| 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.
(Exact name of registrant as specified in its charter)
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| |
| Delaware | 33-0963637 | |||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer 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 | ¨ | ||||||||||||||||||||
| x | Smaller reporting company | x | |||||||||||||||||||||
| Emerging growth company | ¨ | ||||||||||||||||||||||
POWER SOLUTIONS INTERNATIONAL, INC.
QUARTER ENDED MARCH 31, 2016
INDEX
| Page | |||||||||||
| PART I – FINANCIAL INFORMATION | |||||||||||
| Forward-Looking Statements | |||||||||||
| Financial Statements | |||||||||||
| 2019 | |||||||||||
| Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019 (Unaudited) | |||||||||||
| Consolidated Statements of Cash Flows for the | |||||||||||
Notes to | |||||||||||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||||||
| Quantitative and Qualitative Disclosures | |||||||||||
| Item 4. | Controls and Procedures | ||||||||||
| PART II – OTHER INFORMATION | |||||||||||
| Item 1. | Legal Proceedings | ||||||||||
| Item 1A. | Risk Factors | ||||||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||||
| Item 3. | Defaults Upon Senior Securities | ||||||||||
| Item 4. | Mine Safety Disclosures | ||||||||||
| Item 5. | Other Information | ||||||||||
| Item 6. | Exhibits | ||||||||||
| |||||||||||
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. year ended December 31, 2019 are as follows: Operations or Consolidated statements of Cash Flow. Assets acquired: Inventories Property, plant & equipment Total tangible assets Intangible assets: Intangible assets Goodwill Total assets acquired $3.3 million at September 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 of December 31, 2019 and 2018, respectively. The increase in the contract asset during the nine months ended September 30, 2020 is related to performance completed and revenue recognized under certain contracts for which the Company’s right to consideration is conditional at the end of the period. The increase in the contract liabilities during the nine months ended September 30, 2020 is primarily related to prepayments for certain engines by a customer under a long-term supply agreement. 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 September 30, 2020: 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 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 POWER SOLUTIONS INTERNATIONAL, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(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.(UNAUDITED)(in thousands, except par values) As of September 30, 2020 As of December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 26,727 $ 3 Restricted cash 3,299 0 Accounts receivable, net of allowances of $3,058 and $3,561 as of September 30, 2020 and December 31, 2019, respectively 52,379 104,515 Income tax receivable 3,716 1,055 Inventories, net 128,827 108,839 Prepaid expenses and other current assets 15,030 8,110 Total current assets 229,978 222,522 Property, plant and equipment, net 21,116 23,194 Intangible assets, net 11,082 13,372 Goodwill 29,835 29,835 Other noncurrent assets 22,042 24,749 TOTAL ASSETS $ 314,053 $ 313,672 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 45,237 $ 75,835 Current maturities of long-term debt 288 195 Revolving line of credit 130,000 39,527 Other accrued liabilities 83,049 66,030 Total current liabilities 258,574 181,587 Deferred income taxes 839 1,105 Long-term debt, net of current maturities 754 55,657 Noncurrent contract liabilities 10,009 17,998 Other noncurrent liabilities 34,841 28,828 TOTAL LIABILITIES $ 305,017 $ 285,175 STOCKHOLDERS’ EQUITY Preferred stock – $0.001 par value. Shares authorized: 5,000. NaN shares issued and outstanding at all dates. $ 0 $ 0 Common stock – $0.001 par value; 50,000 shares authorized; 23,117 and 23,117 shares issued; 22,886 and 22,857 shares outstanding at September 30, 2020 and December 31, 2019, respectively 23 23 Additional paid-in capital 157,138 156,727 Accumulated deficit (146,832) (126,912) Treasury stock, at cost, 231 and 260 shares at September 30, 2020 and December 31, 2019, respectively (1,293) (1,341) TOTAL STOCKHOLDERS’ EQUITY 9,036 28,497 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 314,053 $ 313,672 See Notes to Consolidated Financial Statements4POWER SOLUTIONS INTERNATIONAL, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(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.(UNAUDITED)(in thousands, except per share amounts) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Net sales $ 114,450 $ 138,512 $ 312,603 $ 392,983 Cost of sales 96,281 111,640 272,943 322,793 Gross profit 18,169 26,872 39,660 70,190 Operating expenses: Research, development and engineering expenses 6,555 6,366 19,121 18,695 Selling, general and administrative expenses 11,964 11,461 38,434 41,476 Amortization of intangible assets 763 910 2,290 2,729 Total operating expenses 19,282 18,737 59,845 62,900 Operating (loss) income (1,113) 8,135 (20,185) 7,290 Other expense: Interest expense 1,510 1,921 4,211 6,156 Loss from change in value of warrants 0 0 0 1,352 Loss on extinguishment of debt 0 0 497 0 Other income, net (947) (25) (1,202) (526) Total other expense 563 1,896 3,506 6,982 (Loss) income before income taxes (1,676) 6,239 (23,691) 308 Income tax (benefit) expense (210) 483 (3,771) 136 Net (loss) income $ (1,466) $ 5,756 $ (19,920) $ 172 Weighted-average common shares outstanding: Basic 22,881 22,849 22,866 21,064 Diluted 22,881 22,876 22,866 21,088 (Loss) earnings per common share: Basic $ (0.06) $ 0.25 $ (0.87) $ 0.01 Diluted $ (0.06) $ 0.25 $ (0.87) $ 0.01 See Notes to Consolidated Financial Statements5POWER SOLUTIONS INTERNATIONAL, INC.CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(UNAUDITED)(in thousands) For the Three Months Ended Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock Total Stockholders’ Equity Balance at June 30, 2020 $ 23 $ 157,052 $ (145,366) $ (1,354) $ 10,355 Net loss — — (1,466) — (1,466) Stock-based compensation expense — 94 — 71 165 Common stock issued for stock-based awards, net — (8) — (10) (18) Balance at September 30, 2020 $ 23 $ 157,138 $ (146,832) $ (1,293) $ 9,036 Balance at June 30, 2019 $ 23 $ 158,530 $ (140,744) $ (3,418) $ 14,391 Net income — — 5,756 — 5,756 Stock-based compensation expense — 173 — — 173 Common stock issued for stock-based awards, net — (2,123) — 2,080 (43) Balance at September 30, 2019 $ 23 $ 156,580 $ (134,988) $ (1,338) $ 20,277 (in thousands) For the Nine Months Ended Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock Total Stockholders’ Equity Balance at December 31, 2019 $ 23 $ 156,727 $ (126,912) $ (1,341) $ 28,497 Net loss — — (19,920) — (19,920) Stock-based compensation expense — 411 — 71 482 Common stock issued for stock-based awards, net — — — (23) (23) Balance at September 30, 2020 $ 23 $ 157,138 $ (146,832) $ (1,293) $ 9,036 Balance at December 31, 2018 $ 19 $ 119,724 $ (135,160) $ (3,161) $ (18,578) Net income — — 172 — 172 Stock-based compensation expense — 1,101 — — 1,101 Common stock issued for stock-based awards, net — (2,309) — 1,823 (486) Exercise of Weichai Warrant 4 38,064 — — 38,068 Balance at September 30, 2019 $ 23 $ 156,580 $ (134,988) $ (1,338) $ 20,277 See Notes to Consolidated Financial Statements6POWER SOLUTIONS INTERNATIONAL, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(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.(UNAUDITED)(in thousands) For the Nine Months Ended September 30, 2020 2019 Cash (used in) provided by operating activities Net (loss) income $ (19,920) $ 172 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Amortization of intangible assets 2,290 2,729 Depreciation 3,922 3,875 Change in value of warrants 0 1,352 Stock-based compensation expense 482 1,101 Amortization of financing fees 1,102 545 Deferred income taxes (265) (30) Loss on extinguishment of debt 497 0 Other adjustments, net (260) 193 Changes in operating assets and liabilities: Accounts receivable, net 52,083 9,213 Inventory, net (20,842) (9,613) Prepaid expenses and other assets (5,362) 6,897 Accounts payable (30,482) 379 Accrued expenses 16,572 6,262 Other noncurrent liabilities (2,100) (3,953) Net cash (used in) provided by operating activities (2,283) 19,122 Cash used in investing activities Capital expenditures (1,991) (2,048) Proceeds from corporate-owned life insurance 930 0 Other investing activities, net 7 13 Net cash used in investing activities (1,054) (2,035) Cash provided by (used in) financing activities Repayments of long-term debt and lease liabilities (55,200) (136) Proceeds from revolving line of credit 180,298 394,631 Repayments of revolving line of credit (89,826) (412,488) Payments of deferred financing costs (1,970) (375) Proceeds from Weichai Warrant exercise0 1,616 Other financing activities, net 58 (388) Net cash provided by (used in) financing activities 33,360 (17,140) Net increase (decrease) in cash, cash equivalents, and restricted cash 30,023 (53) Cash, cash equivalents, and restricted cash at beginning of the period 3 54 Cash, cash equivalents, and restricted cash at end of the period $ 30,026 $ 1 (in thousands) As of September 30, 2020 2019 Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets Cash and cash equivalents $ 26,727 $ 1 Restricted cash 3,299 0 Total cash, cash equivalents, and restricted cash $ 30,026 $ 1 See Notes to Consolidated Financial Statements7POWER SOLUTIONS INTERNATIONAL, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Tabular dollar amounts in thousands, except per share amounts)Note 1. DescriptionSummary of the companySignificant Accounting Policies and business operationsNature of Business OperationsPower Solutions International, Inc. (“Power Solutions,” “PSI” or “the Company”), a Delaware corporation, (“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. The Company’s customers include large, industry-leading 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.The Company’s power system configurations range from a basic engine integrated with appropriate fuel system components to completely packaged power systems that include any combination of cooling systems, electronic systems, air intake systems, fuel systems, housings, power takeoff systems, exhaust systems, hydraulic systems, enclosures, brackets, hoses, tubes and other assembled componentry. The Company also designs and manufactures large, custom-engineered integrated electrical power generation systems for both standby and prime power applications. The Company purchases engines from third partythird-party suppliers and produces internally-designedinternally designed engines, all of which are then integrated into the Company’sits power systems.Of the other components that the Company integrates into its power systems, a substantial portion consist of internally designed components and components for which 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.Stock Ownership and ControlWeichai America Corp., a wholly-owned subsidiary of Weichai Power Co., Ltd. (HK2338, SZ000338) (herein collectively referred to as “Weichai”), currently owns a majority of the 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 stockholders.Weichai currently has 3 representatives on the Company’s Board of Directors (the “Board”). Under the Investor Rights Agreement (the “Rights Agreement”) between Weichai and the Company, since Weichai became the majority owner of the Company’s outstanding shares of Common Stock, the Company became required to appoint to the Board an additional individual designated by Weichai, or such additional number of individuals so that Weichai designees constitute the majority of the directors serving on the Board. As of the date of this filing, Weichai has nominated an additional representative to stand for election to the Board at the Company’s upcoming Annual Meeting of Stockholders on December 15, 2020. According to the Rights Agreement, during any period when the Company is a “controlled company” within the meaning of the NASDAQ Stock Market (“NASDAQ”) Listing Rules, it will take such measures as to avail itself of the “controlled company” exemptions available under Rule 5615 of the NASDAQ Listing Rules of Rules 5605(b), (d) and (e).Going Concern ConsiderationsIn April 2020, the Company closed on its new senior secured revolving credit facility pursuant to that certain credit agreement, dated as of March 27, 2020, between the Company and Standard Chartered Bank (“Standard Chartered”), as administrative agent (the “Credit Agreement”). The Credit Agreement, which allows the Company to borrow up to $130.0 million, matures on March 26, 2021 with an optional 60-day extension, subject to certain conditions and payment of a 0.25% extension fee. See Note 6. Debt for further information regarding the terms and conditions of the Credit Agreement.8The Credit Agreement includes financial covenants which were effective for the Company beginning with the six months ended June 30, 2020. The financial covenants include an interest coverage ratio and a minimum threshold for earnings before interest, taxes, depreciation and amortization (“EBITDA”) as further defined in the Credit Agreement. For the six months ended June 30, 2020 and the nine months ended September 30, 2020, the Company did not meet the defined minimum EBITDA requirement. A breach of the financial 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. Accordingly, the Company is currently in discussions with Standard Chartered to seek appropriate waivers and amendments to cure its financial covenant breach and amend its financial covenants.Significant uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness, maintain sufficient liquidity to fund its business activities, obtain a waiver or satisfactory amendment in connection with the financial covenant breach, and maintain compliance with the covenants and other requirements under the Credit Agreement in the future. Based on the Company’s current forecasts, without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay the Credit Agreement by March 26, 2021. Management plans to seek an extension and/or replacement of the Credit Agreement or additional liquidity from its current or other lenders before March 26, 2021. There can be no assurance that the Company’s management will be able to obtain waivers or satisfactory amendments to its financial covenants or successfully complete “green” power systems to industrial OEMsan extension of the Credit Agreement or obtain new financing on acceptable terms when required or if at a low cost and with fast design turnaround.2. Basis of presentationUnaudited condensedall. The consolidated financial statementsFurthermore, if the Company cannot raise capital on acceptable terms, it may not, among other things, be able to do the following:•continue to expand the Company’s research and product investments and sales and marketing organization;•continue to fund and expand operations both organically and through acquisitions; and•respond to competitive pressures or unanticipated working capital requirements.Additionally, as discussed further below, in January 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a global pandemic (the “COVID-19 pandemic”), based on the rapid increase in exposure globally. The unaudited condensedpotential impact of future disruptions to the Company, continued economic uncertainty, and continued depressed crude oil prices and low rig count levels may have a material adverse impact on the results of operations, financial position, and liquidity of the Company.The Company’s management has concluded that, due to uncertainties surrounding the Company’s future ability to refinance, extend, or repay its outstanding indebtedness, maintain sufficient liquidity to fund its business activities, obtain a cure or waiver of its 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. The Company’s plans to alleviate the substantial doubt about its ability to continue as a going concern may not be successful, and it may be