) | NM | (41,179) | (23,691) | (17,488) | 74 | % | |||||||||||||||||||||||||||||||||||||||||
| Income tax benefit | (133) | (210) | 77 | (37) | % | (281) | (3,771) | 3,490 | (93) | % | ||||||||||||||||||||||||||||||||||||||||
| Net loss | $ | (7,177) | $ | (1,466) | $ | (5,711) | NM | $ | (40,898) | $ | (19,920) | $ | (20,978) | 105 | % | |||||||||||||||||||||||||||||||||||
| Loss per common share: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | (0.31) | $ | (0.06) | $ | (0.25) | NM | $ | (1.79) | $ | (0.87) | $ | (0.92) | 106 | % | |||||||||||||||||||||||||||||||||||
| Diluted | $ | (0.31) | $ | (0.06) | $ | (0.25) | NM | $ | (1.79) | $ | (0.87) | $ | (0.92) | 106 | % | |||||||||||||||||||||||||||||||||||
| Non-GAAP Financial Measures: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted net (loss) earnings * | $ | (4,841) | $ | 652 | $ | (5,493) | NM | $ | (21,571) | $ | (12,197) | $ | (9,374) | 77 | % | |||||||||||||||||||||||||||||||||||
| Adjusted (loss) earnings per share – diluted * | $ | (0.21) | $ | 0.03 | $ | (0.24) | NM | $ | (0.95) | $ | (0.53) | $ | (0.42) | 79 | % | |||||||||||||||||||||||||||||||||||
| EBITDA * | $ | (3,851) | $ | 1,911 | $ | (5,762) | NM | $ | (30,378) | $ | (13,268) | $ | (17,110) | 129 | % | |||||||||||||||||||||||||||||||||||
| Adjusted EBITDA * | $ | (1,515) | $ | 4,316 | $ | (5,831) | (135) | % | $ | (10,496) | $ | (1,640) | $ | (8,856) | NM | |||||||||||||||||||||||||||||||||||
NM Not meaningful
*Non-GAAP measurement, see reconciliation below
27
Net Sales
Net sales increased $3.2 million, or 3%, during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 as a result of higher sales of $10.7 million in the industrial end market, partly offset by decreases of $5.5 million and $2.0 million within the transportation and energy and markets, respectively. The increase in industrial end market sales was primarily due to higher demand for products across various applications, with the largest increase attributable to products used within the material handling/forklift industry. The decrease within the transportation end market primarily reflects a decrease in sales within the terminal tractor and school bus markets. Lower energy end market sales were driven by decreased sales of the Company’s power generation products.
Net sales increased $16.7 million, or 5%, during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, as a result of higher sales of $34.3 million and $14.4 million in the transportation and industrial end markets, respectively, partly offset by a decrease of $31.9 million in the energy end market. The increase in transportation end market sales was primarily due to higher sales of products used in the medium duty truck market partly resulting from lower sales volumes in the first nine months of 2020 due to the acceleration of shipments of certain engines during the fourth quarter of 2019, in combination with the continued sell down of certain 6.0L engines that were previously prepaid by a customer under a long-term supply agreement. Higher sales within the transportation end market were partly offset by lower demand for products used in the terminal tractor and school bus markets. Higher sales within the industrial end market reflects increased demand for products used across various applications, with the largest increases attributable to higher demand for products used in the material handling/forklift, arbor care and industrial cleaning equipment markets. Lower energy end market sales were driven by decreased demand for the Company’s power generation products, especially for demand response products and those used within the oil and gas industry.
Gross Profit
Gross profit decreased during the three months ended September 30, 2021 by $6.8 million, or 38%, compared to the three months ended September 30, 2020. Gross margin was 9.6% and 15.9% during the three months ended September 30, 2021 and 2020, respectively. The decrease in gross margin is primarily due to significantly higher warranty expenses, material cost increases, higher tariff and freight costs and unfavorable product mix. For the three months ended September 30, 2021, warranty costs were $7.3 million, an increase of $4.6 million compared to warranty costs of $2.7 million last year, due largely to higher charges for adjustments to preexisting warranties and lower recognized recoveries during the three months ended September 30, 2021.
Gross profit decreased during the nine months ended September 30, 2021 by $8.1 million, or 20%, compared to the nine months ended September 30, 2020. Gross margin was 9.6% and 12.7% during the nine months ended September 30, 2021 and 2020, respectively. The decline in gross margin is primarily due to material cost increases, unfavorable product mix, and higher tariff and freight costs, partly mitigated by lower warranty expense, the impact of higher sales and cost savings driven by actions to improve manufacturing operations. For the nine months ended September 30, 2021, warranty costs were $14.8 million, a decrease of $3.4 million compared to warranty costs of $18.2 million last year, due largely to lower charges for adjustments to preexisting warranties, partly offset by lower recognized recoveries during the nine months ended September 30, 2021.
