10-Q 1 psix-20220930.htm 10-Q psix-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
psix-20220930_g1.jpg
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022    
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission file number 001-35944
POWER SOLUTIONS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware33-0963637
(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 ClassTrading Symbol(s)Name of Each Exchange on Which Registered
None——
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒     No   ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒     No   ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company☒
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No ☒
As of November 3, 2022, there were 22,951,379 outstanding shares of the Common Stock of the registrant.
1

TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
Forward-Looking Statements
Item 1.Financial Statements
Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021
Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (Unaudited)
Consolidated Statements of Stockholders’ Deficit for the three and nine months ended September 30, 2022 and 2021 (Unaudited)
Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II – OTHER INFORMATION
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
Signatures



FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2022 (the “Quarterly Report”) that are not historical facts are intended to constitute “forward-looking statements” entitled to the safe-harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may involve risks and uncertainties. These statements often include words such as “anticipate,” “believe,” “budgeted,” “contemplate,” “estimate,” “expect,” “forecast,” “guidance,” “may,” “outlook,” “plan,” “projection,” “should,” “target,” “will,” “would” or similar expressions, but these words are not the exclusive means for identifying such statements. These forward-looking statements include statements regarding Power Solutions International, Inc.’s, a Delaware corporation (“Power Solutions,” “PSI” or the “Company”), projected sales, potential profitability and liquidity, strategic initiatives, future business strategies, warranty mitigation efforts and market opportunities, improvements in its business, remediation of internal controls, improvement of product margins, and product market conditions and trends. These statements are not guarantees of performance or results, and they involve risks, uncertainties and assumptions. Although the Company believes that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect the Company’s results of operations and liquidity and could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the Company’s forward-looking statements.
The Company cautions that the risks, uncertainties and other factors that could cause its actual results to differ materially from those expressed in, or implied by, the forward-looking statements include, without limitation, the factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and from time to time in the Company’s subsequent filings with the United States Securities and Exchange Commission (the “SEC”); the impact of the ongoing COVID-19 pandemic could have on the Company’s business and financial results; the Company’s ability to continue as a going concern; the Company’s ability to raise additional capital when needed and its liquidity; uncertainties around the Company’s ability to meet funding conditions under its financing arrangements and access to capital thereunder; the potential acceleration of the maturity at any time of the loans under the Company’s uncommitted senior secured revolving credit facility through the exercise by Standard Chartered Bank of its demand right; the impact of rising interest rates; changes in economic conditions, including inflationary trends in the price of raw materials; our reliance on information technology and the associated risk involving potential security lapses and/or cyber attacks; the timing of completion of steps to address, and the inability to address and remedy, material weaknesses; the identification of additional material weaknesses or significant deficiencies; risks related to complying with the terms and conditions of the settlements with the SEC and the United States Attorney's Office for the Northern District of Illinois (the “USAO”); variances in non-recurring expenses; risks relating to the substantial costs and diversion of personnel’s attention and resources deployed to address the internal control matters; the Company’s obligations to indemnify past and present directors and officers and certain current and former employees with respect to the investigations conducted by the SEC which will be funded by the Company with its existing cash resources due to the exhaustion of its historical primary directors’ and officers’ insurance coverage; the ability of the Company to accurately forecast sales, and the extent to which sales result in recorded revenues; changes in customer demand for the Company’s products; volatility in oil and gas prices; the impact of U.S. tariffs on imports from China on the Company’s supply chain; impact on the global economy of the war in Ukraine; the impact of supply chain interruptions and raw material shortages; the potential impact of higher warranty costs and the Company’s ability to mitigate such costs; any delays and challenges in recruiting and retaining key employees consistent with the Company’s plans; any negative impacts from delisting of the Company’s common stock par value $0.001 (the “Common Stock”) from the NASDAQ Stock Market (“NASDAQ”) and any delays and challenges in obtaining a re-listing on a stock exchange.
The Company’s forward-looking statements are presented as of the date hereof. Except as required by law, the Company expressly disclaims any intention or obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
AVAILABLE INFORMATION
The Company is subject to the reporting and information requirements of the Exchange Act, and as a result, it is obligated to file annual, quarterly and current reports, proxy and information statements and other information with the SEC. The Company makes these filings available free of charge on its website (http://www.psiengines.com) as soon as reasonably practicable after it electronically files them with, or furnishes them to, the SEC. Information on the Company’s website does not constitute part of this Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains the annual, quarterly and current reports, proxy and information statements, and other information the Company electronically files with, or furnishes to, the SEC.
3

