10-K 1 ppsi-10k_123120.htm ANNUAL REPORT

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2020

 

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: 333-155375

 

 

(GRAPHIC) 

 

PIONEER POWER SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

27-1347616

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

400 Kelby Street, 12th Floor

Fort Lee, New Jersey 07024

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code: (212) 867-0700

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $.001 per share

 

Nasdaq Stock Market LLC (Nasdaq Capital Market)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock

PPSI

Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No  ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal controls over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No  ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No  ☑

 

As of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the price at which the common equity was last sold on the Nasdaq Capital Market on such date, was approximately $7.1 million. For purposes of this computation only, all officers, directors and 10% or greater stockholders of the registrant are deemed to be affiliates.

 

As of March 30, 2021, 8,726,045 shares of the registrant’s common stock were outstanding.

 

 

 

 

PIONEER POWER SOLUTIONS, INC.

 

Form 10-K

 

For the Fiscal Year Ended December 31, 2020

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

Special Note Regarding Forward-Looking Statements

 

 

 

 

PART I

 

 

Item 1.

Business

2

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

16

Item 2.

Properties

16

Item 3.

Legal Proceedings

17

Item 4.

Mine Safety Disclosures

17

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18

Item 6.

Selected Financial Data

18

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 8.

Financial Statements and Supplementary Data

28

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

57

Item 9A.

Controls and Procedures

57

Item 9B.

Other Information

57

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

58

Item 11.

Executive Compensation

60

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

66

Item 13.

Certain Relationships and Related Transactions, and Director Independence

67

Item 14.

Principal Accounting Fees and Services

68

 

 

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

69

Item 16.

Form 10-K Summary

69

 

 

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains “forward-looking statements,” which include information relating to future events, future financial performance, financial projections, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

 

General economic conditions and their effect on demand for electrical equipment, particularly in the commercial construction market, but also in the power generation, industrial production, data center, oil and gas, marine and infrastructure industries.

 

 

The effects of fluctuations in sales on our business, revenues, expenses, net income, income (loss) per share, margins and profitability.

 

 

Many of our competitors are better established and have significantly greater resources and may subsidize their competitive offerings with other products and services, which may make it difficult for us to attract and retain customers.

 

 

We depend on CleanSpark, Inc (“CleanSpark”) for a large portion of our business, and any change in the level of orders from CleanSpark could have a significant impact on results of operations.

 

 

The potential loss or departure of key personnel, including Nathan J. Mazurek, our chairman, president and chief executive officer.

 

 

Our ability to generate internal growth, maintain market acceptance of our existing products and gain acceptance for our new products.

 

 

Unanticipated increases in raw material prices or disruptions in supply could increase production costs and adversely affect our profitability.

 

 

Our ability to realize revenue reported in our backlog.

 

 

Operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material, labor or overhead cost increases, interest rate risk and commodity risk.

 

 

Strikes or labor disputes with our employees may adversely affect our ability to conduct our business.

 

 

The impact of geopolitical activity on the economy, changes in government regulations such as income taxes, climate control initiatives, the timing or strength of an economic recovery in our markets and our ability to access capital markets.

 

 

Our chairman controls a majority of our voting power, and may have, or may develop in the future, interests that may diverge from yours.

 

 

Future sales of large blocks of our common stock may adversely impact our stock price.

 

 

The liquidity and trading volume of our common stock.

 

 

Our business could be adversely affected by an outbreak of disease, epidemic or pandemic, such as the global coronavirus pandemic, or similar public threat, or fear of such an event.

 

The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Moreover, new risks regularly emerge and it is not possible for us to predict or articulate all risks we face, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should review carefully the risks and uncertainties described under the heading “Item 1A. Risk Factors” in this Annual Report on Form 10-K for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.

 

1

 

 

PART I

 

ITEM 1.  BUSINESS.

 

Overview

 

Pioneer Power Solutions, Inc. and its wholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,” “we,” “our” and “us”) manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. Our principal products and services include switchgear and engine-generator controls, complemented by a national field-service network to maintain and repair power generation assets. The Company is headquartered in Fort Lee, New Jersey and operates from three (3) additional locations in the U.S. for manufacturing, service and maintenance, engineering, sales and administration.