forced to limit its business activities or be unable to continue as a going concern, which would have a material adverse effect on its results of operations and financial condition.The consolidated financial statements included herein have been prepared assuming that the Company will continue as a going concern and contemplating the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company’s ability to continue as a going concern is dependent on generating profitable operating results, having sufficient liquidity, obtaining a cure or waiver in connection with the financial covenant breach, maintaining compliance with the covenants and other requirements under the Credit Agreement in the future, and extending, refinancing or repaying the indebtedness outstanding under the Credit Agreement.Recent COVID-19 Outbreak and Oil and Gas Market Price VolatilityAs a result of the COVID-19 pandemic, the global economy has 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 as compared to prices at the end of 2019. A significant portion of the Company’s sales and profitability is derived from the sale of products that are used within the oil and gas industry. While the Company has yet to experience significant supply chain interruptions or material cancellations of orders, the Company has seen a decline in orders and lower volumes compared to the prior year. The potential impact of future disruptions, continued economic uncertainty, and continued depressed crude oil prices and low rig count levels may have a significant adverse impact on the timing of delivery of customer orders and the levels of future customer orders. Accordingly, these adverse impacts may significantly impact the Company’s future results of operations, financial position, and liquidity.The Company performs its annual goodwill impairment test as of October 1, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The9Company considered the significant changes in the market due to the COVID-19 pandemic and the oil and gas market price volatility in performing its assessment of whether an interim impairment review was required for any reporting units and determined that a triggering event had occurred for both reporting units as of March 31, 2020. The Company considered both qualitative and quantitative factors in its assessment including the significant amount of headroom resulting from the prior fiscal year’s impairment test and potential changes in key assumptions, including discount rates, expected profitability and long-term growth rates, used in the last fiscal year’s impairment analysis that may have been impacted by the recent market conditions and economic events. Based on this interim assessment, the Company concluded that goodwill was not impaired as of March 31, 2020. It is reasonably possible that potential adverse impacts of the factors noted above could result in the recognition of material impairments of goodwill and other long-lived assets or other related charges in future periods as the extent and duration of the impact of the COVID-19 pandemic and resulting effect on the Company’s operations continues to evolve and remains uncertain.The Company has initiated certain contingency actions as a result of the significant negative impacts of these factors. During the nine months ended September 30, 2020, the Company has taken actions to continue to improve its manufacturing operations which includes making reductions in its production facility workforce to align with current volume trends. In addition, the Company implemented various temporary cost reduction measures, including reduced pay for salaried employees, suspension of the 401(k) match program, and deferred spending on certain R&D programs, among others. The measures with regard to pay for employees and the Company’s 401(k) plan match will run through December 31, 2020. The Company plans to reinstate full pay for employees and 401(k) matching effective January 1, 2021. The Company continues to review operating expenses as part of the contingency planning process.Basis of Presentation and ConsolidationThe Company is filing this Form 10-Q for the three and nine months ended September 30, 2020, which contains unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2020 and 2019.The consolidated financial statements include the accounts of Power Solutions International, Inc. 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.Certain information and note disclosures normally included in the 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.The Company operates as 1 business and geographic operating segment. Operating segments are defined as components of a business that can earn revenue and incur expenses for which discrete financial information is available that is evaluated on a regular basis by the 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.Immaterial Revision to Prior Period Financial StatementsDuring the third quarter of 2020, the Company determined that, in certain prior periods, treasury stock had not been relieved at the appropriate share prices when restricted shares were issued under the Company’s incentive compensation plan (refer to Item 8. Note 13. Stock-Based Compensation in the 2019 Annual Report for further discussion of the Company’s incentive compensation plan). The Company assessed the materiality of the issue considering both qualitative and quantitative factors and determined the adjustments were immaterial. The Company has decided to correct the prior year presentation to provide comparability to the 2020 financial statements. The adjustments had no impact on total assets, total liabilities or total stockholders’ equity, the Consolidated Statements of Operations, or the Consolidated Statements of Cash Flows.10Consolidated Balance SheetThe effects of the adjustments on the line items within the Company’s Consolidated Balance Sheet at December 31, 2019 are as follows:(in thousands) December 31, 2019
(As Previously Reported)Adjustment December 31, 2019
(As Revised)Additional paid-in capital $ 165,527 $ (8,800) $ 156,727 Treasury stock $ (10,141) $ 8,800 $ (1,341) Consolidated Statements of Stockholders’ Equity (unaudited)The effects of the adjustments on the line items within the Company’s Consolidated Statement of Stockholders’ Equity for the full year.(in thousands) Additional Paid-in Capital Treasury Stock As previously reported Adjustment As revised As previously reported Adjustment As revised Year ended December 31, 2019 Balance at December 31, 2018 $ 126,412 $ (6,688) $ 119,724 $ (9,849) $ 6,688 $ (3,161) Stock-based compensation expense *1,540 (2,112) (572) (292) 2,112 1,820 Balance at December 31, 2019 $ 165,527 $ (8,800) $ 156,727 $ (10,141) $ 8,800 $ (1,341) *There was no impact to total stock-based compensation expense as a result of the adjustment.11The effects of the adjustments on the line items within the Company’s Consolidated Statement of Stockholders’ Equity (unaudited) for the three month periods ended June 30, 2020, March 31, 2020, and September 30, 2019, the six month period ended June 30, 2020, and the nine month period ended September 30, 2019, respectively, are as follows:(in thousands) Additional Paid-in Capital Treasury Stock As previously reported Adjustment As revised As previously reported Adjustment As revised Three months ended June 30, 2020 (unaudited) Balance at March 31, 2020 $ 165,691 $ (8,800) $ 156,891 $ (10,149) $ 8,800 $ (1,349) Balance at June 30, 2020 $ 165,852 $ (8,800) $ 157,052 $ (10,154) $ 8,800 $ (1,354) Three months ended March 31, 2020 (unaudited) Balance at December 31, 2019 $ 165,527 $ (8,800) $ 156,727 $ (10,141) $ 8,800 $ (1,341) Balance at March 31, 2020 $ 165,691 $ (8,800) $ 156,891 $ (10,149) $ 8,800 $ (1,349) Three months ended September 30, 2019 (unaudited) Balance at June 30, 2019 $ 165,437 $ (6,907) $ 158,530 $ (10,325) $ 6,907 $ (3,418) Stock-based compensation expense *(14) (1,893) (1,907) 187 1,893 2,080 Balance at September 30, 2019 $ 165,380 $ (8,800) $ 156,580 $ (10,138) $ 8,800 $ (1,338) Six months ended June 30, 2020 (unaudited) Balance at December 31, 2019 $ 165,527 $ (8,800) $ 156,727 $ (10,141) $ 8,800 $ (1,341) Balance at June 30, 2020 $ 165,852 $ (8,800) $ 157,052 $ (10,154) $ 8,800 $ (1,354) Nine months ended September 30, 2019 (unaudited) Balance at December 31, 2018 $ 126,412 $ (6,688) $ 119,724 $ (9,849) $ 6,688 $ (3,161) Stock-based compensation expense *1,390 (2,112) (722) (289) 2,112 1,823 Balance at September 30, 2019 $ 165,380 $ (8,800) $ 156,580 $ (10,138) $ 8,800 $ (1,338) *There was no impact to total stock-based compensation expense as a result of the adjustment.ReclassificationsCertain amounts recordedpresented in the prior period unaudited condensed consolidated financial statements presentedprior-period Consolidated Statements of Stockholders’ Equity have been reclassified between Stock-based compensation expense and Common stock issued for stock-based awards, net to conform to the current period financial statement presentation. These reclassifications had no effect on previously reported operating results.Principlestotal stockholders’ equity, the Consolidated Balance Sheet, Consolidated Statements of consolidationConcentrationsThe unaudited condensedfollowing table presents customers individually accounting for more than 10% of the Company’s net sales:For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Customer A 17 % 15 % 10 % 12 % Customer B 11 % 11 % 14 % 15 % Customer C 11 % ** 11 % ** Customer D ** 11 % ** ** Customer E ** 11 % ** ** 12The following table presents customers individually accounting for more than 10% of the Company’s accounts receivable:As of September 30, 2020 As of December 31, 2019 Customer A ** 49 % Customer B 16 % ** Customer C 18 % ** The following table presents suppliers individually accounting for more than 10% of the Company’s purchases:For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Supplier A 38 % 29 % 25 % 20 % Supplier B ** 12 % ** 12 % **Less than 10% of the totalUse of EstimatesThe preparation of consolidated financial statements presented herein includein conformity with U.S. GAAP requires that management make estimates and assumptions that affect the accountsreported amounts of Power Solutions International, Inc.assets and its directliabilities and indirect wholly owned subsidiaries. All significant intercompany balancesdisclosure of contingent assets and transactions have been eliminated in consolidation.Significant accounting policiesThe Company’s significant accounting policies as of December 31, 2015 are described inliabilities at the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 26, 2016. There have been no material changes with respect 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 impact of new pronouncements on GAAP and the Company. In May 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 standardconsolidated financial statements and the impact thatreported amounts of revenue and expenses during the adoptionreporting period. Significant estimates and assumptions include the valuation 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 measurementallowances for uncollectible receivables, inventory reserves, warranty reserves, stock-based compensation, evaluation of inventories by replacing the lowergoodwill, other intangibles, plant and equipment for impairment, and determination of cost or market test with a loweruseful lives of costlong-lived assets. Actual results could materially differ from those estimates.Research and net realizable value test. The guidance applies to inventories for which cost is determined by methods other than LIFODevelopmentResearch and the retail inventory method. The amendment is to be applied prospectivelydevelopment (“R&D”) expenses are expensed when incurred. R&D expenses consist primarily of wages, materials, testing 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 asconsulting related to the impact that the adoptiondevelopment 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 fornew engines, parts 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,applications. These costs were $6.2 million 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 expected to have a significant effect on the Company’s consolidated financial statements.4. AcquisitionsThe unaudited condensed consolidated financial statements$5.9 million for the three months ended March 31, 2016, includeSeptember 30, 2020 and 2019, respectively. These costs were $18.2 million and $17.4 million for the assets, liabilities and operating results of certain businesses acquired during 2015. There were no such business combinations during the threenine months ended March 31, 2016.When appropriate,September 30, 2020 and 2019, respectively.Restricted CashIn April 2020, the Company accountsentered into the Credit Agreement with Standard Chartered and extinguished the prior credit agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) as discussed further in Note 6. Debt. While the revolving credit facility with Wells Fargo was extinguished, Wells Fargo continues to perform other services 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 excessthe Company including issuing letters of credit. Wells Fargo required the acquisition consideration overCompany to have cash collateral to support the fair valueletters 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 acquiredsliabilities 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”)$2.8 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 sharesInventoriesThe Company 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.13Inventories consisted of the following:(in thousands)InventoriesAs of September 30, 2020 As of December 31, 2019 Raw materials $ 104,286 $ 90,677 Work in process 5,014 2,007 Finished goods 22,751 19,119 Total inventories 132,051 111,803 Inventory allowance (3,224) (2,964) Inventories, net $ 128,827 $ 108,839 Activity in the Company’s inventory allowance was as follows:(in thousands) For the Nine Months Ended September 30, Inventory Allowance 2020 2019 Balance at beginning of period $ 2,964 $ 5,730 Charged to expense 1,272 560 Write-offs (1,012) (2,027) Balance at end of period $ 3,224 $ 4,263 Other Accrued LiabilitiesOther accrued liabilities consisted of the following:(in thousands)Other Accrued LiabilitiesAs of September 30, 2020 As of December 31, 2019 Accrued product warranty $ 16,210 $ 17,142 Litigation reserves *2,535 5,020 Contract liabilities 52,502 26,898 Accrued compensation and benefits 1,978 6,599 Operating lease liabilities 3,802 3,789 Accrued interest expense 917 1,087 Other 5,105 5,495 Total $ 83,049 $ 66,030 *As of September 30, 2020 litigation reserves primarily consisted of reserves related to the settlement of the SEC and USAO investigations that were resolved in September 2020 and other matters. As of December 31, 2019, litigation reserves primarily consisted of reserves related to the settlement of the SEC and USAO investigations and the Federal Derivative Litigation. The Company concluded that insurance recovery was probable related to $0.2 million and $1.9 million of the litigation reserves as of September 30, 2020 and December 31, 2019, respectively, and recognized full recovery of the reserved amounts in Prepaid expenses and other current assets. See Note 9. Commitments and Contingencies for additional information.Warranty CostsThe Company offers a standard limited warranty on the workmanship of its products that in most cases covers defects for a defined period. Warranties for certified emission products are mandated by the U.S. Environmental Protection Agency (the “EPA”) and/or the California Air Resources Board (the “CARB”) and are longer than the Company’s standard warranty on certain emission related products. The Company’s products also carry limited warranties from suppliers. The Company’s warranties generally apply to engines fully manufactured by the Company and to the modifications the Company makes to supplier base products. Costs related to supplier warranty claims are generally borne by the supplier and passed through to the end customer.Warranty estimates are based on historical experience and represent the projected cost associated with the product. A liability and related expense are recognized at the time products are sold. The Company adjusts estimates when it is determined that actual costs may differ from initial or previous estimates.14Accrued product warranty activities are presented below:(in thousands) For the Nine Months Ended September 30, Accrued Product Warranty 2020 2019 Balance at beginning of period $ 25,501 $ 23,102 Current year provision *13,949 7,706 Changes in estimates for preexisting warranties **8,756 2,730 Payments made during the period (15,357) (7,244) Balance at end of period 32,849 26,294 Less: Current portion 16,210 14,677 Noncurrent accrued product warranty $ 16,639 $ 11,617 *Warranty costs, net of supplier recoveries, were $18.2 million and $7.4 millionfor the nine months ended September 30, 2020 and 2019, respectively. Supplier recoveries were $4.6 million and $3.0 million for the nine months ended September 30, 2020 and 2019, respectively.