| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
transition period from ________to________
Power Solutions International, Inc.
| Delaware | 33-0963637 | |
(State or
| ( Identification No.) | |
201 Mittel Drive, Wood Dale, IL | 60191 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
| (630) 350-9400 | ||
| (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 | ||
Registrant’s telephone number, including area code: (630) 350-9400
(Former name or former address, if changed since last report)
| Large accelerated filer | ¨ | Accelerated filer | ||||||
| Non-accelerated filer | x | Smaller reporting company | x | |||||
| ¨ | ||||||||
QUARTER ENDED MARCH 31, 2016
INDEX
| Page | ||||||
| PART I – FINANCIAL INFORMATION | ||||||
| Forward-Looking Statements | ||||||
| Item 1. | Financial Statements | |||||
| Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019 (Unaudited) | ||||||
Notes to | ||||||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||
| Quantitative and Qualitative Disclosures | ||||||
| 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 | ||||||
Statements. ASSETS Current assets Cash Accounts receivable, net Inventories, net Prepaid expenses and other current assets Total current assets Property, plant & equipment, net Intangible assets, net Goodwill Deferred income taxes, net Other noncurrent assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable Accrued compensation and benefits Other accrued liabilities Total current liabilities Long-term obligations Revolving line of credit Private placement warrants Long-term debt, net Other noncurrent liabilities TOTAL LIABILITIES COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY Series A convertible preferred stock – $0.001 par value. Authorized: 114,000 shares. Issued and outstanding: -0- shares at March 31, 2016 and December 31, 2015. Common stock – $0.001 par value. Authorized: 50,000,000 shares. Issued: 11,583,831 shares at March 31, 2016 and December 31, 2015. Outstanding: 10,752,906 at March 31, 2016 and December 31, 2015. Additional paid-in-capital Retained earnings Treasury stock, at cost, 830,925 shares at March 31, 2016 and December 31, 2015. TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY Net sales Cost of goods sold Gross profit Operating expenses: Research & development and engineering Selling General and administrative Amortization of intangible assets Total operating expenses Operating (loss) income Other (income) expense: Interest expense Private placement warrant (income) expense Other expense, net Total other expense Loss before income taxes Income tax (benefit) provision Net loss Weighted-average common shares outstanding: Basic Diluted Loss per common share: Basic Diluted Cash flows from operating activities Net loss Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation Amortization Non-cash interest expense Share-based compensation expense Increase in accounts receivable allowances Increase in inventory reserves (Decrease) increase in valuation of private placement warrants liability Loss on investment in joint venture Loss on disposal of assets (Increase) decrease in operating assets, net of effects of business combination: Accounts receivable Inventories Prepaid expenses and other assets Increase (decrease) in operating liabilities, net of effects of business combination: Accounts payable Accrued compensation and benefits and other accrued liabilities Income taxes payable Other noncurrent liabilities Net cash provided by (used in) operating activities Cash flows from investing activities Purchases of property, plant & equipment Business combination Net cash used in investing activities Cash flows from financing activities Advances from revolving line of credit – noncurrent obligation Repayments of revolving line of credit – noncurrent obligation Payments on long-term debt Net cash (used in) provided by financing activities (Decrease) increase in cash Cash at beginning of period Cash at end of period Supplemental disclosures of cash flow information Cash paid for interest Cash paid for income taxes Supplemental disclosure of non-cash transactions Unpaid property, plant & equipment Other Information included in this Quarterly Report do not include any adjustments that might result from the outcome of the Company’s efforts to address these issues. Assets acquired: Inventories Property, plant & equipment Total tangible assets Intangible assets: Intangible assets Goodwill Total assets acquired $3.4 million at June 30, 2020. Numerator: Net loss Change in the value of Private Placement Warrants Denominator: Weighted average common shares outstanding-basic Incremental shares from assumed exercise of Private Placement Warrants, SAR and restricted stock Weighted average common shares outstanding-diluted Loss per share of common stock – basic and diluted Loss per share of common stock – basic Loss per share of common stock – diluted Specific analysis of individual items or groups of items is performed based on these same criteria, as well as on changes in market conditions or any other identified conditions. Raw material Work in process Finished goods Total inventories Inventory allowance Inventories, net by type were as follows: Land Buildings and improvements Office furniture and equipment Tooling and equipment Transportation equipment Construction in progress Property, plant and equipment, at cost Accumulated depreciation Property, plant and equipment, net covenants under the Credit Agreement constitutes an event of default and, if not cured or waived, could result in the obligations under the Credit Agreement being accelerated. The Company is currently in discussion with Standard Chartered in connection with the financial covenant breach. See Note 1. Market value of the Company’s common stock Exercise price Risk-free interest rate Estimated price volatility Contractual term Dividend yield observable. Balance at December 31, 2015 Decrease in the fair value of private placement warrants liability Balance at March 31, 2016 Seventh Circuit affirmed the district court’s approval of the settlement. The Private placement warrants liability Private placement warrants liability Award description Grant date Recipient(s) Award Expiration SAR I June 6, 2012 Chief Operating Officer 543,872 shares June 6, 2022 SAR II October 19, 2015 Chief Financial Officer 60,000 shares October 19, 2025 SAR III February 22, 2016 103,350 shares February 22, 2026 December 31, 2015 Granted Forfeited Vested March 31, 2016 StatementsCONDENSED (Unaudited)(Dollar amounts in thousands, except per share amounts) March 31,
2016 December 31,
2015 $ 1,495 $ 8,445 63,163 104,365 120,735 130,347 9,496 9,518 194,889 252,675 24,289 26,001 30,316 31,745 41,466 41,466 819 819 7,181 7,230 $ 298,960 $ 359,936 $ 41,491 $ 76,078 3,649 4,009 16,043 19,175 61,183 99,262 80,568 97,299 226 1,482 53,946 53,820 1,670 1,776 197,593 253,639 — — 12 12 75,500 75,179 30,105 35,356 (4,250 ) (4,250 ) 101,367 106,297 $ 298,960 $ 359,936 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.(in thousands, except par values) As of June 30, 2020 As of December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 32,533 $ 3 Restricted cash 3,449 — Accounts receivable, net of allowances of $3,834 and $3,561 as of June 30, 2020 and December 31, 2019, respectively 62,038 104,515 Income tax receivable 3,419 1,055 Inventories, net 140,321 108,839 Prepaid expenses and other current assets 9,500 8,110 Total current assets 251,260 222,522 Property, plant and equipment, net 22,137 23,194 Intangible assets, net 11,845 13,372 Goodwill 29,835 29,835 Other noncurrent assets 22,787 24,749 TOTAL ASSETS $ 337,864 $ 313,672 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 67,367 $ 75,835 Current maturities of long-term debt 282 195 Revolving line of credit 130,000 39,527 Other accrued liabilities 91,004 66,030 Total current liabilities 288,653 181,587 Deferred income taxes 781 1,105 Long-term debt, net of current maturities 816 55,657 Noncurrent contract liabilities 3,062 17,998 Other noncurrent liabilities 34,197 28,828 TOTAL LIABILITIES $ 327,509 $ 285,175 STOCKHOLDERS’ EQUITY Preferred stock – $0.001 par value. Shares authorized: 5,000. No shares issued and outstanding at all dates. $ — $ — Common stock – $0.001 par value; 50,000 shares authorized; 23,117 and 23,117 shares issued; 22,860 and 22,857 shares outstanding at June 30, 2020 and December 31, 2019, respectively 23 23 Additional paid-in capital 165,852 165,527 Accumulated deficit (145,366 ) (126,912 ) Treasury stock, at cost, 257 and 260 shares at June 30, 2020 and December 31, 2019, respectively (10,154 ) (10,141 ) TOTAL STOCKHOLDERS’ EQUITY 10,355 28,497 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 337,864 $ 313,672 CONDENSED (Unaudited)(Dollar amounts in thousands, except per share amounts) Three months
ended March 31,
2016 Three months
ended March 31,
2015 $ 61,814 $ 86,139 57,758 69,682 4,056 16,457 5,250 5,168 2,609 2,750 3,449 3,655 1,429 814 12,737 12,387 (8,681 ) 4,070 1,421 489 (1,256 ) 3,614 85 39 250 4,142 (8,931 ) (72 ) (3,680 ) 1,384 $ (5,251 ) $ (1,456 ) 10,818,678 10,797,056 10,818,678 10,797,056 $ (0.49 ) $ (0.13 ) $ (0.49 ) $ (0.13 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.(in thousands, except per share amounts) For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Net sales $ 93,056 $ 138,684 $ 198,153 $ 254,471 Cost of sales 89,279 113,070 176,662 211,153 Gross profit 3,777 25,614 21,491 43,318 Operating expenses: Research, development and engineering expenses 5,814 6,030 12,566 12,329 Selling, general and administrative expenses 12,580 13,955 26,470 30,015 Amortization of intangible assets 764 909 1,527 1,819 Total operating expenses 19,158 20,894 40,563 44,163 Operating (loss) income (15,381 ) 4,720 (19,072 ) (845 ) Other expense: Interest expense 1,427 2,122 2,701 4,235 Loss from change in value of warrants — 5,752 — 1,352 Loss on extinguishment of debt 497 — 497 — Other income, net (44 ) (395 ) (255 ) (501 ) Total other expense 1,880 7,479 2,943 5,086 Loss before income taxes (17,261 ) (2,759 ) (22,015 ) (5,931 ) Income tax expense (benefit) 481 239 (3,561 ) (347 ) Net loss $ (17,742 ) $ (2,998 ) $ (18,454 ) $ (5,584 ) Weighted-average common shares outstanding: Basic 22,858 21,702 22,858 20,171 Diluted 22,858 21,702 22,858 20,171 Loss per common share: Basic $ (0.78 ) $ (0.14 ) $ (0.81 ) $ (0.28 ) Diluted $ (0.78 ) $ (0.14 ) $ (0.81 ) $ (0.28 ) CONDENSED (in thousands) For the Three Months Ended Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock Total Stockholders’ Equity Balance at March 31, 2020 $ 23 $ 165,691 $ (127,624 ) $ (10,149 ) $ 27,941 Net loss — — (17,742 ) — (17,742 ) Stock-based compensation expense — 165 — (5 ) 160 Payment of withholding taxes for net settlement of stock-based awards — (4 ) — — (4 ) Balance at June 30, 2020 $ 23 $ 165,852 $ (145,366 ) $ (10,154 ) $ 10,355 Balance at March 31, 2019 $ 19 $ 126,977 $ (137,746 ) $ (10,225 ) $ (20,975 ) Net loss — — (2,998 ) — (2,998 ) Stock-based compensation expense — 493 — (100 ) 393 Payment of withholding taxes for net settlement of stock-based awards — (97 ) — — (97 ) Exercise of Weichai Warrant 4 38,064 — — 38,068 Balance at June 30, 2019 $ 23 $ 165,437 $ (140,744 ) $ (10,325 ) $ 14,391 (in thousands) For the Six Months Ended Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock Total Stockholders’ Equity Balance at December 31, 2019 $ 23 $ 165,527 $ (126,912 ) $ (10,141 ) $ 28,497 Net loss — — (18,454 ) — (18,454 ) Stock-based compensation expense — 330 — (13 ) 317 Payment of withholding taxes for net settlement of stock-based awards — (5 ) — — (5 ) Balance at June 30, 2020 $ 23 $ 165,852 $ (145,366 ) $ (10,154 ) $ 10,355 Balance at December 31, 2018 $ 19 $ 126,412 $ (135,160 ) $ (9,849 ) $ (18,578 ) Net loss — — (5,584 ) — (5,584 ) Stock-based compensation expense — 1,404 — (476 ) 928 Payment of withholding taxes for net settlement of stock-based awards — (443 ) — — (443 ) Exercise of Weichai Warrant 4 38,064 — — 38,068 Balance at June 30, 2019 $ 23 $ 165,437 $ (140,744 ) $ (10,325 ) $ 14,391 (Unaudited)(Dollar amounts in thousands) Three months
ended March 31,
2016 Three months
ended March 31,
2015 $ (5,251 ) $ (1,456 ) 1,270 833 1,429 850 149 25 321 305 62 163 219 225 (1,256 ) 3,614 85 47 — 18 41,140 6,251 9,393 (18,059 ) 1,306 672 (35,274 ) (4,820 ) (3,492 ) 568 — 812 (106 ) 221 9,995 (9,731 ) (214 ) (806 ) — (9,735 ) (214 ) (10,541 ) 46,902 32,363 (63,633 ) (8,000 ) — (417 ) (16,731 ) 23,946 (6,950 ) 3,674 8,445 6,561 $ 1,495 $ 10,235 $ 479 $ 435 100 608 $ 687 $ 1,001 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.(in thousands) For the Six Months Ended June 30, 2020 2019 Cash provided by operating activities Net loss $ (18,454 ) $ (5,584 ) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of intangible assets 1,527 1,819 Depreciation 2,608 2,605 Change in value of warrants — 1,352 Stock-based compensation expense 317 928 Amortization of financing fees 609 361 Deferred income taxes (323 ) (458 ) Loss on extinguishment of debt 497 — Other non-cash adjustments, net 253 (68 ) Changes in operating assets and liabilities: Accounts receivable, net 42,492 10,292 Inventory, net (31,980 ) (4,393 ) Prepaid expenses and other assets 22 4,902 Accounts payable (8,634 ) (1,201 ) Accrued expenses 24,692 (5,354 ) Other noncurrent liabilities (9,616 ) (3,230 ) Net cash provided by operating activities 4,010 1,971 Cash used in investing activities Capital expenditures (1,416 ) (1,536 ) Other investing activities, net 7 — Net cash used in investing activities (1,409 ) (1,536 ) Cash provided by (used in) financing activities Repayments of long-term debt and lease liabilities (55,200 ) (78 ) Proceeds from revolving line of credit 180,298 267,584 Repayments of revolving line of credit (89,826 ) (268,743 ) Payments of deferred financing costs (1,970 ) (375 ) — 1,616 Other financing activities, net 76 (443 ) Net cash provided by (used in) financing activities 33,378 (439 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 35,979 (4 ) Cash, cash equivalents, and restricted cash at beginning of the period 3 54 Cash, cash equivalents, and restricted cash at end of the period $ 35,982 $ 50 (in thousands) As of June 30, 2020 2019 Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets Cash and cash equivalents $ 32,533 $ 50 Restricted cash 3,449 — Total cash, cash equivalents, and restricted cash $ 35,982 $ 50 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Tabular dollar amounts in thousands, except per share amounts)DescriptionSummary of the companySignificant Accounting Policies and business operations (“Power Solutions International”, “PSI” or the “Company”) is a global producer and distributor of a broad range of high performance,high-performance, certified, low emissionlow-emission power systems, including alternative fuelalternative-fueled power systems for original equipment manufacturers (“OEMs”) of off-highway industrial equipment (“Industrial OEMs”) and certain on-road vehicles and large custom-engineered integrated electrical power generation systems. The Company also sells gasoline, diesel and non-certified power systems as well as aftermarket components to support these products. and/orand 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 operates as one business and geographic operating segment.The Company’s power systems are highly engineered, comprehensive systems which, through itsthe 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 restrictions required, or desired, to be met)considerations), allow the Company to provide its customers with power systems customized to meet specific industrial OEM application requirements, other technical customers’ specifications, of customers, and requirements imposed by environmental regulatory bodies.third partythird-party suppliers and produces internally-designedinternally designed engines, all of which are then integrated into the Company’sits power systems.the Companyit coordinates significant design efforts with third partythird-party suppliers, with the remainder consisting largely of parts that are sourced off-the-shelf from third partythird-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 comprehensive power system whichthat can be incorporated using a single part number, directly into a customer’s specified application. Capitalizing on its expertise in developingIn addition to the certified products described above, the Company sells diesel, gasoline and manufacturing emission-certifiednon-certified power systems and its accessaftermarket components.latest power system technologies,outstanding shares of the Company believes that itCompany’s Common Stock. As a result, Weichai is able to provideexercise control over Company matters including those requiring stockholders’ approval, including the election of the directors, amendments to the Company’s Charter and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of the Company and could deter or prevent actions that may be favored by other shareholders.“green” power systems to industrial OEMsa financing on acceptable terms or repay this outstanding indebtedness, when required or if at a low cost and with fast design turnaround.2. Basis of presentationUnaudited condensedall. The consolidated financial statementsunaudited condensedpotential impact of future disruptions to the Company, continued economic uncertainty, and continued depressed crude oil prices and declining rig count levels may have a material adverse impact on the results of operations, financial position, and liquidity of the Company.presentand its wholly-owned subsidiaries and majority-owned subsidiaries in which the Company exercises control. The foregoing financial information was prepared in accordance with generally accepted accounting principles in the United States (“U.S. (“GAAP”), have been prepared pursuant to the and rules and regulations of the SECU.S. Securities and Exchange Commission (“SEC”) for interim financial reportingreporting. All intercompany balances and transactions have been eliminated in consolidation.opinion of management, reflect all normal and recurring adjustments necessary to present fairly the interim periods of the unauditedCompany’s annual financial statements prepared in accordance with U.S. GAAP have been condensed consolidated financial position, results of operations and cash flows of the Company and its wholly-owned subsidiaries for the periods presented.These unaudited condensedor omitted. The accompanying consolidated financial statements should be read in conjunction with, and have been prepared in conformityaccordance with the accounting principlespolicies reflected in, the consolidated financial statements and related notes, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. As these2019 (“the 2019 Annual Report”). The Company’s significant accounting policies are described in the aforementioned 2019 Annual Report. Included below are certain updates to those policies. The accompanying interim financial statements have been prepared pursuant toinformation is unaudited; however, the rules and regulationsCompany believes the financial information reflects all adjustments (consisting of the SEC, certain information and disclosures normally included in annualitems of a normal recurring nature) necessary for a fair presentation of financial statements and related notes prepared in accordance with GAAP have been condensed or omitted. Theposition, results of operations and cash flows in conformity with U.S. GAAP. Operating results for the three months ended March 31, 2016interim periods are not necessarily indicative of annual operating results.resultschief operating decision maker (“CODM”). The Company’s CODM is its principal executive officer, who decides how to be expectedallocate 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.full year.Certain amounts recorded inCompany’s net sales: For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Customer A 15 % 17 % 15 % 17 % Customer B 10 % ** 10 % ** Customer C ** 12 % ** ** prior period unaudited condensedCompany’s accounts receivable: As of June 30, 2020 As of December 31, 2019 Customer A 13 % ** Customer B 14 % ** Customer C 10 % 49 % For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Supplier A 30 % 13 % 20 % 15 % Supplier B ** 16 % ** 13 % Supplier C ** 10 % ** 11 % presented have been reclassified to conform toin conformity with U.S. GAAP requires that management make estimates and assumptions that affect the current period financial statement presentation. These reclassifications had no effect on previously reported operating results.Principlesamounts of consolidationThe unaudited condensedassets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements presented hereinand the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions include the accountsvaluation of Power Solutions International, Inc.allowances for uncollectible receivables, inventory reserves, warranty reserves, stock-based compensation, evaluation of goodwill, other intangibles, plant and its directequipment for impairment, and indirect wholly owned subsidiaries. All significant intercompany balancesdetermination of useful lives of long-lived assets. Actual results could materially differ from those estimates.transactions have been eliminated in consolidation.Significant accounting policiesThe Company’s significant accounting policies asDevelopmentDecember 31, 2015 are described in the Company’s Annual Report on Form 10-K, filed with the Securitieswages, materials, testing and Exchange Commission on February 26, 2016. There have been no material changes with respectconsulting related to the Company’s significant accounting policies subsequent to December 31, 2015.3. Recently issued or adopted accounting pronouncementsThe Company evaluates the pronouncements of authoritative accounting organizations, including the Financial Accounting Standards Board (FASB), to determine the impactdevelopment of new pronouncements on GAAPengines, parts and the Company. In Mayapplications. These costs were $5.6 million for each of 2014, the FASB and International Accounting Standards Board jointly issued a final standard on revenue recognition which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This standard will supersede most current revenue recognition guidance. Under the new standard, entities are required to identify the following within a contract with a customer: the separate performance obligations in the contract; the transaction price; allocation of the transaction price to the separate performance obligations in the contract; and the appropriate amount of revenue to be recognized when (or as) the entity satisfies each performance obligation. Entities have the option of using either retrospective transition or a modified approach in applying the new standard. On July 9, 2015, the FASB voted to issue a final Accounting Standards Update (ASU) that defers for one year the effective date of the new revenue standard and allows early adoption as of the original effective date (i.e., annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods). After reviewing and discussing the feedback received, the FASB decided to adopt the standard as originally proposed. Thus, the anticipated final ASU will be effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. The Company is currently evaluating the approach it will use to apply the new standard and the impact that the adoption of the new standard will have on the Company’s consolidated financial statements.In July 2015, the FASB issued final guidance to simplify the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies to inventories for which cost is determined by methods other than LIFO and the retail inventory method. The amendment is to be applied prospectively and is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASC amendment, but does not expect it will have a significant effect on the Company’s consolidated financial statements.In February 2016, the FASB issued ASU No. 2016-02, Leases, Topic 842. This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. Adoption for this standard is to be applied with a modified retrospective transition, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASC, but cannot make an assessment as to the impact that the adoption of this ASU will have on the Company’s