 

Our largest customers include a number of recognized national and regional industrial companies, engineering, procurement and construction firms, electrical and gas utilities and major national retailers located in North America. We intend to grow our business through internal product development and expansion of our sales force coverage to increase the scope and relevance of our highly-engineered solutions and the technical service we offer our customers for their specific electrical applications.

 

Description of Business Segments

 

We have two reportable segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).

 

 

Our T&D Solutions business provides equipment solutions that help customers effectively and efficiently manage their electrical power distribution systems to desired specifications. These solutions are marketed principally through our Pioneer Custom Electrical Products Corp. (“PCEP”) brand name.

 

 

Our Critical Power business performs service and maintenance on our customers’ sophisticated power generation equipment and also provides customers with new and used power generation equipment intended to ensure smooth, uninterrupted power to operations during times of emergency. These solutions are marketed by our operations headquartered in Minnesota, currently doing business under the Titan Energy Systems Inc. (“Titan”) brand name.

 

Disposition of Business Units

 

Sale of Pioneer Critical Power, Inc.

 

On January 22, 2019, Pioneer Critical Power, Inc., a Delaware corporation (“PCPI”), a wholly-owned subsidiary of the Company within the T&D Solutions segment, CleanSpark and CleanSpark Acquisition, Inc., a Delaware corporation (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, among other things, Merger Sub merged with and into PCPI, with PCPI becoming a wholly-owned subsidiary of the CleanSpark and the surviving company of the merger (the “Merger”).

 

At the effective date of the Merger, all of the issued and outstanding shares of common stock of PCPI, par value $0.01 per share, were converted into the right to receive (i) 175,000 shares of common stock, par value $0.001 per share (“CleanSpark Common Stock”), of CleanSpark, (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split completed by CleanSpark in December 2019.

 

During the year ended December 31, 2020, the Company sold all of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock it received in connection with the Merger Agreement and recorded proceeds of $2.4 million. The gain from the sale was partially offset by a mark to market adjustment of $1.4 million resulting in a net gain of $968 to other (income) expense in the accompanying statements of operations. Warrants at fair value were previously recorded at inception as long term within other assets.

 

In connection with the Merger Agreement, the Company, CleanSpark and PCPI entered into an Indemnity Agreement (the “Indemnity Agreement”), dated January 22, 2019, pursuant to which the Company agreed to assume the liabilities and obligations related to the claims made by Myers Powers Products, Inc. in the then-pending case titled Myers Power Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical Products, Corp., et al., Los Angeles County Superior Court Case No. BC606546 (the “Myers Power Case”) as they may relate to PCPI or CleanSpark after the closing of the Merger.

 

In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Contract Manufacturing Agreement (the “Contract Manufacturing Agreement”), dated as of January 22, 2019, pursuant to which the Company will manufacture paralleling switchgear, automatic transfer switches and related control and circuit protective equipment (collectively, “Products”) exclusively for purchase by CleanSpark. CleanSpark will purchase the Products via purchase orders issued to the Company at any time and from time to time. The price for the Products payable by CleanSpark to the Company will be negotiated on a case by case basis. The Contract Manufacturing Agreement had a term of 18 months and expired during the third quarter of 2020.

 

2

 

 

In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Non-Competition and Non-Solicitation Agreement (the “Non-Compete Agreement”), dated January 22, 2019, pursuant to which the Company agreed not to, among other things, own, manage, operate, finance, control, advise, render services to or guarantee the obligations of any person or entity that engages in or plans to engage in the design, manufacture, distribution and service of paralleling switchgear, automatic transfer switches, and related products (the “Restricted Business”). The Company agreed not to engage in the Restricted Business within any state or county within the United States in which CleanSpark or the surviving company of the Merger conducts such Restricted Business for a period of four (4) years from the date of the Non-Compete Agreement.

 

In addition, the Company also agreed, for a period of four (4) years from the date of the Non-Compete Agreement, not to, among other things, directly or indirectly (i) solicit, induce, or attempt to induce customers, suppliers, licensees, licensors, franchisees, consultants of the Restricted Business as conducted by the Company, CleanSpark or the surviving company to cease doing business with the surviving company or CleanSpark or (ii) solicit, recruit, or encourage any of the surviving company’s or CleanSpark’s employees, or independent contractors to discontinue their employment or engagement with the surviving company or CleanSpark.