**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. The Company recorded a benefit for changes in estimates of preexisting warranties of $1.2 million, or $0.05 per diluted share, for the three months ended September 30, 2020, and charges of $8.8 million, or $0.38 per diluted share, for the nine months ended September 30, 2020. The Company recorded charges for changes in estimates of preexisting warranties of $2.7 million, or $0.13 per diluted share, for the nine months ended September 30, 2019.Recently Issued Accounting Pronouncements – AdoptedIn August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This guidance requires the use of existing accounting guidance applicable to software developed for internal use to be applied to cloud computing service contracts’ implementation costs. The costs capitalized would be amortized over the life of the agreement, including renewal option periods likely to be used. The Company adopted the standard effective January 1, 2020 on a prospective basis. There was no impact on the Company’s financial statements including the related notes as a result of adopting the guidance.In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which both reduces and expands selected disclosure requirements. The principal changes expected to impact the Company’s disclosure are requirements to disclose the range and weighted average of each of the significant unobservable items and the way the weighted average of a range is calculated for items in the “table of significant unobservable inputs.” The guidance also requires disclosure of changes in unrealized gains and losses in other comprehensive income and removes requirements regarding, among other items, disclosure of the valuation process for Level 3 measurements. The Company adopted the guidance on January 1, 2020. There was no impact on the Company’s financial statements including the related notes as a result of adopting the guidance.In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminated the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The Company adopted the guidance on January 1, 2020 on a prospective basis. There was no impact on the Company’s financial statements including the related notes as a result of adopting the guidance.Recently Issued Accounting Pronouncements – Not Yet AdoptedIn June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which applies primarily to the Company’s accounts receivable impairment loss allowances. The guidance provides a revised model whereby the current expected credit losses are used to compute impairment of financial instruments. The new model requires evaluation of historical experience and various current and expected factors, which may affect the estimated amount of losses and requires determination of whether the affected financial instruments should be grouped in units of account. The guidance, as originally issued, was effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates of these standards for certain entities. Based on the guidance, the effective date of ASU 2016-13 is deferred for the Company until fiscal year 2023. The Company currently plans to adopt the guidance on January 1, 2023 when it becomes effective. The Company is continuing to assess the impact of the standard on its financial statements.15Note 2. RevenueDisaggregation of RevenueThe following table summarizes net sales by end market:(in thousands) For the Three Months Ended September 30, For the Nine Months Ended September 30, End Market 2020 2019 2020 2019 Energy $ 33,813 $ 64,331 $ 113,546 $ 162,224 Industrial 29,843 37,020 97,437 142,267 Transportation 50,794 37,161 101,620 88,492 Total $ 114,450 $ 138,512 $ 312,603 $ 392,983 The following table summarizes net sales by geographic area:(in thousands) For the Three Months Ended September 30, For the Nine Months Ended September 30, Geographic Area 2020 2019 2020 2019 North America $ 104,840 $ 125,971 $ 281,339 $ 343,593 Pacific Rim 5,466 6,744 18,215 30,173 Europe 2,395 4,329 7,630 12,712 Other 1,749 1,468 5,419 6,505 Total $ 114,450 $ 138,512 $ 312,603 $ 392,983 Contract BalancesMost of the Company’s contracts are for a period of less than one year; however, certain long-term manufacturing and extended warranty contracts extend beyond one year. The timing of revenue recognition may differ from the time of invoicing to customers and these timing differences result in contract assets or contract liabilities on the Company’s Consolidated Balance Sheets. Contract assets include amounts related to the contractual right to consideration for completed performance when the right to consideration is conditional. The Company records contract liabilities when cash payments are received or due in advance of performance. Contract assets and contract liabilities are recognized at the contract level.(in thousands) As of September 30, 2020 As of December 31, 2019 Short-term contract assets (included in Prepaid expenses and other current assets)$ 8,601 $ 694 Short-term contract liabilities (included in Other accrued liabilities)(52,502) (26,898) Long-term contract liabilities (included in Noncurrent contract liabilities)(10,009) (17,998) Net contract liabilities $ (53,910) $ (44,202) During the nine months ended September 30, 2020 and 2019, the Company recognized $18.4 million and $4.1 million, respectively, of revenue upon satisfaction of performance obligations related to amounts that were included in the net contract liabilities balance as 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 Remaining Performance ObligationsFor performance obligations that extend beyond one year, the Company had $62.1 million of remaining performance obligations as of September 30, 2020 which primarily relates to prepayments for certain engines by a customer under a long-term supply agreement. The Company expects to recognize revenue related to these remaining performance obligations of approximately $14.8 million in the remainder of 2020, $44.5 million in 2021, $0.7 million in 2022, $0.9 million in 2023, $0.8 million in 2024 and $0.4 million in 2025 and beyond.16Note 3. Weichai TransactionsWeichai WarrantIn September 2018, Weichai’s stock purchase warrant (the “Weichai Warrant”) was amended under the terms of a second amended and restated warrant (“Amended and Restated Warrant”) to defer its exercise date to a 90-day period commencing April 1, 2019, to adjust the exercise price to a price per share of the Company’s Common Stock equal to the lesser of (i) 50% of the Volume-Weighted Average Price (“VWAP”) during the 20 consecutive trading day period preceding October 1, 2018 and (ii) 50% of the VWAP during the 20 consecutive trading day period preceding the date of exercise, subject to an adjustment that could reduce the exercise price by up to $15.0 million. In the event that the adjustment exceeded the exercise price, the excess would be due to the warrant holder.The Weichai Warrant was a freestanding derivative financial instrument that was not indexed solely to the Company’s Common Stock due to the Weichai Warrant exercise terms. On April 23, 2019, Weichai exercised the Weichai Warrant resulting in the Company issuing 4,049,759 shares of the Company’s Common Stock and Weichai becoming the owner of 51.5% of the outstanding shares of the Company’s Common Stock, as of such date. The exercise proceeds for the warrants of $1.6 million were based on 50% of the VWAP during the 20 consecutive trading day period preceding April 23, 2019 and the $15.0 million reduction in the exercise price described above. Changes in value of the Weichai Warrant, including the impact of the exercise, resulted in a loss of $1.4 million reported in Loss from change in value of warrants in the Company’s Consolidated Statement of Operations for the nine months ended September 30, 2019.Weichai Collaboration Arrangement and Related Party TransactionsThe Company and Weichai executed a strategic collaboration agreement (the “Collaboration Agreement”) in March 2017, in order to achieve their respective strategic objectives and enhance the strategic cooperation alliance to share experiences, expertise and resources. Among other things, the Collaboration Agreement established a joint steering committee, permitted Weichai to second a limited number of certain technical, marketing, sales, procurement and finance personnel to work at the Company and established several collaborations, related to stationary natural-gas applications and Weichai diesel engines. The Collaboration Agreement provided for the steering committee to create various sub-committees with operating roles and otherwise governs the treatment of intellectual property of parties prior to the collaboration and the intellectual property developed during the collaboration. The Collaboration Agreement had a term of three years that was set to expire in March 2020. On March 26, 2020, the Collaboration Agreement was extended for an additional term of three years.The Company evaluates whether an arrangement is a collaborative arrangement at its inception based on the facts and circumstances specific to the arrangement. The Company also reevaluates whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards dependent on the ultimate commercial success of the endeavor. For those collaborative arrangements where it is determined that the Company is the principal participant, costs incurred, and revenue generated from third parties are recorded on a gross basis in the financial statements. For the three and nine months ended September 30, 2020 and 2019, the Company’s sales to Weichai were immaterial in all periods. Purchases of inventory from Weichai were $4.1 million and $16.3 million for the three and nine months ended September 30, 2020, respectively. Purchases of inventory from Weichai were $0.6 million and $1.5 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020 and December 31, 2019, the Company had immaterial receivables from Weichai and outstanding payables to Weichai of $6.6 million and $5.9 million, respectively.Note 4. Property, Plant and EquipmentProperty, plant and equipment by type were as follows:(in thousands) As of September 30, 2020 As of December 31, 2019 Property, Plant and Equipment Leasehold improvements $ 6,820 $ 6,745 Machinery and equipment 42,857 41,243 Construction in progress 1,543 1,679 Total property, plant and equipment, at cost 51,220 49,667 Accumulated depreciation (30,104) (26,473) Property, plant and equipment, net $ 21,116 $ 23,194 17Note 5. Goodwill and Other IntangiblesGoodwillThe carrying amount of goodwill at both September 30, 2020 and December 31, 2019 was $29.8 million. Accumulated impairment losses at both September 30, 2020 and December 31, 2019 were $11.6 million.See Note 1. Summary of Significant Accounting Policies and Other Information for additional discussion of the Company’s impairment considerations related to the impacts of the COVID-19 pandemic and the oil and gas market price volatility.Other Intangible AssetsComponents of intangible assets are as follows:(in thousands) As of September 30, 2020 Gross Carrying Value Accumulated Amortization Net Book Value Customer relationships $ 34,940 $ (24,397) $ 10,543 Developed technology 700 (639) 61 Trade names and trademarks 1,700 (1,222) 478 Total $ 37,340 $ (26,258) $ 11,082 (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 Note 6. DebtThe Company’s outstanding debt consisted of the following:(in thousands) As of September 30, 2020 As of December 31, 2019 Short-term financing: Revolving credit facility $ 130,000 $ 39,527 Long-term debt: Unsecured senior notes $ 0 $ 55,000 Finance leases and other debt 1,042 1,087 Unamortized debt issuance costs 0 (235) Total long-term debt and finance leases 1,042 55,852 Less: Current maturities of long-term debt and finance leases 288 195 Long-term debt $ 754 $ 55,657 *Unamortized financing costs and deferred fees on the revolving credit facility are not presented in the above table as they are classified in Prepaid expenses and other current assets on the Consolidated Balance Sheet. Unamortized debt issuance costs related to the revolving credit facility were $1.0 million as of September 30, 2020.Credit AgreementOn April 2, 2020, the Company closed on its new senior secured revolving credit facility pursuant to that certain credit agreement, dated as of March 27, 2020, by and between the Company and Standard Chartered as administrative agent. The Credit Agreement allows the Company to borrow up to $130.0 million and matures on March 26, 2021 with an optional 60-day extension, subject to certain conditions and payment of a 0.25% extension fee. Borrowings under the Credit Agreement bear interest at either the base rate as defined in the Credit Agreement or the London Interbank Offered Rate (“LIBOR”) plus 2.00% per annum, and the Company is required to pay a 0.25% commitment fee on the 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 $95.018million under the Credit Agreement and utilized the funds (i) to repay the outstanding balance of $16.8 million on the revolving credit agreement between the Company and Wells Fargo Bank, N.A. (the “Wells Fargo Credit Agreement”), (ii) to fully redeem and discharge $55.0 million in aggregate outstanding principal amount of its 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 recognized a loss on the extinguishment of the Wells Fargo Credit Agreement and the Unsecured Senior Notes of $0.5 million related to premiums to early retire the Unsecured Senior Notes and unamortized debt issuance costs. The Company deferred debt issuance costs related to the closing of the Credit Agreement of $2.0 million. On April 29, 2020, the Company borrowed an additional $35.0 million under the Credit Agreement, which was the remaining portion of availability, providing the Company with greater financial flexibility.As discussed above, the Credit Agreement includes financial covenants which were effective for the Company beginning with the six months ended June 30, 2020. The financial covenants include an interest coverage ratio and a minimum EBITDA threshold as further defined in the Credit Agreement. For the six months ended June 30, 2020 and the nine months ended September 30, 2020, the Company did not meet the defined minimum EBITDA requirement. A breach of the financial 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. Summary of Significant Accounting Policies and Other Information for further discussion of the Company’s going concern considerations.Note 7. LeasesLeasesThe Company has obligations under lease arrangements primarily for facilities, equipment and vehicles. These leases have original lease periods expiring between December 2020 and August 2034. For the three and nine months ended September 30, 2020, the Company recorded lease expense of $1.4 million and $4.9 million within Cost of sales, $0.4 million and $0.5 million within Research, development, and engineering expenses, $0.1 million and $0.2 million within Selling, general and administrative