Research, Development and Engineering Expenses
Research, development and engineering expenses during the three months ended September 30, 2021 were $5.4 million, a decrease of $1.1 million, or 17%, from the three months ended September 30, 2020. The decrease was primarily related to the timing of projects and lower wages and benefits driven by reduced headcount.
Research, development and engineering expenses during the nine months ended September 30, 2021 were $17.8 million, a decrease of $1.3 million, or 7%, from the nine months ended September 30, 2020. The decrease was primarily due to lower wages and benefits driven by reduced headcount, coupled with lower overall general expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased during the three months ended September 30, 2021 by $1.0 million, or 8%, compared to the three months ended September 30, 2020. The decrease was primarily due to lower legal costs related to the Company’s indemnification obligations of former officers and employees, in part the result of decreased spending activity during the three months ended September 30, 2021 in relation to the USAO’s trial involving former officers and employees, which concluded in September 2021 (see additional discussion in Note 9. Commitments and Contingencies in Part I, Item 1. Financial Statements). The Company also experienced lower severance costs. These decreases were partly offset by higher wages and benefits expense as 2020 included salary reductions and other cost containment actions.
Selling, general and administrative expenses increased during the nine months ended September 30, 2021 by $9.4 million, or 25%, compared to the nine months ended September 30, 2020. The increase was primarily due to the Company’s indemnification obligations of former officers and employees as a result of the exhaustion of its directors’ and officers’
28
insurance during the early part of 2020 coupled with elevated spending activity during the nine months ended September 30, 2021 as a result of the USAO’s trial (which concluded in September 2021) involving former officers and employees during the period (see additional discussion in Note 9. Commitments and Contingencies in Part I, Item 1. Financial Statements). The Company also experienced higher wages and benefits expense as 2020 included salary reductions and other cost containment actions. In addition, there were higher severance costs in 2021 as compared to 2020. These increases were partly offset by lower financial reporting costs during the nine months ended September 30, 2021.
Interest Expense
Interest expense was $1.6 million for the three months ended September 30, 2021 as compared to $1.5 million for the three months ended September 30, 2020.
Interest expense was $5.3 million for the nine months ended September 30, 2021 as compared to $4.2 million for the nine months ended September 30, 2020, largely due to higher average outstanding debt and a higher overall effective interest rate on the Company’s debt during the nine months ended September 30, 2021, as compared to the prior year.
Loss on Extinguishment of Debt
There was no impact related to the loss on the extinguishment of debt during 2021. The Company recognized a loss on the extinguishment of debt of $0.5 million for nine months ended September 30, 2020 related to the repayment of its revolving credit facility with Wells Fargo Bank, N.A and its unsecured senior notes in April 2020. These debt instruments were replaced by a new senior secured revolving credit facility with Standard Chartered Bank.
See Note 6. Debt, included in Part I, Item 1. Financial Statements, for additional information regarding the Company’s current debt agreements.
Other Expense (Income), Net
Other expense (income), net experienced no activity during the three months ended September 30, 2021 compared to income of $0.9 million during the three months ended September 30, 2020 primarily due to the receipt of life insurance proceeds upon the death of a former employee during the 2020 period.
Other expense (income), net experienced a loss of less than $0.1 million during the nine months ended September 30, 2021 compared to income of $1.2 million during the nine months ended September 30, 2020 primarily due to the receipt of life insurance proceeds upon the death of a former employee and equity earnings from the Company’s joint venture.
Income Tax Expense
The Company recorded an income tax benefit of $0.1 million for the three months ended September 30, 2021, as compared to income tax expense of $0.2 million for the three months ended September 30, 2020. The Company’s pretax loss was $7.3 million for the three months ended September 30, 2021, compared to pretax loss of $1.7 million for the three months ended September 30, 2020. Income tax benefit for the three months ended September 30, 2021 primarily related to an adjustment in the impact of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Company continues to record a full valuation allowance against deferred tax assets which offsets the tax benefit associated with the pre-tax loss for both the three months ended September 30, 2021 and 2020.
The Company recorded an income tax benefit of $0.3 million for the nine months ended September 30, 2021, as compared to an income tax benefit of $3.8 million for the nine months ended September 30, 2020. The Company’s pretax loss was $41.2 million for the nine months ended September 30, 2021, compared to pretax loss of $23.7 million for the nine months ended September 30, 2020. The Company continues to record a full valuation allowance against deferred tax assets which offsets the tax benefits associated with the pre-tax loss for both the nine months ended September 30, 2021 and 2020. The income tax benefit for the nine months ended September 30, 2020 is primarily attributable to the enactment of the CARES Act in the period.
