POWER SOLUTIONS INTERNATIONAL, INC. The following discussion and analysis includes forward-looking statements about the Company's business and consolidated results of operations for the three months endedMarch 31, 2022 and 2021, including discussions about management's expectations for the Company's business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and are made in light of recent events and trends. These statements should not be construed either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause the Company's actual performance and management's actions to vary, and the results of these variances may be both material and adverse. See "Forward-Looking Statements." The following discussion should also be read in conjunction with the Company's unaudited consolidated financial statements and the related Notes included in this Quarterly Report.
Executive Overview
The Company designs, engineers, manufactures, markets and sells a broad range of
advanced, emission-certified engines and power systems that run on a wide
variety of clean, alternative fuels, including natural gas, propane, and
biofuels, as well as gasoline and diesel options, within the power systems,
industrial and transportation end markets with primary manufacturing, assembly,
engineering, research and development ("R&D"), sales and distribution facilities
located in suburban Chicago, Illinois and Darien, Wisconsin . The Company
provides highly engineered, comprehensive solutions designed to meet specific
customer application requirements and technical specifications, including those
imposed by environmental regulatory bodies, such as the U.S. Environment
Protection Agency ("EPA "), the California Air Resource Board ("CARB") and the
People's Republic of China's Ministry of Ecology and Environment ("MEE").
The Company's products are primarily used by global original equipment
manufacturers ("OEM") and end-user customers across a wide range of applications
and equipment that includes standby and prime power generation, demand response,
microgrid, combined heat and power, arbor care, material handling (including
forklifts), agricultural and turf, construction, pumps and irrigation,
compressors, utility vehicles, light- and medium-duty vocational trucks, school
and transit buses, and utility power. The Company manages the business as a
single reporting segment.
For the three months ended March 31, 2022 , the Company's net sales decreased
$1.2 million , or 1%, from the three months ended March 31, 2021 to $98.9
million , as a result of a sales decline of $25.8 million in the transportation
end market, partly offset by increases of $13.1 million and $11.5 million in the
power systems and industrial end markets, respectively. Gross margin for the
three months ended March 31, 2022 was 16.9%, a improvement versus 7.1% in the
comparable 2021 period. Gross profit increased $9.6 million for the three months
ended March 31, 2022 , while operating expenses decreased by $6.2 million , as
compared to the comparable period in 2021. Interest expense increased by $0.3
million for the three months ended March 31, 2022 versus the comparable period
in 2021. Also, the Company recorded income tax expense of $0.4 million for both
the three months ended March 31, 2022 and March 31, 2021 , respectively.
Collectively, these factors contributed to a $15.6 million decrease in the net
loss, which totaled $2.6 million in the 2022 period compared to a net loss of
$18.2 million in the same period of 2021. Diluted loss per share was $0.11 in
the 2022 period compared to a diluted loss per share of $0.79 in the comparable
2021 period. Adjusted net loss, which excludes certain items described below
that the Company believes are not indicative of its ongoing operating
performance, was $0.9 million in the 2022 period, an improvement of $12.1
million , compared to an Adjusted net loss of $13.0 million in 2021. Adjusted
loss per share was $0.03 in 2022 compared to an Adjusted loss per share of $0.56
in 2021. Adjusted earnings before interest expense, income taxes, depreciation
and amortization ("EBITDA") was positive at $3.7 million in 2022 compared to an
Adjusted EBITDA loss of $8.5 million in 2021. Adjusted net (loss) income,
Adjusted earnings (loss) 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 months ended
(in thousands)
For the Three Months Ended
2022 2021
Geographic Area % of Total % of Total
United States $ 74,410 75 % $ 89,595 90 %
North America (outside of United States) 3,411 4 % 2,320 2 %
Pacific Rim 13,841 14 % 5,528 5 %
Europe 3,122 3 % 1,610 2 %
Other 4,163 4 % 1,118 1 %
Total $ 98,947 100 % $ 100,171 100 %
25
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(in thousands) For the Three Months Ended March 31,
2022 2021
End Market % of Total % of Total
Power Systems $ 38,230 39 % $ 25,159 25 %
Industrial 45,803 46 % 34,320 34 %
Transportation 14,914 15 % 40,692 41 %
Total $ 98,947 100 % $ 100,171 100 %
Recent Trends and Business Outlook
COVID-19 Update and Oil and Gas Market Volatility
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 restrictions on the movement of people inthe United States and abroad. These factors, in turn, have impacted and may continue to impact the Company's operations, financial condition, and demand for its goods and services, as well as its overall ability to react timely to mitigate any further impact of the COVID-19 pandemic. As of the date of this Form 10-Q, the Company continues to judiciously manage its expenses through the continuation of certain measures, including the restriction of all non-essential travel and minimized discretionary expenses and consulting services. The Company continues to review operating expenses, including prioritizing certain R&D investments in support of the Company's long-term growth objectives. During 2021, the Company took rightsizing actions to align its staffing with current needs, while also streamlining certain roles. These actions, when coupled with attrition, contributed to the reduction of approximately 100 positions, or approximately 12.5% of the Company's headcount. Also, the Company continues to review its facilities footprint in light of its current and planned business mix and its evolving needs. To date, these efforts resulted in the exit and sublease of itsHanover Park, IL materials and warehousing facility which is expected to generate annualized savings of approximately$1.3 million , with approximately$0.9 million expected to be realized in 2022.