expenses and less than $0.1 million within Interest expense in the Consolidated Statements of Operations, respectively. For the three and nine months ended September 30, 2019, the Company recorded lease expense of $1.6 million and $5.2 million within Cost of sales, $0.3 million and $0.5 million within Research, development and engineering expenses, $0.1 million and $0.2 million within Selling, general and administrative expenses and less than $0.1 million within Interest expense in the Consolidated Statements of Operations, respectively.The following table summarizes the components of lease expense:(in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Operating lease cost $ 1,394 $ 1,386 $ 4,141 $ 4,193 Finance lease cost Amortization of right-of-use (“ROU”) asset 52 50 156 119 Interest expense 12 14 37 35 Short-term lease cost 105 177 322 453 Variable lease cost 363 390 1,160 1,156 Total lease cost $ 1,926 $ 2,017 $ 5,816 $ 5,956 The following table presents supplemental cash flow information related to leases:(in thousands) For the Nine Months Ended September 30, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows paid for operating leases $ 4,105 $ 3,816 Operating cash flows paid for interest portion of finance leases 37 36 Financing cash flows paid for principal portion of finance leases 145 106 Right-of-use assets obtained in exchange for lease obligations Operating leases 299 280 Finance leases 11 517 19As of September 30, 2020 and December 31, 2019, the weighted-average remaining lease term was 6.3 years and 6.7 years for operating leases and 4.0 years and 4.5 years for finance leases, respectively. The weighted-average discount rate was 7.2% for operating leases as of both September 30, 2020 and December 31, 2019 and 6.7% and 6.8% for finance leases as of September 30, 2020 and December 31, 2019, respectively.The following table presents supplemental balance sheet information related to leases:(in thousands) September 30, 2020 December 31, 2019 Operating lease ROU assets, net 1$ 18,083 $ 20,677 Operating lease liabilities, current 23,802 3,789 Operating lease liabilities, non-current 315,114 17,679 Total operating lease liabilities $ 18,916 $ 21,468 Finance lease ROU assets, net 1$ 617 $ 777 Finance lease liabilities, current 2197 195 Finance lease liabilities, non-current 3464 617 Total finance lease liabilities $ 661 $ 812 1.Included in Other noncurrent assets for operating leases and Property, plant and equipment, net for finance leases on the Consolidated Balance Sheets.2.Included in Other accrued liabilities for operating leases and Current maturities of long-term debt for finance leases on the Consolidated Balance Sheets.3.Included in Other noncurrent liabilities for operating leases and Long-term debt, net of current maturities for finance leases on the Consolidated Balance Sheets.The componentsfollowing table presents maturity analysis of property, plant and equipment are recorded at cost and included the followinglease liabilities 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 As of March 31, 2016, the Company reclassified $1,343,000 consisting of land and buildings and improvements to “Assets held for sale” within “Prepaid expenses and other current assets” on its condensed consolidated balance sheet as a result of the Company’s decision to sell one of its operating facilities. The Company expects to complete the sale of this facility in 2016.(in thousands) Operating Leases Finance Leases Three months ending December 31, 2020 $ 1,300 $ 61 Year ending December 31, 2021 4,948 245 Year ending December 31, 2022 4,788 177 Year ending December 31, 2023 3,283 103 Year ending December 31, 2024 1,813 84 Thereafter 7,399 83 Total undiscounted lease payments 23,531 753 Less: imputed interest 4,615 92 Total lease liabilities $ 18,916 $ 661 Note 8. Fair valueValue of financial instrumentsAs of March 31, 2016, and December 31, 2015, the Company measured its financialFinancial InstrumentsFor assets and liabilities 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:•Level 1 —– based on quoted prices in active markets for identical assets or liabilities;•Level 2 —– based on other significant observable inputs for the assets or liabilities through corroborations with market data at the measurement date; and•Level 3 —– based on significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.Private placement warrants liabilityAs of March 31, 2016 and December 31, 2015, the Company’s liability for Private Placement Warrants was measured20Financial Instruments Measured at fair 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 ValueDebtThe Company analyzes 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.The 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 September 30, 2020 Carrying Value Fair Value Level 1 Level 2 Level 3 Revolving credit facility $ 130,000 $ 0 $ 130,000 $ 0 (in thousands) As of December 31, 2019 Carrying Value Fair Value Level 1 Level 2 Level 3 Revolving credit facility $ 39,527 $ 0 $ 39,527 $ 0 Unsecured Senior Notes 54,765 0 0 54,600 Financial Instruments Measured at Fair ValueWarrantsThe following table summarizes the changechanges in the estimated fair value of the Company’s Level 3 Private placement warrants liability in the three months ended March 31, 2016: $ 1,482 (1,256 ) $ 226 For the three months ended March 31, 2016, the Company recognized income of $1,256,000 due to a decrease in the estimated fair value of the Company’s liability for Private Placement Warrants. For the three months ended March 31, 2015, the Company recognized expense of $3,614,000 due to an increase in the estimated fair value of the Company’s liability for Private Placement Warrants. The respective amounts were recorded as “Private placement warrant (income) expense” in the Company’s unaudited condensed consolidated statements of operations for the respective periods.Financial liabilities measured at fair valueThe following table summarizes fair value measurements by level as of March 31, 2016, for the Company’s level 3 financial liabilities measured at fair value on a recurring basis: Level 1 Level 2 Level 3 — — $ 226 The following table summarizes fair value measurements by level as of December 31, 2015, for the Company’s level 3 financial liabilities measured at fair value on a recurring basis: Level 1 Level 2 Level 3 — — $ 1,482 Financial assets and liabilities not measured at fair valueAs of March 31, 2016 and December 31, 2015, the Company’s revolving line of credit and term debt, including accrued interest, recorded on the unaudited condensed consolidated balance sheets were carried at cost. The carrying value of the revolving line of credit and term debt approximated fair value because the interest rates fluctuate with market interest rates or the fixed rates approximate current rates offered to the Company for debt with similar terms and maturities, and the Company’s credit profile had not changed significantly since the origination 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, the Company entered into a credit agreement with Wells Fargo Bank, National Association (the “Wells Credit Agreement”), which replaced its prior credit agreement. The Wells Credit Agreement enabled the Company to borrow under a revolving line of credit secured by substantially all 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 to the Company, which, at the Company’s request and subject to the terms 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 or a 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) required 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 plus 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 priceFor the Nine Months Ended September 30, 2019 May 1, 2016 through October 31, 2016101.0%$35,100 November 1, 2016 and thereafter100.0%1,352 Settlement of warrants (36,452) Balance at end of period $ 0 At*The change in value of the warrant liability is presented as Loss from change in value of warrants in the Company’s Consolidated Statements of Operations.Note 9. Commitments and ContingenciesLegal ContingenciesThe legal matters discussed below and others could result in losses, including damages, fines, civil penalties and criminal charges, which could be substantial. The Company records accruals for these contingencies to the extent the Company concludes that a loss is both probable and reasonably estimable. Regarding the matters disclosed below, unless otherwise disclosed, the Company has determined that liabilities associated with these legal matters are reasonably possible; however, unless otherwise stated, the possible loss or range of possible loss cannot be reasonably estimated. Given the nature of the litigation and investigations and the complexities involved, the Company is unable to reasonably estimate a possible loss for all such matters until the Company knows, among other factors, the following:•what claims, if any, time priorwill survive dispositive motion practice;•the extent of the claims, particularly when damages are not specified or are indeterminate;•how the discovery process will affect the litigation;•the settlement posture of the other parties to May 1, 2016,the litigation; and•any other factors that may have a material effect on the litigation or investigation.However, the Company could incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have redeemed up to 35%a material adverse effect on the Company’s results of operations in the period in which the amounts are accrued and/or liquidity in the period in which the amounts are paid.21Securities and Exchange Commission and United States Attorney’s Office for the Northern District of Illinois InvestigationsIn August 2016, the Chicago Regional Office of the Senior NotesSEC 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 accounting 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. In September 2020, the Company entered into agreements with the net cash proceedsSEC and USAO to resolve the investigations into the Company’s past revenue recognition practices. As part of this resolution, the Company made a payment of $1.7 million as a civil penalty to the SEC in October 2020. Furthermore, under the settled administrative order with the SEC, the Company is committed to remediate the deficiencies in its internal control over financial reporting that constituted material weaknesses identified in its 2017 Form 10-K filed in May 2019 by April 30, 2021 unless an extension is provided by the SEC. The Company also entered into a Non-Prosecution Agreement (the “NPA”) with the USAO, which contains no further monetary penalty and provides that the USAO will not charge the Company with a crime, provided that the Company complies with the provisions of the NPA, including making enhancements to its corporate compliance program. The Company also will continue to fully cooperate with the SEC and USAO pursuant to these agreements. With these agreements, the investigations into the Company by the SEC and USAO have concluded. The Company had accrued the $1.7 million penalty in Other accrued liabilities in the first quarter of 2019.Federal Derivative LitigationIn February 2017, Travis Dorvit filed a putative stockholder derivative action in the U.S. District Court for the Northern District of Illinois, captioned Dorvit v. Winemaster, et al., No. 1:17-cv-01097 (N.D. Ill.) (the “Dorvit Action”), against certain of the Company’s current and former officers and directors. The complaint asserted claims for breach of fiduciary duty and unjust enrichment arising from the same matters at issue in the consolidated 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 current and former officers and directors. In July 2018, the court consolidated the Martin Actionand the Dorvit Action.In July 2018, the plaintiffs in the consolidated Dorvit and Martin Actions filed an amended consolidated complaint (the “Second Amended Complaint”) against certain of the Company’s current 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 fiduciary 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. In February 2020, the U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s approval of the settlement. The deadline for the plaintiffs in the McClenney Action to seek further review in the U.S. Supreme Court elapsed in July 2020 and the settlement is a final judgement. The Company’s insurers 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 insurer allocated the remaining half of the Settlement Amount toward the payment of certain equity offerings specifieddefense costs consistent with the terms of the settlement. The Company had accrued for the settlement in Other accrued liabilities and for the full insurance recovery of the Settlement Amount in Prepaid expenses and other current assets as of December 31, 2019.State Derivative LitigationIn May 2017, Lewis McClenney filed a putative stockholder derivative action in the Indenture at a redemption price of 105.5%Chancery Division of the principal amountCircuit Court of Cook County, Illinois, captioned McClenney v. Winemaster, et al., No. 2017-CH-06481 (the “McClenney Action”), against certain of the Senior Notes, togetherCompany’s current and former officers and directors. The McClenney Action asserted claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and corporate waste arising from the same matters at issue in the Giunta Action. On the same day that the McClenney Action was filed, Sara Rebscher also filed a putative stockholder derivative action in the same court, captioned Rebscher v. Winemaster, et al., No. 2017-CH-06517 (the “Rebscher Action”). The Rebscher Action asserts claims for breach of fiduciary duty and unjust enrichment against certain of the Company’s current and former officers and directors, arising from the same matters at issue in the Giunta Action. Additionally, the complaint in the Rebscher Action asserts a claim for professional negligence and accounting malpractice against the Company’s former auditor, RSM U.S. LLP (“RSM”). In July 2017, the court consolidated the McClenney Action and the Rebscher Action. Subsequently, the court appointed Rebscher as lead plaintiff and designated the Rebscher Action as the22operative complaint. In November 2018, the court granted the Company’s motion to dismiss the consolidated case with accrued prejudice on the grounds that it is duplicative of the Dorvit and unpaid interestMartin Actions. Plaintiffs moved for reconsideration of the court’s decision, which the court denied in January 2019. In February 2019, plaintiffs filed a notice of appeal from the court’s order dismissing the case. In December 2019, the Illinois Appellate Court affirmed the dismissal of the McClenney Action. Plaintiffs did not seek rehearing in the Illinois Appellate Court and did not petition for leave to appeal to the dateIllinois Supreme Court.Jerome Treadwell v. the Company In October 2018, a putative class-action complaint was filed against the Company and NOVAtime Technology, Inc. (“NOVAtime”) in the Circuit Court of redemption, but only if at least 65%Cook County, Illinois. In December 2018, NOVAtime removed the case to the U.S. District Court for the Northern District of Illinois, Eastern Division under the Class Action Fairness Act. Plaintiff has since voluntarily dismissed NOVAtime from the lawsuit without prejudice and filed an amended complaint in April 2019. The operative, amended complaint asserts violations of the original aggregate principal amountIllinois Biometric Information Privacy Act (“BIPA”) in connection with employees’ use of the Senior Notes would have remained outstanding following such redemption. In addition, priortime clock to May 1, 2016,clock in and clock out using a finger scan and seeks statutory damages, attorneys’ fees, and injunctive and equitable relief. An aggrieved party under BIPA may recover (i) $1,000 per violation if the Company couldis found to have redeemednegligently violated BIPA or (ii) $5,000 per violation if the Senior Notes in wholeCompany is found to have intentionally or recklessly violated BIPA plus reasonable