consolidated financial statements.In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC 718, Compensation – Stock Compensation. The ASU includes provisions intended to simplify various provisions related to how share-based payments are accounted for and presented in the financial statements. Early adoption will be permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The amendment is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. The Company is currently evaluating the impact of adopting this ASC, but cannot make an assessment as to the impact that the adoption of this ASU will have on the Company’s consolidated financial statements.There were no additional new accounting pronouncements or guidance that have been issued or adopted by authoritative accounting organizations during the three months ended March 31, 2016, that are expectedJune 30, 2020 and 2019. These costs were $12.0 million and $11.5 million for the six months ended June 30, 2020 and 2019, respectively.a significant effect oncash collateral to support the Company’s consolidated financial statements.4. AcquisitionsThe unaudited condensed consolidated financial statements for the three months ended March 31, 2016, include the assets, liabilities and operating resultsletters of certain businesses acquired during 2015. There were no such business combinations during the three months ended March 31, 2016.When appropriate, the Company accounts for business combinations in accordance with ASC 805,Business Combinations, and, as such, assets acquired and liabilities assumed are recorded at their respective fair values. The excess of the acquisition consideration over the fair value of tangible and intangible assets acquired and liabilities assumed, if any, is then allocated to goodwill. Any goodwill ultimately recorded is generally attributable to one or more values ascribed to geographic expansion of product sales, manufacturingcredit and other synergies of the combined businesses.The ultimate determination of fair values assigned to the assets acquiredservices provided. As discussed in Note 9. liabilities assumed requires management to make significant assumptions and estimates. The more significant assumptions include estimating future cash flows and developing appropriate discount rates. When required, independent valuation specialists conduct valuations to assist management of the Company in determining the estimated fair values of trade receivables, inventory, machinery and equipment, intangible assets and liabilities assumed, including contingent consideration. Fair value measurements can be highly subjective, and the reasonable application of measurement principles may result in a range of alternative estimates using the same facts and circumstances.On March 18, 2015 (“Buck’s Date of Acquisition”)Contingenciesacquired allhad outstanding letters of the membership interests in Buck’s Acquisition Company, LLC, (“Buck’s”) from UE Powertrain d/b/a Buck’s Engines and United Holdings, LLC, for an initial cash purchase pricecredit of approximately $9,735,000, subject to certain adjustments as defined by the purchase agreement. Buck’s is a manufacturer of alternative-fuel engines for industrial markets and was formerly a product line of United Engines, LLC. Buck’s supplies a range of alternative-fuel engines that run on natural gas, propane and liquid propane gas fuels. Buck’s targets an extensive range of industrial applications, including irrigation, gas compression, oil production, industrial equipment, power generation, mobile equipment, wind turbines, and re-power applications. The acquisition of Buck’s was accounted for as a business combination in accordance with ASC 805,Business Combinations, and as such, the excess of the purchase price over the fair values assigned to the assets acquired and liabilities assumed was allocated to goodwill and deemed final as of December 31, 2015. The Company treated the acquisition of Buck’s as a purchase of assets for income tax purposes. Accordingly, the financial and income tax bases of the assets and liabilities were assumed to be the same at the Buck’s Date of Acquisition, and therefore, a provision for deferred income tax was not recorded in connection with the purchase price allocation. Any excess of the purchase price over the fair value of the assets acquired is expected to be deductible for income tax purposes. The acquisition of Buck’s was funded through the Company’s revolving line of credit.The purchase price for this acquisition had been provisionally allocated at the Buck’s Date of Acquisition, and deemed final as of December 31, 2015, to the assets acquired and liabilities assumed based on their estimated fair values as follows: March 18, 2015
(Buck’s Date of Acquisition) $ 6,598 231 6,829 1,380 1,526 $ 9,735 The Company incurred total transaction costs related to its acquisition activities of $200,000 for the three months ended March 31, 2015, all of which was recognized as an operating expense and classified within general and administrative expenses in the Company’s unaudited condensed consolidated statement of operations in accordance with GAAP. The Company did not incur any similar expenses for the three months ended March 31, 2016.5. Earnings per shareThe Company computes earnings per share by applying the guidance stated in ASC 260,Earnings per Share. The treasury stock method has been used to compute earnings per share. The Company has issued warrants (“Private Placement Warrants”) that represent the right to purchase shares of the Company’s common stock, stock appreciation rights (“SAR”)$3.0 million and restricted stock, allcash of which have been evaluated for their potentially dilutive effect under the treasury stock method. Refer to Note 11, “Stockholders’ equity” for a further description of the Private Placement Warrants and Note 10, “2012 Incentive compensation plan” for a further description of the SAR and restricted stock.Computation of dilutive common sharesCompany utilizes the treasury stock method described in ASC 260-10-55 to determine the number of treasury shares assumed to be purchased from the hypothetical proceeds of exercise, with any residual shares representing the incremental common shares to be issued and included in diluted earnings per share. As of March 31, 2016 and 2015, the Company’s Private Placement Warrants, SAR and restricted stock were evaluated for their potentially dilutive effect under the treasury stock method. Due to the loss reported in the unaudited condensed consolidated statements of operations, certain potentially issuable shares of Company common stock associated with the Private Placement Warrants, SAR and restricted stock were not included in the dilutive EPS calculation for the three months ended March 31, 2016 and March 31, 2015, respectively. These potential shares were excluded from the diluted EPS calculation because they would have had an anti-dilutive effect under the treasury stock method. Additionally, in the three months ended March 31, 2016, certain potential shares have been excluded from the computation of diluted earnings per share, due to the Company’s average stock price falling beneath the respective exercise price.The computations of basic and diluted earnings per share for the three months ended March 31, 2016 and 2015, were as follows: Three months ended March 31, 2016 2015 $ (5,251 ) $ (1,456 ) — — $ (5,251 ) $ (1,456 ) 10,818,678 10,797,056 — — 10,818,678 10,797,056 $ (0.49 ) $ (0.13 ) $ (0.49 ) $ (0.13 ) 6. Inventories, netInventoriesinventories consist primarily of engines and parts. Engines are valued at the lower of cost plus estimated freight-in or marketnet realizable value. Parts are valued at the lower of cost (first-in, first-out) or marketnet realizable value. When necessary,Net realizable value approximates replacement cost. Cost is principally determined using the Company writes downfirst-in, first-out method and includes material, labor and manufacturing overhead. It is the Company’s policy to review inventories on a continuing basis for obsolete, excess and slow-moving items and to record valuation adjustments for such items in order to eliminate non-recoverable costs from inventory. Valuation adjustments are recorded in an inventory for an estimated amount equal to the difference betweenreserve account and reduce the cost basis of the inventory in the period in which the reduced valuation is determined. Inventory reserves are established based on quantities on hand, usage and the estimated realizable value. Additionally, an inventory allowance is provided based upon the Company’s estimation of futuresales history, customer orders, projected demand for the quantity of inventory on hand. In determining an estimate of future demand, multiple factors are taken into consideration, including, but not limited to: (i) customer purchase orders and customer forecasted demand; (ii) historical sales/usage for each inventory item; and (iii) utilization within a current or anticipated future power system. As of June 30, 2020 As of December 31, 2019 Raw materials $ 120,237 $ 90,677 Work in process 3,422 2,007 Finished goods 19,704 19,119 Total inventories 143,363 111,803 Inventory allowance (3,042 ) (2,964 ) Inventories, net $ 140,321 $ 108,839 (in thousands) For the Six Months Ended June 30, Inventory Allowance 2020 2019 Balance at beginning of period $ 2,964 $ 5,730 Charged to expense 897 41 Write-offs (819 ) (878 ) Balance at end of period $ 3,042 $ 4,893 As of June 30, 2020 As of December 31, 2019 Accrued product warranty $ 16,660 $ 17,142 4,429 5,020 Contract liabilities 52,412 26,898 Accrued compensation and benefits 6,443 6,599 Operating lease liabilities 3,759 3,789 Accrued interest expense 906 1,087 Other 6,395 5,495 Total $ 91,004 $ 66,030 * (in thousands) For the Six Months Ended June 30, Accrued Product Warranty 2020 2019 Balance at beginning of period $ 25,501 $ 23,102 Current year provision 7,418 4,585 9,925 2,730 Payments made during the period (10,373 ) (4,454 ) Balance at end of period 32,471 25,963 Less: Current portion 16,660 15,078 Noncurrent accrued product warranty $ 15,811 $ 10,885 * Change in estimates for preexisting warranties reflect changes in the Company’s estimate of warranty costs for products sold in prior periods. Such adjustments typically occur when claims experience deviates from historical and expected trends. The Company’s warranty liability is generally affected by failure rates, repair costs and the timing of failures. Future events and circumstances related to these factors could materially change the estimates and require adjustments to the warranty liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available. For the three and six months ended June 30, 2020, the Company recorded charges for changes in estimates of preexisting warranties of $9.3 million, or $0.41 per diluted share, and $9.9 million, or $0.43 per diluted share, respectively. For the six months ended June 30, 2019, the Company recorded charges for changes in estimates of preexisting warranties of $2.7 million, or $0.13 per diluted share. (in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30, End Market 2020 2019 2020 2019 Energy $ 29,649 $ 52,245 $ 79,733 $ 97,893 Industrial 30,463 54,660 67,594 105,247 Transportation 32,944 31,779 50,826 51,331 Total $ 93,056 $ 138,684 $ 198,153 $ 254,471 (in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30, Geographic Area 2020 2019 2020 2019 North America $ 81,979 $ 119,943 $ 176,499 $ 217,622 Pacific Rim 6,295 10,804 12,749 23,429 Europe 2,578 5,006 5,235 8,383 Other 2,204 2,931 3,670 5,037 Total $ 93,056 $ 138,684 $ 198,153 $ 254,471 (in thousands) As of June 30, 2020 As of December 31, 2019 $ 2,340 $ 694 (52,412 ) (26,898 ) (3,062 ) (17,998 ) Net contract liabilities $ (53,134 ) $ (44,202 ) of: March 31,
2016 December 31,
2015 $ 93,310 $ 104,433 9,719 6,401 20,220 21,853 123,249 132,687 (2,514 ) (2,340 ) $ 120,735 $ 130,347 7. of December 31, 2019 and 2018, respectively. The increase in the contract asset during the six months ended June 30, 2020 is related to performance completed and revenue recognized under certain contracts but for which the Company’s right to consideration is conditional at the end of the period. The increase in the contract liabilities during the six months ended June 30, 2020 is primarily related to prepayments for certain engines by a customer under a long-term supply agreement.net(in thousands) As of June 30, 2020 As of December 31, 2019 Property, Plant and Equipment Leasehold improvements $ 6,760 $ 6,745 Machinery and equipment 42,664 41,243 Construction in progress 1,679 1,679 Total property, plant and equipment, at cost 51,103 49,667 Accumulated depreciation (28,966 ) (26,473 ) Property, plant and equipment, net $ 22,137 $ 23,194 componentscarrying amount of property, plantgoodwill at both June 30, 2020 and equipment are recordedDecember 31, 2019 was $29.8 million. Accumulated impairment losses at costboth June 30, 2020 and included the following as of: March 31,
2016 December 31,
2015 $ — $ 260 6,036 8,189 4,581 4,675 21,642 21,381 560 560 3,411 3,011 36,230 38,076 (11,941 ) (12,075 ) $ 24,289 $ 26,001 AsDecember 31, 2019 were $11.6 million.March 31, 2016, the Company reclassified $1,343,000 consisting of landSignificant Accounting Policies and buildings and improvements to “Assets held Other Information for sale” within “Prepaid expenses and other current assets” on its condensed consolidated balance sheet as a resultadditional discussion of the Company’s decisionimpairment considerations related to sell onethe impacts of the COVID-19 pandemic and the oil and gas market price volatility.(in thousands) As of June 30, 2020 Gross Carrying Value Accumulated Amortization Net Book Value Customer relationships $ 34,940 $ (23,676 ) $ 11,264 Developed technology 700 (628 ) 72 Trade names and trademarks 1,700 (1,191 ) 509 Total $ 37,340 $ (25,495 ) $ 11,845 (in thousands) As of December 31, 2019 Gross Carrying Value Accumulated Amortization Net Book Value Customer relationships $ 34,940 $ (22,236 ) $ 12,704 Developed technology 700 (605 ) 95 Trade names and trademarks 1,700 (1,127 ) 573 Total $ 37,340 $ (23,968 ) $ 13,372 (in thousands) As of June 30, 2020 As of December 31, 2019 Short-term financing: Revolving credit facility $ 130,000 $ 39,527 Long-term debt: Unsecured senior notes $ — $ 55,000 Finance leases and other debt 1,098 1,087 Unamortized debt issuance costs — (235 ) Total long-term debt and finance leases 1,098 55,852 Less: Current maturities of long-term debt and finance leases 282 195 Long-term debt $ 816 $ 55,657 * operating facilities.unsecured notes due June 2020 (the “Unsecured Senior Notes”) and pay related interest, and (iii) for general corporate purposes. The Wells Fargo Credit Agreement was terminated in connection with repayment of the outstanding balance. The Company expectsrecognized a loss on the extinguishment of the Wells Fargo Credit Agreement and the Unsecured Senior Notes of $0.5 million related to completepremiums to early retire the saleUnsecured Senior Notes and unamortized debt issuance costs. The Company deferred debt issuance costs related to the closing of this facilitythe Credit Agreement of $2.0 million. On April 29, 2020, the Company borrowed an additional $35.0 million under the Credit Agreement, which is the remaining portion of availability, providing the Company with greater financial flexibility.2016.8. Fair valuethe Credit Agreement. For the six months ended June 30, 2020, the Company did not meet the defined minimum EBITDA requirement. A breach of the financial instruments(in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Operating lease cost $ 1,368 $ 1,406 $ 2,747 $ 2,807 Finance lease cost Amortization of right-of-use (“ROU”) asset 52 45 104 69 Interest expense 12 14 25 21 Short-term lease cost 108 133 217 276 Variable lease cost 374 311 797 766 Total lease cost $ 1,914 $ 1,909 $ 3,890 $ 3,939 (in thousands) For the Six Months Ended June 30, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows paid for operating leases $ 2,734 $ 2,444 Operating cash flows paid for interest portion of finance leases 25 21 Financing cash flows paid for principal portion of finance leases 96 61 Right-of-use assets obtained in exchange for lease obligations Operating leases 299 280 Finance leases — 517 March 31, 2016,June 30, 2020 and December 31, 2015,2019, the Company measured its financialweighted-average remaining lease term was 6.4 years and 6.7 years for operating leases and 4.1 years and 4.5 years for finance leases, respectively. The weighted-average discount rate was 7.2% for operating leases and 6.8% for finance leases as of both June 30, 2020 and December 31, 2019.(in thousands) June 30, 2020 December 31, 2019 $ 19,014 $ 20,677 3,759 3,789 16,063 17,679 Total operating lease liabilities $ 19,822 $ 21,468 $ 656 $ 777 192 195 524 617 Total finance lease liabilities $ 716 $ 812 1. 2. 3. (in thousands) Operating Leases Finance Leases Six months ending December 31, 2020 $ 2,555 $ 121 Year ending December 31, 2021 4,948 243 Year ending December 31, 2022 4,788 175 Year ending December 31, 2023 3,283 101 Year ending December 31, 2024 1,813 82 Thereafter 7,399 96 Total undiscounted lease payments 24,786 818 Less: imputed interest 4,964 102 Total lease liabilities $ 19,822 $ 716 under the amended ASC 820,Fair Value Measurements and Disclosures of the Accounting Standards Codification, which definesmeasured at fair value as the price that would be received to sell an asset or paid to transferon a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. It also establishesrecurring 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 hierarchy for disclosures of fair valuebased on the best information available in the circumstances. Depending on the inputs, the Company classifies each fair-value measurement as follows:—– based on quoted prices in active markets for identical assets or liabilities;—– based on other significant observable inputs for the assets or liabilities through corroborations with market data at the measurement date; and—– 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.Private placement warrants liabilityAs of March 31, 2016 and December 31, 2015, the Company’s liability for Private Placement Warrants was measuredfair value under ASC 820. The Company’s liability for the Private Placement Warrants is measured at fair value based on unobservable inputs, and thus is considered a Level 3 financial instrument. Carrying Valueanalyzes financial instruments with featuresmeasured its revolving credit facilities and the Unsecured Senior Notes at original carrying value including accrued interest, net of both liabilitiesunamortized deferred financing costs and equity under ASC 480,Distinguishing Liabilities from Equity and ASC 815,Derivatives and Hedging.As of March 31, 2016 and December 31, 2015, the Company estimated thefees. The fair value of its liability for Private Placement Warrants with a publicly traded stock pricing approach using the Black-Scholes option pricing model. revolving credit facility approximated carrying value, as it consisted of short-term variable rate loans.inputsfair value measurement of the Black-Scholes option pricing model included the following: March 31,
2016 December 31,
2015 $ 13.80 $ 18.25 $ 13.00 $ 13.00 0.25 % 0.12 % 55.00 % 55.00 % 0.08 years 0.33 years — — The market value of the Company’s common stockUnsecured Senior Notes was based on its closing price on March 31, 2016 anddefined as Level 3 at December 31, 2015, the date of each valuation. The volatility factors noted above represented the upper end of the range of implied volatility of publicly traded call options of benchmark companies. If all other assumptions were held constant, a 10% change2019 in the three-level fair value hierarchy, as the inputs to their valuation were not all market value of the Company’s common stock as of March 31, 2016, would have an immaterial effect on the recorded liability of the Private Placement Warrants.(in thousands) As of June 30, 2020 Carrying Value Fair Value Level 1 Level 2 Level 3 Revolving credit facility $ 130,000 $ — $ 130,000 $ — (in thousands) As of December 31, 2019 Carrying Value Fair Value Level 1 Level 2 Level 3 Revolving credit facility $ 39,527 $ — $ 39,527 $ — Unsecured Senior Notes 54,765 — — 54,600 the changechanges in the estimated fair value of the Company’s Level 3 Private placement warrantswarrant liability:(in thousands) For the Six Months Ended June 30, 2019 Balance at beginning of period $ 35,100 Change in value of warrants * 1,352 Settlement of warrants (36,452 ) Balance at end of period $ — * three months ended March 31, 2016: $ 1,482 (1,256 ) $ 226 Forperiod in which the three months ended March 31,amounts are accrued and/or liquidity in the period in which the amounts are paid.Company recognized incomeChicago Regional Office of $1,256,000 due to a decreasethe SEC commenced an investigation focused on, among other things, the Company’s financial reporting, misapplication of U.S. GAAP, revenue recognition practices and related conduct, which resulted in the estimated fair valueaccounting errors giving rise to the financial restatements reported in prior SEC filings. In 2016, the United States Attorney's Office for the Northern District of Illinois (the “USAO”) began conducting a parallel investigation regarding these matters. The Company is fully cooperating with the SEC and the USAO in their investigations. The Company is engaged in ongoing discussions with the SEC and the USAO regarding resolutions of these matters. If the SEC or the USAO determines that the Company violated federal securities or other laws and institutes civil enforcement or criminal proceedings, the Company may become subject to civil or criminal sanctions, including, but not limited to, criminal or civil charges, fines, other monetary penalties, injunctive relief andliabilitycurrent and former officers and directors. The complaint asserted claims for Private Placement Warrants. Forbreach of fiduciary duty and unjust enrichment arising from the three months ended March 31, 2015, the Company recognized expense of $3,614,000 due to an increasesame matters at issue in the estimated fair valueconsolidated case captioned Guinta v. Power Solutions International, Inc., No. 1:16-cv-09599 (N.D.Ill.), which had alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), arising from public filings, press releases and conference calls between February 2014 and February 2017, and which was settled in May 2019 (hereinafter, the “Giunta Action”). In April 2018, Michael Martin filed a second putative stockholder derivative action, captioned Martin v. Winemaster, et al., No. 18-CV-2386 (N.D. Ill.) (the “Martin Action”), in the same court against certain of the Company’s liability for Private Placement Warrants. The respective amounts were recorded as “Private placement warrant (income) expense”current and former officers and directors. In July 2018, the court consolidated the Martin Actionand the Dorvit Action.unaudited condensed consolidated statementscurrent and former officers and directors, who are indemnified by the Company as to their legal fees and defense costs. The Second Amended Complaint asserts claims for breach of operationsfiduciary duty, unjust enrichment, corporate waste and failure to hold an annual stockholders’ meeting, and it seeks an unspecified amount of damages, an order compelling the Company to hold an annual stockholders’ meeting and an award of costs, including reasonable attorneys’ fees and expenses. In April 2019, the parties reached an agreement in principle to settle the litigation for approximately $1.9 million (“Settlement Amount”), half of which will be used to pay certain defense costs on behalf of the Company, and the remaining half of which the plaintiffs sought as an award of their attorneys’ fees and expenses in connection with the benefit conferred by the settlement. The settlement was approved by the court in August 2019 over two objections, including from the plaintiffs in the McClenney Action (defined below). Plaintiffs in the McClenney Action appealed the court’s order approving the settlement. On February 28, 2020, the U.S. Court of Appeals for the respective periods.Financial liabilities measured at fair valuefollowing table summarizes