PART I – FINANCIAL INFORMATION
Item 1.    Financial Statements.
POWER SOLUTIONS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)As of September 30, 2022 (unaudited)As of December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$16,477 $6,255 
Restricted cash3,565 3,477 
Accounts receivable, net of allowances of $3,115 and $3,420 as of September 30, 2022 and December 31, 2021, respectively
82,732 65,110 
Income tax receivable567 4,276 
Inventories, net127,221 142,192 
Prepaid expenses and other current assets17,849 8,918 
Total current assets248,411 230,228 
Property, plant and equipment, net14,389 17,344 
Intangible assets, net6,186 7,784 
Goodwill29,835 29,835 
Other noncurrent assets12,762 15,347 
TOTAL ASSETS$311,583 $300,538 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable$73,120 $93,256 
Current maturities of long-term debt217 254 
Revolving line of credit130,000 130,000 
Other short-term financing81,001 25,000 
Other accrued liabilities42,618 34,801 
Total current liabilities326,956 283,311 
Deferred income taxes1,041 1,016 
Long-term debt, net of current maturities455 25,636 
Noncurrent contract liabilities3,412 3,330 
Other noncurrent liabilities19,479 29,268 
TOTAL LIABILITIES$351,343 $342,561 
STOCKHOLDERS’ DEFICIT
Preferred stock – $0.001 par value. Shares authorized: 5,000. No shares issued and outstanding at all dates.
$— $— 
Common stock – $0.001 par value; 50,000 shares authorized; 23,117 shares issued; 22,950 and 22,926 shares outstanding at September 30, 2022 and December 31, 2021, respectively
23 23 
Additional paid-in capital157,603 157,436 
Accumulated deficit(196,415)(198,366)
Treasury stock, at cost, 167 and 191 shares at September 30, 2022 and December 31, 2021, respectively
(971)(1,116)
TOTAL STOCKHOLDERS’ DEFICIT(39,760)(42,023)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT$311,583 $300,538 
See Notes to Consolidated Financial Statements
4

POWER SOLUTIONS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)For the Three Months Ended September 30,For the Nine Months Ended September 30,
2022202120222021
Net sales$124,900 $117,630 $344,326 $329,279 
Cost of sales100,792 106,288 285,181 297,673 
Gross profit24,108 11,342 59,145 31,606 
Operating expenses:
Research, development and engineering expenses4,819 5,437 13,931 17,772 
Selling, general and administrative expenses11,541 10,958 32,922 47,858 
Amortization of intangible assets526 634 1,598 1,901 
Total operating expenses16,886 17,029 48,451 67,531 
Operating income (loss)7,222 (5,687)10,694 (35,925)
Other expense, net:
Interest expense3,615 1,623 8,729 5,253 
Other expense, net— — — 1 
Total other expense, net3,615 1,623 8,729 5,254 
Income (Loss) before income taxes3,607 (7,310)1,965 (41,179)
Income tax expense (benefit)415 (133)14 (281)
Net income (loss)$3,192 $(7,177)$1,951 $(40,898)
Weighted-average common shares outstanding:
Basic22,948 22,920 22,934 22,902 
Diluted22,959 22,920 22,944 22,902 
Earnings (Loss) per common share:
Basic$0.14 $(0.31)$0.09 $(1.79)
Diluted$0.14 $(0.31)$0.09 $(1.79)
See Notes to Consolidated Financial Statements
5

POWER SOLUTIONS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(in thousands)For the Three Months Ended
Common StockAdditional Paid-in CapitalAccumulated DeficitTreasury StockTotal Stockholders’ Deficit
Balance at June 30, 2022$23 $157,689 $(199,607)$(1,118)$(43,013)
Net income— — 3,192 — 3,192 
Stock-based compensation expense— (86)— 148 62 
Common stock issued for stock-based awards, net— — — (1)(1)
Balance at September 30, 2022$23 $157,603 $(196,415)$(971)$(39,760)
Balance at June 30, 202123 157,394 (183,615)(1,198)(27,396)
Net loss— — (7,177)— (7,177)
Stock-based compensation expense— 102 — — 102 
Common stock issued for stock-based awards, net— — — (36)(36)
Balance at September 30, 2021$23 $157,496 $(190,792)$(1,234)$(34,507)

(in thousands)For the Nine Months Ended
Common StockAdditional Paid-in CapitalAccumulated DeficitTreasury StockTotal Stockholders’ Deficit
Balance at December 31, 2021$23 $157,436 $(198,366)$(1,116)$(42,023)
Net income— — 1,951 — 1,951 
Stock-based compensation expense— 167 — 148 315 
Common stock issued for stock-based awards, net— — — (3)(3)
Balance at September 30, 2022$23 $157,603 $(196,415)$(971)$(39,760)
Balance at December 31, 2020$23 $157,262 $(149,894)$(1,294)$6,097 
Net loss— — (40,898)— (40,898)
Stock-based compensation expense— 234 100 334 
Common stock issued for stock-based awards, net— — — (40)(40)
Balance at September 30, 2021$23 $157,496 $(190,792)$(1,234)$(34,507)
See Notes to Consolidated Financial Statements
6