See Note 10. Income Taxes, included in Part I, Item 1. Financial Statements, for additional information related to the Company’s income tax provision.
29
Non-GAAP Financial Measures
In addition to the results provided in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) above, this report also includes non-GAAP (adjusted) financial measures. Non-GAAP financial measures provide insight into selected financial information and should be evaluated in the context in which they are presented. 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 amounts 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.
| Non-GAAP Financial Measure | Comparable GAAP Financial Measure | ||||
| Adjusted net income (loss) | Net income (loss) | ||||
| Adjusted earnings (loss) per share | Earnings (loss) per common share – diluted | ||||
| EBITDA | Net income (loss) | ||||
| Adjusted EBITDA | Net income (loss) | ||||
The Company believes that Adjusted net income (loss), Adjusted earnings (loss) per share, EBITDA, and Adjusted EBITDA provide relevant and useful information, which is widely used by analysts, investors and competitors in its industry as well as by the Company’s management in assessing the performance of the Company. Adjusted net income (loss) is defined as net income (loss) as adjusted for certain items that the Company believes are not indicative of its ongoing operating performance. Adjusted earnings (loss) per share is a measure of the Company’s diluted earnings (loss) 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 charges and certain other items that do not reflect the ordinary earnings of the Company’s operations.
Adjusted net income (loss), Adjusted earnings (loss) per share, EBITDA, and Adjusted EBITDA are used by management for various purposes, including as a measure of performance of the Company’s operations and as a basis for strategic planning and forecasting. Adjusted net income (loss), Adjusted earnings (loss) 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 alternative measures of operating results or cash flow from operations as determined in accordance with U.S. GAAP.
The following table presents a reconciliation from Net loss to Adjusted net (loss) earnings for the three and nine months ended September 30, 2021 and 2020:
| (in thousands) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net loss | $ | (7,177) | $ | (1,466) | $ | (40,898) | $ | (19,920) | ||||||||||||||||||
Stock-based compensation 1 | 102 | 165 | 334 | 482 | ||||||||||||||||||||||
Loss on debt extinguishment 2 | — | — | — | 497 | ||||||||||||||||||||||
Severance 3 | (2) | 332 | 690 | 332 | ||||||||||||||||||||||
Incremental financial reporting 4 | — | 4 | — | 1,783 | ||||||||||||||||||||||
Internal control remediation 5 | 268 | 137 | 971 | 1,029 | ||||||||||||||||||||||
Government investigations and other legal matters 6 | 1,968 | 2,697 | 17,887 | 8,435 | ||||||||||||||||||||||
Life insurance proceeds 7 | — | (930) | — | (930) | ||||||||||||||||||||||
Discrete income tax items 8 | — | (287) | (555) | (3,905) | ||||||||||||||||||||||
| Adjusted net (loss) earnings | $ | (4,841) | $ | 652 | $ | (21,571) | $ | (12,197) | ||||||||||||||||||
30
The following table presents a reconciliation from Loss per common share – diluted to Adjusted (loss) earnings per share for the three and nine months ended September 30, 2021 and 2020:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Loss per common share – diluted | $ | (0.31) | $ | (0.06) | $ | (1.79) | $ | (0.87) | ||||||||||||||||||
Stock-based compensation 1 | — | 0.01 | 0.01 | 0.02 | ||||||||||||||||||||||
Loss on debt extinguishment 2 | — | — | — | 0.02 | ||||||||||||||||||||||
Severance 3 | — | 0.01 | 0.03 | 0.01 | ||||||||||||||||||||||
Incremental financial reporting 4 | — | — | — | 0.08 | ||||||||||||||||||||||
Internal control remediation 5 | 0.01 | 0.01 | 0.04 | 0.05 | ||||||||||||||||||||||
Government investigations and other legal matters 6 | 0.09 | 0.11 | 0.78 | 0.37 | ||||||||||||||||||||||
Life insurance proceeds 7 | — | (0.04) | — | (0.04) | ||||||||||||||||||||||
Discrete income tax items 8 | — | (0.01) | (0.02) | (0.17) | ||||||||||||||||||||||
| Adjusted (loss) earnings per share – diluted | $ | (0.21) | $ | 0.03 | $ | (0.95) | $ | (0.53) | ||||||||||||||||||
| Diluted shares (in thousands) | 22,920 | 22,881 | 22,902 | 22,866 | ||||||||||||||||||||||
The following table presents a reconciliation from Net loss to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2021 and 2020:
| (in thousands) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Net loss | $ | (7,177) | $ | (1,466) | $ | (40,898) | $ | (19,920) | ||||||||||||||||||
| Interest expense | 1,623 | 1,510 | 5,253 | 4,211 | ||||||||||||||||||||||
| Income tax benefit | (133) | (210) | (281) | (3,771) | ||||||||||||||||||||||
| Depreciation | 1,202 | 1,314 | 3,647 | 3,922 | ||||||||||||||||||||||
| Amortization of intangible assets | 634 | 763 | 1,901 | 2,290 | ||||||||||||||||||||||