fair value measurements by level as of March 31, 2016,deadline for the plaintiffs in the level 3 financialinsurers made a payment of half of the Settlement Amount in September 2019 toward the fulfillment of the plaintiff’s award of attorneys’ fees and expenses, and the insurers have allocated the remaining half of the Settlement Amount toward the payment of certain defense costs consistent with the terms of the settlement. The Company had accrued for the settlement in Other accrued liabilities measured at fair value on a recurring basis: Level 1 Level 2 Level 3 — — $ 226 The following table summarizes fair value measurements by level2015,2019.level 3 financial liabilities measured at fair valuemotion 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 recurring basis: Level 1 Level 2 Level 3 — — $ 1,482 Financial assetslegal 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 liabilitiesstayed the case pending the Illinois Appellate Court’s ruling in measuredhave cause to terminate Mr. Wilkins’ Employment and Confidentiality Agreement (the “Wilkins Agreement”), executed January 6, 2012, and that the Company and Mr. Winemaster violated the IWPCA by failing to pay him accrued but unpaid vacation and earned commissions. The Wilkins Complaint seeks damages including a $2.0 million bonus entitlement in the Wilkins Agreement, guaranteed annual salary to increase at fair valueAs1.5 times the Consumer Price Index per year from the termination date to the end-date of March 31, 2016 andthe Wilkins Agreement, December 31, 2015,2020, and 20,000 shares of restricted stock granted to him in 2013 with a vesting schedule through 2020. In June 2017, the Company and Mr. Winemaster answered the complaint and asserted numerous defenses. The Company also asserted counterclaims against Mr. Wilkins including violation of the Illinois Trade Secrets Act, breach of the Wilkins Agreement, breach of fiduciary duty, and spoliation. In January 2019, Wilkins voluntarily dismissed with prejudice his claims for unpaid commissions and vacation against the Company and Mr. Winemaster, subject to the parties’ confidential settlement agreement of those claims. In February 2020, the Company filed a motion for protective order or to stay the litigation, which the Court denied in April 2020. In May 2020, the parties reached an agreement to settle all remaining claims for a $1.1 million payment (“Wilkins Settlement Amount”) to Mr. Wilkins. The Company paid $0.9 million of the Wilkins Settlement Amount which was reserved as of the first quarter of 2019. The Company’s insurance provider contributed the remainder of the Wilkins Settlement Amount. On June 1, 2020, the Court dismissed the Wilkins Complaint with prejudice and with each party to bear their own costs and attorneys’ fees.revolving linebylaws 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 creditcumulative legal fees and term debt, including accrued interest, recorded onsettlements previously paid, the unaudited condensed consolidated balance sheets were carried at cost. The carrying valueCompany 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 revolving lineCompany’s past and present directors and officers and certain current and 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 credit and term debt approximated fair value becauseOperations. At this time, the interest rates fluctuate with market interest rates orCompany is not able to estimate the fixed rates approximate current rates offeredimpact of these obligations due to the Company for debt with similar terms and maturities, andactions ongoing; however, the impact may be material to the Company’s credit profile had not changed significantly sinceresults of operations, financial condition, and cash flows.originationend of these financial liabilities. Under ASC 825, Financial Instruments, these financial liabilities were defined as Level 2 in the three-level valuation hierarchy, as the inputs to their valuation are market observable. The carrying value of cash, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable and other accrued liabilities approximated fair value because of their short maturities.9. DebtRevolving line of credit and term debtOn June 28, 2013,2020, the Company entered into a new directors’ and officers’ liability insurance policy. The insurance policy includes standard exclusions including for any ongoing or pending litigation such as the previously disclosed investigations by the SEC and USAO.agreementtotaling $3.0 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 SignificantWells Fargo Bank, National Association (the “Wells Credit Agreement”), which replaced its prior credit agreement. The Wells Credit Agreement enabledcertain suppliers that require it to purchase minimum volumes or be subject to monetary penalties. As of June 30, 2020, if the Company were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $4.7 million. Most of these arrangements enable the Company to borrowsecure supplies of critical components. The Company does not currently anticipate any material penalties under a revolving line of credit secured by substantially allthese contracts; however, given the significant declines in oil prices in early 2020 and the impacts of the Company’s tangible and intangible assets (other than real property). The Wells Credit Agreement (a) provided an initial maximum $75.0 million revolving line of credit toCOVID-19 pandemic, the Company which, atcontinues to monitor and evaluate the Company’s request and subject to the termsimpact of the Wells Credit Agreement, could have been increased up to $100.0 million during the term of the Wells Credit Agreement; (b) bore interest at the Wells Fargo Bank’s prime rate plus an applicable margin ranging from 0% to 0.50%; or at the Company’s option, all orpotential future purchase volume reductions.portion of the revolving line of credit could have been designated to bear interest at LIBOR plus an applicable margin ranging from 1.50% to 2.00%; (c) had an unused line fee of 0.25% and (d) requiredquarterly basis, the Company to report its fixed charge coverage ratio, when its Availability (as defined in the Wells Credit Agreement) was less than the Threshold Amount (as defined in the Wells Credit Agreement) and to continue to report its fixed charge coverage ratio until the date that Availability for a period of 60 consecutive days, was greater than or equal to the Threshold Amount. The Company was required to meet a minimum monthly fixed charge coverage ratio of not less than 1.0 to 1.0, the testing of which commenced on the last day of the month prior to the date on which its Availability was less than the Threshold Amount. The Threshold Amount was defined in the Wells Credit Agreement as the greater of (i) $9,375,000 or (ii) 12.5% of the maximum revolver amount of $75.0 million or as it may have been increased during the term of the Wells Credit Agreement up to $100.0 million.On April 1, 2014, the Wells Credit Agreement was amended (the “Amended Wells Credit Agreement”) to increase the Company’s revolving line of credit from $75.0 million to $90.0 million. The Amended Wells Credit Agreement (a) bears interest at the Wells Fargo Bank’s prime rate pluscomputes an applicable margin ranging from 0% to 0.5%; or at the Company’s option, all or a portion of the revolving line of credit can be designated to bear interest at LIBOR plus an applicable margin ranging from 1.50% to 2.00%; (b) has an unused line fee of 0.25%; (c) requires the Company to report its fixed charge coverage ratio and leverage ratio as described below; (d) included a $5.0 million term loan arrangement with Wells Fargo Bank; and (e) includes a letter of credit sub-facility of the revolving line of credit. The principal amount of the $5.0 million term loan was payable in 36 equal monthly installments with the first payment due on June 1, 2014, plus interest at LIBOR plus 4.50%. Effective April 1, 2014 and during the period in which the term loan was outstanding, the Company was subject to a fixed charge coverage ratio covenant and a debt leverage ratio covenant. The Company was required to maintain a fixed charge coverage ratio of at least 1.20 to 1.00 and the Company’s debt leverage ratio could not exceed 4.0 to 1.0 during the period in which the term loan was outstanding. At the time, the Company used borrowings under this expanded revolving line of credit as well as the proceeds from the term loan to finance the acquisition of Professional Power Products, Inc., which was consummated on April 1, 2014. The term loan was subsequently paid in full on April 29, 2015. In connection with the repayment of the term loan on April 29, 2015, the Company’s minimum monthly fixed charge coverage ratio reverted back to 1.0 to 1.0, the testing of which commences on the last day of the month prior to the date on which the Company’s Availability is less than the Threshold Amount.On September 30, 2014 and again on February 11, 2015, the Company further amended its credit facility with Wells Fargo Bank, National Association, to increase its revolving line of credit facility to $100.0 million and $125.0 million, respectively (collectively with the Amended Wells Credit Agreement, the “Amended Wells Credit Agreement II”). The Amended Wells Credit Agreement II was scheduled to mature on June 28, 2018.Other than the above-mentioned amendments, the terms and conditions of the Amended Wells Credit Agreement and Amended Wells Credit Agreement II are substantially similar to the Wells Credit Agreement. Under the Amended Wells Credit Agreement and Amended Wells Credit Agreement II, the amount that the Company may borrow is limited to the lesser of (i) the maximum available amount and (ii) borrowing base. The borrowing base is calculated as a percentage of the Company’s eligible accounts receivable and eligible inventory, plus a defined amount based upon certain of the Company’s fixed assets (all as defined in the Amended Wells Credit Agreement and Amended Wells Credit Agreement II). The Amended Wells Credit Agreement and Amended Wells Credit Agreement II also contain customary covenants and restrictions applicable to the Company, including agreements to provide financial information, comply with laws, pay taxes and maintain insurance, restrictions on the incurrence of certain indebtedness, guarantees and liens, restrictions on mergers, acquisitions and certain dispositions of assets, and restrictions on the payment of dividends and distributions. The revolving line of credit is secured by substantially all of the Company’s tangible and intangible assets (other than real property).On April 29, 2015, the Company entered into an amended credit facility (“Amended Wells Credit Agreement III”) for the purpose of facilitating the issuance of Senior Notes as described below, and this amendment provided for the earlier maturity of the Amended Wells Credit Agreement III to insure that the Amended Wells Credit Agreement III will come due before the Senior Notes are payable as described below. While the Senior Notes are outstanding, the Amended Wells Credit Agreement III would have become due 75 days prior to the earliest date that a Special Mandatory Offer to Purchase might occur or 90 days prior to the final maturity date of the Senior Notes, all as described in the Indenture agreement below. Accordingly, under the above terms, the Amended Wells Credit Agreement III would have become due no earlier than March 15, 2017, but no later than January 31, 2018. However, the Special Mandatory Purchase Date was eliminated, effective April 1, 2016 as described below.As of March 31, 2016, $80.0 million of the Company’s outstanding borrowings under its revolving line of credit bore interest at the LIBOR rate, plus an applicable margin. The weighted average interest rate on these borrowings was 1.93% as of March 31, 2016. The remaining outstanding balance of $568,000 as of March 31, 2016 had been designated to bear interest at the prime rate, plus an applicable margin, which equaled 3.50% with the applicable margin included. The unused and available revolving line of credit balance was $21.1 million at March 31, 2016.As of December 31, 2015, $97.0 million of the Company’s outstanding borrowings under its revolving line of credit bore interest at the LIBOR rate, plus an applicable margin. The weighted average interest rate on these borrowings was 1.84% as of December 31, 2015. The remaining outstanding balance of $299,000 as of December 31, 2015 had been designated to bear interest at the prime rate, plus an applicable margin, which equaled 3.50% with the applicable margin included. The unused and available revolving line of credit balance was $27.1 million at December 31, 2015.Senior NotesOn April 24, 2015, the Company entered into a purchase agreement with certain institutional investors for a private sale of an aggregate amount of $55.0 million of unsecured Senior Notes with a stated interest rate of 5.50%. The sale closed on April 29, 2015. In connection with the issuance of the Senior Notes, the Company entered into an indenture agreement (“Indenture”) dated April 29, 2015, by and among the Company, The Bank of New York Mellon, as Trustee, and the Company’s subsidiaries as guarantors. The Company received net proceeds of $53,483,000 after financing costs of $1,517,000. The Company presented issuance costs associated with the Senior Notes as a direct deduction from the carrying value of the obligation on the Company’s unaudited condensed consolidated balance sheets. The balance outstanding on the Senior Notes, net of unamortized financing fees was $53,946,000 and $53,820,000 as of March 31, 2016 and December 31, 2015, respectively.The Senior Notes are unsecured debt of the Company and are effectively subordinated to the Company’s existing and future secured debt including the debt in connection with the Amended Wells Credit Agreement III.The Company may redeem the Senior Notes in whole or in part at any time on or after May 1, 2016, at the option of the Company at the following redemption prices (expressed as percentages of the principal amount), together with accrued and unpaid interest to the date of redemption:Redemption dateRedemption priceMay 1, 2016 through October 31, 2016101.0%November 1, 2016 and thereafter100.0%At any time prior to May 1, 2016, the Company could have redeemed up to 35% of the Senior Notes with the net cash proceeds of certain equity offerings specified in the Indenture at a redemption price of 105.5% of the principal amount of the Senior Notes, together with accrued and unpaid interest to the date of redemption, but only if at least 65% of the original aggregate principal amount of the Senior Notes would have remained outstanding following such redemption. In addition, prior to May 1, 2016, the Company could have redeemed the Senior Notes in whole or in part at a redemption price equal to 101.0% of the principal amount plus (i) accrued and unpaid interest to the redemption date and (ii) an Applicable Premium (as defined in the Indenture) that was intended as a “make-whole” to May 1, 2016. The Company did not redeem any of the Senior Notes prior to May 1, 2016.The Senior Notes have a final maturity date of May 1, 2018. The Senior Notes originally had a Special Mandatory Offer to Purchase as described in the Indenture and summarized as follows: Upon the occurrence of the earlier of (I) March 15, 2017, if the Trustee had not received on or within five days prior to such date an officer’s certificate stating that (i) the Company’s pro forma consolidated EBITDA (as defined in the Indenture) was at least equal to or greater than $35.0 million for the most recent four full fiscal quarters for which financial statements were available as of such date and (ii) the Company’s consolidated pro forma ratio of consolidated EBITDA to fixed charges (as defined in the Indenture) was at least equal to or greater than 3.25 to 1.0 for the most recent four full fiscal quarters for which financial statements were available as of such date or (II) the date on which the Company notified the Trustee in writing (which date could have been at any time on or after March 1, 2017 but on or prior to March 15, 2017) that the Company could not or would not deliver such officers’ certificate, then, unless the Company had given on or prior to March 15, 2017 a notice of redemption of all of the Senior Notes, the Company would make a mandatory offer to purchase all of the Senior Notes at a purchase price of 100.0% of the principal amount plus accrued and unpaid interest, if any, to the date of purchase in accordance with the procedures set forth in the Indenture.On April 1, 2016, the Company entered into a Second Supplemental Indenture (“Second Supplemental Indenture”) which, among other things, eliminated the Special Mandatory Offer to Purchase in its entirety. The Second Supplemental Indenture also increased the Company’s permitted indebtedness to $145.0 million from $125.0 million until February 1, 2017 when such permitted indebtedness shall be reduced to $135.0 million. The Second Supplemental Indenture also resulted in an increase in the interest rate on the Senior Notes to 6.50% effective April 1, 2016. The Company paid a consent fee of $275,000 in connection with the execution of the Second Supplemental Indenture.The Indenture, as amended, contains covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional debt, prepay subordinated indebtedness, pay dividends or make other distributions on capital stock, redeem or repurchase capital stock, make investments and restricted payments, enter into transactions with affiliates, sell assets, create liens on assets to secure debt, or effect a consolidation or merger or to sell all, or substantially all, of the Company’s assets, in each case subject to certain qualifications and exceptions set forth in the Indenture. The Indenture also provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the Indenture, payment defaults or acceleration of other indebtedness, and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the Trustee or holders of at least 25.0% in principal amount of the then outstanding Senior Notes may declare the principal of and accrued but unpaid interest on all Senior Notes to be due and payable.Interest on the Senior Notes is payable semi-annually in arrears on May 1 and November 1 of each year. As of March 31, 2016 and December 31, 2015, the accrued, but unpaid interest on the Senior Notes was $1,260,000 and $513,000, respectively.10. 2012 Incentive compensation planThe Company provides a compensation plan, 2012 Incentive Compensation Plan, as amended, (“2012 Plan”), which is administered by the Compensation Committee of the Board of Directors. The 2012 Plan is a broad-based plan which allows for a variety of different types of awards, including (but not limited to) non-qualified stock options, incentive stock options, SAR, restricted stock, deferred stock and performance units, to be made to the Company’s executive officers, employees, consultants and directors. The 2012 Plan is intended to assist the Company in attracting and retaining exceptionally qualified employees, consultants and directors to support the sustained progress, growth and profitability of the Company.Of the Company’s 1,530,925 shares initially made available and reserved for awards under the 2012 Plan, 894,215 shares have been granted under various awards as described below, and as of March 31, 2016, the Company had 636,710 shares of common stock available for future issuance under the 2012 Plan.SAR award agreementsSAR awards are accounted for as equity, in accordance with ASC 718,Compensation — Stock Compensation, which states that options or similar instruments on shares shall be classified as liabilities if either the underlying shares are classified as liabilities or the entity can be required under any circumstance to settle the option or similar instrument by transferring cash or other assets. The Company’s underlying shares are classified as equity, and under the terms of the SAR Award Agreement, the Company must settle the exercised portion of the SAR in shares of the Company’s common stock. As such, the Company has accounted for the SAR as equity.ASC 718,Compensation — Stock Compensation, was utilized in order to estimate the fair value of the SAR. The term “fair value” has been defined in Note 8, “Fair value of financial instruments.” ASC 718 requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award as of the grant date. That cost is then recognized over the period during which an employee is required to provide service in exchange for the award. The Company has computed compensation expense by applying the guidance stated in ASC 718, on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards.The Compensation Committee of the Board of Directors approved, and the Company granted the following SAR awards: Exercise price $ 22.07 $ 24.41 February 22, 2016 Employee Group $ 11.25 SAR awards entitle the recipients to receive, upon any exercise, a number of shares of the Company’s common stock equal to (i) the number of shares for which the SAR is being exercised multiplied by the value of one share of the Company’s common stock on the date of exercise (determined as provided in the SAR Award Agreement), (ii) less the number of shares for which the SAR is being exercised multiplied by the applicable exercise price, (iii) divided by the value of one share of the Company’s common stock on the date of exercise (determined as provided in the SAR Award Agreement). The exercised SAR is to be settled only in whole shares of the Company’s common stock, and the value of any fractional share of the Company’s common stock is forfeited.SAR IThe assumptions used for the measurement of the expense for SAR I included an expected term of 6.0 years, a risk-free interest rate of 0.92%, an anticipated volatility factor of 55.0% and a zero dividend yield. The resulting valuation as of the SAR I grant date was discounted by 15%, reflecting an assessment of the then trading activity of the Company’s common stock (and by extension SAR I). The suggested value from the Black Scholes method reflected a fully marketable security that was not burdened by limited marketability; however, at that time, the Company’s common stock (and by extension SAR I) did not have regular trading activity. Therefore, the Company considered it necessary to incorporate a discount to reflect the limited liquidity associated the SAR I. This approach was consistent with that utilized to value the Company’s Private Placement Warrants at that time. The resulting fair value of SAR I was $3.31 per underlying share. The compensation expense for this SAR I was initially determined to approximate $1.8 million which amount was recognized from the grant date through June 6, 2015.On June 5, 2015, the Company and the recipient agreed to defer the vesting of the remaining unvested portion of the SAR I granted for 30 days until July 6, 2015 pursuant to an amendment to the initial SAR I. On July 6, 2015, the Company and recipient entered into a SAR and Bonus Agreement which amended SAR I by extending the vesting period applicable to the remaining unvested portion of SAR I. The unvested portion covers 181,290 underlying shares of the Company’s common stock which, prior to the amendment, would have vested on June 6, 2015. The amendment extended the vesting of these shares to June 6, 2017 with respect to 100,000 underlying shares of the Company’s common stock and to June 6, 2019 with respect to the remaining 81,290 shares of underlying Company common stock (in each case subject to forfeiture upon termination of employment by the Company for “Cause” (as defined in the SAR and Bonus Agreement)). The SAR and Bonus Agreement also provides the recipient with an annual bonus in the amount of $250,000 for each of calendar years 2016, 2017, 2018 and 2019 as long as the conditions of the SAR I agreement are met and subject to forfeiture under certain circumstances enumerated in the SAR I agreement.The extension of the vesting period described above resulted in an additional expense attributable to the fair value of the unrecognized compensation expense of SAR I and was estimated at $333,000 using the Black-Scholes option pricing model. The inputs of the Black-Scholes option pricing model included the market value closing price of the Company’s common stock on the grant date, exercise price, risk-free interest rate, estimated price volatility, term and dividend yield as follows: a market value of $51.13, an exercise price of $22.07, a risk-free interest rate of 1.53%, an expected term of 4.9 years, an anticipated volatility factor of 50.0% and a zero dividend yield. The resulting fair value of the extension was $1.54 per underlying share.This additional expense will be recognized during the remaining vesting period through June 6, 2019. In the three months ended March 31, 2016 and 2015, the Company recognized $32,000 and $49,000, respectively, of expense for the SAR I. Including the amendment discussed above, the total SAR I expense is expected to be approximately $2,133,000 from initial grant through the final vesting date in 2019. As of March 31, 2016, there was approximately $227,000 of total unrecognized compensation expense related to the SAR I.SAR IIThe assumptions used for the measurement of the expense for SAR II included the closing market value of the Company’s common stock on the date of grant of $24.41, an exercise price of $24.41, an expected term of 7.25 years, a risk-free interest rate of 1.76%, an anticipated volatility factor of 50.0% and a zero dividend yield. The resulting fair value of SAR II was $12.96 per underlying share. SAR II vests ratably and becomes exercisable with respect to one-fourth of the covered shares annually beginning on the third anniversary of the SAR II grant date.In the three months ended March 31, 2016, the Company recognized $32,000 of expense for the SAR II. There was no similar SAR II expense recognized during the three months ended March 31, 2015. As of March 31, 2016, there was approximately $708,000 of total unrecognized compensation expense related to the SAR II granted under the 2012 Plan.SAR IIIThe assumptions used for the measurement of the expense for SAR III included the closing market value of the Company’s common stock on the date of grant of $10.76, an exercise price of $11.25, an expected term of 5.75 years, a risk-free interest rate of 1.36%, an anticipated volatility factor of 55.0% and a zero dividend yield. The resulting fair value of SAR III was $5.37 per underlying share. SAR III vests ratably and becomes exercisable with respect to one-half of the covered shares annually for two years beginning on the first anniversary of the SAR III grant date.In the three months ended March 31, 2016, the Company recognized $29,000 of expense for the SAR III. There was no similar SAR III expense in the three months ended March 31, 2015. As of March 31, 2016, there was approximately $526,000 of total unrecognized compensation expense related to the SAR III under the 2012 Plan. The total SAR III expense is expected to be approximately $555,000.Restricted stock awardsThe Compensation Committee of the Board of Directors has approved, and the Company granted, shares of Company restricted stock (“Restricted Stock”) to various employees pursuant to the 2012 Plan and subject in each case to a Restricted Stock Award Agreement (“Restricted Stock Award Agreement”). Restricted stock activity consisted of the following for the three months ended March 31, 2016: Shares Weighted average grant date