POWER SOLUTIONS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)For the Nine Months Ended September 30,
20222021
Cash used in operating activities
Net income (loss)$1,951 $(40,898)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of intangible assets1,598 1,901 
Depreciation3,532 3,647 
Stock-based compensation expense315 334 
Amortization of financing fees1,730 2,102 
Deferred income taxes25 179 
Other adjustments, net900 652 
Changes in operating assets and liabilities:
Accounts receivable, net(17,635)5,611 
Income taxes receivable3,710 — 
Inventory, net14,548 (37,167)
Prepaid expenses and other assets(6,289)(2,497)
Accounts payable(20,186)58,798 
Other current liabilities7,802 (26,911)
Other noncurrent liabilities(9,708)(4,852)
Net cash used in operating activities(17,707)(39,101)
Cash (used in) provided by investing activities
Capital expenditures(991)(2,156)
Return of investment in joint venture— 2,263 
Other investing activities, net— 88 
Net cash (used in) provided by investing activities(991)195 
Cash provided by financing activities
Repayments of long-term debt and lease liabilities(203)(286)
Proceeds from short-term financings31,582 26,309 
Repayment of short-term financings(581)(708)
Payments of deferred financing costs(1,787)(2,562)
Other financing activities, net(3)(40)
Net cash provided by financing activities29,008 22,713 
Net increase (decrease) in cash, cash equivalents, and restricted cash10,310 (16,193)
Cash, cash equivalents, and restricted cash at beginning of the period9,732 24,267 
Cash, cash equivalents, and restricted cash at end of the period$20,042 $8,074 
(in thousands)As of September 30,
20222021
Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets
Cash and cash equivalents$16,477 $4,993 
Restricted cash3,565 3,081 
Total cash, cash equivalents, and restricted cash$20,042 $8,074 
See Notes to Consolidated Financial Statements
7

POWER SOLUTIONS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.    Summary of Significant Accounting Policies and Other Information
Nature of Business Operations
Power Solutions International, Inc. (“Power Solutions,” “PSI” or the “Company”), a Delaware corporation, is a global producer and distributor of a broad range of high-performance, certified, low-emission power systems, including alternative-fueled power systems for original equipment manufacturers (“OEMs”) of off-highway industrial equipment and certain on-road vehicles and large custom-engineered integrated electrical power generation systems.
The Company’s customers include large, industry-leading and multinational organizations. The Company’s products and services are sold predominantly to customers throughout North America as well as to customers located throughout the Pacific Rim and Europe. The Company’s power systems are highly engineered, comprehensive systems which, through the Company’s technologically sophisticated development and manufacturing processes, including its in-house design, prototyping, testing and engineering capabilities and its analysis and determination of the specific components to be integrated into a given power system (driven in large part by emission standards and cost considerations), allow the Company to provide its customers with power systems customized to meet specific OEM application requirements, other technical customers’ specifications and requirements imposed by environmental regulatory bodies.
The Company’s power system configurations range from a basic engine integrated with appropriate fuel system components to completely packaged power systems that include any combination of cooling systems, electronic systems, air intake systems, fuel systems, housings, power takeoff systems, exhaust systems, hydraulic systems, enclosures, brackets, hoses, tubes and other assembled componentry. The Company also designs and manufactures large, custom-engineered integrated electrical power generation systems for both standby and prime power applications. The Company purchases engines from third-party suppliers and produces internally designed engines, all of which are then integrated into its power systems.
Of the other components that the Company integrates into its power systems, a substantial portion consist of internally designed components and components for which it coordinates significant design efforts with third-party suppliers, with the remainder consisting largely of parts that are sourced off-the-shelf from third-party suppliers. Some of the key components (including purchased engines) embody proprietary intellectual property of the Company’s suppliers. As a result of its design and manufacturing capabilities, the Company is able to provide its customers with a power system that can be incorporated into a customer’s specified application. In addition to the certified products described above, the Company sells diesel, gasoline and non-certified power systems and aftermarket components.
Stock Ownership and Control
In March 2017, the Company executed a share purchase agreement (the “SPA”) with Weichai America Corp., a wholly-owned subsidiary of Weichai Power Co., Ltd. (HK2338, SZ000338) (herein collectively referred to as “Weichai”). Under the terms of the SPA, Weichai invested $60.0 million in the Company purchasing a combination of newly issued Common and Preferred Stock as well as a stock purchase warrant (the “Weichai Warrant”).
With the exercise of the Weichai Warrant in April 2019, Weichai owns a majority of the outstanding shares of the Company’s common stock par value $0.001 (“Common Stock”). As a result, Weichai is able to exercise control over matters requiring stockholders’ approval, including the election of the directors, amendment of the Company’s Certificate of Incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of the Company or changes in management and will make the approval of certain transactions impractical without the support of Weichai.
Weichai also entered into an Investor Rights Agreement (the “Rights Agreement”) with the Company upon execution of the SPA. The Rights Agreement provides Weichai with representation on the Company’s Board of Directors (the “Board”) and management representation rights. Weichai currently has four representatives on the Board, which constitutes the majority of the directors serving on the Board. According to the Rights Agreement, during any period when the Company is a “controlled company” within the meaning of the NASDAQ Stock Market (“NASDAQ”) Listing Rules, it will take such measures as to avail itself of the “controlled company” exemptions available under Rule 5615 of the NASDAQ Listing Rules of Rules 5605(b), (d) and (e).
Going Concern Considerations
Significant uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Company’s debt arrangements. As of September 30, 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
8