The full impact of the COVID-19 pandemic continues to evolve as of the date of this Form 10-Q.
During 2020 and 2021, as a result of the COVID-19 pandemic, the global economy experienced substantial turmoil, which led to challenging market conditions across certain areas of the Company's business. In addition, due to unprecedented decreases in demand, an oil price war, and economic uncertainty resulting from the COVID-19 pandemic, average crude oil prices were considerably lower in 2020 as compared to prices at the end of 2019 but showed signs of improvement in 2021 and through the first quarter of 2022. However, although rig counts in theU.S. oil markets increased during 2021 and through the first quarter of 2022, average rig counts remained below pre-pandemic levels. The Company also believes that capital spending within theU.S. oil and gas industry remains well below pre-pandemic levels. While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during the first quarter of 2022, as compared to the prior year, sales remain below 2019 levels. A significant portion of the Company's sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry. In addition, the Company continued to experience delays in its supply chain during the first quarter of 2022 due to temporary shortages of raw materials and container delays of overseas materials as bottlenecks occurred at ports inAsia andNorth America . This, in turn, caused delivery delays to some of the Company's customers. The Company also experienced inflationary cost pressures for certain materials and shipping-related costs. Additionally, the Company continues to experience ongoing tariff costs for products that did not receive exclusions. The Company is working to mitigate the impact of these matters through price increases and other measures, such as seeking certain tariff exclusions, where possible. The potential for continued disruptions, economic uncertainty, and unfavorable oil and gas market dynamics may have a material adverse impact on the timing of delivery of customer orders and the levels of future customer orders. Lastly, during 2021, the Company incurred significantly higher legal costs due to its obligation to indemnify certain former officers and employees as a result of exhaustion of its directors and officers insurance during the early part of 2020. In particular, spending activity was elevated during the first nine months of 2021 as a result of the USAO trial involving former officers and employees of the Company. With a verdict reached in the USAO trial matter involving former officers and employees inSeptember 2021 , the Company believes its costs related to the matter will cease. Accordingly, the Company saw a substantial decline in these costs during the first quarter of 2022. However, at this time, the Company is not able to estimate the potential future amount of its indemnity obligations related to the pendingSEC matter involving prior officers and employees. See Note 9. Commitments and Contingencies, included in Part 1, Item 1. Financial Statements, for further discussion of the Company's indemnification obligations. Accordingly, the above challenges may continue to have a material adverse impact on the Company's future results of operations, financial position, and liquidity. 26
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Results of Operations
Results of operations for the three months ended
(in thousands, except per share amounts) For the Three Months Ended March
31,
2022 2021 Change % Change
Net sales $ 98,947 $ 100,171 $ (1,224) (1) %
Cost of sales 82,229 93,101 (10,872) (12) %
Gross profit 16,718 7,070 9,648 136 %
Gross margin % 16.9 % 7.1 % 9.8 %
Operating expenses:
Research, development and engineering 4,560 6,224 (1,664) (27) %
expenses
Research, development and engineering 4.6 % 6.2 % (1.6) % expenses as a % of sales Selling, general and administrative (4,426) (28) % expenses 11,385
15,811
Selling, general and administrative 11.5 % 15.8 % (4.3) %
expenses as a % of sales