fair value 130,244 $ 41.77 — — — — — — 130,244 $ 41.77 These shares of Restricted Stock vest in various increments and periods over a maximum of ten years from the date the stock was granted as defined under the applicable Restricted Stock Award Agreement. In the three months ended March 31, 2016 and 2015, the Company recognized approximately $228,000 and $256,000, respectively, of compensation expense in connection with the Restricted Stock granted under the 2012 Plan. As of March 31, 2016, there was approximately $4,654,000 of total unrecognized compensation expense related to the shares of Restricted Stock granted under the 2012 Plan. As of March 31, 2016, the weighted-average period over which the unrecognized compensation cost is expected to be recognized was approximately 6 years.11. Stockholders’ equityThe Company’s equity securities and the Private Placement Warrants are described below.Common stockThe Company has authorized 50,000,000 shares of common stock with a par value of $0.001 per share. Issued shares and outstanding shares of the Company’s common stock were 11,583,831 and 10,752,906, respectively, at each of March 31, 2016 and December 31, 2015. Each holder of a share of the Company’s common stock is entitled to one vote per share held on each matter to be considered by holders of the Company’s common stock. Holders of the Company’s common stock are entitled to receive ratably such dividends, if any, as may be declared by the Company’s board of directors. The Company’s current policy is to retain earnings for operations and growth. Upon any liquidation, dissolution or winding-up of the Company, the holders of the Company’s common stock are entitled to share ratably in all assets available for distribution, after payment of, or provision for, all liabilities and the preferences of any then outstanding shares of Company preferred stock. The holders of the Company’s common stock have no preemptive, subscription, redemption or conversion rights.Series A Convertible preferred stockThe Company has authorized 114,000 shares of Series A convertible preferred stock with a par value of $0.001 per share. As of March 31, 2016 and December 31, 2015, no shares of Series A convertible preferred stock of the Company were issued or outstanding.SAR exercise for shares of Company common stockDuring the three months ended March 31, 2016 and 2015, there was no vesting or exercises of shares in association with the SARs. As of March 31, 2016, there were 61,291 unexercised shares under the SAR I tranche that vested on June 6, 2014 and 181,290 shares subject to vest as further described in Note 10, “2012 Incentive compensation plan”. There were no unexercised shares under SAR II or SAR III as of March 31, 2016.Restricted stock vesting for shares of Company common stockDuring the three months ended March 31, 2016 and 2015, there was no vesting of the Company’s shares of restricted stock.Private Placement WarrantsIn connection with a private placement (“Private Placement”) on April 29, 2011, investors in the Private Placement received Company preferred stock (which subsequently converted to shares of Company common stock) and Private Placement Warrants. The Private Placement Warrants represented the right to purchase a total of 750,002 shares of the Company’s common stock at an exercise price of $13.00 per share, subject to further adjustment for non-cash dividends, distributions, stock splits or other reorganizations or reclassifications of the Company’s common stock. The Private Placement Warrants were also subject to full ratchet anti-dilution protection whereby, upon the issuance (or deemed issuance) of shares of the Company’s common stock at a price below the then-current exercise price of the Private Placement Warrants, subject to specified exceptions, the exercise price of the Private Placement Warrants would have been reduced to the effective price of the Company’s common stock so issued (or deemed to be issued). The Private Placement Warrants had an estimated fair value of $2,887,000 upon issuance based upon a Black-Scholes option pricing model.At any time beginning six months after the closing of the Private Placement at which the Company is required to register the shares issuable upon exercise of the Private Placement Warrants pursuant to the registration rights agreement entered into in connection with the Private Placement, but such shares may not be freely sold to the public, the Private Placement Warrants may be “cashlessly” exercised by their holders. In such circumstances, the warrant holders may “cashlessly” exercise the Private Placement Warrants by causing the Company to withhold a number of shares of its common stock otherwise issuable upon such exercise having a value, based upon the market price of the Company’s common stock (such market price as defined in the purchase agreement for the Private Placement), equal to the aggregate exercise price associated with such exercise. In other words, in such circumstances, the exercise of the Private Placement Warrants will occur without any cash being paid by the holders of the Private Placement Warrants. Because the shares issuable upon exercise of the Private Placement Warrants are currently available for resale pursuant to effective registration statements filed by the Company with the SEC, the Private Placement Warrants may not be “cashlessly” exercised at this time. The Private Placement Warrants further include a requirement that, the Company will keep reserved out of the authorized and unissued shares of its common stock sufficient shares to provide for the exercise of the Private Placement Warrants.The Company’s Private Placement Warrants were accounted for as a liability, in accordance with ASC 480,Distinguishing Liabilities from Equity. ASC 480 states that, if an entity must or could settle an instrument by issuing a variable number of its own shares, and, as in this case, the obligation’s monetary value is based solely or predominantly on variations in the fair value of the company’s equity shares, but moves in the opposite direction, then the obligation to issue shares is to be recorded as a liability at the inception of the arrangement, and is adjusted with subsequent changes in the fair value of the underlying stock. The effect of the change in value of the obligation is reflected as “Private placement warrant (income) expense” in the Company’s unaudited condensed consolidated statements of operations.See Note 8, “Fair value of financial instruments,” for detail describing the valuation approach for the Private Placement Warrants.There were no warrants exercised during the three months ended March 31, 2016 or 2015.As of March 31, 2016 and December 31, 2015, 282,257 shares of Company common stock, remained reserved for the exercise of the Private Placement Warrants, in accordance with the terms of the purchase agreement for the Private Placement.The Private Placement Warrants expired on April 29, 2016. Subsequent to March 31, 2016, 153,916 shares were issued as a result of Private Placement Warrants which were exercised prior to their expiration. The Company received proceeds of $2,001,000 as a result of these subsequent exercises.Registration rights agreementIn connection with the Private Placement, the Company entered into a Registration Rights Agreement (the “Private Placement Registration Rights Agreement”) with the investors in the Private Placement and Roth Capital Partners, LLC, pursuant to which it agreed to file a registration statement on Form S-1, with the SEC, covering the resale of “Registrable Securities” (as defined below) (which includes the shares of the Company’s common stock that were issuable upon conversion of shares of the Company’s preferred stock originally issued in the Private Placement and shares of the Company’s common stock issuable upon exercise of the Private Placement Warrants and shares of the Company’s common stock that were issuable upon exercise of the Roth Warrant), on or before the date which is 30 days after the closing date of the Private Placement, and to use its commercially reasonable efforts to have such registration statement declared effective by the SEC as soon as practicable. The Company further agreed, within 30 days after it becomes eligible to use a registration statement on Form S-3 to register the Registrable Securities for resale, to file a registration statement on Form S-3 covering the Registrable Securities. On June 27, 2013, within 30 days after the Company became eligible to use a registration statement on Form S-3, in accordance with the Private Placement Registration Rights Agreement, it filed a registration statement on Form S-3 (as a post-effective amendment to the registration statement on Form S-1) covering the Registrable Securities, which was declared effective on June 27, 2013.The Company is obligated to maintain the effectiveness of the registration statement until the earliest of (1) the first date on which all Registrable Securities covered by such registration statement have been sold, (2) the first date on which all Registrable Securities covered by such registration statement may be sold without restriction pursuant to Rule 144 or (3) the first date on which none of the securities included in the registration statement constitute Registrable Securities.Pursuant to the Private Placement Registration Rights Agreement, the holders of Registrable Securities are also entitled to certain piggyback registration rights if the Registrable Securities are not covered by one or more effective registration statements. As of December 31, 2013, and as of the time of the closing of the public offering on July 16, 2013, all of the Registrable Securities were covered by an effective registration statement. “Registrable Securities,” as contemplated by the Private Placement Registration Rights Agreement, means certain shares of the Company’s common stock, including those shares that were issuable upon conversion of shares of Company preferred stock issued in the Private Placement and shares of the Company’s common stock issuable upon exercise of the Private Placement Warrants and the shares of the Company’s common stock that were issued upon exercise of the Roth Warrant; provided, that, any such share shall cease to be a Registrable Security upon (A) sale pursuant to the registration statement or Rule 144 under the Securities Act, (B) such share becoming eligible for sale without restriction by the selling securityholder holding such security pursuant to Rule 144 under the Securities Act or (C) such share otherwise becoming eligible for sale without restriction pursuant to Section 4(1) of the Securities Act, provided that, any restrictive legend on any certificate or other instrument representing such shares has been removed or there has been delivered to the transfer agent for such shares irrevocable documentation (including any necessary legal opinion) to the effect that, upon submission by the applicable selling securityholder of the certificate or instrument representing such security, any such restrictive legend shall be removed.Universal shelf registrationThe Company has a universal shelf registration pursuant to which the Company may offer, issue and sell, from time to time, in one or more offerings, up to $150,000,000 of common stock, preferred stock, debt securities, depositary shares, warrants, subscription rights, stock purchase contracts and units, and certain selling stockholders may offer and sell, from time to time, in one or more offerings, up to 500,000 shares of common stock.12. Income taxesAt the end of each interim period, the Company applies its estimated annual effective tax rate (“ETR”)considering ordinary income and related income tax expense. Ordinary income refers to its interim earningsincome (loss) before considering theincome tax effect of any discrete items. The Company also records the tax impact of certainexpense excluding significant, unusual or infrequently occurring items, including the effectsitems. The tax effect of changes in valuation allowances and tax lawsan unusual or rates,infrequently occurring item is recorded in the interim period in which they occur. Ait occurs.is established iffor deferred tax assets based on an assessment of whether it is determinedmore 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 portion or all of the net deferred income tax assets will not be realized. Management exercises significant judgment in determiningrealized through the Company’s provisions for income taxes, its deferred income tax assets and liabilities and itsgeneration of future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred income tax assets. Although management believes that its tax estimates are reasonable,income. In making this determination, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date management considers new evidence, both positive and negative, that could impact management’s view with regards to future realization of deferred tax assets. As of March 31, 2016 and December 31, 2015, management believed that it was more likely than not thatCompany assessed all of the Company’s deferredevidence available at the time, including recent earnings, forecasted income tax assets would be realizedprojections and nohistorical performance. The Company determined that the negative evidence outweighed the objectively verifiable positive evidence and continues to maintain a full valuation allowance was required on its U.S.against deferred tax assets. As of31, 201627, 2020, President Trump signed into law the Coronavirus Aid, Relief, and December 31, 2015, $5,563,000Economic Security Act (the “CARES Act”). Among the changes to the U.S. federal income tax rules, the CARES Act modified net operating loss carryback rules that were eliminated by the 2017 Tax Cuts and $7,052,000 of tax assets, respectively, were included as “Prepaid expenses and other current assets”Jobs Act, restored 100% bonus depreciation for qualified improvement property, increased the limit on the deduction for net interest expense and accelerated the time frame for refunds of alternative minimum tax (“AMT”) credits. The Company’s unaudited condensed consolidated balance sheet. The Company recognizes interestability to elect bonus depreciation for the 2018 and penalties related2019 tax years, carryback net operating losses to unrecognizedearlier years, and immediately refund AMT credits due to the enactment of the CARES Act resulted in a tax benefits in income tax expense. Asbenefit of March 31, 2016 and December 31, 2015,$1.9 million for the amount accrued for interest and penalties was notsix months ended June 30, 2020. There is no material impact to the Company’s unaudited condensed consolidated financial statements.The computation of the estimated annual ETR for each interim period requires certain estimates and significant judgments, including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state jurisdictions, estimates of permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained, or the tax environment changes. In addition, changes related to unrecognized income tax benefits are also excluded from the determination of the Company’s estimated annual ETR. For the 2016 fiscal year, the Company’s estimated annual ETR is 37.0%, which excludes the impact of changes in the valuation of the Private Placement Warrants, as such amounts are excluded from the calculation of taxable income. Given the subjectivity and volatility of the valuation of the Private Placement Warrants, it is not possible to project the impact of the change in the Private Placement Warrants in the computation of the Company’s estimated annual ETR.As a result, the Company’s reported ETR will differ from the estimated annual ETR due to the changes infull valuation allowance.valuationthree and six months ended June 30, 2020 was (2.8)% and 16.2%, respectively, compared to an effective tax rate for the three and six months ended June 30, 2019 of (8.7)% and 5.9%. The effective tax rates for all periods were significantly different than the Private Placement Warrants in the periods in which such changes occur.applicable U.S. statutory tax rate. For the three months ended March 31, 2016,June 30, 2020, the Company recordeddifference between the effective and statutory tax rates was primarily due to an income tax benefit of $3,680,000 and income tax benefit rate of 41.2%. Excludingadjustment in the impact of the changeCARES Act. For the six months ended June 30, 2020, the difference between the effective and statutory tax rates was primarily due to the impact of the enactment of the CARES Act in the valuefirst quarter of the Private Placement Warrants in the three months ended March 31, 2016, the Company’s income tax benefit rate would have been 36.1%. Although the Company realized a pre-tax loss for the three months ended March 31, 2015, the Company recorded an income tax provision of $1,384,000. The pre-tax loss was attributable to the expense arising from2020, a change in the value ofdeferred tax liability related to an indefinite-lived intangible asset and the Private Placement Warrants inCompany’s full valuation allowance. For the three and six months ended March 31, 2015. ExcludingJune 30, 2019, the difference between the effective and statutory tax rates is primarily due to the Company’s full valuation allowance, the impact of the changelosses related to the Weichai Warrant and an increase in the valuedeferred tax liability related to indefinite-lived assets which cannot serve as a source of income for the Private Placement Warrantsrealization of deferred tax assets and states that base tax on gross margin.(in thousands) Common Shares Issued Treasury Stock Shares Common Shares Outstanding Balance as of January 1, 2020 23,117 260 22,857 Net shares issued for Stock awards — (3 ) 3 Balance as of June 30, 2020 23,117 257 22,860 this period,the period. Diluted loss per share is calculated to give effect to all potentially dilutive common shares that were outstanding during the period. 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 six months ended June 30, 2020 and 2019.income tax rate2019 Annual Report for additional information on the SARs and the RSAs.(in thousands, except per share basis) For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Numerator: Net loss $ (17,742 ) $ (2,998 ) $ (18,454 ) $ (5,584 ) Denominator: Shares used in computing net loss per share: Weighted-average common shares outstanding – basic 22,858 21,702 22,858 20,171 Effect of dilutive securities — — — — 22,858 21,702 22,858 20,171 Loss per common share: Loss per share of common stock – basic $ (0.78 ) $ (0.14 ) $ (0.81 ) $ (0.28 ) Loss per share of common stock – diluted $ (0.78 ) $ (0.14 ) $ (0.81 ) $ (0.28 ) 39.1%anti-dilutive, were 0.2 million shares for both the three and six months ended June 30, 2020, respectively, and 1.1 million and 2.7 million shares during the three and six months ended June 30, 2019, respectively. For the three and six months ended June 30, 2020 and 2019, SARs and RSAs were not included in the diluted loss per share calculations as they would have been anti-dilutive (1) due to the losses reported in the Consolidated Statements of Operations or (2) the Company’s average stock price was less than the exercise price of the SARs or the grant price of the RSAs.March 31, 2015.The Company is currently under audit for its income taxes at the federal levelJune 30, 2020, respectively. Income from this investment was $0.4 million and $0.5 million for the tax yearthree and six months ended December 31, 2013 and the state level for the tax years ended December 31, 2011 and 2012.June 30, 2019, respectively. The ultimate impact, if any, as a result of these audits cannot be determined at this time. However, the Company does not believe that the outcome for these audits will have a material effect on its consolidatedjoint venture operating results of operations or its financial position.13. Commitments and contingenciesThe Company is involvedare presented in various legal proceedings from time to time arisingnormal courseCompany’s Consolidated Statements of doing business. The Company is required to record a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated; however, based upon a review of information currently available to the Company regarding the potential impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to the legal proceedings in which the Company is currently involved, the resolution of these legal proceedings, either individually or in the aggregate, is not expected to have a material effect on the Company’s consolidated results of operations, financial condition or cash flows.On December 7, 2012, the Company entered into a joint venture with another entity for the purpose of manufacturing, assembling and selling certain engines into the Asian markets. In connection with this agreement, the Company has committed up to $1.2 million toward the joint venture of which $850,000 had been contributed since inception through March 31, 2016.