attorneys’ fees. In May 2019, the Company filed its motion to dismiss the plaintiff’s amended complaint. In December 2019, the court denied the Company’s motion to dismiss. In January 2020, the Company moved for reconsideration of the court’s order denying the motion to dismiss, or in part atthe alternative, to stay the case pending the Illinois Appellate Court’s ruling in McDonald v. Symphony Healthcare on a redemption price equallegal 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 101.0%submit additional briefing on the Company’s motion to stay. In April 2020, the court granted the Company’s motion to stay and stayed the case pending the Illinois Appellate Court’s ruling in McDonald v. Symphony Healthcare. In October 2020, after the McDonald ruling, the court granted the parties’ joint request to continue the stay of the principal amount plus (i) accruedcase for 60 days. The court also ordered the parties to schedule a settlement conference with the Magistrate Judge, and unpaid interestscheduling is in progress. At this time, the Company is unable to predict the outcome of this matter or meaningfully quantify how the final resolution of this matter may impact its results of operations, financial condition or cash flows.Elton Evans v. the CompanyIn September 2020, a claim was filed against the Company in the Circuit Court of DuPage County, Illinois. The claim asserts an individual violation of the Illinois BIPA similar to the redemption date and (ii) an Applicable Premium (as definedclaims made in the Indenture) that was intended asJerome Treadwell v. the Company matter discussed above. The Company’s responsive pleading is currently due on November 16, 2020. At this time, the Company is unable to predict the outcome of this matter or meaningfully quantify how the final resolution of this matter may impact its results of operations, financial condition or cash flows.Don Wilkins v. the CompanyIn April 2017, Don Wilkins, former VP of Advanced Product Development for the Company, filed a “make-whole” to May 1, 2016.two-count complaint alleging breach of contract by the Company and violation of the Illinois Wage Payment and Collections Act (“IWPCA”) by the Company and its former CEO, Gary Winemaster (the “Wilkins Complaint”). The Wilkins Complaint claims the Company did not redeem any of the Senior Notes priorhave cause 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 Indentureterminate Mr. Wilkins’ Employment 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 dateConfidentiality Agreement (the “Wilkins Agreement”), executed January 6, 2012, 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, unlessand 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 1.5 times the Consumer Price Index per year from the termination date to the end-date of the Wilkins Agreement, December 31, 2020, and 20,000 shares of restricted stock granted to him in 2013 with a vesting schedule through 2020. In June 2017, the Company had given on or prior to March 15, 2017 a notice of redemption of alland Mr. Winemaster answered the complaint and asserted numerous defenses. The Company also asserted counterclaims against Mr. Wilkins including violation of the Senior Notes,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 would makeand Mr. Winemaster, subject to the parties’ confidential settlement agreement of those claims. In February 2020, the Company filed a mandatory offermotion for protective order to purchasestay 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 Senior Notes at a purchase price of 100.0%Wilkins Settlement Amount which was reserved as of the principal amount plus accruedfirst quarter of 2019. The Company’s insurance provider contributed the remainder of the Wilkins Settlement Amount. In June 2020, the court dismissed the Wilkins Complaint with prejudice and unpaid interest, if any,with each party to bear their own costs and attorneys’ fees.Mast Powertrain v. the CompanyIn February 2020, the Company received a demand for arbitration from Mast Powertrain, LLC (“Mast”) pursuant to a development agreement entered into in November 2011 (the “Development Agreement”). Mast claimed that it is owed more than $9.0 million in past royalties and other damages for products sold by the Company pursuant to the date of purchase in accordance with the procedures set forthDevelopment23Agreement. The Company has disputed Mast’s damages, denied that any royalties are owed to Mast, denied any liability, and counterclaimed for overpayment on invoices paid to Mast. Mast has subsequently clarified its claim for past royalties owed to be approximately $4.5 million. Arbitration is anticipated to occur in the Indenture.On April 1, 2016,Spring of 2021. At this time, the Company is unable to predict the outcome of this matter or meaningfully quantify how the final resolution of this matter may impact its results of operations, financial condition or cash flows.Indemnification AgreementsUnder the Company’s bylaws and certain indemnification agreements, the Company has obligations to indemnify current and former officers and directors and certain current and former employees. As a result of cumulative legal fees and settlements previously paid, the Company fully exhausted its primary directors’ and officers’ insurance coverage of $30 million during the first quarter of 2020. Additional expenses currently expected to be incurred and that will occur in the future and/or liabilities that may be imposed in connection with actions against certain of the Company’s past 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 Operations. At this time, the Company is not able to estimate the impact of these obligations due to the actions ongoing; however, the impact may be material to the Company’s results of operations, financial condition, and cash flows.At the end of June 2020, the Company entered into a Second Supplemental Indenture (“Second Supplemental Indenture”) which, among other things, eliminatednew directors’ and officers’ liability insurance policy. The insurance policy includes standard exclusions including for any ongoing or pending litigation such as the Special Mandatory Offer to Purchase in its entirety. The Second Supplemental Indenture also increasedpreviously disclosed investigations by 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 $135.0SEC and USAO.Other CommitmentsAt September 30, 2020, the Company had 6 outstanding letters of credit totaling $2.8 million. The Second Supplemental Indenture also resultedletters of credit primarily serve as collateral for the Company for certain facility leases and insurance policies. As discussed in an increase inNote 1. Summary of Significant Accounting Policies and Other Information, the interest rate on the Senior NotesCompany had restricted cash of $3.3 million at September 30, 2020 related to 6.50% effective April 1, 2016. these letters of credit.The Company paid a consent feehas arrangements with certain suppliers that require it to purchase minimum volumes or be subject to monetary penalties. As 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 ofSeptember 30, 2020, if the Company and its subsidiarieswere 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,stop purchasing from each of these suppliers, 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 principalaggregate amount of the then outstanding Senior Notes may declare the principal of and accrued but unpaid interest on all Senior Notes topenalty would 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 vestingapproximately $4.0 million. 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 causingarrangements enable the Company to withhold a numbersecure supplies of shares of its common stock otherwise issuable upon such exercise having a value, based uponcritical componenmarket pricesignificant declines in oil prices in early 2020 and the impacts 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 byCOVID-19 pandemic, the Company withcontinues to monitor and evaluate the SEC, the Private Placement Warrants may not be “cashlessly” exercised at this time. The Private Placement Warrants further includeimpact of potential future purchase volume reductions.Note 10. Income TaxesOn a requirement that,quarterly basis, 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, ifcomputes 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.The Company has assessed the need to maintain a valuation allowance 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 ofIn March 31, 20162020, 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,$2.2 million for the amount accrued for interest and penalties was notnine months ended September 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.The effective tax rate for the valuationthree and nine months ended September 30, 2020 was 12.5% and 15.9%, respectively, compared to an effective tax rate for the three and nine months ended September 30, 2019 of 7.7% and 44.2%. The effective tax rates for24all 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,September 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 to the impact of the CARES Act. For the nine months ended September 30, 2020, the difference between the effective and statutory tax rates was primarily due to the impact of the CARES Act, a change in the valuedeferred tax liability related to an indefinite-lived intangible asset and the Company’s full valuation allowance. For the three and nine months ended September 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 Private Placement Warrants inlosses related to the Weichai Warrant (except the three months ended March 31, 2016,September 30, 2019, which was not impacted due to the April 2019 exercise of the Weichai Warrant) and an increase in the deferred tax liability related to indefinite-lived assets which cannot serve as a source of income for the realization of deferred tax assets and states that base tax on gross margin.Note 11. Stockholders’ EquityCommon and Treasury StockThe changes in shares of Common and Treasury Stock are as follows:(in thousands) Common Shares Issued Treasury Stock Shares Common Shares Outstanding Balance as of January 1, 2020 23,117 260 22,857 Net shares issued for Stock awards — (29) 29 Balance as of September 30, 2020 23,117 231 22,886 Note 12. (Loss) Earnings Per ShareThe Company computes basic (loss) earnings per share by dividing net (loss) income distributable to common shares by the weighted-average common shares outstanding during the period. Diluted (loss) earnings 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) earnings per share for the three and nine months ended September 30, 2020 and 2019.The Company issued warrants that represent the right to purchase shares of Common Stock, Stock Appreciation Rights (“SARs”) and Restricted Stock Awards (“RSAs”), all of which have been evaluated for their potentially dilutive effect under the treasury stock method. See Note 3. Weichai Transactions herein for additional information on the Weichai Warrant and Note 12. Stock-Based Compensation in the Company’s income tax benefit rate2019 Annual Report for additional information on the SARs and the RSAs.The computations of basic and diluted (loss) earnings per share are as follows:(in thousands, except per share basis) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Numerator: Net (loss) income $ (1,466) $ 5,756 $ (19,920) $ 172 Denominator: Shares used in computing net (loss) income per share: Weighted-average common shares outstanding – basic 22,881 22,849 22,866 21,064 Effect of dilutive securities 0 27 0 24 Weighted-average common shares outstanding – diluted22,881 22,876 22,866 21,088 (Loss) earnings per common share: (Loss) earnings per share of common stock – basic $ (0.06) $ 0.25 $ (0.87) $ 0.01 (Loss) earnings per share of common stock – diluted $ (0.06) $ 0.25 $ (0.87) $ 0.01 The aggregate number of shares excluded from the diluted (loss) earnings per share calculations, because they would have been 36.1%. Althoughanti-dilutive, were 0.2 million shares for both the three and nine months ended September 30, 2020, respectively, and 0.2 million and 1.8 million shares during the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2020 and 2019, SARs and RSAs were 0t included in the diluted (loss) earnings per share25calculations as they would have been anti-dilutive (1) due to the losses reported in the Consolidated Statements of Operations or (2) the Company’s average stock price was less than the exercise price of the SARs or the grant price of the RSAs.Note 13. Related Party TransactionsWeichai TransactionsSee Note 3. Weichai Transactions for information regarding transactions with Weichai.Transactions with Joint VenturesDoosan-PSI, LLCIn 2015, the Company realizedand Doosan Infracore Co., Ltd. (“Doosan”), a pre-tax losssubsidiary of Doosan Group, entered into an agreement to form Doosan-PSI, LLC. The Company invested $1.0 million to acquire 50% of the venture, which was formed to operate in the field of developing, designing, testing, manufacturing, assembling, branding, marketing, selling, distributing and providing support for industrial gas engines and all components and materials required for assembly of the gas engines to the global power generation market outside of North America and South Korea. In the fourth quarter of 2019, Doosan and the Company agreed to wind down and dissolve the joint venture. This is expected to be completed by the end of 2020.Joint Venture Operating ResultsThe Company’s Consolidated Statements of Operations included income from this investment of less than $0.1 million and $0.3 million for the three and nine months ended March 31, 2015,September 30, 2020, respectively. Income from this investment was $0.1 million and $0.5 million for the Company recorded anthree and nine months ended September 30, 2019, respectively. The joint venture operating results are presented in Other income, tax provision of $1,384,000. The pre-tax loss was attributable to the expense arising from a changenet in the valueCompany’s Consolidated Statements of the Private Placement Warrants in the three months ended March 31, 2015. Excluding the impact of the change in the value of the Private Placement Warrants during this period, the Company’s income tax rate would have been 39.1% in the three months ended March 31, 2015.The Company is currently under audit for its income taxes at the federal level for the tax year ended December 31, 2013 and the state level for the tax years ended December 31, 2011 and 2012. 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 consolidated results of operations or its financial position.13. Commitments and contingenciesThe Company is involved in various legal proceedings from time to time arising in the normal course 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, 2016.26