| EBITDA | (3,851) | 1,911 | (30,378) | (13,268) | ||||||||||||||||||||||
Stock-based compensation 1 | 102 | 165 | 334 | 482 | ||||||||||||||||||||||
Loss on debt extinguishment 2 | — | — | — | 497 | ||||||||||||||||||||||
Severance 3 | (2) | 332 | 690 | 332 | ||||||||||||||||||||||
Incremental financial reporting 4 | — | 4 | — | 1,783 | ||||||||||||||||||||||
Internal control remediation 5 | 268 | 137 | 971 | 1,029 | ||||||||||||||||||||||
Government investigations and other legal matters 6 | 1,968 | 2,697 | 17,887 | 8,435 | ||||||||||||||||||||||
Life insurance proceeds 7 | — | (930) | — | (930) | ||||||||||||||||||||||
| Adjusted EBITDA | $ | (1,515) | $ | 4,316 | $ | (10,496) | $ | (1,640) | ||||||||||||||||||
1.Amounts reflect non-cash stock-based compensation expense.
2.Amount represents the loss on the extinguishment of the Company’s prior credit facility with Wells Fargo Bank, N.A. and the unsecured senior notes in April 2020.
3.Amounts represent severance and other post-employment costs for certain former employees of the Company.
4.Amounts represent professional services fees related to the Company’s efforts to prepare, audit and file delinquent financial statements with the SEC, as well as tax compliance matters impacted by the restatement of prior period financial statements. The amounts exclude $0.1 million and $1.0 million for the three and nine months ended September 30, 2020.
5.Amounts represent professional services fees related to the Company’s efforts to remediate internal control material weaknesses including certain costs to upgrade IT systems.
6.Amounts include professional services fees for the three and nine months ended September 30, 2021 of $1.6 million and $15.2 million, respectively, and $1.7 million and $5.5 million for the three and nine months ended September 30, 2020, respectively, related to costs to indemnify certain former officers and employees of the Company. The Company is obligated to pay legal costs of certain former officers and employees in accordance with Company bylaws and certain indemnification agreements. As further discussed in Note 9. Commitments and Contingencies of Part I, Item 1. Financial Statements, the Company fully exhausted its historical primary directors’ and officers’ insurance coverage in connection with these matters during the first quarter of 2020. Also included are professional services fees and reserves related to certain other legal matters.
7.Amount represents a life insurance payment to the Company related to the death of a former employee.
8.Amounts for all periods include adjustments to impacts of the CARES Act; the nine months ended September 30, 2020 also include a change in the deferred tax liability related to an indefinite lived intangible asset.
31
Cash Flows
Cash was impacted as follows:
| (in thousands) | For the Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||||||||||||
| Net cash used in operating activities | $ | (39,101) | $ | (2,283) | $ | (36,818) | *NM | |||||||||||||||||||
| Net cash provided by (used in) investing activities | 195 | (1,054) | 1,249 | 119 | % | |||||||||||||||||||||
| Net cash provided by financing activities | 22,713 | 33,360 | (10,647) | (32) | % | |||||||||||||||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | $ | (16,193) | $ | 30,023 | $ | (46,216) | (154) | % | ||||||||||||||||||
| Capital expenditures | $ | (2,156) | $ | (1,991) | $ | (165) | (8) | % | ||||||||||||||||||
*NMNot meaningful
Cash Flows for the Nine Months Ended September 30, 2021
Cash Flow from Operating Activities
Net cash used in operating activities was $39.1 million in the nine months ended September 30, 2021 compared to net cash used in operating activities of $2.3 million in the nine months ended September 30, 2020, resulting in an increase of $36.8 million in cash used in operating activities year-over-year. The increase in cash used by operating activities was primarily related to an increase in the net loss of $21.0 million and a $16.8 million decrease in cash generated from working capital accounts, partially offset by an increase of $1.1 million in non-cash adjustments. The decrease in cash generated from working capital in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily related to lower accounts receivable collections and an increase in cash outflows associated with inventory purchases and a net increase in liabilities. The increase in the cash outflow for inventory for the nine months ended September 30, 2021 compared to the same period in 2020 was largely due to increased purchases of inventory during the nine months ended September 30, 2021 to support forecasted sales growth in the fourth quarter of 2021. The net increase in liabilities was largely due to increased accounts payable related to the previously discussed increased inventory purchases as well as due to the timing of management of payables, partly offset by a decline in accrued expenses. The increase in non-cash adjustments was primarily due to increased amortization of deferred financing fees.