 

The Merger resulted in the deconsolidation of PCPI and a gain of $4.2 million in the first quarter of 2019. The fair value of the investment in the CleanSpark Common Stock was determined using quoted market prices, and the fair value of the investment in the warrants was established using a Black Scholes model.

 

The PCPI entity was a dormant business unit at the time of this sale; therefore this sale has no impact to the discontinued operations presented within the financial statements.

 

Sale of Transformer Business Units

 

On June 28, 2019, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek (Chief Executive Officer of the Company), Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”). Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer (the “Equity Transaction”), for a purchase price of $68.0 million. Included in the purchase price, the Company received two subordinated promissory notes, issued by the Buyer, in the aggregate principal amount of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million (the “Seller Notes”). During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.8 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.2 million. During the second quarter of 2020, the Company recognized an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the Company. Including the reduction to the principal amount for the valid claim, the Company has revalued the Seller Notes for an appropriate imputed interest rate, resulting in a change to the value of the Seller Notes at December 31, 2020 of $254, for a carrying value of $5.3 million, which is included within other long term assets (see Note 11 - Other Assets).

 

The transaction was consummated on August 16, 2019. Pioneer sold to the Buyer all of the assets and liabilities associated with its liquid-filled transformer and dry-type transformer manufacturing businesses within the Company’s T&D Solutions segment. Pioneer Power retained its switchgear manufacturing business within the T&D Solutions segment, as well as all of the operations associated with its Critical Power segment.  

 

For presentation within these statements, the Disposed Companies are being presented as discontinued operations for all periods presented.

 

T&D Solutions Segment

 

We design, manufacture and sell a wide range of distribution and transmission equipment and our emphasis is to provide custom engineered, manufactured-to-order solutions, which we estimate currently represents all of our T&D revenue. We believe that demand for our solutions is driven primarily by new installations and customer growth.

 

3

 

 

We distinguish ourselves by producing a wide range of engineered-to-order equipment, sold either directly to end users, engineering and construction firms or through electrical distributors. We serve customers in a variety of industries including industrial customers, OEMs, commercial firms, contractors and renewable energy producers.

 

Summary of T&D Solutions Segment Offerings

 

Product Category Solutions

Switchgear

 

▪ Low and medium voltage panelboards, switchboards and switchgear, integrating electrical components from major manufacturers 

▪ Low and medium voltage automatic transfer switches 

 

There are many different classes of switchgear, a generic term that encompasses the finished assembly of a system of devices utilizing electrical disconnects, fuses and circuit breakers, whose general function is to distribute, control and monitor the flow of electrical energy, while isolating and protecting critical equipment such as transformers, motors and other electrically powered machinery.

 

We design and manufacture low and medium voltage electric power distribution panel boards, switchboards, switchgear and automatic transfer switches at our facility in Southern California.

 

Critical Power Segment

 

Our Critical Power business performs service and maintenance on our customers’ sophisticated power generation equipment. These systems are used to maintain reliable emergency standby power at facilities where it is either required or where the potential consequences of a power outage make it necessary – such as at major national retailers, hospitals, data centers, communications facilities, factories, military sites, office complexes and other critical operations. We also provide customers with new and used power generation equipment intended to ensure smooth, uninterrupted power to operations during times of emergency.

 

Summary of Critical Power Segment Offerings

 

Product Category Solutions

Service

 

▪ Scheduled preventative maintenance, and 24/7 repair and support services provided for all makes and models of equipment under one to five year contracts 

▪ Regional service and maintenance: provided by our technicians in the Midwest and Florida 

▪ National service and maintenance: provided by our technicians and a network of field service providers throughout the United States for multi-site, multi-state power generation equipment owners 

▪ UPS systems from major manufacturers

Power Generation 

Equipment

▪ Engine-generator sets: power generation equipment with up to 2 MW of power output per genset, sourced from several manufacturers. 

▪ Available individually or in multi-unit paralleled configurations. Fuel options include natural gas, diesel and bi-fuel. 