Amortization of intangible assets 541 634 (93) (15) % Total operating expenses 16,486 22,669 (6,183) (27) % Operating income (loss) 232 (15,599) 15,831 (101) % Other expense, net: Interest expense 2,445 2,161 284 13 % Other expense, net - - - - % Total other expense, net 2,445 2,161 284 13 % Loss before income taxes (2,213) (17,760) 15,547 (88) % Income tax expense 386 390 (4) (1) % Net loss$ (2,599) $ (18,150) $ 15,551 (86) % Loss per common share: Basic$ (0.11) $ (0.79) $ 0.68 (86) % Diluted$ (0.11) $ (0.79) $ 0.68 (86) % Non-GAAP Financial Measures: Adjusted net loss *$ (879) $ (12,956) $ 12,077 93 % Adjusted loss per share *$ (0.03) $ (0.56) 0.53 95 % EBITDA *$ 1,979 $ (13,699) $ 15,678 114 % Adjusted EBITDA *$ 3,699 $ (8,505) $ 12,204 143 % NM Not meaningful * See reconciliation of non-GAAP financial measures to GAAP results below 27 --------------------------------------------------------------------------------
Net sales decreased$1.2 million , or 1%, during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , as a result of a sales decline of$25.8 million in the transportation end market, partly offset by increases of$13.1 million and$11.5 million in the power systems and industrial end markets, respectively. Further, overall sales in the first quarter of 2022 continued to reflect supply chain challenges that impacted the Company's ability to timely meet certain orders. The decreased sales within the transportation end market were primarily attributable to lower sales in the medium duty truck market, coupled with lower demand for school bus products. Higher power systems end market sales were primarily due to increased sales of power generation products, particularly to customers serving the demand response markets and to customers with traditional exposure to the oil and gas markets. Higher industrial end market sales are primarily due to increased demand for products across various applications, with the largest increase attributable to products used within the material handling/forklift market.
Gross Profit
Gross profit increased by$9.6 million , or 136%, during the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . Gross margin was 16.9% during the three months endedMarch 31, 2022 , an increase of 9.8 percentage points compared to 7.1% for the three months endedMarch 31, 2021 , primarily due to lower warranty expense, among other items. For the three months endedMarch 31, 2022 , warranty costs were a benefit of$0.3 million , a change of$7.1 million compared to warranty costs of$6.8 million last year, due largely to favorable adjustments to preexisting warranties during the first quarter of 2022. A majority of the warranty activity is attributable to products sold within the transportation end market.
Research, Development and Engineering Expenses
Research, development and engineering expenses during the three months endedMarch 31, 2022 were$4.6 million , a decrease of$1.7 million , or 27%, from the three months endedMarch 31, 2021 , due to lower wages and benefits driven by reduced headcount and lower project activity in the current quarter versus the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased during the three
months ended March 31, 2022 by $4.4 million , or 28%, compared to the three
months ended March 31, 2021 , primarily due to lower legal costs related to the
Company's indemnification obligations of former officers and employees driven
largely by the conclusion of the USAO trial involving former officers and
employees during September 2021 . (see additional discussion in Note 9.
Commitments and Contingencies in Part I. Item 1. Financial Statements for
further discussion). The Company also experienced lower wages and benefits
expense, due in part to reduced incentive compensation expense, and also had
lower financial reporting fees.
Interest Expense
Interest expense increased$0.3 million to$2.4 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 , due in part to higher outstanding debt levels during the current quarter versus the prior year. See Note 6. Debt, included in Part 1, Item 1. Financial Statements, for additional information.
Income Tax Expense
The Company recorded income tax expense of$0.4 million for both the three months endedMarch 31, 2022 and 2021, respectively. The Company's pretax loss was$2.2 million for the three months endedMarch 31, 2022 , compared to a pretax loss of$17.8 million for the three months endedMarch 31, 2021 . The Company continues to record a full valuation allowance against deferred tax assets which offsets the tax benefits otherwise associated with the pre-tax losses for the three months endedMarch 31, 2022 and 2021. See Note 10. Income Taxes, included in Part 1, Item 1. Financial Statements, for additional information related to the Company's income tax provision.