Cash Flow from Investing Activities
Net cash provided by investing activities was $0.2 million for the nine months ended September 30, 2021 compared to cash used in investing activities of $1.1 million for the nine months ended September 30, 2020, respectively. For the nine months ended September 30, 2021, cash provided by investing activities primarily related to a return of investment upon the liquidation of a joint venture partly offset by capital expenditures associated with normal maintenance of the Company’s facilities. For the nine months ended September 30, 2020, cash used in investing activities was primarily related to capital expenditures associated with normal maintenance of the Company’s facilities, partly offset by proceeds from corporate-owned life insurance.
Cash Flow from Financing Activities
The Company generated $22.7 million in cash from financing activities in the nine months ended September 30, 2021 compared to $33.4 million in cash generated by financing activities in the nine months ended September 30, 2020. The cash generated by financing activities for the nine months ended September 30, 2021 was primarily attributable to cash received under Second Shareholder’s Loan Agreement with Weichai, compared to net borrowings under the Company’s revolving credit facility for the nine months ended September 30, 2020 partly offset by repayment of the Company’s senior secured notes. See additional discussion below and in Note 6. Debt, included in Part I, Item 1. Financial Statements related to the amendments of the Company’s debt arrangements.
Liquidity and Capital Resources
In March 2021, the Company entered into an amended and restated uncommitted revolving credit agreement between the Company and Standard Chartered Bank (“Standard Chartered”), as administrative agent (the “Amended and Restated Uncommitted Revolving Credit Agreement”). The Amended and Restated Uncommitted Revolving Credit Agreement continues to allow the Company to borrow up to $130.0 million and matures on March 25, 2022. Under the Amended and Restated Uncommitted Revolving Credit Agreement, Standard Chartered has the right to demand payment of any and all outstanding borrowings and other amounts outstanding under the Amended and Restated Uncommitted Revolving Credit Agreement at any point in time at its discretion. In connection with the execution of the Amended and Restated Uncommitted Revolving Credit Agreement, the Company entered into an amendment and restatement of the shareholder’s loan agreement originally executed with Weichai in December 2020 (“the First Amended and Restated Shareholder’s Loan Agreement”). The
32
First Amended and Restated Shareholder’s Loan Agreement provides the Company with access to $130.0 million of credit solely for purposes of repaying outstanding borrowings under the Amended and Restated Uncommitted Revolving Credit Agreement. The First Amended and Restated Shareholder’s Loan Agreement expires on April 25, 2022. The Amended and Restated Uncommitted Revolving Credit Agreement provides Standard Chartered with a power of attorney (“POA”) to submit a borrowing request to Weichai under the First Amended and Restated Shareholder’s Loan Agreement if the Company fails to submit a borrowing request within five business days of receiving a request from Standard Chartered.
As discussed in Item 1. Note 6. Debt, included in Part I, Item 1. Financial Statements, the Amended and Restated Uncommitted Revolving Credit Agreement includes financial covenants which were effective for the Company beginning with the three months ended June 30, 2021 and each of the third and fourth quarters of 2021. The financial covenants include an interest coverage ratio and a minimum EBITDA threshold as further defined in the Amended and Restated Credit Agreement. For both the three months ended June 30, 2021 and September 30, 2021, the Company did not meet the defined minimum interest coverage nor EBITDA requirements. A breach of the financial covenants under the Amended and Restated Uncommitted Revolving Credit Agreement constitutes an event of default which, if not cured or waived, could result in the obligations under the Amended and Restated Uncommitted Revolving Credit Agreement being accelerated. On November 9, 2021, the Company entered into a waiver with Standard Chartered, which waived the financial covenant defaults for the quarters ended June 30 and September 30, 2021 in exchange for the payment of a $0.6 million fee by the Company to Standard Chartered.