Report. Management’s Discussion and Analysis ofFinancial Condition and Results of Operationsshould be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included in this report and our audited consolidated financial statements and the related notes for the fiscal year ended December 31, 2015, and the related management’s discussion and analysis of financial condition and results of operations, contained in our annual report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission on February 26, 2016 (our “2015 Annual Report”). References to “we,” “us,” “our” and “our company” refer to Power Solutions International, Inc. and its subsidiaries.The discussion and analysis below includes forward-looking statements about ourthe Company’s business financial condition and consolidated results of operations for the three and six months ended June 30, 2020 and 2019, including discussions about management’s expectations for ourthe Company’s business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and are in light of recent events and trends, and youthese statements should not construe these statementsbe 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 ourthe Company’s actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. In evaluating suchSee “Forward-Looking Statements.” The following discussion should also be read in conjunction with the Company’s unaudited consolidated financial statements you should carefully considerand the various factors identified in this report and our 2015 Annual Report which could cause our actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those factors set forth under the heading “Cautionary Note Regarding Forward-Looking Statements” at the end of this Item 2related Notes included in this Quarterly Report on Form 10-Q.OrganizationWe design, manufacture, distributesupport power systems and large custom-engineered integrated electrical power generation systems for industrial OEMs acrosssells a broad range of industries including stationary electricity power generation, oiladvanced, emission-certified engines and gas, material handling, aerial work platforms, industrial sweepers, arbor, welding, airport ground support, turf, agricultural, construction and irrigation. We also develop and deliver power systems aimed atthat run on road-marketsa wide variety of fuels, including medium duty fleets, delivery trucks, school busesnatural gas, propane, gasoline, diesel and garbage trucks. Ourbiofuels, within the energy, industrial and transportation end markets with primary manufacturing, assembly, engineering, personnel designresearch and test power system solutionsdevelopment (“R&D”), sales and the components supporting those solutions. We manufacture and assemble our products at our primarydistribution facilities located in suburban Chicago, Illinois, and Darien, WisconsinWisconsin. The Company provides highly engineered, comprehensive solutions designed to meet specific customer application requirements and Madison Heights, Michigan. We operatetechnical specifications, including those imposed by environmental regulatory bodies, such as onethe U.S. Environmental Protection Agency (“EPA”), the California Air Resources Board (“CARB”) and the People’s Republic of China’s Ministry of Ecology and Environment (“MEE,” formerly the Ministry of Environmental Protection).geographic operatingrestrictions on the movement of people in the United States and abroad, and the related recent historic decline in oil demand. The Company has experienced a significant overall reduction in demand for its products which is, in large part, attributable to the impact of the COVID-19 pandemic. This reduction in demand has adversely impacted the Company’s financial results for the three and six months ended June 30, 2020. Accordingly,following discussion is based upon this presentation.Netthree months ended June 30, 2020, the Company’s net salesWe generate revenues and cash primarily decreased $45.6 million from the salethree months ended June 30, 2019 to $93.1 million, the result of off-highwaydecreased sales volumes across the industrial power systems and aftermarket parts to industrial OEMsenergy end markets of $24.2 million and power systems to on-road markets. Our products and services are sold predominantly to customers throughout North America, as well as customers located throughout the Pacific Rim and Europe. Net sales are derived from gross sales less sales returns and/or sales discounts.Cost of goods soldMaterials used to manufacture and assemble our power systems account for the most significant component of our costs. Our cost of goods sold also includes, labor, freight, depreciation and other inventoriable costs such as allocated overhead. Additionally, we also include the costs to procure materials and service our products as components of our cost.Operating expensesOperating expenses include research & development and engineering, selling and general and administrative expenses. Research & development and engineering expense includes both internal personnel costs and expenses associated with outsourced third party engineering relationships. Research & development and engineering activities are staff intensive. Costs incurred primarily consist of salaries and benefits for professional engineers, materials used in the development of new products and applications, and amounts paid to third parties under contractual engineering agreements. Research & development and engineering staff focus on four areas as follows: Advanced product development, application design, customer product support and other engineering related activities. Our advanced product development and application design staff primarily focus on current and future product design, prototyping, testing and application development activities. Our customer product support group provides dedicated engineering and technical attention to customer production support, including$22.6 million, respectively, partly offset by a direct communication link with our internal operations.Selling expense represents the costs of our sales team and an aftermarket sales group. We utilize a direct sales and marketing approach to maintain maximum customer interface. Salaries and benefits, together with expenses associated with travel, account for the majority of the costs in this category.General and administrative expense principally represents costs of our corporate office and personnel that provide management, accounting, finance, human resources, information systems and related services which support the organization. In addition to salaries and benefits, costs include public company expenses, consulting and professional services fees, insurance premiums, banking fees and other general facility and administrative support costs.Amortization of intangible assets expense principally represents costs associated with the amortization of certain acquisition-related intangible assets.Other (income) expenseOther (income) expense includes interest expense on our revolving line of credit and other obligations upon which we pay interest, changes in the valuation of the warrants issued in the private placement that closed on April 29, 2011, and other pre-tax transactions. Thechange in the valuation of our private placement warrants liability is based upon fluctuations in the market price of our common stock which can vary significantly from period to period. Other (income) expense may also include other non-operating expenses from time to time, such as a loss on debt extinguishment, valuation adjustments associated with acquisition activity, and other matters which are not otherwise considered operating income or expense.2016 Significant developmentAmendment to Senior NotesOn April 1, 2016, we entered into a Second Supplemental Indenture which, among other things, eliminated the Special Mandatory Offer to Purchase in its entirety. The Second Supplemental Indenture also increases our permitted indebtedness to $145.0$1.2 million from $125.0 million until February 1, 2017 when such permitted indebtedness is reduced to $135.0 million. In addition, the Second Supplemental Indenture resulted in an increase in the interest rate on the Senior Notes to 6.50% effective April 1, 2016. We paid a consent fee of $275,000 in connection with the execution of the Second Supplemental Indenture. The Senior Notes are more fully described below under, “Credit agreements, Senior Notes” and below under, “2015 Significant developments, Senior Notes.”2015 Significant developmentsSenior NotesOn April 24, 2015, we entered into a purchase agreement with certain institutional investors for a private sale of an aggregate amount of $55.0 million in unsecured 5.50% Senior Notes. The sale closed on April 29, 2015. In connection with the issuance of the Senior Notes, we entered into an indenture agreement dated April 29, 2015, by and among us, The Bank of New York Mellon, as Trustee, and our subsidiaries as guarantors. We received net proceeds of $53,483,000 after financing costs of $1,517,000. The Senior Notes are unsecured debt and are effectively subordinated to our existing and future secured debt including the obligation under our revolving line of credit. The Senior Notes are more fully described below under, “Credit agreements, Senior Notes”.Acquisition of Powertrain Integration, LLCOn May 4, 2015, we entered into an Asset Purchase Agreement (“APA”) with Powertrain Integration, LLC (“Powertrain”) and its owners, to acquire the assets of Powertrain. Powertrain provides on-road powertrain solutions, including systems, components and services for niche OEM automakers and fleets. Powertrain also specializes in alternative-fuel as well as gasoline and diesel systems and offers design, engineering, testing and production capabilities to deliver one-stop vehicle integration. The acquisition was completed on May 19, 2015. The cash consideration paid, net of working capital adjustments totaled $20,776,000. We also recorded an initial liability of $8,200,000 as of the date of acquisition representing the contingent consideration associated with the Base Earn-out Payment and Additional Earn-out Payment each as defined in the APA for a provisional aggregate purchase price of $28,976,000. As of December 31, 2015, the Base Earn-out Payment and The Additional Earn-out Payment were finalized at $8,248,000. The additional liability was recorded as an adjustment within “Other (income) expense” within our consolidated statement of operations for the year ended December 31, 2015.We accounted for this acquisition as a business combination in accordance with ASC 805,Business Combinations, and as such, the excess of the purchase price over the fair values assigned to the assets acquired and liabilities assumed was allocated to goodwill. The acquisition of Powertrain was accounted for as a purchase of assets for income tax purposes. Accordingly, the financial and income tax bases of the assets and liabilities were assumed to be the same at the date of acquisition, and therefore, a provision for deferred income tax was not recorded in connection with the purchase price allocation, and the excess of the purchase price over the fair value of the assets acquired is expected to be deductible for income tax purposes. The acquisition was funded by the proceeds received from the issuance of Senior Notes described in Note 9, “Debt”, to our unaudited condensed consolidated financial statements.Acquisition of Bi-Phase Technologies, LLCOn May 1, 2015, we acquired all of the membership interests in Bi-Phase Technologies, LLC, a Minnesota limited liability company (“Bi-Phase”) and wholly-owned subsidiary of TPB, Inc., a Minnesota corporation. Bi-Phase is engaged in the design and manufacture of liquid propane electronic fuel injection systems to allow for the conversion of vehicles from gasoline to propane. The purchase price was $3,500,000 plus certain working capital, assumption of certain liabilities and Earn-out Payments as defined in the Membership Interest Purchase Agreement. The cash paid was $3,885,000 which represented the purchase price of $3,500,000 plus an adjustment for working capital. We also recorded a contingent consideration liability of $540,000, representing an estimate of the Earn-out Payments expected to be payable in connection with the acquisition of Bi-Phase. This contingent consideration, payable to TPB, Inc., is based upon sales of Bi-Phase fuel systems over a period of three to five years. Accordingly, the aggregate purchase price approximated $4,425,000.We accounted for this acquisition as a business combination in accordance with ASC 805,Business Combinations, and as such, the excess of the purchase price over the fair values assigned to the assets acquired and liabilities assumed was allocated to goodwill. Theacquisition of Bi-Phase was accounted for as a purchase of assets for income tax purposes. Accordingly, the financial and income tax bases of the assets and liabilities were assumed to be the same at the date of acquisition, and a provision for deferred income tax was not recorded in connection with the purchase price allocation. The excess of the purchase price over the fair value of the assets acquired is expected to be deductible for income tax purposes. The acquisition was funded by the proceeds received from the issuance of the Senior Notes described in Note 9, “Debt”, to our unaudited condensed consolidated financial statements.Acquisition of Buck’sOn March 18, 2015, we acquired all of the membership interests in Buck’s Acquisition Company, LLC (“Buck’s”) from UE Powertrain d/b/a Buck’s Engines and United Holdings, LLC, for cash of $9,735,000. Buck’s is a manufacturer of alternative-fuel engines for industrial markets and was formerly a product line of United Engines, LLC. Buck’s supplies a range of alternative-fuel engines that run on natural gas, propane and liquid propane gas fuels. Buck’s targets an extensive range of industrial applications, including irrigation, gas compression, oil production, industrial equipment, power generation, mobile equipment, wind turbines, and re-power applications.We accounted for this acquisition as a business combination in accordance with ASC 805,Business Combinations, and as such, the excess of the purchase price over the fair values assigned to the assets acquired and liabilities assumed was allocated to goodwill. The acquisition of Buck’s was accounted for as a purchase of assets for income tax purposes. Accordingly, the financial and income tax bases of the assets and liabilities were assumed to be the same at the date of acquisition, and a provision for deferred income tax was not recorded in connection with the purchase price allocation. The excess of the purchase price over the fair value of the assets acquired is expected to be deductible for income tax purposes. Refer to Note 4, “Acquisitions” to our unaudited condensed consolidated financial statements, for a further discussion of the acquisition.Amended credit agreementOn April 29, 2015, we entered into an amendment with Wells Fargo Bank, National Association, for the purpose of facilitating the issuance of Senior Notes, as described above, and this amendment also provided for the earlier maturity of our revolving credit agreement to insure that the revolving line of credit will come due before the Senior Notes are payable. The Amended Wells Credit Agreement will become due 90 days prior to the final maturity date of the Senior Notes, all as described in the Indenture agreement below under “Credit agreements”.Factors affecting comparabilityWe have set forth below selected factors that we believe have had, or can be expected to have, a significant effect on the comparability of recent or future results of operations:AcquisitionsOur unaudited condensed consolidated financial statementstransportation end market. Gross margin for the three months ended March 31, 2016, includeJune 30, 2020 was 4.1%, a decrease versus 18.5% in the results of operations of two acquisitions which we completed during the second quarter of 2015, Powertrain and Bi-Phase. Our unaudited condensed consolidated financial statementscomparable 2019 period. Gross profit declined by $21.8 million for the three months ended March 31, 2015, do not include such results.Acquisition expensesWe incurred transaction costs related to acquisition activities of $200,000, all of which was recognized as an expense classified within general and administrative expense, in the three months ended March 31, 2015. We did not incur any such costs related to acquisitions during the three months ended March 31, 2016.Share-based compensationOn February 22, 2015, our Compensation Committee of the Board of Directors approved, and we granted restricted stock awards to certain employees. As a result, we incurred non-cash, stock-based compensation expense in the three months ended March 31, 2016, that was not present in 2015. We may consider making additional equity awards to our directors, officers and other employees and possibly to consultants, and if we do, we will incur additional non-cash, stock-based compensation expenses in future periods.Private placement warrantsOur results can be impacted by our private placement warrants liability. The change in estimated fair value of the liability associated with the private placement warrants is primarily attributable to fluctuations in the value of our common stock during a period. Our unaudited condensed consolidated results of operations for the three months ended March 31, 2016 and 2015, included $1,256,000 of income and $3,614,000 of expense, respectively, related to the change in the estimated fair value of the private placement warrants during each period.Other events affecting sales and profitability comparisonsOur year-to-year and year-over-yearJune 30, 2020, while operating results (including our sales, gross profit and net (loss) income) and cash flows can be impacted by a variety of internal and external events associated with our business operations. Examples of such events include (1) changes in regulatory emission requirements (which generally occur on January 1 of the year in which they become effective), (2) customer product phase-in/phase-out programs, (3) supplier product (e.g., a specific engine model) phase-in/phase-out programs, (4) changes in pricing by suppliers to us of engines, components and other parts (typically effective January 1 of any year), and (5) changes in our pricing to our customers (typically effective January 1 of any year), which may be related to changes in the pricing by suppliers to us. In order to mitigate potential availability or pricing issues, customers may adjust their demand requirements from traditional patterns. We may also extend special programs to customers in advance of such events, and we are more likely to offer such programs in our fourth quarter of a year in anticipation of events expected to occur in the first quarter of the next year. The occurrence of any of the events discussed above may result in fluctuations in our operating results (including sales and profitability) and cash flows between and among reporting periods.Results of operationsThree months ended March 31, 2016 compared with three months ended March 31, 2015Net salesOur net sales decreased $24,325,000 (28.2%) to $61,814,000 in the three months ended March 31, 2016, compared to $86,139,000 for the same period of 2015. Organic sales decreased $29.1 million primarily due to a decrease in sales into the oil and gas end market partially offset by a $4.8 million sales increase attributable to incremental sales from businesses acquired.Gross profitOur gross profit decreased $12,401,000 (75.4%) to $4,056,000 in the three months ended March 31, 2016, from $16,457,000 in the comparable period of 2015. Our lower gross profit resulted from the aforementioned decrease in net sales and a shift in the product mix of our power systems away from the oil and gas end markets into which our higher margin products are sold. The decrease in volumes also contributed to lower absorption of production expenses which further negatively impacted our gross profit. As a percentage of net sales, gross margin was 6.6% in the three months ended March 31, 2016, compared to 19.1% for the same period in 2015.Research & development and engineeringResearch & development and engineering expense increased $82,000 (1.6%) to $5,250,000 in the three months ended March 31, 2016, as compared to $5,168,000 for the same period in 2015. Wages and benefits increased $361,000 as we increased headcount while consulting and outside services, including product testing, decreased $274,000 as 2015 included higher spending to support activities related to development of new engines and pursuing on-road applications for our products, among other things. The remaining net decrease in other research & development and engineering expense was $5,000 of which none of the individual components was individually significant. As a percentage of net sales, research & development and engineering expense increased to 8.5% in the three months ended March 31, 2016, as compared to 6.0% for the same period in 2015, primarily due to the quarter over quarter sales decrease.SellingSelling expense decreased $141,000 (5.1%) to $2,609,000 in the three months ended March 31, 2016, from $2,750,000 in the comparable period of 2015.Advertising and promotional expenses, including related travel expenses decreased $170,000 in the three months ended March 31, 2016,by $1.7 million, as compared to the samecomparable period in 2015 and other selling expenses accounted for the remaining net increase of $29,000 period over period, of which none of the components was individually significant. As a percentage of net sales, selling expenses increased to 4.2% in the three months ended March 31, 2016, compared to 3.2% for the same period in 2015.General and administrativeGeneral and administrative expense decreased $206,000 (5.6%) to $3,449,000 in the three months ended March 31, 2016, from $3,655,000 in 2015. Consulting and professional fees decreased $321,000 in the three months ended March 31, 2016 as compared to 2015 as a result of $200,000 of transaction expenses incurred the three months ended March 31, 2015 that did not reoccur in 2016 and due to reduced expenses attributable to legal fees related to various litigation matters in which we are engaged. The remaining individual expense components resulted in a net increase in general and administrative expense of $115,000 of which none of the individual components was individually significant in the three months ended March 31, 2016, as compared to the same period in 2015. As a percentage of net sales, general and administrative expense increased to 5.6% in the three months ended March 31, 2016, compared to 4.2% for the same period in 2015.Amortization of intangible assetsAmortization expense increased $615,000 to $1,429,000 in the three months ended March 31, 2016, from $814,000 in the comparable period of 2015. Our amortizable intangible assets increased in 2015 due to various acquisitions completed during the year. As a result of acquisitions in 2015, we recognized amortizable intangible assets relating to customer relationships and developed technology of $14,340,000 and $700,000, respectively. Specifically, amortization expense attributable to customer relationships arising from the acquisition of Powertrain was $567,000 in the three months ended March 31, 2016 as compared to none for the same period in 2015. The remaining net increase of $48,000 was attributable to the amortization of intangible assets associated with our other acquisitions. As a percentage of net sales, amortization of intangible assets expense increased to 2.3% in the three months ended March 31, 2016, compared to 0.9% for the same period in 2015.Other (income) expenseInterest expense increased $932,000 to $1,421,000 in the three months ended March 31, 2016, as compared to $489,000 for the same period in 2015. The increase in interest expense attributable to the Senior Notes was $874,000, including $126,000 of amortization of debt issuance costs for the three months ended March 31, 2016, as compared to none for the same period in 2015. Other interest expense resulted in the remaining increase of $58,000 period-over-period, of which none of the components was individually significant or significant in the aggregate.Through March 31, 2016, the interest rate on our Senior Notes was 5.50%. We also incurred interest expense on our revolving line of credit. Our average borrowings outstanding on our revolving line of credit were approximately $87.1 million in the three months ended March 31, 2016, as compared to approximately $94.2 million during 2015. Including only our revolving line of credit and our term loan which was paid in full on April 29, 2015, our weighted average borrowing rate was 2.02% in the three months ended March 31, 2016, as compared to 1.89% for the same period in 2015.Private placement warrant (income) expense was income of $1,256,000 in the three months ended March 31, 2016, as compared to expense of $3,614,000 for the same period in 2015. We are required to recognize changes in the estimated fair value of unexercised private placement warrants in our unaudited condensed consolidated statement of operations. The change in estimated fair value of the private placement warrants was attributable to fluctuations in the trading price of our common stock at each balance sheet date.Income tax expenseOur income tax expense decreased $5,064,000 to an income tax benefit of $3,680,000 in the three months ended March 31, 2016, as compared to income tax expense of $1,384,000 for the same period in 2015.2019. For the three months ended March 31, 2016 and 2015, we reportedJune 30, 2019, the Company recognized a pre-tax loss of $8,931,000 and $72,000, respectively. Included in the pre-tax results was the change in the valuation$5.8 million as a result of our private placement warrants during the respective periods, which amounts are permanently excluded from the computation of taxable income. Excluding $1,256,000 of income in the three months ended March 31, 2016 and $3,614,000 of expense in the three months ended March 31, 2015, each attributable to the change in the value of the private placement warrants, weWeichai Warrant including the impact of it being exercised in April 2019. Because the Weichai Warrant was exercised in April 2019, it had a pre-tax loss of $10,187,000 inno impact on the three months ended March 31, 2016 as compared to pre-tax incomeJune 30, 2020. See Note 3. 