Report. September 30, 2019 was primarily due to increased demand for products used in the medium duty truck market, as well as stronger demand for products used within the terminal tractor and school bus markets. life insurance proceeds upon the death of a former employee. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Management’s Discussion and Analysis ofFinancial Condition and Results of OperationsThe following discussion and analysis should 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 nine months ended September 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.Executive OverviewOrganizationWe design, manufacture, distributeThe Company designs, engineers, manufactures, markets and support 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).The COVID-19 pandemic has resulted in the implementation of significant governmental measures to control the spread of the virus, including quarantines, travel restrictions, business shutdowns and 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 nine months ended September 30, 2020.The Company’s products are primarily used by global original equipment manufacturers (“OEMs”) and end-user customers across a wide range of applications and equipment that includes standby and prime power generation, demand response, microgrid, combined heat and power, arbor care, material handling (including forklifts), agricultural and turf, construction, pumps and irrigation, compressors, utility vehicles, light- and medium-duty vocational trucks, school and transit buses, and utility power. The Company manages the business as a single reporting segment. Accordingly,For the following discussion is based upon this presentation.Netthree months ended September 30, 2020, the Company’s net salesWe generate revenues and cash primarily decreased $24.1 million, or 17%, from the salethree months ended September 30, 2019 to $114.5 million, the result of off-highwaydecreased sales across the energy and industrial power systemsend markets of $30.5 million and aftermarket parts to industrial OEMs 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$7.2 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$13.6 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, includeSeptember 30, 2020 was 15.9%, a decrease versus 19.4% 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 $8.7 million for the three months ended March 31, 2015, do not include such results.AcquisitionSeptember 30, 2020, while operating expensesWe incurred transaction costs related increased by $0.5 million, as compared to acquisition activities of $200,000, all of which was recognized as an expense classified within general and administrative expense,the comparable period in the three months ended March 31, 2015. We did not incur any such costs related to acquisitions2019. March 31, 2016.Share-based compensationOn February 22, 2015, our Compensation Committee of the Board of Directors approved, and we granted restricted stock awardsSeptember 30, 2020 compared to certain employees. As a result, we incurred non-cash, stock-based compensation expense in the three months ended March 31, 2016,September 30, 2019 primarily due to the receipt of life insurance benefits.not present$0.7 million in 2015. We may consider makingthe 2020 period, a decrease of $7.5 million, compared to Adjusted net income of $8.1 million in 2019. Adjusted earnings per share was $0.03 in 2020 compared to Adjusted earnings per share of $0.35 in 2019. Adjusted earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”) was $4.3 million in 2020 compared to Adjusted EBITDA of $12.7 million in 2019. Adjusted net loss (income), Adjusted loss (income) per share and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of each of these measures to the nearest applicable GAAP financial measure, as well as additional equity awardsinformation about these non-GAAP measures, see the section entitled Non-GAAP Financial Measures in this Item 2.For the nine months ended September 30, 2020, the Company’s net sales decreased $80.4 million, or 20%, compared to our directors, officersthe nine months ended September 30, 2019, as a result of sales declines across the energy and other employeesindustrial end markets of $48.7 million and possibly$44.8 million, respectively, partly offset by a $13.1 million increase in the transportation end market. Gross margin was 12.7% and 17.9% during the nine months ended September 30, 2020 and 2019, respectively. Gross profit decreased during the nine months ended September 30, 2020 by $30.5 million compared to consultants, and if we do, we will incur additional non-cash, stock-based compensationthe nine months ended September 30, 2019, while operating expenses decreased by $3.1 million as compared to the comparable period in future periods.Private placement warrantsOur results can be impacted2019. Interest expense decreased by our private placement warrants liability.$1.9 million for the nine months ended September 30, 2020 versus the comparable period in 2019. The change in estimated fair valueCompany recognized a loss of $1.4 million for the nine months ended September 30, 2019 as a result of the liability associated with the private placement warrants is primarily attributable to fluctuationschange in the value of our common stock duringthe Weichai Warrant27including the impact of the exercise in the second quarter of 2019. See Note 3. Weichai Transactions, included in Part 1, Item 1. Financial Statements, for additional information. Also, the Company recorded an income tax benefit of $3.8 million for the nine months ended September 30, 2020 versus an expense of $0.1 million for the same period last year. Collectively, these factors contributed to a $20.1 million increase in the net loss, which totaled $19.9 million in the 2020 period compared to net income of $0.2 million in the same period of 2019. Diluted loss per share was $0.87 in the 2020 period compared to diluted earnings per share of $0.01 in the comparable 2019 period. Our unaudited condensed consolidated resultsAdjusted net loss, which excludes certain items described below that the Company believes are not indicative of its ongoing operating performance, was $12.2 million in the 2020 period compared to Adjusted net income of $16.5 million in 2019. Adjusted loss per share was $0.53 in 2020 compared to Adjusted earnings per share of $0.78 in 2019. Adjusted EBITDA was a loss of $1.6 million in 2020 compared to Adjusted EBITDA of $29.4 million in 2019. Adjusted net loss (income), Adjusted loss (earnings) per share and Adjusted EBITDA are non-GAAP financial measures. For a reconciliation of each of these measures to the nearest applicable GAAP financial measure, as well as additional information about these non-GAAP measures, see the section entitled Non-GAAP Financial Measures in this Item 2.Net sales by geographic area and by end market for the three and nine months ended September 30, 2020 and 2019 are presented below:For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Geographic Area % of Total % of Total % of Total % of Total North America $ 104,840 92 % $ 125,971 91 % $ 281,339 90 % $ 343,593 87 % Pacific Rim 5,466 5 % 6,744 5 % 18,215 6 % 30,173 8 % Europe 2,395 2 % 4,329 3 % 7,630 2 % 12,712 3 % Others 1,749 1 % 1,468 1 % 5,419 2 % 6,505 2 % Total $ 114,450 100 % $ 138,512 100 % $ 312,603 100 % $ 392,983 100 % For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 End Market % of Total % of Total Energy $ 33,813 30 % $ 64,331 46 % $ 113,546 36 % $ 162,224 41 % Industrial 29,843 26 % 37,020 27 % 97,437 31 % 142,267 36 % Transportation 50,794 44 % 37,161 27 % 101,620 33 % 88,492 23 % Totals $ 114,450 100 % $ 138,512 100 % $ 312,603 100 % $ 392,983 100 % 28Results of OperationsResults of operations for the three and nine months ended March 31, 2016September 30, 2020 compared with the three 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-year 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 operationsThreenine months ended March 31, 2016 compared with three months ended March 31, 2015(in thousands, except per share amounts) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 Change % Change 2020 2019 Change % Change Net sales $ 114,450 $ 138,512 $ (24,062) (17) % $ 312,603 $ 392,983 $ (80,380) (20) % Cost of sales 96,281 111,640 (15,359) (14) % 272,943 322,793 (49,850) (15) % Gross profit 18,169 26,872 (8,703) (32) % 39,660 70,190 (30,530) (43) % Gross margin % 15.9 % 19.4 % (3.5) % 12.7 % 17.9 % (5.2) % Operating expenses: Research, development and engineering expenses 6,555 6,366 189 3 % 19,121 18,695 426 2 % Research, development and engineering expenses as a % of sales 5.7 % 4.6 % 1.1 % 6.1 % 4.8 % 1.3 % Selling, general and administrative expenses 11,964 11,461 503 4 % 38,434 41,476 (3,042) (7) % Selling, general and administrative expenses as a % of sales 10.5 % 8.3 % 2.2 % 12.3 % 10.6 % 1.7 % Amortization of intangible assets 763 910 (147) (16) % 2,290 2,729 (439) (16) % Total operating expenses 19,282 18,737 545 3 % 59,845 62,900 (3,055) (5) % Operating (loss) income (1,113) 8,135 (9,248) (114) % (20,185) 7,290 (27,475) *NM Other expense: Interest expense 1,510 1,921 (411) (21) % 4,211 6,156 (1,945) (32) % Loss from change in value of warrants — — — — % — 1,352 (1,352) (100) % Loss on extinguishment of debt — — — — % 497 — 497 — % Other income, net (947) (25) (922) NM (1,202) (526) (676) 129 % Total other expense 563 1,896 (1,333) (70) % 3,506 6,982 (3,476) (50) % (Loss) income before income taxes (1,676) 6,239 (7,915) (127) % (23,691) 308 (23,999) *NM Income tax (benefit) expense (210) 483 (693) (143) % (3,771) 136 (3,907) *NM Net (loss) income $ (1,466) $ 5,756 $ (7,222) (125) % $ (19,920) $ 172 $ (20,092) *NM (Loss) earnings per common share: Basic $ (0.06) $ 0.25 $ (0.31) (124) % $ (0.87) $ 0.01 $ (0.88) *NM Diluted $ (0.06) $ 0.25 $ (0.31) (124) % $ (0.87) $ 0.01 $ (0.88) *NM Non-GAAP Financial Measures: Adjusted net income (loss) * $ 652 $ 8,147 $ (7,495) (92) % $ (12,197) $ 16,502 $ (28,699) (174) % Adjusted earnings (loss) per share – diluted * $ 0.03 $ 0.35 $ (0.32) (91) % $ (0.53) $ 0.78 $ (1.31) (168) % EBITDA * $ 1,911 $ 10,340 $ (8,429) (82) % $ (13,268) $ 13,068 $ (26,336) *NM Adjusted EBITDA * $ 4,316 $ 12,731 $ (8,415) (66) % $ (1,640) $ 29,398 $ (31,038) (106) % *NMNot meaningful*Non-GAAP measurement, see reconciliation below29Net salesOur netSalesNet sales decreased $24,325,000 (28.2%) to $61,814,000 in$24.1 million, or 17%, during the three months ended March 31, 2016,September 30, 2020 compared to $86,139,000the three months ended September 30, 2019, as a result of sales declines of $30.5 million and $7.2 million in the energy and industrial end markets, respectively, partly offset by a $13.6 million increase in the transportation end market. Lower energy end market sales were driven by decreased demand for the same period of 2015. Organic sales decreased $29.1 million primarily due to a decrease in sales intoCompany’s power generation products, especially those used within the oil and gas industry. The decreased sales within the industrial end market partiallyreflects lower demand for products used across a wide range of applications, with the largest decrease attributable to those products used in the material handling/forklift markets. The increase in transportation end market sales was primarily due to increased medium duty truck market business in addition to higher sales in the terminal tractor market and a nominal increase in the school bus market.Net sales decreased $80.4 million, or 20%, during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, as a result of sales declines of $48.7 million and $44.8 million in the energy and industrial end markets, respectively, partly offset by a $4.8an increase of $13.1 million in the transportation end market. Lower energy end market sales increasewere driven by decreased demand for the Company’s power generation products, particularly those used within the oil and gas industry, partly offset by increased demand for demand response products. The decreased sales within the industrial end market reflects lower demand for products used across various applications, with the largest decreases attributable to incrementallower demand for products used in the material handling/forklift and arbor care markets. The increase in transportation end market sales from businesses acquired.Gross profitOur grossProfitGross profit decreased $12,401,000 (75.4%) to $4,056,000 induring 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 contributedSeptember 30, 2020 by $8.7 million, or 32%, compared 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 & developmentSeptember 30, 2019. Gross margin was 15.9% and engineeringResearch & development and engineering expense increased $82,000 (1.6%) to $5,250,000 in19.4% during the three months ended March 31, 2016, as comparedSeptember 30, 2020 and 2019, respectively. The decline in gross margin is primarily due to $5,168,000 forunfavorable product mix and the same periodimpact of lower sales, partly mitigated by cost savings driven by reductions in 2015. Wagesthe production facility workforce 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% inactions. For the three months ended March 31, 2016, asSeptember 30, 2020, warranty costs were $2.7 million (net of supplier recoveries of $2.8 million), including a $1.2 million benefit for adjustments to preexisting warranties, a decrease of $0.3 million compared to 6.0%warranty costs of $3.0 million (net of supplier recoveries of $0.1 million) 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, as compared to the same 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.September 30, 2019. 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 issuancewarranty costs for the three months ended March 31, 2016, asSeptember 30, 2020 included $1.0 million of net charges related to specific engine supplier quality issues, for which the Company is actively seeking additional cost reimbursement.Gross profit decreased during the nine months ended September 30, 2020 by $30.5 million, or 43%, compared to nonethe nine months ended September 30, 2019. Gross margin was 12.7% and 17.9% during the nine months ended September 30, 2020 and 2019, respectively. The decline in gross margin is primarily due to significantly higher warranty expense related to charges from adjustments to preexisting warranties largely within the transportation end market, reduced operating leverage as a result of lower sales and unfavorable product mix, partly mitigated by cost savings driven by reductions in the production facility workforce and other actions. For the nine months ended September 30, 2020, warranty costs were $18.2 million (net of supplier recoveries of $4.6 million), including $8.8 million of charges for adjustments to preexisting warranties, an increase of $10.8 million compared to warranty costs of $7.4 million (net of supplier recoveries of $3.0 million) for the same period in 2015. Other interest expense resulted innine months ended September 30, 2019. The warranty costs for the remaining increasenine months ended September 30, 2020 included $1.6 million of $58,000 period-over-period, ofnet charges related to specific engine supplier quality issues, for 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 inCompany is actively seeking additional cost reimbursement.Research, Development and Engineering ExpensesResearch, development and engineering expenses during the three months ended March 31, 2016, as compared to approximately $94.2September 30, 2020 were $6.6 million, during 2015. Including only our revolving linean increase of credit and our term loan which was paid in full on April 29, 2015, our weighted average borrowing rate was 2.02% in$0.2 million, or 3%, from the three months ended March 31, 2016, as comparedSeptember 30, 2019 levels. The increase was primarily related to 1.89% for the same period in 2015.Private placement warrant (income) expensetiming of projects, partly offset by the impact of cost savings actions.Research, development and engineering expenses during the nine months ended September 30, 2020 were $19.1 million, an increase of $0.4 million, or 2%, from the nine months ended September 30, 2019 levels. The increase was incomeprimarily related to the timing of $1,256,000 inprojects, partly offset by the impact of cost savings actions.Selling, General and Administrative ExpensesSelling, general and administrative expenses increased during the three months ended March 31, 2016,September 30, 2020 by $0.5 million, or 4%, compared to the three months ended September 30, 2019. The increase was primarily due to higher legal costs related to the recently settled 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 (see additional discussion in Note 9. Commitments and Contingencies in Part I, Item 1. Financial Statements), among other items, partly offset by lower incentive compensation expense, lower financial reporting expenses, and the impact of cost savings actions.30Selling, general and administrative expenses decreased during the nine months ended September 30, 2020 by $3.0 million, or 7%, compared to the nine months ended September 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, lower severance costs and lower key employee retention