On July 14, 2021, the Company entered into an additional Shareholder’s Loan Agreement (the “Second Shareholder’s Loan Agreement”) with Weichai. The Second Shareholder’s Loan Agreement provides the Company with a $25 million uncommitted facility that is subordinated to the Amended and Restated Uncommitted Revolving Credit Agreement and any borrowing requests made under the Second Shareholder’s Loan Agreement are subject to Weichai’s discretionary approval. Borrowings under the Second Shareholder’s Loan Agreement bear interest at LIBOR plus 4.50% and can be used to supplement the Company’s working capital, except for certain legal expenditures which require Weichai’s prior consent. The Second Shareholder’s Loan Agreement expires on May 20, 2022 with any outstanding principal and accrued interest due upon maturity. As of November 12, 2021, the Company had $25.0 million outstanding under the Second Shareholder’s Loan Agreement.
As of September 30, 2021, the Company’s total outstanding debt obligations under the Amended and Restated Uncommitted Credit Agreement and the Second Shareholder’s Loan Agreement were $155.0 million in the aggregate, and its cash and cash equivalents were $5.0 million. See Item 1. Note 6. Debt, included in Part I, Item 1. Financial Statements, for additional information. These amounts reflect a net positive cash impact from customer prepayments of $3.1 million.
As of September 30, 2021, Accounts Payable were approximately $89.7 million reflective of higher inventory, costs incurred related to the Company’s indemnification obligations and the management of timing of payables. The Company is working with Weichai to explore near-term financing solutions in addition to longer-term financing options.
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 Amended and Restated Uncommitted Revolving Credit Agreement 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 it becomes due. Management currently plans to seek an extension and/or replacement of its existing debt arrangements or seek additional liquidity from its current or other lenders before the maturity dates in 2022 as discussed above. There can be no assurance that the Company will be able to successfully complete a refinancing on acceptable terms or repay this outstanding indebtedness when required or if at all.
Additionally, during 2020, as a result of the COVID-19 pandemic, the global economy experienced substantial turmoil, which led to challenging market conditions across certain areas of the Company’s business. In addition, due to unprecedented decreases in demand, an oil price war, and economic uncertainty resulting from the COVID-19 pandemic, average crude oil prices were considerably lower in 2020 as compared to prices at the end of 2019. Since May 2020, crude oil prices increased considerably from their lows reached in April 2020. However, U.S. rig counts have been slower to return as the average count during the first nine months of 2021 remains below the average for the first nine months of 2020 and significantly below the full year average during 2019. Meanwhile, capital spending within the U.S. oil markets remains well below 2019 levels. These circumstances have contributed to a challenging environment for the sale of the Company’s oil and gas related products through the first nine months of 2021. The Company is encouraged with the continued U.S. rig count improvement during 2021; however, there can be no assurance that the Company’s oil and gas related sales will improve during the fourth quarter of 2021. A significant portion of the Company’s sales and profitability is derived from the sale of products that are used within the oil and gas industry. In addition, the Company experienced delays in its supply chain during the first nine months of 2021 due to temporary shortages of raw materials and container delays of overseas materials as bottlenecks occurred at ports in Asia and North America. This, in turn, caused delivery delays to some of the Company’s customers. The Company also experienced inflationary cost pressures for certain materials and shipping related costs. Additionally, the Company has also experienced higher tariff costs as a result of the non-renewal of certain exclusions. The Company is working to mitigate the impact of these
33
matters through price increases and other measures, where possible. The potential for continued disruptions, economic uncertainty, and unfavorable oil and gas market dynamics may have a material adverse impact on the timing of delivery of customer orders and the levels of future customer orders.
Additionally, during the first nine months of 2021, the Company incurred significantly higher legal costs due to its obligation to indemnify certain former officers and employees as a result of exhaustion of its directors and officers insurance during the early part of 2020. In particular, spending activity was elevated in the first nine months of 2021 as a result of the United States Attorney’s Office for the Northern District of Illinois (the “USAO”) trial involving former officers and employees of the Company. With a verdict reached in the USAO trial matter involving former officers and employees, the Company believes its costs related to this matter will cease. However, at this time, the Company is not able to estimate the potential future amount of its indemnity obligations related to the pending U.S. Securities and Exchange Commission (“SEC”) matter involving prior officers and employees. The continued impacts of the above items may result in the recognition of material impairments or other related charges. Moreover, the full impact of the above items on the Company’s operations and liquidity continues to evolve.
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 Amended and Restated Uncommitted Revolving Credit Agreement in the future, substantial doubt exists as to its ability to continue as a going concern within one year after the date that these financial statements are issued. 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.