3,542,000 in the three months ended March 31, 2015. After excluding the change in the valuation of the private placement warrants, the income tax rates computed approximated a benefit rate of 36.1% in the three months ended March 31, 2016 as compared to 39.1% provision ratedebt for the three months ended March 31, 2015.Liquidity and capital resourcesOur cash requirements are dependent uponJune 30, 2020 of $0.5 million, compared to no loss on the extinguishment of debt for the three months ended June 30, 2019. Collectively, these factors contributed to a variety of factors, foremost of$14.7 million increase in the net loss, which is the execution of our strategic plan. We expect to continue to devote substantial capital resources to running our business. Our primary sources of liquidity have been and are expected to continue to be cash flows from operations, principally collections of customer accounts receivable, and borrowing capacity under our credit facility. During 2015, we issued $55.0totaled $17.7 million in Senior Notes forthe 2020 period compared to a net loss of $3.0 million in the same period of 2019. Diluted loss per share was $0.78 in the 2020 period compared to a diluted loss per share of $0.14 in the comparable 2019 period. Adjusted net loss, which we received $53,483,000 after financing fees. These Senior Notes areexcludes certain items described below under “Credit agreements.” Although we believe we have or can access sufficient liquiditythat the Company believes are not indicative of its ongoing operating performance, was $12.2 million in the 2020 period, a decrease of $20.7 million, compared to fund our operations as needed, there can be no assurances such funding will be consistently availableAdjusted net income of $8.5 million in 2019. Adjusted loss per share was $0.53 in 2020 compared to us on terms thatAdjusted earnings per share of $0.39 in 2019. Adjusted earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) was a loss of $8.6 million in 2020 compared to Adjusted EBITDA of $13.0 million in 2019. Adjusted net loss (income), Adjusted loss (income) per share and Adjusted EBITDA are attractive or at all. Our ability to access additional funding as and when needed, our ability to timely refinance and/or replace our outstanding debt securities and credit facilities on acceptable terms, and our costnon-GAAP financial measures. For a reconciliation of funding will depend upon numerous factors including, but not limitedeach of these measures to the health and vibrancy ofnearest applicable GAAP financial measure, as well as additional information about these non-GAAP measures, see the financial markets, our financial performance, andsection entitled Non-GAAP Financial Measures in this Item 2.performance of our specific industry and other macro-economic factors in general. Our access to liquidity within a chosen funding mechanism is based on numerous factors, includingsix months ended June 30, 2020, the following: strength and quality of our assets, the continuation of our existing customer relationships and our development of new customer relationships; market acceptance of our existing and future products; the success of our product development and commercialization efforts and the costs associated with those efforts; and the costs associated with any future acquisitions, joint venturesCompany’s net sales decreased $56.3 million, or other strategic transactions. Accordingly, we may evaluate and pursue various financing alternatives determined advantageous to us at any particular point in time, including a larger credit facility, additional or replacement debt financing and/or additional equity financing as needed.As of March 31, 2016, we had working capital of $133,706,00022.1%, compared to $153,413,000the six months ended June 30, 2019, as a result of December 31, 2015. Our working capital decreasesales declines of $19,707,000$37.7 million, $18.2 million and $0.5 million in the industrial, energy and transportation end markets, respectively. Gross margin was attributable primarily10.8% and 17.0% during the six months ended June 30, 2020 and 2019, respectively. Gross profit decreased during the six months ended June 30, 2020 by $21.8 million compared to the six months ended June 30, 2019, while operating expenses decreased by $3.6 million as compared to the comparable period in 2019. Interest expense decreased by $1.5 million for the six months ended June 30, 2020 versus the comparable period in$41,202,000 decreasechange in our accounts receivable, net from December 31, 2015,value of warrants for the six months ended June 30, 2020 due to the Weichai Warrant being exercised in April 2019. The Company recognized a loss of $1.4 million for the six months ended June 30, 2019 as a result of the collection of receivables and a decreasechange in sales. Net inventory decreased $9,612,000 from December 31, 2015, as a result of our efforts to reduce inventory and improve working capital. Also, our cash on hand decreased by $6,950,000 from December 31, 2015 to March 31, 2016. Our prepaid expenses and other current assets decreased $22,000. Included in this decrease was the collection of $5,230,000 representing an amount due from the U.S. Departmentvalue of the Treasury asWeichai Warrant including the impact of the exercise. See Note 3. Weichai Transactions, included in Part 1, Item 1. Financial Statements, for additional information. The Company recognized a resultloss on the extinguishment of a refund attributabledebt for the six months ended June 30, 2020 of $0.5 million, compared to our 2015 estimated federal income tax position. This amount was almost entirely offset by an increase arising fromno loss on the extinguishment of debt for the six months ended June 30, 2019. Also, the Company recorded an income tax benefit recorded as of March 31, 2016 and$3.6 million for the six months ended June 30, 2020 versus a reclassification$0.3 million benefit for the same period last year. Collectively, these factors contributed to a $12.9 million increase in the net loss, which totaled $18.5 million in the 2020 period compared to a net loss of $1,343,000$5.6 million in the same period of assets held for sale,2019. Diluted loss per share was $0.81 in the 2020 period compared to a diluted loss per share of $0.28 in the comparable 2019 period. Adjusted net loss, which were reclassified from “Property, plant & equipment, net” to “Prepaid expenses and other current assets” on our condensed consolidated balance sheet as a resultexcludes certain items described below that the Company believes are not indicative of our decision to sell one of ourits ongoing operating facilities. We expect to completeperformance, was $12.8 million in the sale of this facility in 2016.The decreases to working capital were partially offset by a $34,587,000 decrease in accounts payable arising from2020 period, a decrease of $21.2 million, compared to Adjusted net income of $8.4 million in purchases2019. Adjusted loss per share was $0.56 in 2020 compared to Adjusted earnings per share of $0.41 in 2019. Adjusted EBITDA was a loss of $6.0 million in 2020 compared to Adjusted EBITDA of $16.7 million in 2019. Adjusted net loss (income), Adjusted loss (earnings) per share and the timingAdjusted EBITDA are non-GAAP financial measures. For a reconciliation of payments to suppliers and a $3,132,000 decrease in other accrued liabilities, principally attributable to a $2,975,000 decrease attributable to acquisition consideration payableeach of these measures to the former ownersnearest 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 Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Geographic Area % of Total % of Total % of Total % of Total North America $ 81,979 88 % $ 119,943 86 % $ 176,499 89 % $ 217,622 86 % Pacific Rim 6,295 7 % 10,804 8 % 12,749 6 % 23,429 9 % Europe 2,578 3 % 5,006 4 % 5,235 3 % 8,383 3 % Others 2,204 2 % 2,931 2 % 3,670 2 % 5,037 2 % Total $ 93,056 100 % $ 138,684 100 % $ 198,153 100 % $ 254,471 100 % For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 End Market % of Total % of Total Energy $ 29,649 32 % $ 52,245 38 % $ 79,733 40 % $ 97,893 39 % Industrial 30,463 33 % 54,660 39 % 67,594 34 % 105,247 41 % Transportation 32,944 35 % 31,779 23 % 50,826 26 % 51,331 20 % Totals $ 93,056 100 % $ 138,684 100 % $ 198,153 100 % $ 254,471 100 % Powertrain Integration, which we acquiredOperations(in thousands, except per share amounts) For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 Change % Change 2020 2019 Change % Change Net sales $ 93,056 $ 138,684 $ (45,628 ) (33 )% $ 198,153 $ 254,471 $ (56,318 ) (22 )% Cost of sales 89,279 113,070 (23,791 ) (21 )% 176,662 211,153 (34,491 ) (16 )% Gross profit 3,777 25,614 (21,837 ) (85 )% 21,491 43,318 (21,827 ) (50 )% Gross margin % 4.1 % 18.5 % (14.4 )% 10.8 % 17.0 % (6.2 )% Operating expenses: Research, development and engineering expenses 5,814 6,030 (216 ) (4 )% 12,566 12,329 237 2 % Research, development and engineering expenses as a % of sales 6.2 % 4.3 % 1.9 % 6.3 % 4.8 % 1.5 % Selling, general and administrative expenses 12,580 13,955 (1,375 ) (10 )% 26,470 30,015 (3,545 ) (12 )% Selling, general and administrative expenses as a % of sales 13.5 % 10.1 % 3.4 % 13.4 % 11.8 % 1.6 % Amortization of intangible assets 764 909 (145 ) (16 )% 1,527 1,819 (292 ) (16 )% Total operating expenses 19,158 20,894 (1,736 ) (8 )% 40,563 44,163 (3,600 ) (8 )% Operating (loss) income (15,381 ) 4,720 (20,101 ) NM (19,072 ) (845 ) (18,227 ) NM Other expense: Interest expense 1,427 2,122 (695 ) (33 )% 2,701 4,235 (1,534 ) (36 )% Loss from change in value of warrants — 5,752 (5,752 ) (100 )% — 1,352 (1,352 ) (100 )% Loss on extinguishment of debt 497 — 497 — % 497 — 497 — % Other income, net (44 ) (395 ) 351 (89 )% (255 ) (501 ) 246 (49 )% Total other expense 1,880 7,479 (5,599 ) (75 )% 2,943 5,086 (2,143 ) (42 )% Loss before income taxes (17,261 ) (2,759 ) (14,502 ) NM (22,015 ) (5,931 ) (16,084 ) NM Income tax expense (benefit) 481 239 242 101 % (3,561 ) (347 ) (3,214 ) NM Net loss $ (17,742 ) $ (2,998 ) $ (14,744 ) NM $ (18,454 ) $ (5,584 ) $ (12,870 ) NM Loss per common share: Basic $ (0.78 ) $ (0.14 ) $ (0.64 ) NM $ (0.81 ) $ (0.28 ) $ (0.53 ) 189 % Diluted $ (0.78 ) $ (0.14 ) $ (0.64 ) NM $ (0.81 ) $ (0.28 ) $ (0.53 ) 189 % Non-GAAP Financial Measures: Adjusted net (loss) income * $ (12,178 ) $ 8,456 $ (20,634 ) NM $ (12,849 ) $ 8,355 $ (21,204 ) NM Adjusted (loss) earnings per share – diluted * $ (0.53 ) $ 0.39 $ (0.92 ) NM $ (0.56 ) $ 0.41 $ (0.97 ) NM EBITDA * $ (13,758 ) $ 1,534 $ (15,292 ) NM $ (15,179 ) $ 2,728 $ (17,907 ) NM Adjusted EBITDA * $ (8,582 ) $ 12,988 $ (21,570 ) (166 )% $ (5,956 ) $ 16,667 $ (22,623 ) (136 )% NM Not meaningful * Non-GAAP measurement, see reconciliation below 2015. Additionally, accrued compensation and benefits decreased $360,000 from December 31, 2015 to March 31, 2016.A limited number of our customers have payment terms which may extend up to 150 days. As of March 31, 2016 and December 31, 2015, our trade receivables included $10.8 million and $8.0 million, respectively, of trade receivables which represented aggregate customer account balances subject to these terms. Of these amounts, $4.5 million and $3.7 million at March 31, 2016 and December 31, 2015, respectively, represented the portion of the balance outstanding with these extended trade terms. Under our revolving line of credit, which funds our working capital as needed, these receivables represent eligible collateral on the same basis as our other trade receivables and remain eligible as collateral upon which we may borrow up to their extended due date of 150 days.Cash flows for the three months ended March 31, 2016Operating activitiesNet income and changes in working capital are the primary drivers of our cash flows from operations. For the three months ended March 31, 2016, we generated $9,995,000 from operations.In the three months ended March 31, 2016, we had a net loss of $5,251,000 and non-cash adjustments totaling $2,279,000, resulting in cash used of $2,972,000 before considering changes in our operating assets and liabilities. Our non-cash adjustments favorably affecting cash in the three months ended March 31, 2016, primarily included (i) $2,699,000 of depreciation and amortization, (ii) $321,000 of share-based compensation expense, (iii) $219,000 of reserves for inventory, and (iv) $149,000 of non-cash interest expense. These increases were partially offset by a non-cash gain of $1,256,000 derived from an adjustment to the fair value of our private placement warrants in the three months ended March 31, 2016. The remaining other non-cash adjustments totaled $147,000, none of which was individually significant.Cash used of $2,972,000 from our net loss adjusted for non-cash items was offset by $12,967,000 of cash generated by operating assets and liabilities in the three months ended March 31, 2016. Our trade receivables decreased by $41,140,000 from the collection of outstanding trade receivables and a decrease in sales in the three months ended March 31, 2016,June 30, 2020 compared to the three months ended December 31, 2015. Our inventories decreased $9,393,000June 30, 2019, as a result of our effortssales declines of $24.2 million and $22.6 million in the industrial and energy end markets, respectively, partly offset by a $1.2 million increase in the transportation end market. The decreased sales within the industrial end market reflects lower demand for products used across a wide range of applications, with the largest decrease attributable to reduce inventorythose products used in the material handling/forklift markets. Lower energy end market sales were driven by decreased demand for the Company’s power generation products, particularly those used within the oil and improve our working capital. Prepaid expenses and other current assets increased cashgas industry, partly offset by $1,306,000 principallyhigher demand for demand response products. The nominal increase in transportation end market sales were primarily due to increased medium duty truck market business as the collection of an income tax receivable of $5,230,000 and partiallyCompany began shipping to a new customer, while it also saw higher demand in the terminal tractor market. These increases were partly offset by lower demand for products used within the recognitionschool bus market.additional income tax assetssales declines of $37.7 million, $18.2 million and $0.5 million in the industrial, energy and transportation end markets, respectively. The decreased sales within the industrial end market reflects lower demand for products used across a wide range of applications, with the largest decreases attributable to lower demand for products used in the material handling/forklift and arbor care markets. Lower energy end market sales were driven by decreased demand for the Company’s power generation products, particularly those used within the oil and gas industry, partly offset by stronger demand for demand response products. The nominal decrease in transportation end market sales were primarily due to lower demand for products used in the medium duty truck market mostly attributable to the previously disclosed acceleration of the shipment of certain engines during the fourth quarter of 2019, which negatively impacted sales in the first six months of 2020 notwithstanding shipments to a new customer during the second quarter of 2020. The decrease was partly offset by stronger demand for products used within the school bus and terminal tractor markets.March 31, 2016. Partially offsetting these favorable effects on cashflow was a $35,274,000 decrease in accounts payable, principally attributableJune 30, 2020 by $21.8 million, or 85%, compared to the timing of payments, along with the payment of contingent consideration of $2,975,000 related to our acquisition of Powertrain in 2015, a $517,000 decrease in accrued compensation and benefits and other accrued liabilities, and a $106,000 decrease in our other non-current liabilities.Investing activitiesNet cash used in investing activities was $214,000 attributable to property and equipment additions in the three months ended March 31, 2016.Financing activitiesWe repaid $16,731,000 of cash from financing activities to reduce our net borrowings under our revolving line of credit inJune 30, 2019. Gross margin was 4.1% and 18.5% during the three months ended March 31, 2016.Cash flowsJune 30, 2020 and 2019, respectively. The decline in gross margin is primarily due to reduced operating leverage as a result of lower sales, unfavorable product mix, and significantly higher warranty expense related to charges from adjustments to preexisting warranties largely within the transportation end market, partly mitigated by favorable tariff costs. For the three months ended June 30, 2020, warranty costs were $13.8 million (net of supplier recoveries of $0.6 million), including $9.3 million of charges for adjustments to preexisting warranties, an increase of $10.8 million compared to warranty costs of $3.0 million (net of supplier recoveries of $0.2 million) for the three months ended March 31, 2015Operating activitiesForJune 30, 2019. The warranty costs for the three months ended March 31, 2015, we used $9,731,000June 30, 2020 included $0.6 million of charges related to fund our operations.Inspecific engine supplier quality issues, for which the Company is actively seeking cost reimbursement.March 31, 2015, we hadJune 30, 2020 were $5.8 million, a net lossdecrease of $1,456,000 and non-cash adjustments totaling $6,080,000, resulting in cash generated$0.2 million, or 4%, from operations of $4,624,000 before considering changes in our operating assets and liabilities. Our non-cash adjustments favorably affecting our cash from operations in the three months ended March 31, 2015 primarily included (i) $3,614,000 derivedJune 30, 2019 levels.change in the fair value of our private placement warrants, (ii) $1,683,000 of depreciationsix months ended June 30, 2019 levels.amortization, (iii) $305,000 of share-based compensation expense, (iv) $225,000 of reserves for inventory,Administrative Expenses(v) other adjustments of $253,000.Cash generated of $4,624,000 from our net loss adjusted for non-cash items was offset by $14,355,000 of cash used by operating assets and liabilities inadministrative expenses decreased during the three months ended March 31, 2015. Excluding the impact of the increase in inventories dueJune 30, 2020 by $1.4 million, or 10%, compared to the acquisition of Buck’s, our inventories increased $18,059,000 as we built up our inventory, including strategic engine block purchases, to support current and future period sales. We also used $4,820,000 to pay down our trade payables since December 31, 2014. These uses of cash were partially offset by a $6,251,000 decrease in trade receivables arising from collections as well as a decrease in sales in the three months ended March 31, 2015June 30, 2019. The decrease was primarily due to lower financial reporting costs as a result of the completion of the restatement of the Company’s financial statements in May 2019, lower incentive compensation expense, the absence of severance costs in the second quarter of 2020, and the impact of cost savings actions. Partly offsetting the decline were higher legal costs related to the ongoing government investigations and the Company’s indemnification obligations of former officers and employees as a result of the exhaustion of its directors and officers insurance during the early part of 2020 (seeDecember 31, 2014. In addition, accrued compensation and benefits and other accrued liabilities and income taxes payable increased $568,000 and $812,000, respectively since December 31, 2014 which also partially offsetJune 30, 2019, largely due to lower overall interest rates on the cash usedCompany’s debt during the second quarter of 2020, as compared to the prior year.operations. We also realized cashthe second quarter of 2020 were primarily due to refinancing the debt during the period. See Note 6.Debt, included in Part I, Item 1. Financial Statements, for additional information.