Agreement, the Fourth Shareholder’s Loan Agreement and for finance leases and other debt were $211.7 million in the aggregate, and its cash and cash equivalents were $16.5 million. See Note 6. Debt, for further information regarding the terms and conditions of the Company’s debt agreements.
Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay amounts owing under its existing debt arrangements as they become due. In order to provide the Company with a more permanent source of liquidity, management plans to seek an extension and amendment and/or replacement of its existing debt agreements or seek additional liquidity from its current or other lenders before the maturity dates in 2022 and 2023. There can be no assurance that the Company’s management will be able to successfully complete an extension and amendment of its existing debt agreements or obtain new financing on acceptable terms, when required or if at all. These consolidated financial statements do not include any adjustments that might result from the outcome of the Company’s efforts to address these issues.
Furthermore, if the Company cannot raise capital on acceptable terms, it may not, among other things, be able to do the following:
•continue to expand the Company’s research and product investments and sales and marketing organization;
•continue to fund and expand operations both organically and through acquisitions; and
•respond to competitive pressures or unanticipated working capital requirements.
Additionally, as discussed further below, the global economy continues to be impacted by the outbreak of the COVID-19 pandemic. The potential for continued disruptions, economic uncertainty, and unfavorable oil and gas market dynamics may continue to have a material adverse impact on the results of operations, financial position and liquidity of the Company.
The Company’s management has concluded that, due to uncertainties surrounding the Company’s future ability to refinance, extend and amend, or repay its outstanding indebtedness under its existing debt arrangements, maintain sufficient liquidity to fund its business activities, and maintain compliance with the covenants and other requirements under the Second Amended and Restated Credit Agreement and other outstanding debt, in the future, substantial doubt exists as to its ability to continue as a going concern within one year after the date that these financial statements are issued. The Company’s plans to alleviate the substantial doubt about its ability to continue as a going concern may not be successful, and it may be forced to limit its business activities or be unable to continue as a going concern, which would have a material adverse effect on its results of operations and financial condition.

The consolidated financial statements included herein have been prepared assuming that the Company will continue as a going concern and contemplating the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company’s ability to continue as a going concern is dependent on generating profitable operating results, having sufficient liquidity, maintaining compliance with the covenants and other requirements under the Second Amended and Restated Credit Agreement and other outstanding debt, in the future, and extending and amending, refinancing or repaying the indebtedness outstanding under the Company’s existing debt arrangements.
COVID-19 and other Recent Business Impacts
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 nine months of 2022. However, although rig counts in the U.S. oil markets increased during 2021 and through the first nine months of 2022, average rig counts remained below pre-pandemic levels. The Company also believes that capital spending within the areas of the oil and gas market that it participates in, remains below pre-pandemic levels. While the Company saw an increase of sales to customers with traditional exposure to the oil and gas markets during the first nine months of 2022, as compared to the prior year, sales remain below pre-pandemic levels. A significant portion of the Company’s sales and profitability has historically been derived from the sale of products that are used within the oil and gas industry. In addition, the Company continued to experience delays in its supply chain during the first nine months of 2022 due to temporary shortages of raw materials and container delays of overseas materials as bottlenecks occurred at ports in Asia and North America. This, in turn, caused delivery delays to some of the Company’s customers. The Company also experienced inflationary cost pressures for certain materials and shipping-related costs. Additionally, the Company continues to experience ongoing tariff costs for products that did not receive tariff 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 supply chain 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.
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. As further discussed in Item 8., Note 5. Goodwill and Other Intangibles, the Company completed its annual goodwill impairment
9

assessment for the year ended December 31, 2021 and concluded that goodwill was not impaired. 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.
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 in September 2021, the Company’s costs related to the matter ceased. Accordingly, the Company saw a substantial decline in these costs during the first nine months of 2022. Additionally, in June 2022, the SEC matter concerning former officers and employees was settled. As a result, the Company’s potential future costs for indemnity obligations related to this matter should cease. Meanwhile, the Company continues to be party to several legal contingencies. See Note 9. Commitments and Contingencies for further discussion of the Company’s indemnification obligations.
Lastly, in addition to incurring higher total debt levels during 2022, the Company’s debt is tied to the London Inter-Bank Offered Rate (“LIBOR”) and the Secured Overnight Financing Rate (“SOFR”), both of which have seen significant increases during the year. As a result of these factors, the Company’s interest expense has increased and is subject to further increases. Accordingly, the above challenges may continue to have a material adverse impact on the Company’s future results of operations, financial position, and liquidity.
Basis of Presentation and Consolidation
The Company is filing this Form 10-Q for the three and nine months ended September 30, 2022, which contains unaudited condensed consolidated financial statements as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021.
The condensed consolidated financial statements include the accounts of Power Solutions International, Inc. and 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”) and rules and regulations of the SEC for interim financial reporting. All intercompany balances and transactions have been eliminated in consolidation.
Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by U.S GAAP for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2021, included in the 2021 Annual Report filed with the SEC on March 31, 2022 (“the 2021 Annual Report”). The Company’s significant accounting policies are described in the aforementioned 2021 Annual Report and no changes were made during the nine months ended September 30, 2022. The accompanying interim financial information is unaudited; however, the Company believes the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP. Operating results for interim periods are not necessarily indicative of annual operating results.
The Company operates as one business and geographic operating segment. Operating segments are defined as components of a business that can earn revenue and incur expenses for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker (“CODM”). The Company’s CODM is its principal executive officer, who decides how to allocate resources and assess performance. A single management team reports to the CODM, who manages the entire business. The Company’s CODM reviews consolidated statements of operations to make decisions, allocate resources and assess performance, and the CODM does not evaluate the profit or loss from any separate geography or product line.
Concentrations
The following table presents customers individually accounting for more than 10% of the Company’s net sales:
For the Three Months Ended September 30,For the Nine Months Ended September 30,
2022202120222021
Customer A22 %17 %18 %16 %
Customer B13 %******
Customer C**20 %**21 %
10