▪ Uninterruptible Power Supply (UPS) systems 

  

Service

 

Power generation systems represent considerable investments that require proper maintenance and service in order to operate reliably during a time of emergency. Our power maintenance programs provide preventative maintenance, repair and support service for our customers’ power generation systems. To support our customers in managing their critical infrastructure, we maintain inventories of repair parts, a fleet of service vehicles and a staff of certified field service technicians in the Midwest and Florida. To complete our geographic coverage, we maintain a network of field service partners located in other regions, enabling us to provide quick-response, 24/7 service capability that can effectively service and maintain any make and model of back-up power equipment in any city of the United States. Our field service organization services more than 3,000 generators owned by more than 900 customers located throughout the United States and its territories, including for multi-site, multi-state customers.

 

We recognize discrete revenue streams from service contracts, sales, installation, maintenance and repair services, and we offer service contracts to all owners of power generation and related equipment, whether or not the equipment was originally sold by us. Our service agreements have terms ranging from one to five years in duration, providing us with a recurring revenue stream, and generally yield higher margins as compared to genset equipment sales.

 

4

 

 

Power Generation Equipment

 

We provide our industrial, commercial and residential customers with a variety of new and used sophisticated power generation equipment and fuel options which, depending on their needs and applications, can range from several kilowatts to 2 MW of output per genset. We sell power generation equipment made by several manufacturers.

 

Business Strategy

 

We believe we have established a stable platform from which to develop and grow our business lines, revenues, net income and shareholder value. We are focused on internal growth through operating efficiencies, new product development, customer focus and our continued migration towards more highly-engineered products and specialized services. We intend to significantly increase the percentage of our sales derived from engineered-to-order products and differentiated services and believe this can be accomplished by targeting market segments such as electric vehicle charging infrastructure, microgrid developers, national and regional retailers, telecom towers, farming and agriculture, data centers and independent power producers, which have growth characteristics exceeding the norm in our industry.

 

During 2019, the Company completed the sales of the transformer and the PCPI business units. The Company continues to explore strategic alternatives for its remaining business units.

 

We intend to build our revenue and net income at rates exceeding industry norms through internal growth initiatives and complementary acquisitions. Accomplishing these financial goals will be dependent on a number of factors including our ability to execute the following strategies and actions:

 

 

Establishing a scalable organizational infrastructure to support our expected growth;

 

 

Investing in our capabilities to provide progressively more advanced equipment and service solutions;

 

 

Continuously applying our manufacturing and service resources to their highest and best uses;

 

 

Combining and streamlining our business unit supply chains and administrative functions; and

 

 

Improving business processes to deliver consistency, quality and value to our customers.

 

T&D Solutions Segment

 

We intend to accomplish our growth objectives within our T&D Solutions business by emphasizing our capabilities in OEM equipment solutions and continuing to invest in engineering resources and product development to increase our pipeline of recurring order customers that demand custom solutions for their power needs.

 

Critical Power Segment

 

Within our Critical Power business, we intend to increase the number of national account customers we have by leveraging our scalable, nationwide network of partners which allows us to service and maintain standby power systems anywhere in the United States. We are actively marketing our preventive maintenance services to new national accounts including: major national retailers, telecommunications companies, data centers, banks, hospitals and health care facilities, educational institutions and property management companies. Additionally, we are actively marketing our refurbished and used generation equipment intended to ensure access to uninterrupted power during times of emergency.

 

Our Industry

 

The market for T&D equipment and Critical Power solutions is very fragmented due to the range of equipment types, electrical and mechanical properties, technological standards and service parameters required by different categories of end users for their specific applications. Many orders are custom-engineered and tend to be time-sensitive since other critical work is frequently being coordinated around the customer’s electrical equipment installation. The vast majority of North American demand for the types of solutions we provide is satisfied by thousands of producers and service companies in the U.S.

 

We believe several of the key industry trends supporting future growth in our industry are as follows:

 

 

Aging and Overburdened North American Power Grid — The aging and overburdened North American power grid is expected to require significant capital expenditures to upgrade the existing infrastructure over the next several years to maintain adequate levels of reliability and efficiency. Significant capital investment will be required to relieve congestion, meet growing demand, achieve targets for efficiency, emissions and use of renewable sources, and to replace components of the U.S. power grid operating at, near or past their planned service lives.