Non-GAAP Financial Measures
In addition to the results provided in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP") above, this report also includes non-GAAP (adjusted) financial measures. Non-GAAP financial measures provide insight into selected financial information and should be evaluated in the context in which they are presented. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, financial information presented in compliance withU.S. GAAP, and non-GAAP financial measures as reported by the Company may not be comparable to similarly titled amounts reported by other companies. The non-GAAP financial measures should be considered in conjunction with the consolidated financial statements, including the related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated below. 28 -------------------------------------------------------------------------------- Non-GAAP Financial Measure Comparable GAAP Financial Measure Adjusted net income (loss) Net income (loss) Adjusted earnings (loss) per share Earnings (loss) per common share - diluted EBITDA Net income (loss) Adjusted EBITDA Net income (loss) The Company believes that Adjusted net income (loss), Adjusted earnings (loss) per share, EBITDA, and Adjusted EBITDA provide relevant and useful information, which is widely used by analysts, investors and competitors in its industry as well as by the Company's management in assessing the performance of the Company. Adjusted net income (loss) is defined as net income (loss) as adjusted for certain items that the Company believes are not indicative of its ongoing operating performance. Adjusted earnings (loss) per share is a measure of the Company's diluted earnings (loss) per common share adjusted for the impact of special items. EBITDA provides the Company with an understanding of earnings before the impact of investing and financing charges and income taxes. Adjusted EBITDA further excludes the effects of other non-cash charges and certain other items that do not reflect the ordinary earnings of the Company's operations. Adjusted net income (loss), Adjusted earnings (loss) per share, EBITDA, and Adjusted EBITDA are used by management for various purposes, including as a measure of performance of the Company's operations and as a basis for strategic planning and forecasting. Adjusted net income (loss), Adjusted earnings (loss) per share, and Adjusted EBITDA may be useful to an investor because these measures are widely used to evaluate companies' operating performance without regard to items excluded from the calculation of such measures, which can vary substantially from company to company depending on the accounting methods, the book value of assets, the capital structure and the method by which the assets were acquired, among other factors. They are not, however, intended as alternative measures of operating results or cash flow from operations as determined in accordance withU.S. GAAP.
The following table presents a reconciliation from Net loss to Adjusted net loss
or the three months ended
(in thousands) For the Three Months
Ended March 31,
2022 2021
Net loss $ (2,599) $ (18,150)
Stock-based compensation 1 203 109
Severance 2 12 460
Internal control remediation 3 471 393
Government investigations and other legal matters 4 1,034 4,232
Adjusted net loss $ (879) $ (12,956) The following table presents a reconciliation from Loss per common share -
diluted to Adjusted loss per share for the three months ended
29
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For the Three Months
Ended March 31,
2022 2021
Loss per common share - diluted $ (0.11) $ (0.79)
Stock-based compensation 1 0.01 0.01
Severance 2 - 0.02
Internal control remediation 3 0.02 0.02
Government investigations and other legal matters 4 0.05 0.18
Adjusted loss per share - diluted $ (0.03) $ (0.56)
Diluted shares (in thousands) 22,927 22,893
The following table presents a reconciliation from Net loss to EBITDA and
Adjusted EBITDA for the three months ended
(in thousands) For the Three Months
Ended March 31,
2022 2021
Net loss $ (2,599) $ (18,150)
Interest expense 2,445 2,161
Income tax expense 386 390
Depreciation 1,206 1,266
Amortization of intangible assets 541 634
EBITDA 1,979 (13,699)
Stock-based compensation 1 203 109
Severance 2 12 460
Internal control remediation 3 471 393
Government investigations and other legal matters 4 1,034 4,232
Adjusted EBITDA $ 3,699 $ (8,505)
1.Amounts reflect non-cash stock-based compensation expense.
2.Amounts represent severance and other post-employment costs for certain former
employees of the Company.
3.Amounts represent professional services fees related to the Company's efforts
to remediate internal control material weaknesses including certain costs to
upgrade IT systems.