program costs. Partly offsetting the decline were higher legal costs related to the recently settled 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 (see additional discussion in Note 9. Commitments and Contingencies in Part I, Item 1. Financial Statements), among other items.Interest ExpenseInterest expense decreased $0.4 million to $1.5 million for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, largely due to lower overall interest rates on the Company’s debt during the third quarter of 2020, as compared to the prior year.Interest expense of $3,614,000decreased $1.9 million to $4.2 million for the same periodnine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, largely due to lower overall interest rates on the Company’s debt during the nine months ended September 30, 2020, as compared to the prior year.Lower interest rates in 2015. We are required2020 were primarily due to recognize changesrefinancing the debt in the estimated fairApril 2020. See Note 6. Debt, included in Part I, Item 1. Financial Statements, for additional information.Loss from Change in Value of WarrantsThere was no impact from a change in value of unexercised private placement warrants for the nine months ended September 30, 2020 due to the Weichai Warrant being exercised in our unaudited condensed consolidated statementApril 2019. The Company recognized a loss of operations. The$1.4 million for the nine months ended September 30, 2019 as a result of the change in estimated fairthe value of the private placement warrantsWeichai Warrant including the impact of the exercise.See Note 3. Weichai Transactions and Note 8. Fair Value of Financial Instruments, included in Part I, Item 1. Financial Statements, for additional information.Loss on Extinguishment of DebtThere was attributableno impact related to fluctuationsthe loss on the extinguishment of debt for the three months ended September 30, 2020 and 2019. The Company recognized a loss on the extinguishment of debt for the nine months ended September 30, 2020 of $0.5 million. There was no loss on the extinguishment of debt for the nine ended September 30, 2019.See Note 6. Debt, included in Part I, Item 1. Financial Statements, for additional information.Other Income, NetOther income, net increased by $0.9 million to $0.9 million during the trading pricethree months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to the receipt of our common stock at each balance sheet date.Other income, net increased by $0.7 million to $1.2 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to the receipt of life insurance proceeds upon the death of a former employee, partially offset by lower equity earnings from the Company’s joint venture.Refer to Note 13. Related Party Transactions, in Part I, Item 1. Financial Statements, for further discussion of the Company’s joint venture.Income tax expenseOur income tax expense decreased $5,064,000 toTax ExpenseThe Company recorded an income tax benefit of $3,680,000 in$0.2 million for the three months ended March 31, 2016,September 30, 2020, as compared to income tax expense of $1,384,000 for the same period in 2015. For the three months ended March 31, 2016 and 2015, we reported a pre-tax loss of $8,931,000 and $72,000, respectively. Included in the pre-tax results was the change in the valuation 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, we had a pre-tax loss of $10,187,000 in the three months ended March 31, 2016 as compared to pre-tax income of 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 rate$0.5 million for the three months ended March 31, 2015.Liquidity and capital resourcesOur cash requirements are dependent upon a variety of factors, foremost of 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 $55.0September 30, 2019. The Company’s pretax loss was $1.7 million in Senior Notes for which we received $53,483,000 after financing fees. These Senior Notes are described below under “Credit agreements.” Although we believe we have or can access sufficient liquidity to fund our operations as needed, there can be no assurances such funding will be consistently available to us on terms that 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 cost of funding will depend upon numerous factors including, but not limited to, the health and vibrancy of the financial markets, our financial performance, and the 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, including 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 ventures 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 $133,706,000 compared to $153,413,000 as of December 31, 2015. Our working capital decrease of $19,707,000 was attributable primarily to a $41,202,000 decrease in our accounts receivable, net from December 31, 2015, as a result of the collection of receivables and a decrease 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. Department of the Treasury as a result of a refund attributable to our 2015 estimated federal income tax position. This amount was almost entirely offset by an increase arising from an income tax benefit recorded as of March 31, 2016 and a reclassification of $1,343,000 of assets held for sale, which were reclassified from “Property, plant & equipment, net” to “Prepaid expenses and other current assets” on our condensed consolidated balance sheet as a result of our decision to sell one of our operating facilities. We expect to complete 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 from a decrease in purchases and the timing 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 payable to the former owners of Powertrain Integration, which we acquired during 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,September 30, 2020, compared to the three months ended December 31, 2015. Our inventories decreased $9,393,000 as a resultpretax income of our efforts to reduce inventory and improve our working capital. Prepaid expenses and other current assets increased cash by $1,306,000 principally due to the collection of an income tax receivable of $5,230,000 and partially offset by the recognition of additional income tax assets in the three months ended March 31, 2016. Partially offsetting these favorable effects on cashflow was a $35,274,000 decrease in accounts payable, principally attributable 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 in the three months ended March 31, 2016.Cash flows$6.2 million for the three months ended March 31, 2015Operating activitiesFor the three months ended March 31, 2015, we used $9,731,000 to fund our operations.In the three months ended March 31, 2015, we had a net loss of $1,456,000 and non-cash adjustments totaling $6,080,000, resulting in cash generated 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 derived from the change in the fair value of our private placement warrants, (ii) $1,683,000 of depreciation and amortization, (iii) $305,000 of share-based compensation expense, (iv) $225,000 of reserves for inventory, and (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 in the three months ended March 31, 2015. Excluding the impact of the increase in inventories due 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, 2015 as compared to the three months ended December 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 offset the cash used in operations. We also realized cash from a $672,000 decrease in prepaid expenses and other assets in the three months ended March 31, 2015. The remaining other changes in operating components 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 activitiesSeptember 30, 2019. Income tax benefit for the three months ended March 31, 2015. We generated cash from $24,363,000September 30, 2020 primarily related to an adjustment in net borrowings under our revolving linethe impact of credit inthe CARES Act. The Company continues to record a full valuation allowance against deferred tax assets which offsets the tax benefit associated with the pre-tax loss for the three months ended March 31, 2015. In addition, we repaid $417,000 due under our term loanSeptember 30, 2020.The Company recorded an income tax benefit of $3.8 million for the nine months ended September 30, 2020, as compared to income tax expense of $0.1 million for the nine months ended September 30, 2019. The Company’s pretax loss was $23.7 million for the nine months ended September 30, 2020, compared to pretax income of $0.3 million for the nine months ended September 30, 2019. The increase in the threetax benefit for the nine months ended 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 subjectSeptember 30, 2020 is primarily attributable 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 our option, all or a 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) required us to report our fixed charge coverage ratio, when our Availability (as definedCARES Act enacted in the Wells Credit Agreement) was less thanfirst quarter of 2020, which allowed the Threshold Amount (as defined inCompany to elect bonus depreciation for the Wells Credit Agreement)2018 and 2019 tax years, carryback net operating losses to continue to report our 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. 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 day of the month prior to the date on which our 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 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 defined31change 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 loss 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 $53,946,000 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 debtnine months ended September 30, 2020.See Note 10. Income Taxes, included in 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.Non-GAAP Financial MeasuresIn addition 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, 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 income (loss) Net (loss) income Adjusted earnings (loss) per share (Loss) earnings per common share – diluted EBITDA Net (loss) income Adjusted EBITDA Net (loss) income The Company believes that Adjusted net income (loss), Adjusted earnings (loss) per share, EBITDA, and Adjusted EBITDA provide relevant and useful information, which is widely used by analysts, investors and competitors in its industry as well as by the Company’s management in assessing the performance of our annual report on Form 10-Kthe Company. Adjusted net income (loss) 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 earnings (loss) per share is a measure of the Company’s diluted (loss) earnings per common 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.Adjusted net income (loss), Adjusted earnings (loss) per share, EBITDA, and Adjusted EBITDA are used by management for various purposes, including as a 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.During 2020, the Company changed the presentation of certain non-GAAP financial measures to separate incremental financial reporting and government investigation expenses into: (1) incremental financial reporting, (2) internal control remediation, and (3) government investigations and other legal matters. In addition, the Company changed the presentation of non-GAAP adjustments for the 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 nine 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 whetherSeptember 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.32The following table presents a reconciliation from Net (loss) income to Adjusted net income (loss) for the three and nine months ended September 30, 2020 and 2019:(in thousands) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Net (loss) income $ (1,466) $ 5,756 $ (19,920) $ 172 Change in value of warrants 1— — — 1,352 Stock-based compensation 2165 173 482 841 Loss on debt extinguishment 3— — 497 — Key employee retention program 4— 10 — 492 Severance 5332 267 332 1,865 Incremental financial reporting 64 1,299 1,783 6,792 Internal control remediation 7137 216 1,029 1,467 Government investigations and other legal matters 82,697 426 8,435 3,521 Life insurance proceeds 9(930) — (930) — Discrete income tax items 10(287) — (3,905) — Adjusted net income (loss) $ 652 $ 8,147 $ (12,197) $ 16,502 The following table presents a reconciliation from (Loss) earnings per common share – diluted to Adjusted earnings (loss) per share for the three and nine months ended September 30, 2020 and 2019:For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 (Loss) earnings per common share – diluted $ (0.06) $ 0.25 $ (0.87) $ 0.01 Changes in value of warrants 1— — — 0.06 Stock-based compensation 20.01 0.01 0.02 0.04 Loss on debt extinguishment 3— — 0.02 — Key employee retention program 4— — — 0.02 Severance 50.01 0.01 0.01 0.09 Incremental financial reporting 6— 0.05 0.08 0.33 Internal control remediation 70.01 0.01 0.05 0.07 Government investigations and other legal matters 80.11 0.02 0.37 0.16 Life insurance proceeds 9(0.04) — (0.04) — Discrete income tax items 10(0.01) — (0.17) — Adjusted earnings (loss) per share – diluted $ 0.03 $ 0.35 $ (0.53) $ 0.78 Diluted shares (in thousands) 22,881 22,876 22,866 21,088 33The following table presents a reconciliation from Net (loss) income to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2020 and 2019:(in thousands) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 Net (loss) income $ (1,466) $ 5,756 $ (19,920) $ 172 Interest expense 1,510 1,921 4,211 6,156 Income tax (benefit) expense (210) 483 (3,771) 136 Depreciation 1,314 1,270 3,922 3,875 Amortization of intangible assets 763 910 2,290 2,729 EBITDA 1,911 10,340 (13,268) 13,068 Change in value of warrants 1— — — 1,352 Stock-based compensation 2165 173 482 841 Loss on debt extinguishment 3— — 497 — Key employee retention program 4— 10 — 492 Severance 5332 267 332 1,865 Incremental financial reporting 64 1,299 1,783 6,792 Internal control remediation 7137 216 1,029 1,467 Government investigations and other legal matters 82,697 426 8,435 3,521 Life insurance proceeds 9(930) — (930) — Adjusted EBITDA $ 4,316 $ 12,731 $ (1,640) $ 29,398 1.Amount consists of the change in the value of the Weichai Warrant, including the impact of the exercise in April 2019.2.Amounts reflect non-cashstock-based compensation expense (amounts exclude $0.3 million for the nine months ended September 30, 2019 associated with employee retention programs (see note 4 below)).3.Amount represents the loss on the extinguishment of the Wells Fargo Credit Agreement and the Unsecured Senior Notes in April 2020 as further discussed in Note 6. Debt of Part I, Item 1. Financial Statements.4.Amounts represent incremental compensation costs (including $0.3 million for the nine months ended September 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 $0.5 million and $1.5 million of recurring audit fees for the three and nine months ended September 30, 2020, respectively, and $0.1 million and $1.1 million for the three and nine months ended September 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.Amounts represent professional services fees and reserves primarily related to the recently settled SEC and USAO investigations of the Company and indemnification of certain former officers and employees. The Company is obligated to pay legal costs of certain former officers and employees in accordance with Company bylaws and certain indemnification agreements. As further discussed in Note 9. Commitments and Contingencies of Part I, Item 1. Financial Statements, the Company fully exhausted its historical primary directors’ and officers’ insurance coverage in connection with these matters during the first quarter of 2020. The amounts include $1.7 million and $5.5 million for the three and nine months ended September 30, 2020, respectively, related to indemnification of certain former officers and employees.9.Amount represents a life insurance payment to the Company related to the death of a former employee.10.Amount consists of the impact of the CARES Act and a change in the deferred tax liability related to an indefinite-lived intangible asset.34Cash FlowsCash was impacted as follows:(in