 

5

 

 

 

Increasing Long-Term Demand for Electricity and Reliable Power — The Department of Energy’s Energy Information Administration, or EIA, forecasts that total electricity use in the U.S. will increase by approximately 28% from 2011 to 2040. This increase is driven by anticipated population growth, economic expansion, increasing dependence on computing power throughout the economy and the increased use of electrical devices in the home. In order to meet growing demand for electricity in North America, substantial investment in increased electrical grid capacity and efficiency will be required, as well as the addition of specialized equipment to help ensure the reliability and quality of electricity for critical applications. In response to these challenges, there is an increasing trend among commercial and industrial companies to invest in on-site power sources, both for standby purposes in the event of a catastrophic power outage, or to reduce the amount of electricity they draw from the utility grid during peak periods.

 

 

Rapidly Expanding Electric Vehicle (EV) and Charging Infrastructure Market — A report from Allied Market Research in 2020 projected that the global electric vehicle market will reach $803 billion by the year 2027, registering a compound annual growth rate (CAGR) of 22.6%. North America is estimated to reach $194 billion by 2027, at a significant CAGR of 27.5%. In 2010, only about 17,000 electric vehicles were on the world’s roads. By 2019, that number had swelled to 7.2 million and is increasing rapidly according to the International Energy Agency (IEA). Furthermore, in order for EV’s to grow at such a rapid pace, it is necessary that infrastructure be built to allow for such growth. In 2019, there were about 7.3 million chargers worldwide compared to an insignificant amount ten years ago, and the EV infrastructure has become a global priority as major governments and corporations have committed to spending billions of dollars towards building EV charging infrastructure. In order to meet the rapidly growing demand for EV’s and the infrastructure supporting it, substantial investment in grid connectivity and enhancement will be required.

 

Customers

 

For the year ended December 31, 2020, 100% of our sales were to U.S. customers, represented in large part by companies involved in distributed generation, regulated and non-regulated utilities and industrial and wholesale business. During the year ended December 31, 2020, we sold our electrical equipment and services to over 900 individual customers and our twenty largest customers represented approximately 74% of our consolidated revenue.

 

For the year ended December 31, 2019, 100% of our sales were to U.S. customers, represented in large part by companies involved in distributed generation, regulated and non-regulated utilities and industrial and wholesale business. During the year ended December 31, 2019, we sold our electrical equipment and services to over 900 individual customers and our twenty largest customers represented approximately 75% of our consolidated revenue.

 

Approximately 34% and 18% of our sales in the year ended December 31, 2020 and 2019, respectively, were made to CleanSpark Inc. The majority of our sales to CleanSpark were made pursuant to the Contract Manufacturing Agreement that was entered into as part of the sale of PCPI. The Contract Manufacturing Agreement had a term of 18 months and expired during the third quarter of 2020. We continue to do business with CleanSpark on a case by case arm’s length basis.

 

While the loss of a significant number of customers would have a material adverse effect on our business, we do not believe that the loss of any specific customer, aside from CleanSpark, would have a material adverse effect on our business.

 

Marketing, Sales and Distribution

 

A substantial portion of the products we offer are sold directly to customers by our marketing and sales personnel operating from our office locations in the U.S. Following the sale of the transformer business units`, we no longer have office locations or employees in Canada. Our direct sales force markets to end users and to third parties, such as original equipment manufacturers, engineering firms that prescribe the specifications and parameters that control the applications of our products and commercial and residential parties interested in our new and used generation equipment intended to ensure smooth, uninterrupted power to operations during times of emergency.

 

Sales Backlog

 

Backlog reflects the amount of revenue we expect to realize upon the shipment of customer orders for our products that are not yet complete or for which work has not yet begun. Our sales backlog as of December 31, 2020 was approximately $12.7 million, as compared to $15.9 million as of December 31, 2019 for our continuing operations. During the year ended December 31, 2020, the Company experienced a decline in customer orders for its products and services due to delays caused by the pandemic. We anticipate that most of our current backlog will be delivered during 2021. Orders included in our sales backlog are represented by customer purchase orders and contracts that we believe to be firm.

 

6

 

 

Competition

 

We experience intense competition from a large number of electrical equipment manufacturers and from distributors and servicers of such equipment. The number and size of our competitors varies considerably by product line and service category, with many of our competitors tending to be small, highly specialized or focused on a certain geographic market area or customer. However, several of our competitors have substantially greater financial and technical resources than us, including some of the world’s largest electrical products and industrial equipment manufacturing companies. A representative list of our direct competitors in our T&D Solutions segment includes Crown Electric Engineering and Manufacturing, LLC, Industrial Electric Machinery, LLC, RESA Power, LLC, Myers Power Products, Inc., Powell Industries, Inc. and Eaton Corporation.