4.Amounts include professional services fees for the three months ended March
31, 2022 of $0.2 million , and $3.2 million for the three months ended March 31,
2021 , related to costs to indemnify certain former officers and employees of the
Company. The Company is obligated to pay legal costs of certain former officers
and employees in accordance with Company bylaws and certain indemnification
agreements. As further discussed in Note 9. Commitments and Contingencies of
Part I, Item 1. Financial Statements, the Company fully exhausted its historical
primary directors' and officers' insurance coverage in connection with these
matters during the first quarter of 2020. Also included are professional
services fees and reserves related to certain other legal matters.
Cash Flows
Cash was impacted as follows:
(in thousands) For the Three Months Ended March
31,
2022 2021 Change % Change
Net cash (used in) provided by operating $ (17,377) $ 5,681 $ (23,058) *NM
activities
Net cash used in investing activities (116) (607) 491 81 % Net cash provided by (used in) financing 13,188 (2,638) 15,826 *NM
activities
Net (decrease) increase in cash, cash equivalents, and restricted cash$ (4,305) $ 2,436 $ (6,741) *NM Capital expenditures$ (116) $ (617) $ 501 81 % *NMNot meaningful
Cash Flows for the Three Months Ended
Cash Flow from Operating Activities
30
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Net cash used in operating activities was $17.4 million in the three months
ended March 31, 2022 compared to net cash provided by operating activities of
$5.7 million in the three months ended March 31, 2021 , resulting in an increase
of $23.1 million in cash used in operating activities year-over-year. The
increase in cash used by operating activities was primarily related to a
decrease in the net loss of $15.6 million , offset by a $38.0 million decrease in
cash generated from working capital accounts, and a $0.6 million decline in
non-cash adjustments. The decrease in cash generated from working capital in the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 was primarily related to lower accounts receivable collections and a net
decrease in liabilities, partly offset by a decrease in cash outflows associated
with inventory purchases. The net decrease in liabilities was largely due to
decreased accounts payable due to the timing of management of payables and a
decrease in other non current liabilities, partly offset by an increase in other
current liabilities. The decrease in non-cash adjustments was primarily due to
decreased amortization of deferred financing fees.
Cash Flow from Investing Activities
Net cash used in investing activities was$0.1 million for the three months endedMarch 31, 2022 compared to cash used in investing activities of$0.6 million for the three months endedMarch 31, 2021 . For the three months endedMarch 31, 2022 and 2021, cash used in investing activities primarily related to capital expenditures associated with normal maintenance of the Company's facilities.
Cash Flow from Financing Activities
The Company generated$13.2 million in cash from financing activities in the three months endedMarch 31, 2022 compared to$2.6 million in cash used by financing activities in the three months endedMarch 31, 2021 . The cash generated by financing activities for the three months endedMarch 31, 2022 was primarily attributable to cash received under the shareholder's loan agreement withWeichai , compared to no new borrowings for the three months endedMarch 31, 2021 . See additional discussion below and in Note 6. Debt, included in Part I, Item 1. Financial Statements related to the amendments of the Company's debt arrangements.
Liquidity and Capital Resources
OnMarch 25, 2022 , the Company amended and restated its$130.0 million uncommitted senior secured revolving credit agreement with Standard Chartered by entering (the "Second Amended and Restated Credit Agreement"). The Second Amended and Restated Credit Agreement extends the maturity date of loans outstanding under its previous credit facility to the earlier ofMarch 24, 2023 or the demand of Standard Chartered. The Second Amended and Restated Credit Agreement is subject to customary events of default and covenants, including minimum consolidated EBITDA and Consolidated Interest Coverage Ratio covenants for the second and third quarters of 2022. Borrowings under the Second Amended and Restated Credit Agreement will incur interest at either the alternate base rate or the SOFR plus 2.95% per annum. The Second Amended and Restated Credit Agreement continues to be secured by