The following table presents customers individually accounting for more than 10% of the Company’s accounts receivable:
As of September 30, 2022As of December 31, 2021
Customer A30 %24 %
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,
2022202120222021
Supplier A**11 %****
Supplier B**10 %**13 %
Supplier C13 %******
**Less than 10% of the total
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions include the valuation of allowances for uncollectible receivables, inventory reserves, warranty reserves, stock-based compensation, evaluation of goodwill, other intangibles, property, plant and equipment for impairment, and determination of useful lives of long-lived assets. Actual results could materially differ from those estimates.
Research and Development
Research and development (“R&D”) expenses are expensed when incurred. R&D expenses consist primarily of wages, materials, testing and consulting related to the development of new engines, parts and applications. These costs were $4.8 million and $5.2 million for the three months ended September 30, 2022 and 2021, respectively. These costs were $13.9 million and $17.0 million for the nine months ended September 30, 2022 and 2021, respectively.
Restricted Cash
Restricted cash consists of funds that are contractually restricted as to usage or withdrawal due to required minimum levels of cash collateral for letters of credits and contractual agreements with customers. As of September 30, 2022 and December 31, 2021, the Company had restricted cash of $3.6 million and $3.5 million, respectively, which includes $1.1 million restricted cash held in escrow which could be required to be refunded to the customer if conditions occur as defined in the agreement with the customer. The Company has not recognized revenue associated with the restricted cash. The liability is included within Noncurrent Contract Liabilities on the Consolidated Balance Sheet.
Inventories
The Company’s inventories consist primarily of engines and parts that are valued at the lower of cost or net realizable value. Net realizable value approximates replacement cost. Cost is principally determined using the first-in, first-out method and includes material, labor and manufacturing overhead, and freight-in. 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 reserve 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 sales history, customer orders, projected demand and utilization within a current or future power system. 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.
11

Inventories consisted of the following:
(in thousands)

Inventories
As of September 30, 2022As of December 31, 2021
Raw materials $103,512 $120,130 
Work in process4,697 8,923 
Finished goods22,056 16,509 
Total inventories130,265 145,562 
Inventory allowance(3,044)(3,370)
Inventories, net$127,221 $142,192 
Activity in the Company’s inventory allowance was as follows:
(in thousands)For the Nine Months Ended September 30,
Inventory Allowance20222021
Balance at beginning of period$3,370 $3,328 
Charged to expense604 607 
Write-offs(930)(559)
Balance at end of period$3,044 $3,376 
Other Accrued Liabilities
Other accrued liabilities consisted of the following:
(in thousands)

Other Accrued Liabilities
As of September 30, 2022As of December 31, 2021
Accrued product warranty$14,390 $15,830 
Litigation reserves *
2,711 894 
Contract liabilities1,630 1,819 
Accrued compensation and benefits7,423 4,397 
Operating lease liabilities3,442 3,978 
Accrued interest expense3,596 625 
Other9,426 7,258 
Total$42,618 $34,801 
*As of September 30, 2022 and December 31, 2021 litigation reserves related to various ongoing legal matters including associated legal fees. See Note 9. Commitments and Contingencies for additional information.
Warranty Costs
The Company offers a standard limited warranty on the workmanship of its products that in most cases covers defects for a defined period. Warranties for certified emission products are mandated by the U.S. Environmental Protection Agency (the “EPA”) and/or the California Air Resources Board (the “CARB”) and are longer than the Company’s standard warranty on certain emission related products. The Company’s products also carry limited warranties from suppliers. The Company’s warranties generally apply to engines fully manufactured by the Company and to the modifications the Company makes to supplier base products. Costs related to supplier warranty claims are generally borne by the supplier and passed through to the end customer.
Warranty estimates are based on historical experience and represent the projected cost associated with the product. A liability and related expense are recognized at the time products are sold. The Company adjusts estimates when it is determined that actual costs may differ from initial or previous estimates. The Company’s warranty liability is generally affected by failure rates, repair costs, and the timing of failures. Future events and circumstances related to these factors could materially change the estimates and require adjustments to the warranty liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.
The Company has approximately $2.0 million accrued for a specific warranty-related matter as of September 30, 2022. During the second quarter, the Company concluded it is reasonably possible that future warranty claims for this matter may exceed current estimates that are based upon historical claims experience. The impact could be material to the financial statements.
12