Off-Balance Sheet Arrangements
At September 30, 2021, the Company had five outstanding letters of credit totaling $2.1 million. See Item 1. Note 9. Commitments and Contingencies for additional information related to the Company’s off-balance sheet arrangements and the outstanding letters of credit.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with U.S GAAP. Preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The Company’s most critical accounting policies and estimates are those most important to the portrayal of its financial condition and results of operations and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Although management believes that its estimates and assumptions are reasonable, they are based on information available when they are made and, therefore, may differ from estimates made under different assumptions or conditions.
The Company’s significant accounting policies are consistent with those discussed in Note 1. Summary of Significant Accounting Policies and Other Information, to the consolidated financial statements and the MD&A section of the Company’s 2020 Annual Report on Form 10-K (the “2020 Annual Report”). During the nine months ended September 30, 2021, there were no significant changes in the application of critical accounting policies.
The Company has identified the following accounting policies as its most critical because they require the Company to make difficult, subjective, and complex judgments:
▪Revenue Recognition
▪Inventories
▪Impairment of Long-Lived Assets
▪Warranty
▪Deferred Tax Asset Valuation Allowance
Impact of New Accounting Standards
For information about recently issued accounting pronouncements, see Note 1. Summary of Significant Accounting Policies and Other Information, included in Part 1, Item 1.
34
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.
35
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Exchange Act as “controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms.” The Company’s disclosure controls and procedures are designed to ensure that material information relating to the Company and its consolidated subsidiaries is accumulated and communicated to its management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2021. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2021, because of the previously reported material weaknesses in internal control over financial reporting, as described below.
Ongoing Remediation of Material Weaknesses in Internal Control over Financial Reporting
As previously disclosed under Item 9A. Controls and Procedures in the 2020 Annual Report, the Company’s management concluded that its internal control over financial reporting was not effective based on the material weaknesses identified. Management is committed to the continued implementation of remediation efforts to address the material weaknesses. The remediation efforts summarized below, which have been or will be implemented, are intended both to address the identified material weaknesses and to enhance the Company’s overall internal control environment.
As further discussed in Part II. Item 8. Financial Statements and Supplementary Data., Note 10. Commitments and Contingencies of the Company’s 2020 Annual Report, 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.
Control Environment, Risk Assessment, Information and Communication, and Monitoring
Control Environment:
Since 2017, the Company has either replaced or appointed new Board and Audit Committee members, a Chief Executive Officer, a Chief Financial Officer, a Chief Commercial Officer, a Chief Information Officer, and a Vice President, Internal Audit. These changes, along with the actions of these individuals and other senior management, have collectively improved the tone of integrity, transparency and support of the Company’s updated Code of Business Conduct and Ethics.
The Company has updated its Code of Business Conduct and Ethics and has implemented an ongoing training program to help ensure employees understand and comply with the Code. The Company continues to maintain the program to provide extensive communications and training to employees across the entire organization regarding the importance of integrity and accountability.
The Company has established a process to identify and address internal control weaknesses through the control environment.
IT Skillset and Competency:
The Company continues to assess the level of technical skills in the information technology (“IT”) function to support the design and implementation of IT general controls (“ITGCs”). The IT function has been reorganized under the leadership of a Chief Information Officer who reports to the Chief Executive Officer. The Company hired an IT Security lead in the fourth quarter of 2020 and is actively recruiting for certain technical IT positions. The Company continues to supplement a portion of the IT resources with temporary resources to assist with performing certain technical IT activities.
Segregation of Duties:
▪The Company has established a segregation of duties framework for assessing roles and responsibilities across the Company and within the Enterprise Resource Planning System (“ERP System”). The Company is working to finalize the segregation of duties review for all cycles.
▪The Company has implemented a technical upgrade to its ERP System and is redesigning system access roles across the Company to improve the segregation of incompatible duties.
36
▪The Company is designing and implementing various processes and controls to adequately segregate job responsibilities and system access throughout the organization and implementing applicable mitigating internal controls.
Control Activities
As part of the overall remediation plan, the Company is designing and implementing review and approval controls over data utilized in various accounting processes. These controls will address the accuracy, timely recording and completeness of data used in the determination of significant accounting estimates, reserves, and valuations as well as impacted presentation and disclosures in accordance with U.S. GAAP.
Revenue Accounting:
▪The Company has designed and implemented policies and procedures to ensure that critical inputs affecting the accuracy and timeliness of revenue recognition and related reserves and sales allowances are communicated to the accounting department on a timely basis.
▪The Company has established and implemented improved review and approval controls across the Company to ensure that revenue, including that of nonroutine revenue transactions, is recognized consistently in accordance with the terms of the contracts and customers and U.S. GAAP.