$672,000 decreasechange in prepaid expenses and other assets in the three months ended March 31, 2015. The remaining other changes in operating componentsvalue of $221,000 also contributed to a partial offset of the increase in cash used in the three months ended March 31, 2015.Investing activitiesNet cash used in investing activities was $10,541,000 in the three months ended March 31, 2015. As discussed previously, we acquired Buck’s on March 18, 2015 for an initial purchase price of $9,735,000. In addition, property and equipment additions accounted for $806,000 of cash used in the three months ended March 31, 2015.Financing activitiesWe generated approximately $23,946,000 of cash from financing activitieswarrants for the three months ended March 31, 2015. We generated cash from $24,363,000June 30, 2020 due to the Weichai Warrant being exercised in net borrowings under our revolving lineApril 2019. The Company recognized a loss of credit in$5.8 million for the three months ended March 31, 2015. In addition, we repaid $417,000June 30, 2019 as a result of the change in the value of the Weichai Warrant including the impact of the exercise.under our term loanto the Weichai Warrant being exercised in April 2019. The Company recognized a loss of $1.4 million for the six months ended June 30, 2019 as a result of the change in the value of the Weichai Warrant including the impact of the exercise.March 31, 2015.Credit agreementsWells Fargo Bank, National Association credit agreementOn June 28, 2013, we entered into a credit agreement with Wells Fargo Bank, National Association (the “Wells Credit Agreement”), which replaced our prior credit agreement. The Wells Credit Agreement enabled us to borrow under a revolving line of credit secured by substantially all of our tangible and intangible assets (other than real property). The Wells Credit Agreement (a) provided an initial maximum $75.0 million revolving line of credit to us, which, at our request and subject30, 2020 compared to the terms of the Wells Credit Agreement, could have been increased up to $100.0three months ended June 30, 2019.termsix months ended June 30, 2020 compared to the six months ended June 30, 2019.Wells Credit Agreement; (b) bore interest at the Wells Fargo Bank’s prime rate plus an applicable margin rangingCompany’s equity earnings from 0%its joint venture. Refer to 0.50%; or at our option, all or a portionNote 13. Related Party Transactions, in Part I, Item 1. Financial Statements, for further discussion of the revolving lineCompany’s joint venture.credit could have been designated$0.5 million for the three months ended June 30, 2020, as compared to bear interest at LIBOR plus$0.2 million for the three months ended June 30, 2019. The Company’s pretax loss was $17.3 million for the three months ended June 30, 2020, compared to a pretax loss of $2.8 million for the three months ended June 30, 2019. Income tax expense for the three months ended June 30, 2020 primarily related to an applicable margin ranging from 1.50% to 2.00%; (c) had an unused line fee of 0.25% and (d) required us to report our fixed charge coverage ratio, when our Availability (as definedadjustment in the Wells Credit Agreement)impact of the CARES Act. The Company continues to record a full valuation allowance against deferred tax assets which offsets the tax benefits associated with the pre-tax losses for the three months ended June 30, 2020 and 2019.less than$22.0 million for the Threshold Amount (as definedsix months ended June 30, 2020, compared to a pretax loss of $5.9 million for the six months ended June 30, 2019. The increase in the Wells Credit Agreement) and to continue to report our fixed charge coverage ratio untiltax benefit for the date that Availability for a period of 60 consecutive days, was greater than or equalsix monthsThreshold Amount. We were required to meet a minimum monthly fixed charge coverage ratio of not less than 1.0 to 1.0, the testing of which commenced on the last dayimpact of the month prior to the date on which our Availability was less than the Threshold Amount. The Threshold Amount was definedCARES Act enacted in the Wells Credit Agreement asfirst quarter of 2020, which allowed the greater of (i) $9,375,000 or (ii) 12.5% ofCompany to elect bonus depreciation for the maximum revolver amount of $75.0 million or as it may have been increased during the term of the Wells Credit Agreement up2018 and 2019 tax years, carryback net operating losses to $100.0 million.On April 1, 2014, the Wells Credit Agreement was amended (the “Amended Wells Credit Agreement”) to increase our revolving line of credit from $75.0 million to $90.0 million. The Amended Wells Credit Agreement (a) bears interest at the Wells Fargo Bank’s prime rate plus an applicable margin ranging from 0% to 0.5%; or at our option, all or a portion of the revolving line of credit can be designated to bear interest at LIBOR plus an applicable margin ranging from 1.50% to 2.00%; (b) has an unused line fee of 0.25%; (c) requires us to report our fixed charge coverage ratioearlier years, and leverage ratio as described below; (d) included a $5.0 million term loan arrangement with Wells Fargo Bank; and (e) includes a letter of credit sub-facility of the revolving line of credit. The principal amount of the $5.0 million term loan was payable in 36 equal monthly installments with the first payment due on June 1, 2014, plus interest at LIBOR plus 4.50%. Effective April 1, 2014 and during the period in which the term loan was outstanding, we were subject to a fixed charge coverage ratio covenant and a debt leverage ratio covenant. We were required to maintain a fixed charge coverage ratio of at least 1.20 to 1.00 and our debt leverage ratio could not exceed 4.0 to 1.0 during the period in which the term loan was outstanding. At the time, we used borrowings under this expanded revolving line of creditimmediately refund AMT credits as well as the proceeds from the term loan to finance the acquisition of Professional Power Products, Inc., which was consummated on April 1, 2014. The term loan was subsequently paid in full on April 29, 2015. In connection with the repayment of the term loan on April 29, 2015, our minimum monthly fixed charge coverage ratio reverted back to 1.0 to 1.0, the testing of which commences on the last day of the month prior to the date on which our Availability is less than the Threshold Amount.On September 30, 2014 and again on February 11, 2015, we further amended our credit facility with Wells Fargo Bank, National Association, to increase our revolving line of credit facility to $100.0 million and $125.0 million, respectively (collectively with the Amended Wells Credit Agreement, the “Amended Wells Credit Agreement II”). The Amended Wells Credit Agreement II was scheduled to mature on June 28, 2018.Other than the above-mentioned amendments, the terms and conditions of the Amended Wells Credit Agreement and Amended Wells Credit Agreement II are substantially similar to the Wells Credit Agreement. Under the Amended Wells Credit Agreement and Amended Wells Credit Agreement II, the amount that we may borrow is limited to the lesser of (i) the maximum available amount and (ii) borrowing base. The borrowing base is calculated as a percentage of our eligible accounts receivable and eligible inventory, plus a defined amount based upon certain of our fixed assets (all as definedchange in the Amended Wells Credit Agreement and Amended Wells Credit Agreement II).deferred tax liability related to an indefinite-lived intangible asset. The Amended Wells Credit Agreement and Amended Wells Credit Agreement II also contain customary covenants and restrictions applicableCompany continues to us, including agreements to provide financial information, comply with laws, pay taxes and maintain insurance, restrictions onrecord a full valuation allowance against deferred tax assets which offsets the incurrence of certain indebtedness, guarantees and liens, restrictions on mergers, acquisitions and certain dispositions of assets, and restrictions on the payment of dividends and distributions. The revolving line of credit is secured by substantially all of our tangible and intangible assets (other than real property).On April 29, 2015, we entered into an amended credit facility (“Amended Wells Credit Agreement III”) for the purpose of facilitating the issuance of Senior Notes as described below, and this amendment provided for the earlier maturity of the Amended Wells Credit Agreement III to insure that the Amended Wells Credit Agreement III will come due before the Senior Notes are payable as described below. While the Senior Notes are outstanding, the Amended Wells Credit Agreement III would have become due 75 days prior to the earliest date that a Special Mandatory Offer to Purchase might occur or 90 days prior to the final maturity date of the Senior Notes, all as described in the Indenture agreement below. Under the above terms, the Amended Wells Credit Agreement III would have become due no earlier than March 15, 2017. However, the Special Mandatory Purchase Date was eliminated, effective April 1, 2016 as described below. Accordingly, the Amended Wells Credit Agreement III becomes due on January 31, 2018.Senior NotesOn April 24, 2015, we entered into a purchase agreement with certain institutional investors for a private sale of an aggregate amount of $55.0 million of unsecured Senior Notes with a stated interest rate of 5.50%. The sale closed on April 29, 2015. In connection with the issuance of the Senior Notes, we entered into an indenture agreement (“Indenture”) dated April 29, 2015, by and among the Company, The Bank of New York Mellon, as Trustee, and our subsidiaries as guarantors. We received net proceeds of $53,483,000 after financing costs of $1,517,000. We presented issuance coststax benefits associated with the Senior Notes as a direct deduction frompre-tax losses for the carrying value of the obligation on our unaudited condensed consolidated balance sheets. The balance outstanding on the Senior Notes, net of unamortized financing fees was $53,946,000six months ended June 30, 2020 and $53,820,000 as of March 31, 2016 and December 31, 2015, respectively.The Senior Notes are unsecured debt and are effectively subordinated to our existing and future secured debt including the debt2019.connection with the Amended Wells Credit Agreement III.We may redeem the Senior Notes in whole or in part at any time on or after May 1, 2016, at our option following redemption prices (expressed as percentages of the principal amount)Part I, Item 1. together with accrued and unpaid interestfor additional information related to the date of redemption:Redemption dateRedemption priceMay 1, 2016 through October 31, 2016101.0%November 1, 2016 and thereafter100.0%At any time prior to May 1, 2016, we could have redeemed up to 35% of the Senior Notes with the net cash proceeds of certain equity offerings specified in the Indenture at a redemption price of 105.5% of the principal amount of the Senior Notes, together with accrued and unpaid interestCompany’s income tax provision.date of redemption, but only if at least 65% of the original aggregate principal amount of the Senior Notes would have remained outstanding following such redemption. In addition, prior to May 1, 2016, we could have redeemed the Senior Notes in whole or in part at a redemption price equal to 101.0% of the principal amount plus (i) accrued and unpaid interest to the redemption date and (ii) an Applicable Premium (as defined in the Indenture) that was intended as a “make-whole” to May 1, 2016. We did not redeem any of the Senior Notes prior to May 1, 2016.The Senior Notes have a final maturity date of May 1, 2018. The Senior Notes originally had a Special Mandatory Offer to Purchase as described in the Indenture and summarized as follows: Upon the occurrence of the earlier of (I) March 15, 2017, if the Trustee had not received on or within five days prior to such date an officer’s certificate stating that (i) our pro forma consolidated EBITDA (as defined in the Indenture) was at least equal to or greater than $35.0 million for the most recent four full fiscal quarters for which financial statements were available as of such date and (ii) our consolidated pro forma ratio of consolidated EBITDA to fixed charges (as defined in the Indenture) was at least equal to or greater than 3.25 to 1.0 for the most recent four full fiscal quarters for which financial statements were available as of such date or (II) the date on which we notified the Trustee in writing (which date could have been at any time on or after March 1, 2017 but on or prior to March 15, 2017) that we could not or would not deliver such officers’ certificate, then, unless we had given on or prior to March 15, 2017 a notice of redemption of all of the Senior Notes, we would make a mandatory offer to purchase all of the Senior Notes at a purchase price of 100.0% of the principal amount plus accrued and unpaid interest, if any, to the date of purchaseresults provided in accordance with the procedures set forthaccounting principles generally accepted in the Indenture.On April 1, 2016, we enteredUnited States (“U.S. GAAP”) above, this report also includes non-GAAP (adjusted) financial measures. Non-GAAP financial measures provide insight into a Second Supplemental Indenture (“Second Supplemental Indenture”) which, among other things, eliminated the Special Mandatory Offer to Purchase in its entirety. The Second Supplemental Indenture also increased our permitted indebtedness to $145.0 million from $125.0 million until February 1, 2017 when such permitted indebtedness shallselected financial information and should be reduced to $135.0 million. The Second Supplemental Indenture also resulted in an increaseevaluated in the interest rate oncontext 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 Senior NotesCompany may not be comparable to 6.50% effective April 1, 2016. We paid a consent fee of $275,000similarly titled amounts reported by other companies. The non-GAAP financial measures should be considered in connectionconjunction with the execution ofconsolidated financial statements, including the Second Supplemental Indenture.The Indenture, as amended, contains covenants that, among other things, limit or restrict the ability for usrelated notes, and our subsidiaries to incur additional debt, prepay subordinated indebtedness, pay dividends or make other distributions on capital stock, redeem or repurchase capital stock, make investments and restricted payments, enter into transactions with affiliates, sell assets, create liens on assets to secure debt, or effect a consolidation or merger or to sell all, or substantially all, of our assets, in each case subject to certain qualifications and exceptions set forth in the Indenture. The Indenture also provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the Indenture, payment defaults or acceleration of other indebtedness, and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the Trustee or holders of at least 25.0% in principal amount of the then outstanding Senior Notes may declare the principal of and accrued but unpaid interest on all Senior Notes to be due and payable.Interest on the Senior Notes is payable semi-annually in arrears on May 1 and November 1 of each year. As of March 31, 2016 and December 31, 2015, the accrued, but unpaid interest on the Senior Notes was $1,260,000 and $513,000, respectively.Outstanding borrowingsAs of March 31, 2016, $80.0 million of our outstanding borrowings under our revolving line of credit bore interest at the LIBOR rate, plus an applicable margin. The weighted average interest rate on these borrowings was 1.93% as of March 31, 2016. The remaining outstanding balance of approximately $568,000 as of March 31, 2016, had been designated to bear interest at the prime rate, plus an applicable margin, which equaled 3.50% with the applicable margin included. The unused and available revolving line of credit balance was $21.1 million at March 31, 2016.As of December 31, 2015, $97.0 million of our outstanding borrowings under our revolving line of credit bore interest at the LIBOR rate, plus an applicable margin. The weighted average interest rate on these borrowings was 1.84% as of December 31, 2015. The remaining outstanding balance of $299,000 as of December 31, 2015 had been designated to bear interest at the prime rate, plus an applicable margin, which equaled 3.50% with the applicable margin included. The unused and available revolving line of credit balance was $27.1 million at December 31, 2015.Contractual obligations and commitmentsThere have been no material changes to our contractual obligations and commitments included in Item 7, “Management’sOperations”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 (loss) income Net loss Adjusted (loss) earnings per share Loss per common share – diluted EBITDA Net loss Adjusted EBITDA Net loss our annual report on Form 10-Kthe Company. Adjusted net (loss) income is defined as net loss as adjusted for certain items that the year ended December 31, 2015, exceptCompany believes are not indicative of its ongoing operating performance. Adjusted (loss) earnings per share is a measure of the Company’s diluted net loss per share adjusted for entering into a Second Supplemental Indenture described above and in Note 9, “Debt”, to our unaudited condensed consolidated financial statements.Off-balance sheet arrangementsWe do not have any material off-balance sheet arrangements (as defined in Item 303(a) (4) of Regulation S-K).Impact of recently issued accounting standardsWe evaluate the pronouncements of authoritative accounting organizations, including the Financial Accounting Standards Board (FASB), to determine the impact of new pronouncements on GAAP and our consolidated financial statements. In Mayspecial items. EBITDA provides the Company with an understanding of 2014, the FASB and International Accounting Standards Board jointly issued a final standard on revenue recognition which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This standard will supersede most current revenue recognition guidance. Under the new standard, entities are required to identify the following within a contract with a customer: the separate performance obligations in the contract; the transaction price; allocation of the transaction price to the separate performance obligations in the contract; and the appropriate amount of revenue to be recognized when (or as) the entity satisfies each performance obligation. Entities have the option of using either retrospective transition or a modified approach in applying the new standard. On July 9, 2015, the FASB voted to issue a final Accounting Standards Update (ASU) that defers for one year the effective date of the new revenue standard and allows early adoption as of the original effective date (i.e., annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods). After reviewing and discussing the feedback received, the Board decided to adopt the standard as originally proposed. Thus, the anticipated final ASU will be effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. We are currently evaluating the approach to use to apply the new standard and the impact that the adoption of the new standard will have on our consolidated financial statements.In July 2015, the FASB issued final guidance to simplify the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The guidance applies to inventories for which cost is determined by methods other than LIFO and the retail inventory method. The amendment is to be applied prospectively and is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We are currently evaluatingearnings before the impact of adopting this ASC amendment, butinvesting and financing charges and income taxes. Adjusted EBITDA further excludes the effects of other non-cash charges and certain other items that do not expect it will havereflect the ordinary earnings of the Company’s operations.significant effect on our consolidated financial statements.In February 2016,measure of performance of the FASB issued ASU No. 2016-02, Leases, Topic 842. This ASU requires lesseesCompany’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 recognize,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 balance sheet,accounting methods, the book value of assets, the capital structure and liabilitiesthe 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.rights and obligations created by leasescomparative periods of greater than twelve months. The accounting by lessors will remain largely unchanged. Adoption for this standard is2019 in order to be applied with a modified retrospective transition, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of adopting this ASC, but cannot make an assessment asalign to the current period presentation. There was no impact that the adoption of this ASU will have on our consolidated financial statements.In March, 2016, the FASB issued ASU. No 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC 718, Compensation – Stock Compensation. The ASU includes provisions intended to simplify various provisions related to how share-based payments are accountedAdjusted net income, Adjusted earnings per share, EBITDA or Adjusted EBITDA for and presented in the financial statements. Early adoption will be permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The amendment is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. We are currently evaluating the impact of adopting this ASC, but cannot make an assessment as to the impact that the adoption of this ASU will have on our consolidated financial statements.There were no additional new accounting pronouncements or guidance that have been issued or adopted during the three and six months ended March 31, 2016, that we expect will have a significant effect on our consolidated financial statements.Cautionary Note Regarding Forward-Looking StatementsThis report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), that reflect our expectations and projections about our future results, performance, prospects and opportunities. In this report, the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “potential,” “should,” “will,” “would,” and similar expressions, as they relate to us, our business or our management, are intended to identify forward-looking statements, but they are not the exclusive means of identifying them.Many of these risks, uncertainties and other factors are beyond our control and are difficult to predict. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. New factors could also emerge from time to time that could adversely affect our business. The forward-looking statements herein can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties and assumptions outlined below and described under the heading “Risk Factors” in our 2015 Annual Report and in this Form 10-Q, and include but are not limited to the following:Risks Related to our Business and our Industry•The market for alternative fuel power systems may not continue to develop according to our expectations and, as a result, our business may not grow as planned and our business plan may be adversely affected.