 

We believe that we compete primarily on the basis of technical support and application expertise, engineering, manufacturing and service capabilities, equipment rating, quality, scheduling and price. In all our businesses, our objective is to focus our efforts on more specialized, challenging and complex applications. Accordingly, a critical element to the success of our business is responsiveness and flexibility in providing custom-engineered solutions to satisfy customer needs. As a result of our long-time presence in the industry, we possess a number of special designs and libraries of programming code for our equipment that were engineered and developed specifically for our customers. We believe these factors give us a competitive advantage and that they are a major contributor to our frequency of repeat customer orders and the longevity of our customer relationships.

 

Raw Materials and Suppliers

 

The principal raw materials purchased by us are steel, copper, sensors, circuit breakers, meters and relays. We also purchase certain electrical components from a variety of suppliers including switches, fuses, protectors and circuit breakers. These raw materials and components are available from and supplied by numerous sources at competitive prices. Unanticipated increases in raw material prices or disruptions in supply could increase production costs and adversely affect our profitability. We do not anticipate any significant difficulty in satisfying our raw material requirements on reasonable terms and have not experienced any such difficulty in the past several years. Our largest suppliers during the year ended December 31, 2020 included Industrial Connections & Solutions, LLC, Eaton Corporation, Royal Industrial Solutions, Thyssenkrupp Materials NA, and ABB, Inc.

 

Employees

 

As of December 31, 2020, we had 94 employees consisting of 22 salaried staff and 72 hourly workers. Certain of our hourly employees located at our manufacturing facility in Santa Fe Springs, California are covered by a collective bargaining agreement with Local Union 1710 of the International Brotherhood of Electrical Workers, AFL-CIO that expires in June 2022.

 

Environmental

 

We are subject to numerous environmental laws and regulations concerning, among other areas, air emissions, discharges into waterways and the generation, handling, storing, transportation, treatment and disposal of waste materials. These laws and regulations are constantly changing and it is impossible to predict with accuracy the effect they may have on us in the future. Like many other industrial enterprises, our manufacturing operations entail the risk of noncompliance, which may result in fines, penalties and remediation costs, and there can be no assurance that such costs will be insignificant. To our knowledge, we are in substantial compliance with all federal, state, provincial and local environmental protection provisions, and believe that the future compliance cost should not have a material adverse effect on our capital expenditures, net income or competitive position. However, legal and regulatory requirements in these areas have been increasing and there can be no assurance that significant costs and liabilities will not be incurred in the future due to regulatory noncompliance.

 

Corporate History

 

We were originally formed in the State of Nevada in 2008. On November 30, 2009, we merged with and into Pioneer Power Solutions, Inc., a Delaware corporation, for the sole purpose of changing our state of incorporation from Nevada to Delaware and changing our name to “Pioneer Power Solutions, Inc.” On September 24, 2013, we completed an underwritten public offering and our common stock began trading on the Nasdaq Capital Market under the symbol PPSI.

 

Available Information

 

Our corporate website is located at www.pioneerpowersolutions.com. On the investor relations section of our website, we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, such as us, that file electronically with the SEC at www.sec.gov.

 

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We webcast our earnings calls and certain events we participate in with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events and press and earnings releases as part of the investor relations section of our website. Further corporate governance materials, including our Corporate Governance Guidelines, charters of our Board Committees and our Code of Business Ethics and Conduct, are also available under the heading “Corporate Governance” on the investor relations portion of our website. The contents of and the information on or accessible through our corporate website, including the investor relations portion of our website, is not a part of, and is not intended to be incorporated into, this report or any other report or document we file with or furnish to the SEC, and any references to our website are intended to be an inactive textual references only.

 

ITEM 1A.  RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Before investing in our common stock you should carefully consider the following risks, together with the financial and other information contained in this Annual Report on Form 10–K for the year ended December 31, 2020 and our other periodic filings with the Securities and Exchange Commission. Additional risks and uncertainties that we are unaware of may become important factors that affect us. If any of the following events occur, our business, financial conditions and operating results may be materially and adversely affected. In that event, the trading price of our common stock may decline, and you could lose all or part of your investment.