Reserves and Accruals:
The Company is implementing enhanced controls over the review and approval of key reserves and accruals, including, warranty reserves and excess and obsolete inventory.
Period End Close/Accounting Documentation:
▪The Company has designed and is implementing procedures and controls over the period-end close process and related documentation including, but not limited to, period-end checklists, review and approval of journal entries, taxes, inventory in-transit, account roll forwards and reconciliations, general ledger account maintenance and financial statement analysis/thresholds.
Information Technology:
▪The Company has reconstructed its ITGC framework to focus on controls that mitigate key financial reporting risks.
▪The Company has designed and is implementing controls over access, change management and IT operations to ensure that access rights are restricted to appropriate individuals, and that data integrity is maintained via effective change management controls over system updates and over the flow of data between systems.
Data Maintenance:
▪The Company is designing and implementing procedures and controls to appropriately identify and assess changes made to data repositories that could significantly impact data integrity and the internal control framework, including, but not limited to, (i) creating centralized, complete and accurate data repositories, (ii) maintaining customer and vendor master files, employee data files, perpetual inventory records, inventory physical and cycle counts, and stock compensation agreements and (iii) communicating an enterprise data management policy and record retention policy.
▪The Company has developed and is implementing procedures to ensure completeness and accuracy of the data used in the design and operation of internal controls.
When fully implemented and operational, the Company believes the measures described above will remediate the control deficiencies that have led to the material weaknesses it has identified and will strengthen its internal control over financial reporting. The Company is committed to continuing to improve its internal control processes and it will continue to review its financial reporting controls and procedures. As the Company continues to evaluate and work to improve its internal control over financial reporting, it may determine that a need exists to take additional measures to address control deficiencies or modify certain remediation measures described above.
Changes in Internal Control over Financial Reporting
Other than the ongoing remediation efforts described above, there have been no changes in the Company’s internal control over financial reporting during the three and nine months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
37
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 9. Commitments and Contingencies, included in Part I, Item 1. Financial Statements, for a discussion of legal proceedings, which are incorporated herein by reference.
Item 1A. Risk Factors.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
See Note 6. Debt, included in Part I, Item 1. Financial Statements, for a discussion of the Company’s default under the Amended and Restated Uncommitted Revolving Credit Agreement, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
38
Item 6. Exhibits.
EXHIBIT INDEX
The following documents listed below that have been previously filed with the SEC (1934 Act File No. 001-35944) are incorporated herein by reference:
| Incorporated by Reference Herein | ||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | File No. | |||||||||||||||
| 10.1 | 8-K | 10.1 | 07/20/2021 | 001-35944 | ||||||||||||||||
| 31.1 | * | |||||||||||||||||||
| 31.2 | * | |||||||||||||||||||
| 32.1 | ** | |||||||||||||||||||
| 32.2 | ** | |||||||||||||||||||
| 101.INS | * | XBRL Instance Document. | ||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document. | |||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||||||||||||||
| 101.DEF | * | XBRL Taxonomy Definition Linkbase Document. | ||||||||||||||||||
*Filed with this Report.
**This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 12th day of November 2021.
| POWER SOLUTIONS INTERNATIONAL, INC. | ||||||||||||||
| By: | /s/ Donald P. Klein | |||||||||||||
| Name: | Donald P. Klein | |||||||||||||
| Title: | Chief Financial Officer (Principal Financial Officer) | |||||||||||||
39
Exhibit 31.1
CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lance Arnett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Power Solutions International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: November 12, 2021 | By: | /s/ Lance Arnett | ||||||||||||
| Name: | Lance Arnett | |||||||||||||
| Title: | Chief Executive Officer | |||||||||||||
Exhibit 31.2
CERTIFICATION PURSUANT TO 17 CFR 240.13a-14 PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald P. Klein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Power Solutions International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: November 12, 2021 | By: | /s/ Donald P. Klein | ||||||||||||
| Name: | Donald P. Klein | |||||||||||||
| Title: | Chief Financial Officer | |||||||||||||
Exhibit 32.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Power Solutions International, Inc. (the “Company”) on Form 10-Q for the three and nine months ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lance Arnett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: November 12, 2021 | By: | /s/ Lance Arnett | ||||||||||||
| Name: | Lance Arnett | |||||||||||||
| Title: | Chief Executive Officer | |||||||||||||
This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided by the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Power Solutions International, Inc. (the “Company”) on Form 10-Q for the three and nine months ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald P. Klein, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: November 12, 2021 | By: | /s/ Donald P. Klein | ||||||||||||
| Name: | Donald P. Klein | |||||||||||||
| Title: | Chief Financial Officer | |||||||||||||
This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided by the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.