Accrued product warranty activities are presented below:
(in thousands)For the Nine Months Ended September 30,
Accrued Product Warranty20222021
Balance at December 31, 2021$32,948 $31,542 
Current period provision *
6,484 14,135 
Changes in estimates for preexisting warranties **
2,705 3,750 
Payments made during the period(18,080)(19,244)
Balance at end of period24,057 30,183 
Less: current portion14,390 15,247 
Noncurrent accrued product warranty
(included with Other Noncurrent liabilities)		$9,667 $14,936 
*Warranty costs, net of supplier recoveries, and other adjustments, were a cost of $5.4 million and a cost of $14.8 million for the nine months ended September 30, 2022 and 2021, respectively. Supplier recoveries were $3.4 million and $3.3 million for the nine months ended September 30, 2022 and 2021, respectively.
**Changes 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. During the nine months ended September 30, 2022, the Company recorded a cost for changes in estimates of preexisting warranties of $2.7 million, or $0.12 per diluted share, for the nine months ended September 30, 2022, which includes a favorable experience for preexisting warranties attributable to a contract revision during the quarter ended March 31, 2022, and costs of $3.8 million, or $0.16 per diluted share, for the nine months ended September 30, 2021.
Recently Issued Accounting Pronouncements – Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting, which provided optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendment allows entities to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. The guidance was effective upon issuance and expires after December 31, 2024. There was no impact on the Company’s Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows or Statement of Stockholders’ Deficit as a result of this guidance since the Company’s debt that references LIBOR matures in November 2022, before LIBOR expires in June 2023.
Recently Issued Accounting Pronouncements – Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which applies primarily to the Company’s accounts receivable impairment loss allowances. The guidance provides a revised model whereby the current expected credit losses are used to compute impairment of financial instruments. The new model requires evaluation of historical experience and various current and expected factors, which may affect the estimated amount of losses and requires determination of whether the affected financial instruments should be grouped in units of account. The guidance, as originally issued, was effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates of these standards for certain entities. Based on the guidance, the effective date of ASU 2016-13 is deferred for the Company until fiscal year 2023. The Company currently plans to adopt the guidance on January 1, 2023 when it becomes effective. The Company is continuing to assess the impact of the standard on its consolidated financial statements.
13