•Our engine blocks manufactured in-house by our company are among the first we’ve manufactured in-house and may not be successful.•We may not succeed with the expansion of our products into the on-road market.•New products, including new engines we develop, may not achieve widespread adoption.•Changes in environmental and regulatory policies could hurt the market for our products.•We currently face, and will continue to face, significant competition, which could result in a decrease in our revenue.•Our industrial OEM customers may not continue to outsource their power system needs.•We are dependent on certain products and industrial OEM market categories for a significant share of our revenues and profits.•We are dependent on relationships with our OEM customers and any change in our relationships with any of our key OEM customers could have a material adverse effect on our business and financial results.•We are dependent on relationships with our material suppliers, and the partial or complete loss of one of these key suppliers, or the failure to find replacement suppliers or manufacturers in a timely manner, could adversely affect our business.•We derive a substantial majority of our diesel power systems revenues from our relationships with Perkins and Caterpillar.•The quality and performance of our power systems are, in part, dependent on the quality of their component parts that we obtain from various suppliers, which makes us susceptible to performance issues that could materially and adversely affect our business, reputation and financial results.•We maintain a significant investment in inventory, and a decline in our customers’ purchases could lead to a decline in our sales and profitability, causing us to accumulate excess inventory.•Changes in our product mix could materially and adversely affect our business.•Our financial position, results of operations and cash flows have been, and may in the future be, negatively impacted by challenging global economic conditions.•Fuel price differentials are hard to predict and may have an adverse impact on the future demand for our products.•The volatility of oil and gas prices may indirectly affect our stock price.•Price increases in some of the key components in our power systems could materially and adversely affect our operating results and cash flows.•Many of our power systems involve long and variable design and sales cycles, which could have a negative impact on our results of operations for any given quarter or year.•Our existing debt or new debt that we incur could adversely affect our business and growth prospects.•Our quarterly operating results are subject to variability from quarter to quarter.•If we fail to adequately protect our intellectual property rights, we could lose important proprietary technology, which could materially and adversely affect our business.•If we face claims of intellectual property infringement by third parties, we could encounter expensive litigation, be liable for significant damages or incur restrictions on our ability to sell our products and services.•We could suffer warranty claims or be subject to product liability claims, both of which could materially and adversely affect our business.•We could become subject to product liability claims.•We may have difficulty managing the expansion of our operations.•If our production facilities become inoperable, our business, including our ability to manufacture our power systems, will be harmed.•We may be adversely impacted by work stoppages and other labor matters.•Our business could be adversely affected by increased compensation costs or difficulties in attracting staff for our business including those related to acquisitions.•The loss of one or more key members of our senior management, or our inability to attract and retain qualified personnel could harm our business.•Governmental regulations in employee benefits, insurance, immigration and work authorization requirements may adversely affect our existing and future operations and financial results, including harming our ability to expand or by increasing our operating costs.•If we do not properly manage the sales of our products into foreign markets, our business could suffer.•We could be adversely affected by risks associated with acquisitions and joint ventures, including those in the Asian markets.•Failure to raise additional capital or to generate the significant capital necessary to continue our growth could reduce our ability to compete and could harm our business.•We are and will continue to be subject to foreign laws, rules and regulations as our business expands into these foreign markets and cannot be certain as to our continued compliance and costs related thereto.•We could become liable for damages resulting from our manufacturing activities.•We may have unanticipated tax liabilities that could adversely impact our results of operations and financial condition.•Changes in accounting standards or inaccurate estimates or assumptions in applying accounting policies could adversely affect us.•Variability in self-insurance liability estimates could significantly impact our results of operations.Risks Related to the Ownership of our Common Stock•We incur significant costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; any failure to establish and maintain adequate internal control over financial reporting or to recruit, train and retain necessary accounting and finance personnel could have an adverse effect on our ability to accurately and timely prepare our financial statements.•Concentration of ownership among our existing executive officers may prevent new investors from influencing significant corporate decisions.•The price of our stock may be volatile and may decline in value.•Future sales by us or our existing stockholders could depress the market price of our common stock.•Our actual operating results may differ significantly from our guidance.•We have discretion in the use of borrowings under our revolving line of credit and may use them in a manner in which our stockholders would not consider appropriate.•Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.•Our stockholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses.•If securities or industry analysts cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.•We do not anticipate paying any dividends in the foreseeable future.Our forward-looking statements speak only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements whetherJune 30, 2019 as a result of newthis change in presentation. The Company believes the updated presentation may provide more useful information future events or otherwise. All subsequent writtento investors regarding the Company’s non-GAAP adjustments and oral forward-lookingbetter aligns with management’s use of the information.(in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Net loss $ (17,742 ) $ (2,998 ) $ (18,454 ) $ (5,584 ) — 5,752 — 1,352 160 393 317 668 497 — 497 — — 6 — 482 — 690 — 1,598 957 2,195 1,779 5,493 294 472 892 1,251 3,268 1,946 5,738 3,095 388 — (3,618 ) — Adjusted net (loss) income $ (12,178 ) $ 8,456 $ (12,849 ) $ 8,355 For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Loss per common share – diluted $ (0.78 ) $ (0.14 ) $ (0.81 ) $ (0.28 ) — 0.27 — 0.07 0.01 0.02 0.01 0.03 0.02 — 0.02 — — — — 0.02 — 0.03 — 0.08 0.04 0.10 0.08 0.27 0.02 0.02 0.04 0.06 0.14 0.09 0.25 0.16 0.02 — (0.15 ) — Adjusted (loss) earnings per share – diluted $ (0.53 ) $ 0.39 $ (0.56 ) $ 0.41 Diluted shares (in thousands) 22,858 21,702 22,858 20,171 (in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 Net loss $ (17,742 ) $ (2,998 ) $ (18,454 ) $ (5,584 ) Interest expense 1,427 2,122 2,701 4,235 Income tax expense (benefit) 481 239 (3,561 ) (347 ) Depreciation 1,312 1,262 2,608 2,605 Amortization of intangible assets 764 909 1,527 1,819 EBITDA (13,758 ) 1,534 (15,179 ) 2,728 — 5,752 — 1,352 160 393 317 668 497 — 497 — — 6 — 482 — 690 — 1,598 957 2,195 1,779 5,493 294 472 892 1,251 3,268 1,946 5,738 3,095 Adjusted EBITDA $ (8,582 ) $ 12,988 $ (5,956 ) $ 16,667 1. Amount consists of the change in the value of the Weichai Warrant, including the impact of the exercise in April 2019. 2. 3. 4. Amounts represent incremental compensation costs (including $0.3 million for the six months ended June 30, 2019 of stock-based compensation) incurred to provide retention benefits to certain employees. 5. Amounts represent severance and other post-employment costs for certain former employees of the Company. 6. Amounts represent professional services fees related to the Company’s efforts to restate prior period financial statements and 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 of recurring audit fees for the three and six months ended June 30, 2020, respectively, and $0.1 million and $0.9 million for the three and six months ended June 30, 2019, respectively. 7. Amounts represent professional services fees related to the Company’s efforts to remediate internal control material weaknesses including certain costs to upgrade IT systems. 8. 9. Amount consists of the impact of the enactment of the CARES Act and a change in the deferred tax liability related to an indefinite-lived intangible asset. (in thousands) For the Six Months Ended June 30, 2020 2019 Change % Change Net cash provided by operating activities $ 4,010 $ 1,971 $ 2,039 103 % Net cash used in investing activities (1,409 ) (1,536 ) 127 8 % Net cash provided by (used in) financing activities 33,378 (439 ) 33,817 NM Net increase (decrease) in cash, cash equivalents, and restricted cash $ 35,979 $ (4 ) $ 35,983 NM Capital expenditures $ (1,416 ) $ (1,536 ) $ 120 8 % usborrowing $130.0 million under the Credit Agreement in April 2020, partially offset by using a portion of the funds (i) to repay the outstanding balance of $16.8 million under the Wells Fargo Credit Agreement and (ii) to fully redeem and discharge $55.0 million in aggregate outstanding principal amount of the Unsecured Senior Notes and pay related interest. See additional discussion below and in Note 6. Debt, included in Part I, Item 1. Financial Statements.persons actingLIBOR plus 2.00%, and the Company is required to pay a 0.25% commitment fee on our behalf are expressly qualifiedthe average daily unused portion of the revolving credit facility under the Credit Agreement. The Credit Agreement is secured by substantially all of the Company’s assets and includes certain financial covenants as well as a change of control provision. On April 2, 2020, the Company borrowed $95.0 million under the Credit Agreement and utilized the funds (i) to repay the outstanding balance of $16.8 million under the credit agreement between the Company and Wells Fargo Bank, N.A. (“Wells Fargo”), as administrative agent (the “Wells Fargo Credit Agreement”), (ii) to fully redeem and discharge $55.0 million in their entiretyaggregate principal amount of the unsecured 5.50% senior notes due June 2020 (the “Unsecured Senior Notes”) and pay related interest and (iii) for general corporate purposes. The Wells Fargo Credit Agreement was terminated in connection with the repayment of the outstanding balance. On April 29, 2020, the Company borrowed an additional $35.0 million under the Credit Agreement, which is the remaining portion of availability, providing the Company with greater financial flexibility. As of June 30, 2020, the Company’s total debt obligations under the Credit Agreement were $130.0 million in the aggregate, and its cash and cash equivalents were $32.5 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 $12.1 million.cautionary statements containedMarch 26, 2021 maturity date. Management currently plans to seek additional liquidity from its current or other lenders before March 26, 2021. There can be no assurance that the Company will be able to obtain a cure or waiver of its financial covenant violations or successfully complete a refinancing on acceptable terms or repay this outstanding indebtedness when required or if at all.this quarterly report.Forward looking statements speak only asearly 2020, the global economy experienced substantial turmoil including impacts from the world financial markets which have experienced a period of significant volatility and overall declines. In addition, due to unprecedented decreases in demand, an oil price war, and economic uncertainty resulting from the COVID-19 pandemic, crude oil prices have declined considerably since the end of 2019. A significant portion of the dateCompany’s sales and profitability is derived from the sale of this report. Except as expressly required under federal securities lawsproducts that are used within the oil and gas industry. While the rulesCompany has yet to experience significant supply chain interruptions or material cancellations of orders, the potential impact of future disruptions, continued economic uncertainty, and regulationscontinued depressed crude oil prices and low rig count levels may have a significant adverse impact that may result in the recognition of material impairments or other related charges. Moreover, the full impact of the SEC, we do not undertake any obligationCOVID-19 pandemic on the Company’s operations and liquidity continues to update any forward-looking statementsevolve.reflect eventsuncertainties surrounding the Company’s future ability to refinance, extend, or circumstances arisingrepay its outstanding indebtedness, maintain sufficient liquidity to fund its business activities, obtain a cure or waiver in connection with the financial covenant breach, and maintain compliance with the covenants and other requirements under the 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 this report, whetheroperations and financial condition.newthe need to make estimates regarding matters that are inherently uncertain. The Company has identified the following as its most critical accounting policies and judgments. 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 future events or otherwise. You should not place undue relianceconditions.forward-looking statementssix months ended June 30, 2020, there were no significant changes in the application of critical accounting policies.▪ Revenue Recognition ▪ Allowance for Doubtful Accounts ▪ Inventories ▪ Goodwill and Other Intangibles ▪ Impairment of Long-Lived Assets ▪ Warranty ▪ Deferred Tax Asset Valuation Allowance ▪ Uncertain Tax Positions this report or that may be made elsewhere from time to time by us, or on our behalf. Our results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of our common stock. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.Part 1, Item 1.
Risk. aboutAbout Market Riskexposeda smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to changes in interest rates primarily due to its outstanding balancesprovide the information under the Amended Wells Credit Agreement III. If interest rates were to fluctuate, there is a risk that any outstanding balance would be impacted by the prevailing rate, which may further impact our ability to repay the outstanding balance. A one percentage point increase or decrease in interest rates would increase or decrease our interest expense by approximately $805,700 annually based on our revolving line of credit as of March 31, 2016. Our Senior Notes outstanding as of March 31, 2016 are fixed and not subject to changes in interest rates.For a discussion of our liability for the private placement warrants, see Note 8, “Fair value of financial instruments,” to the unaudited condensed consolidated financial statements.
Procedures. “Item 9A - Controls and Procedures” in the 2019 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.ProceduresWe maintain a system of disclosureisare designed to ensure that information required to be disclosed by the issuer in the reports that we fileit files or submitsubmits under the Exchange Act isare recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms offorms.” The Company’s disclosure controls and procedures are designed to ensure that material information relating to the SecuritiesCompany and Exchange Commission, and that such informationits consolidated subsidiaries is accumulated and communicated to ourits management, including ourits Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.Asdisclosures.the end of the period covered by this report and pursuant to Rule 13a-15(b) under the Exchange Act, our management, including theits Chief Executive Officer and Interim Chief Financial Officer, conducted an evaluation of the effectiveness and design of ourthe Company’s disclosure controls and procedures (as that term is defined in Rule 13a-15(b) underas of June 30, 2020 (the end of the Exchange Act)period covered by this Quarterly Report on Form 10-Q). Based upon that evaluation, the Company’s Chief Executive Officer and Interim Chief Financial Officer have concluded that ourthe Company’s disclosure controls and procedures were not effective as of the endJune 30, 2020, because of the period coveredpreviously reported material weaknesses in internal control over financial reporting, as described below.this report.▪ The Company has issued a revised delegation of authority policy that appoints tiered approvers based upon risk and materiality of the transaction. ▪ The Company has identified a central repository to maintain all the Company’s policies, is providing training to users and is developing a framework to establish responsibility and accountability for executing and monitoring policies and procedures. ▪ The Company has drafted and is in the process of finalizing critical accounting, IT and record retention policies. ▪ The Company continues to create a culture of continuous improvement and design a framework for management to proactively and openly self-identify, document, reassess, report, and remediate policies, procedures, and control issues. ▪ The Company is establishing standards governing the segregation of incompatible duties across the organization. ▪ The Company is designing various accounting processes and application and system controls to adequately segregate job responsibilities and system access throughout the organization and to implement applicable mitigating internal controls. ▪ The Company completed a technical upgrade to its Enterprise Resource Planning System (“ERP System”) and is redesigning system access roles across the Company to improve the segregation of incompatible duties. ▪ The Company is designing and implementing 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 has begun implementing improved review and approval controls across the Company to ensure that revenue, including that of nonroutine revenue transactions and related reserves and sales allowances, is recognized consistently in accordance with U.S. GAAP. ▪ The Company has developed sales transaction review procedures to review certain key transaction attributes. ▪ The Company is designing and implementing policies, 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. ▪ The Company has implemented a formal Section 302 disclosure and certification program that requires management to complete representation letters and disclosure sub-certification questionnaires in connection with SEC filings. ▪ 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 controls over system updates and over the flow of data between systems. ▪ The Company is planning a re-implementation of its ERP System to further improve and automate ITGCs as well as other business process controls. ▪ 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 cycle counts, stock compensation agreements and debt arrangements and (iii) communicating an enterprise data management policy and record retention policy. ▪ The Company is developing procedures to review and validate underlying data supporting the internal controls. Thereourthe Company’s internal control over financial reporting during the quarter ended March 31, 2016,June 30, 2020 that have materially affected, or are reasonably likely to materially affect, ourits internal control over financial reporting.Inherent Limitations on the Effectiveness of ControlsOur management does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no controls can provide absolute assurance that misstatements due to error or fraud will not occur, and no evaluation of any such controls can provide absolute assurance that control issues and instances of fraud, if any, within our company have been detected.These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures.II.II – OTHER INFORMATION
the Exchange Act and is not required to provide the information under this item.ProceedingsFrom time to time,Proceedings.the normal coursePart I, Item 1. Financial Statements, for a discussion of business, we are party to various legal proceedings. Presently, we do not expect that any current pending legal proceedings, will havewhich are incorporated herein by reference.material adverse effect on our business, resultssmaller reporting company as defined by Rule 12b-2 of operations or financial condition.1.A. Risk FactorsThere are no material changes from the risk factors previously disclosed under the caption “Risk Factors”2. Unregistered Sales of Equity Securities and Use of Proceeds.1A1. Financial Statements, for a discussion of the Company’s Annual Report on Form 10-K fordefault under the fiscal year ended December 31, 2015.Credit Agreement, which is incorporated herein by reference.
Exhibits. /s/ ExhibitsSee Exhibit Index. Incorporated by Reference Herein Exhibit No. Exhibit Description Form Exhibit Filing Date File No. 10.1 8-K 10.1 07/24/2020 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. Securities Exchange Act, of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized.authorized, on the 13th day of August, 2020. POWER SOLUTIONS INTERNATIONAL, INC. Date: May 10, 2016 By: MichaelDonald P. Lewis Name: Donald P. Klein Michael P. LewisTitle: Chief Financial Officer(Principal Financial and Accounting Officer)Exhibit IndexExhibitDescription 4.1Second Supplemental Indenture dated as of April 1, 2016 by and among Power Solutions International, Inc., The Bank of New York Mellon, as Trustee, and the Guarantors party thereto (incorporated by reference from Exhibit 4.1 to the registrant’s Current Report on Form 8-K, dated and filed with the Commission on April 4, 2016). 31.1Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a). 31.2Certification of theInterim Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a). 32.1Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002. 32.2Certification of the Chief(Principal Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.101.INSXBRL Instance Document.101.SCHXBRL Taxonomy Extension Schema Document.101.CALXBRL Taxonomy Extension Calculation Linkbase Document.101.LABXBRL Taxonomy Extension Labels Linkbase Document.101.PREXBRL Taxonomy Extension Presentation Linkbase Document.101.DEFXBRL Taxonomy Extension Definition Linkbase Document.Officer)33