thousands) For the Nine Months Ended September 30, 2020 2019 Change % Change Net cash (used in) provided by operating activities $ (2,283) $ 19,122 $ (21,405) (112) % Net cash used in investing activities (1,054) (2,035) 981 48 % Net cash provided by (used in) financing activities 33,360 (17,140) 50,500 *NM Net increase (decrease) in cash, cash equivalents, and restricted cash $ 30,023 $ (53) $ 30,076 *NM Capital expenditures $ (1,991) $ (2,048) $ 57 3 % *NMNot meaningfulCash Flows for the Nine Months Ended September 30, 2020Cash Flow from Operating ActivitiesNet cash used in operating activities was $2.3 million in the nine months ended September 30, 2020 compared to net cash provided by operating activities of $19.1 million in the nine months ended September 30, 2019, resulting in an increase of $21.4 million in cash used in operating activities year-over-year. The increase in cash used in operating activities was primarily related to an increase in the net loss of $20.1 million and a $2.0 million decrease in the impact of non-cash adjustments to the net loss, primarily related to changes in the value of the Weichai Warrant during the nine months ended September 30, 2019, partially offset by an increase in cash generated from working capital accounts of $0.7 million, primarily due to increased collections of accounts receivable, partially offset by increased inventory and a net decrease in accounts payable and accrued expenses.Cash Flow from Investing ActivitiesNet cash used in investing activities was $1.1 million for the nine months ended September 30, 2020 compared to $2.0 million for the nine months ended September 30, 2019, respectively. For the nine months ended September 30, 2020 and 2019, cash used in investing activities primarily related to capital expenditures associated with normal maintenance of the Company’s facilities, partially offset by proceeds from a life insurance policy in 2020.Cash Flow from Financing ActivitiesThe Company generated $33.4 million in cash from financing activities in the nine months ended September 30, 2020 compared to $17.1 million in cash used by financing activities in the nine months ended September 30, 2019. The cash generated by financing activities for the nine months ended September 30, 2020 was primarily attributable to 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. For the nine months ended September 30, 2019, cash used by financing activities primarily related to net repayments of the revolving credit facility.Liquidity and Capital ResourcesOn April 2, 2020, the Company closed on its new senior secured revolving credit facility pursuant to that certain credit agreement dated March 27, 2020, between the Company and Standard Chartered Bank (“Standard Chartered”), as administrative agent (the “Credit Agreement”). The Credit Agreement, which allows the Company to borrow up to $130.0 million, matures on March 26, 2021 with an optional 60-day extension, subject to certain conditions and payment of a 0.25% extension fee. The Credit Agreement bears interest at either the alternate base rate or 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 September 30, 2020, the Company’s total debt obligations under the Credit Agreement35were $130.0 million in the aggregate, and its cash and cash equivalents were $26.7 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 $20.1 million.As discussed further in Item 1. Note 6. Debt, included in Part I, Item 1. Financial Statements, the Credit Agreement includes financial covenants which were effective for the Company beginning with the six months ended June 30, 2020. The financial covenants include an interest coverage ratio and a minimum EBITDA threshold as further defined in the Credit Agreement. For the six months ended June 30, 2020 and the nine months ended September 30, 2020, the Company did not meet the defined minimum EBITDA requirement. A breach of the financial 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. Accordingly, the Company is currently in discussions with Standard Chartered to seek appropriate waivers and amendments to cure its financial covenant breach and amend its financial covenants.Significant uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness, maintain sufficient liquidity to fund its business activities, obtain a waiver or amendment in connection with the financial covenant breach, and maintain compliance with the covenants and other requirements under the Credit Agreement in the future. Based on the Company’s current forecasts, without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay the Credit Agreement by the cautionary statements contained in this quarterly report.Forward looking statements speak only asMarch 26, 2021 maturity date. Management currently plans to seek an extension and/or replacement of the date of this report. Except as expressly required under federal securities laws andCredit Agreement or additional liquidity from its current or other lenders before March 26, 2021. There can be no assurance that the rules and regulationsCompany will be able to obtain waivers or satisfactory amendments to its financial covenants or successfully complete an extension of the SEC, we do not undertake any obligationCredit Agreement or obtain new financing on acceptable terms when required or if at all.Additionally, due to update any forward-looking statementsthe onset of the COVID-19 pandemic in early 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 reflect eventsunprecedented 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 Company’s sales and profitability is derived from the sale of products that are used within the oil and gas industry. While the Company has yet to experience significant supply chain interruptions or circumstances arisingmaterial cancellations of orders, the potential impact of future disruptions, continued economic uncertainty, and continued 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 COVID-19 pandemic on the Company’s operations and liquidity continues to evolve.Due to uncertainties surrounding the Company’s future ability to refinance, extend, or repay its outstanding indebtedness, 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.Off-Balance Sheet ArrangementsAt September 30, 2020, the Company had six outstanding letters of credit totaling $2.8 million. See Item 1. Note 9. Commitments and Contingencies for additional information related to the Company’s off-balance sheet arrangements and the outstanding letters of credit of $2.8 million and restricted cash of $3.3 million at September 30, 2020.Critical Accounting Policies and EstimatesThe Company’s consolidated financial statements are prepared in accordance with U.S GAAP. Preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The Company’s most critical accounting policies and estimates are those most important to the portrayal of its financial condition and results of operations and which require the Company to make its most difficult and subjective judgments, often as a result of 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.The Company’s significant accounting policies are consistent with those discussed in Note 1. Summary of Significant Accounting Policies and Other Information, to the consolidated financial statements and the MD&A section of the Company’s 2019 Annual Report on Form 10-K (the “2019 Annual Report”). During the forward-looking statementsnine months ended September 30, 2020, there were no significant changes in the application of critical accounting policies.36The Company has identified the following accounting policies as its most critical because they require the Company to make difficult, subjective, and complex judgments:▪Revenue Recognition▪Allowance for Doubtful Accounts▪Inventories▪Goodwill and Other Intangibles▪Impairment of Long-Lived Assets▪Warranty▪Deferred Tax Asset Valuation Allowance▪Uncertain Tax PositionsImpact of New Accounting StandardsFor information about recently issued accounting pronouncements, see Note 1. Summary of Significant Accounting Policies and Other Information, included in 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 1.37
Risk. Item 3. Quantitative and Qualitative Disclosures aboutAbout Market RiskThe Company is exposeda 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.38
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.Item 4. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresWe maintain a system of disclosureThe term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Exchange Act as “controls and other procedures of an issuer that isare 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 Company’s management, with the participation of 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 September 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 endSeptember 30, 2020, because of the period coveredpreviously reported material weaknesses in internal control over financial reporting, as described below.Ongoing Remediation of Material Weaknesses in Internal Control over Financial ReportingAs previously disclosed under this report.Control Environment, Risk Assessment, Information and Communication, and MonitoringControl Environment:Since 2017, the Company has either replaced or appointed new Board and Audit Committee members, a Chief Executive Officer, a Chief Financial Officer, a Chief Commercial Officer, a Chief Information Officer, and a Vice President, Internal Audit. These changes, along with the actions of these individuals and other senior management, have collectively improved the tone of integrity, transparency and support of the Company’s updated Code of Business Conduct and Ethics.The Company has updated its Code of Business Conduct and Ethics and has initiated an ongoing training program to help ensure employees understand and comply with the Code. The Company continues to enhance the program to provide extensive communications and training to employees across the entire organization regarding the importance of integrity and accountability.The Company has established a process to identify and address internal control weaknesses through the internal control function.IT Skillset and Competency:The information technology (“IT”) function has been reorganized under the leadership of a new Chief Information Officer who reports to the Chief Executive Officer. The Company continues to assess the level of technical skills in the IT function to support the design and implementation of IT general controls (“ITGCs”).Policies and Procedures:▪The Company has issued a revised delegation of authority policy that appoints tiered approvers based upon risk and materiality of the transaction and trained employees on the revised policy.▪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.Segregation of Duties:▪The Company is establishing standards governing the segregation of incompatible duties across the organization.39▪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.Control ActivitiesAs part of the overall remediation plan, the Company is designing and implementing review and approval controls over data utilized in various accounting processes. These controls will address the accuracy, timely recording and completeness of data used in the determination of significant accounting estimates, reserves, and valuations as well as impacted presentation and disclosures in accordance with U.S. GAAP.Revenue Accounting:▪The Company 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.Capitalization:The Company is designing and implementing policies, procedures, and controls over capitalization, including, but not limited to, the capitalization of costs incurred on capital asset projects and accounting treatment for research and development activities.Complex and Nonroutine Transactions:The Company is designing and implementing policies, procedures and controls over the evaluation, review and approval of complex and nonroutine transactions, including, but not limited to, identification of reporting units and triggering events that could impact the assessment of potential impairments of property, plant and equipment, intangibles and goodwill, accounting for debt transactions, purchase accounting for business combinations and lease classification.Reserves and Accruals:The Company is designing and implementing policies, procedures and controls over the review and approval of key reserves and accruals, including, but not limited to, warranty and excess and obsolete inventory reserves.Period End Close/Accounting Documentation:▪The Company is designing and implementing policies, procedures and controls over the period-end close process and related documentation including, but not limited to, accounting for treasury stock, 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.Information Technology:▪The Company has reconstructed its ITGC framework to focus on controls that mitigate key financial reporting risks.▪The Company has designed and is implementing controls over access, change management and IT operations to ensure that access rights are restricted to appropriate individuals, and that data integrity is maintained via effective change 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.40Data Maintenance:▪The Company is designing and implementing procedures and controls to appropriately identify and assess changes made to data repositories that could significantly impact data integrity and the internal control framework, including, but not limited to, (i) creating centralized, complete and accurate data repositories, (ii) maintaining customer and vendor master files, employee data files, perpetual inventory records, inventory 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.When fully implemented and operational, the Company believes the measures described above will remediate the control deficiencies that have led to the material weaknesses it has identified and will strengthen its internal control over financial reporting. The Company is committed to continuing to improve its internal control processes and it will continue to review its financial reporting controls and procedures. As the Company continues to evaluate and work to improve its internal control over financial reporting, it may determine that a need exists to take additional measures to address control deficiencies or modify certain remediation measures described above.Changes in Internal Control over Financial ReportingThereOther than the ongoing remediation efforts described above, there have been no changes in ourthe Company’s internal control over financial reporting during the quarter ended March 31, 2016,September 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.41PART II.II – OTHER INFORMATION
the Exchange Act and is not required to provide the information under this item.Item 1. Legal ProceedingsFrom time to time,Proceedings.See Note 9. Commitments and Contingencies, included in 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.Item 1A. Risk Factors.The Company is a material adverse effect on our business, resultssmaller reporting company as defined by Rule 12b-2 of operations or financial condition.Item 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.None.Item 3. Defaults upon Senior Securities.See Note 6. Debt, included in Part I, Item 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.Item 4. Mine Safety Disclosures.Not applicable.Item 5. Other Information.Not applicable.42
EXHIBIT INDEXThe following documents listed below that have been previously filed with the SEC (1934 Act File No. 001-35944) are incorporated herein by reference:Incorporated by Reference Herein Exhibit No. Exhibit Description Form Exhibit Filing Date File No. 10.1 8-K 10.1 07/24/2020 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.SIGNATURESPursuant to the requirements of the 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 16th day of November 2020.POWER SOLUTIONS INTERNATIONAL, INC. By: /s/ Donald P. Klein Date: May 10, 2016Name: By:/s/ MichaelDonald P. LewisTitle: Michael P. LewisChief 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)3343