Note 2.    Revenue
Disaggregation of Revenue
The following table summarizes net sales by end market:
(in thousands)For the Three Months Ended September 30,For the Nine Months Ended September 30,
End Market2022202120222021
Power Systems$42,693 $31,801 $127,904 $81,611 
Industrial59,419 40,576 163,671 111,796 
Transportation22,788 45,253 52,751 135,872 
Total$124,900 $117,630 $344,326 $329,279 
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 Area2022202120222021
United States$89,661 $103,872 $250,026 $293,424 
North America (outside of United States)2,903 1,894 10,623 6,126 
Pacific Rim20,083 7,914 56,599 18,862 
Europe7,028 1,729 13,787 5,297 
Other5,225 2,221 13,291 5,570 
Total$124,900 $117,630 $344,326 $329,279 
Contract Balances
Most 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 Sheet. 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, 2022As of December 31, 2021
Short-term contract assets (included in Prepaid expenses and other current assets)
$3,096 $2,707 
Short-term contract liabilities (included in Other accrued liabilities)
(1,630)(1,819)
Long-term contract liabilities (included in Noncurrent contract liabilities)
(3,412)(3,330)
Net contract liabilities$(1,946)$(2,442)
During the nine months ended September 30, 2022 and 2021, the Company recognized $0.5 million and $32.5 million, respectively, of revenue upon satisfaction of performance obligations related to amounts that were included in the net contract liabilities balance as of December 31, 2021 and 2020, respectively.
Remaining Performance Obligations
For performance obligations that extend beyond one year, the Company had $4.4 million of remaining performance obligations as of September 30, 2022 primarily related to a long-term manufacturing contract with a customer and extended warranties. The Company expects to recognize revenue related to these remaining performance obligations of approximately $0.4 million in the remainder of 2022, $0.9 million in 2023, $1.0 million in 2024, $0.5 million in 2025, $0.2 million in 2026 and less than $1.5 million in 2027 and beyond.
Note 3.    Weichai Transactions
Weichai Shareholder’s Loan Agreements
The Company is party to four shareholder’s loan agreements with Weichai, including the $130 million Amended First Shareholder’s Loan Agreement, the $25 million Amended Second Shareholder’s Loan Agreement, the $50 million Third
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Shareholder’s Loan Agreement, and the $30 million Fourth Shareholder’s Loan Agreement. See additional discussion of these debt agreements in Note 6. Debt.
Weichai Collaboration Arrangement and Related Party Transactions
The Company and Weichai executed a strategic collaboration agreement (the “Collaboration Agreement”) in March 2017 in order to achieve their respective strategic objectives and enhance the strategic cooperation alliance to share experiences, expertise and resources. Among other things, the Collaboration Agreement established a joint steering committee, permitted Weichai to select a limited number of certain technical, marketing, sales, procurement and finance personnel to work at the Company and established several collaborations related to stationary natural-gas applications and Weichai diesel engines. The Collaboration Agreement provided for the steering committee to create various sub-committees with operating roles and otherwise governs the treatment of intellectual property of parties prior to the collaboration and the intellectual property developed during the collaboration. The Collaboration Agreement is set to expire in March 2023.
The Company evaluates whether an arrangement is a collaborative arrangement at its inception based on the facts and circumstances specific to the arrangement. The Company also reevaluates whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards dependent on the ultimate commercial success of the endeavor. For those collaborative arrangements where it is determined that the Company is the principal participant, costs incurred, and revenue generated from third parties are recorded on a gross basis in the financial statements. For the three and nine months ended September 30, 2022 and 2021, the Company’s sales to Weichai were immaterial in all periods. Purchases of inventory from Weichai were $3.5 million and $10.6 million for the three and nine months ended September 30, 2022, respectively. Purchases of inventory from Weichai were $3.2 million and $9.9 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022 and December 31, 2021, the Company had $0.5 million and immaterial receivables from Weichai, respectively and outstanding accounts payables to Weichai of $22.4 million and $12.5 million, respectively.
In January 2022, PSI and Société Internationale des Moteurs Baudouin (“Baudouin”), a subsidiary of Weichai, entered into an international distribution and sales agreement which enables Baudouin to bring PSI’s power systems line of products into the European, Middle Eastern, and African markets. In addition to sales, Baudouin will manage service, support, warranty claims, and technical requests. The Company’s sales to Baudouin were $1.4 million and $1.5 million for the three and nine months ended September 30, 2022, respectively. For the three and nine months ended September 30, 2021 there were no Company sales to Baudouin. As of September 30, 2022 and December 31, 2021, the Company had $1.5 million and no receivables from Baudouin, respectively.
Note 4.    Property, Plant and Equipment
Property, plant and equipment by type were as follows:
(in thousands)As of September 30, 2022As of December 31, 2021
Property, Plant and Equipment
Leasehold improvements$7,107 $7,107 
Machinery and equipment44,915 44,358 
Construction in progress812 1,125 
Total property, plant and equipment, at cost52,834 52,590 
Accumulated depreciation(38,445)(35,246)
Property, plant and equipment, net$14,389 $17,344 
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Note 5.    Goodwill and Other Intangibles
Goodwill
The carrying amount of goodwill at both September 30, 2022 and December 31, 2021 was $29.8 million. Accumulated impairment losses at both September 30, 2022 and December 31, 2021 were $11.6 million.
Other Intangible Assets
Components of intangible assets are as follows:
(in thousands)As of September 30, 2022
Gross Carrying ValueAccumulated AmortizationNet Book Value
Customer relationships$34,940 $(29,024)$5,916 
Developed technology700 (700)— 
Trade names and trademarks1,700 (1,430)270 
Total$37,340 $(31,154)$6,186 
(in thousands)As of December 31, 2021
Gross Carrying ValueAccumulated AmortizationNet Book Value
Customer relationships$34,940 $(27,514)$7,426 
Developed technology700 (680)20 
Trade names and trademarks1,700 (1,362)338 
Total$37,340 $(29,556)$7,784 
Note 6.    Debt
The Company’s outstanding debt consisted of the following:
(in thousands)As of September 30, 2022As of December 31, 2021
Short-term financing:
Revolving credit facility *$130,000 $130,000 
Other short-term financing81,001 25,000 
Total short-term debt$211,001 $155,000 
Long-term debt:
  Unsecured senior notes $— $25,000 
Finance leases and other debt672 890 
Total long-term debt and finance leases672 25,890 
Less: Current maturities of long-term debt and finance leases217 254 
Long-term debt$455 $25,636 