substantially all of the Company's assets and provides Standard Chartered the right to demand payment of any and all of the outstanding borrowings and other amounts owed under the Second Amended and Restated Credit Agreement at any point in time prior to the maturity date at Standard Chartered's discretion. Furthermore, the Second Amended and Restated Credit Agreement grants Standard Chartered a power of attorney (POA) to submit a borrowing request toWeichai under the Amended First Shareholder's Loan Agreement (see discussion below) if the Company did not submit a borrowing request toWeichai within five business days of receiving a request from Standard Chartered to submit said borrowing request. As ofMarch 31, 2022 , the Company had$130.0 million outstanding under the Second Amended and Restated Credit Agreement. In connection with the Second Amended and Restated Credit Agreement, onMarch 25, 2022 , the Company also amended two of its shareholder's loan agreements withWeichai , to among other things, extend the maturities thereof. The amended first shareholder's loan agreement (the "Amended First Shareholder's Loan Agreement") continues to provide the Company with a$130.0 million subordinated loan under whichWeichai is obligated to advance funds solely for purposes of repaying outstanding borrowings under the Second Amended and Restated Credit Agreement if the Company is unable to pay such borrowings. The amended second shareholder's loan agreement (the "Amended Second Shareholder's Loan Agreement") continues to provide the Company with a$25.0 million subordinated loan at the discretion ofWeichai . The maturity of the Amended First Shareholder's Loan Agreement was extended toApril 24, 2023 and the maturity of the Amended Second Shareholder's Loan Agreement was extended toMay 20, 2023 . The Company has covenanted to secure any amounts borrowed under either of the agreements upon payment in full of all amounts outstanding under the Second Amended and Restated Credit Agreement. As ofMarch 31, 2022 , there were no borrowings under the Amended First Shareholder's Loan Agreement and$25.0 million under the Amended Second Shareholder's Loan Agreement. The Company is also party to the third shareholder's loan agreement withWeichai , which was entered into onDecember 10, 2021 (the "Third Shareholder's Loan Agreement"). The Third Shareholder's Loan Agreement provides the Company with a$50.0 million uncommitted facility that is subordinated to the Second Amended and Restated Credit Agreement and any borrowing requests made under the Third Shareholder's Loan Agreement are subject toWeichai's discretionary approval. Borrowings under the Third Shareholder's Loan Agreement bear interest at LIBOR plus 4.50% and can be used for general 31 -------------------------------------------------------------------------------- corporate purposes, except for certain legal expenditures which require additional approval fromWeichai . The Third Shareholder's Loan Agreement expires onNovember 30, 2022 with any outstanding principal and accrued interest due upon maturity. As ofMarch 31, 2022 , the Company had$40.0 million outstanding under the Third Shareholder's Loan Agreement. OnApril 20, 2022 , the Company entered into an additional shareholder's loan agreement withWeichai (the "Fourth Shareholder's Loan Agreement"). The Fourth Shareholder's Loan Agreement, which matures onMarch 31, 2023 , provides the Company with access to up to$30.0 million of credit at the discretion ofWeichai to supplement the Company's working capital. The Fourth Shareholder's Loan Agreement is subordinated in all respects to the Second Amended and Restated Credit Agreement. Borrowings under the Amended First Shareholder's Loan Agreement, the Amended Second Shareholder's Loan Agreement and the Fourth Shareholder's Loan Agreement will incur interest at the applicable SOFR, plus 4.65% per annum. Further, if the applicable term SOFR is negative, the interest rate per annum shall be deemed as 4.65% per annum. If the interest rate for any loan is lower thanWeichai's borrowing cost, the interest rate for such loan shall be equal toWeichai's borrowing cost plus 1%. As ofMarch 31, 2022 , the Company's total outstanding debt obligations under the Second Amended and Restated Credit Agreement, the Amended Second Shareholder's Loan Agreement, the Third Shareholder's Loan Agreement and for finance leases and other debt were$195.8 million in the aggregate, and its cash and cash equivalents were$2.3 million . See Item 1. Financial Statements and Supplementary Data, Note 6. Debt, for additional information.