*Unamortized financing costs and deferred fees on the revolving credit facility are not presented in the above table as they are classified in Prepaid expenses and other current assets on the Consolidated Balance Sheet. Unamortized debt issuance costs, were $0.9 million and $0.8 million as of September 30, 2022 and December 31, 2021, respectively.
Credit Agreement and Shareholders’ Loan Agreements
On March 25, 2022, the Company amended and restated its $130.0 million uncommitted senior secured revolving credit agreement with Standard Chartered by entering into 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 of March 24, 2023 or the demand of Standard Chartered. The Second Amended and Restated Credit Agreement is subject to customary events of default and covenants, as well as financial covenants, including minimum consolidated EBITDA and Consolidated Interest Coverage Ratio covenants, as further defined in the Second Amended and Restated Credit Agreement, required only for the second and third quarters of 2022. The Company was in compliance with these financial covenants for the third quarter 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
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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 to submit a borrowing request to Weichai under the Amended First Shareholder’s Loan Agreement (see discussion below) if the Company did not submit a borrowing request to Weichai within five business days of receiving a request from Standard Chartered to submit said borrowing request. As of September 30, 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, on March 25, 2022, the Company also amended two of its shareholder’s loan agreements with Weichai, to among other things, extend the maturities thereof. The Amended First Shareholder’s Loan Agreement continues to provide the Company with a $130.0 million subordinated loan under which Weichai 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 continues to provide the Company with a $25.0 million subordinated loan at the discretion of Weichai. The maturity of the Amended First Shareholder’s Loan Agreement was extended to April 24, 2023 and the maturity of the Amended Second Shareholder’s Loan Agreement was extended to May 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 of September 30, 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 with Weichai, which was entered into on December 10, 2021. 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 to Weichai’s discretionary approval. Borrowings under the Third Shareholder’s Loan Agreement bear interest at LIBOR plus 4.50% and can be used for general corporate purposes, except for certain legal expenditures which require additional approval from Weichai. The Third Shareholder’s Loan Agreement expires on November 30, 2022, with any outstanding principal and accrued interest due upon maturity. As of September 30, 2022, the Company had $50.0 million outstanding under the Third Shareholder’s Loan Agreement.
On April 20, 2022, the Company entered into the Fourth Shareholder’s Loan Agreement with Weichai. The Fourth Shareholder’s Loan Agreement, which matures on March 31, 2023, provides the Company with access to up to $30.0 million of credit at the discretion of Weichai 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 than Weichai’s borrowing cost, the interest rate for such loan shall be equal to Weichai’s borrowing cost plus 1%. As of September 30, 2022, the Company had $4.8 million outstanding under the Fourth Shareholder’s Loan Agreement.
As of September 30, 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, the Fourth Shareholder’s Loan Agreement and for finance leases and other debt were $211.7 million in the aggregate, and its cash and cash equivalents were $16.5 million. The Company's total accrued interest for all shareholder loans was $3.6 million and $0.6 million as of September 30, 2022 and December 31, 2021, respectively. Accrued interest is included within Other Accrued Liabilities on the Consolidated Balance Sheet.
See Note 1. Summary of Significant Accounting Policies and Other Information for further discussion of the Company’s going concern considerations.
Note 7.    Leases
Leases
The Company has obligations under lease arrangements primarily for facilities, equipment and vehicles. These leases have original lease periods expiring between November 2022 and July 2034. For the three and nine months ended September 30, 2022, the Company recorded lease expense of $1.6 million and $4.7 million within Cost of sales, $0.1 million and $0.2 million within Research, development, and engineering expenses, less than $0.1 million within Selling, general and administrative expenses for both periods and less than $0.1 million within Interest expense for both periods in the Consolidated Statements of Operations. For the three and nine months ended September 30, 2021, the Company recorded lease expense of $1.4 million and $4.4 million within Cost of sales, $0.1 million and $0.3 million within Research, development and engineering expenses, $0.1
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million and less than $0.1 million within Selling, general and administrative expenses and less than $0.1 million within Interest expense for both periods in the Consolidated Statements of Operations.
The following table summarizes the components of lease expense:
(in thousands)For the Three Months Ended September 30,For the Nine Months Ended September 30,
2022202120222021
Operating lease cost
$1,150 $1,194 $3,489 $3,661 
Finance lease cost
Amortization of right-of-use (“ROU”) asset31 40 119 144 
Interest expense5 7 17 26 
Short-term lease cost
24 38 89 270 
Variable lease cost
306 326 1,026 840 
Sublease income(259)— (795)— 
Total lease cost$1,257 $1,605 $3,945 $4,941 
The following table presents supplemental cash flow information related to leases:
(in thousands)For the Nine Months Ended September 30,
20222021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows paid for operating leases$3,642 $3,731 
Operating cash flows paid for interest portion of finance leases16 26 
Financing cash flows paid for principal portion of finance leases125 144 
Right-of-use assets obtained in exchange for lease obligations
Operating leases
— 9 
Finance leases— — 
As of September 30, 2022 and December 31, 2021, the weighted-average remaining lease term for both periods was 5.8 years for operating leases and 3.3 years for finance leases. The weighted-average discount rate was 7.0% and 7.1% for operating leases as of September 30, 2022 and December 31, 2021, respectively, and 6.6% and 6.5% for finance leases as of September 30, 2022 and December 31, 2021, respectively.
The following table presents supplemental balance sheet information related to leases:
(in thousands)September 30, 2022December 31, 2021
Operating lease ROU assets, net 1
$10,742 $13,545 
Operating lease liabilities, current 2
3,442 3,978 
Operating lease liabilities, non-current 3
7,886 10,304 
Total operating lease liabilities
$11,328 $14,282 
Finance lease ROU assets, net 1
$246 $364 
Finance lease liabilities, current 2
89 147 
Finance lease liabilities, non-current 3
193 260 
Total finance lease liabilities
$282 $407 
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