As of
Significant uncertainties exist about the Company's ability to refinance, extend, or repay its outstanding indebtedness under its existing debt arrangements, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Second Amended and Restated Credit Agreement or shareholder's loan agreements in the future. Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay the outstanding indebtedness under the Company's existing debt arrangements as they become due. Management currently plans to seek an extension and/or replacement of its existing debt arrangements or seek additional liquidity from its current or other lenders before the maturity dates in 2022 and 2023 as discussed above. There can be no assurance that the Company will be able to successfully complete a refinancing on acceptable terms or repay this outstanding indebtedness when required or if at all. During 2020 and 2021, as a result of the COVID-19 pandemic, the global economy experienced substantial turmoil, which led to challenging market conditions across certain areas of the Company's business. In addition, due to unprecedented decreases in demand, an oil price war, and economic uncertainty resulting from the COVID-19 pandemic, average crude oil prices were considerably lower in 2020 as compared to prices at the end of 2019 but showed signs of improvement in 2021 and through the first quarter of 2022. However, although rig counts in theU.S. oil markets increased during 2021 and through the first quarter of 2022, average rig counts remained below pre-pandemic levels. The Company also believes that capital spending within theU.S. oil and gas industry remains well below pre-pandemic levels. While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during the first quarter of 2022, as compared to the prior year, sales remain below 2019 levels. A significant portion of the Company's sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry. In addition, the Company continued to experience delays in its supply chain during the first quarter of 2022 due to temporary shortages of raw materials and container delays of overseas materials as bottlenecks occurred at ports inAsia andNorth America . This, in turn, caused delivery delays to some of the Company's customers. The Company also experienced inflationary cost pressures for certain materials and shipping-related costs. Additionally, the Company continues to experience ongoing tariff costs for products that did not receive exclusions. The Company is working to mitigate the impact of these matters through price increases and other measures, such as seeking certain tariff exclusions, where possible. The potential for continued disruptions, economic uncertainty, and unfavorable oil and gas market dynamics may have a material adverse impact on the timing of delivery of customer orders and the levels of future customer orders. Lastly, during 2021, the Company incurred significantly higher legal costs due to its obligation to indemnify certain former officers and employees as a result of exhaustion of its directors and officers insurance during the early part of 2020. In particular, spending activity was elevated during the first nine months of 2021 as a result of the USAO trial involving former officers and employees of the Company. With a verdict reached in the USAO trial matter involving former officers and employees inSeptember 2021 , the Company believes its costs related to the matter will cease. Accordingly, the Company saw a substantial decline in these costs during the first quarter of 2022. However, at this time, the Company is not able to estimate the potential future amount of its indemnity obligations related to the pendingSEC matter involving prior officers and employees. See Item 1. Financial Statements and Supplementary Data, Note 9. Commitments and Contingencies for further discussion of the Company's indemnification obligations. Accordingly, the above challenges may continue to have a material adverse impact on the Company's future results of operations, financial position, and liquidity. 32 -------------------------------------------------------------------------------- Due to uncertainties surrounding the Company's future ability to refinance, extend, or repay its outstanding indebtedness under its existing debt arrangements, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Second Amended and Restated Credit Agreement or shareholder's loan agreements in the future, substantial doubt exists as to its ability to continue as a going concern within one year after the date that these financial statements are issued. If the Company does not have sufficient liquidity to fund its business activities, it may be forced to limit its business activities or be unable to continue as a going concern, which would have a material adverse effect on its results of operations and financial condition. AtMarch 31, 2022 , the Company had five outstanding letters of credit totaling$2.1 million . See Item 1. Financial Statements and Supplementary Data, Note 9. Commitments and Contingencies for additional information related to the Company's off-balance sheet arrangements and the outstanding letters of credit.
Critical Accounting Policies and Estimates
The Company's consolidated financial statements are prepared in accordance withU.S GAAP. Preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The Company's most critical accounting policies and estimates are those most important to the portrayal of its financial condition and results of operations and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Although management believes that its estimates and assumptions are reasonable, they are based on information available when they are made and, therefore, may differ from estimates made under different assumptions or conditions. The Company's significant accounting policies are consistent with those discussed in Note 1. Summary of Significant Accounting Policies and Other Information, to the consolidated financial statements and the MD&A section of the Company's 2021 Annual Report on Form 10-K (the "2021 Annual Report"). During the three months endedMarch 31, 2022 , there were no significant changes in the application of critical accounting policies.
The Company has identified the following accounting policies as its most critical because they require the Company to make difficult, subjective, and complex judgments:
?Revenue Recognition ?Inventories ?Impairment of Long-Lived Assets ?Warranty ?Deferred Tax Asset Valuation Allowance
Impact of New Accounting Standards
For information about recently issued accounting pronouncements, see Note 1.
Summary of Significant Accounting Policies and Other Information, included in
Part 1, Item 1.
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