 

Risks Relating to Our Business and Industry

 

We are vulnerable to economic downturns in the commercial construction market, which may reduce the demand for some of our products and adversely affect our sales, net income, cash flow or financial condition.

 

A large portion of our business involves sales of our products in connection with commercial and industrial construction. Our sales to this sector are affected by the level of discretionary business spending. During economic downturns in this sector, the level of business discretionary spending may decrease. This decrease in spending will likely reduce the demand for some of our products and may adversely affect our sales, net income, cash flow or financial condition.

 

The ongoing COVID-19 pandemic may adversely affect our business.

 

The ongoing global coronavirus pandemic could have a negative impact on our revenues and operating results. This pandemic could result in disruptions and damage to our business, caused by both the negative impact to our ability to obtain cost effective raw materials, supplies and component parts necessary to operate our business and the negative impact on our ability to operate our facility should the coronavirus spread more broadly in the regions we are located, thereby creating an increased risk of exposure to our workforce which cannot operate our facility remotely. The full impact of the COVID-19 pandemic continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on our financial condition, liquidity, and future results of operations. During the year ended December 31, 2020, the Company experienced a decline in customer orders for its products and services due to delays caused by the pandemic. Additionally, the Company experienced an impact to productivity as a result of implementing social distancing guidelines and personal protective measures. While there has been some return towards normal operations, the Company continues to experience some disruption as a result of the pandemic. Given the daily evolution of the COVID-19 pandemic and the global responses to contain its spread, we are not able to estimate the full effects of the COVID-19 pandemic at this time, however, if the pandemic continues, it may continue to have an adverse effect on the Company’s results of operations, financial condition, or liquidity. Mitigation efforts will not completely prevent our business from being adversely affected, and the longer the pandemic impacts supply and demand and the more broadly the pandemic spreads, it is more likely that the impact on our business, revenues and operating results will become increasingly negative.

 

Per the guidance issued from the Cybersecurity and Infrastructure Security Agency (“CISA”), part of the United States Department of Homeland Security, we and our subsidiaries, are considered “essential businesses”. We fall into multiple categories within the guidance but specifically within 1) Energy & Electricity Industry and 2) Critical Manufacturing as we provide essential services and products for the energy sector.

 

While we cannot guarantee that we will continue to be considered an “essential business,” this guidance and exception allow work at our facilities to continue in order to provide products and services to our customers.

 

Moreover, the COVID-19 pandemic has created significant economic uncertainty and volatility in the credit and capital markets. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital and on the market price of our common stock. In addition, the continuation of the COVID-19 pandemic or a significant outbreak of other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations.

 

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Our operating results may vary significantly from quarter to quarter, which makes our operating results difficult to predict and can cause our operating results in any particular period to be less than comparable quarters and expectations from time to time.

 

Our quarterly results may fluctuate significantly from quarter to quarter due to a variety of factors, many of which are outside our control and have the potential to materially and adversely affect our results. Factors that affect our operating results include the following:

 

 

the size, timing and terms of sales and orders, especially large customer orders;

 

 

variations caused by customers delaying, deferring or canceling purchase orders or making smaller purchases than expected;

 

 

the timing and volume of work under new agreements;

 

 

the spending patterns of customers;

 

 

customer orders received;

 

 

a change in the mix of our products having different margins;

 

 

a change in the mix of our customers, contracts and business;

 

 

increases in design and manufacturing costs;

 

 

the length of our sales cycles;

 

 

the rates at which customers renew their contracts with us;

 

 

changes in pricing by us or our competitors, or the need to provide discounts to win business;

 

 

a change in the demand or production of our products caused by severe weather conditions;

 

 

our ability to control costs, including operating expenses;

 

 

losses experienced in our operations not otherwise covered by insurance;

 

 

the ability and willingness of customers to pay amounts owed to us;

 

 

the timing of significant investments in the growth of our business, as the revenue and profit we hope to generate from those expenses may lag behind the timing of expenditures;

 

 

costs related to the acquisition and integration of companies or assets;

 

 

general economic trends, including changes in equipment spending or national or geopolitical events such as economic crises, wars or incidents of terrorism; and

 

 

future accounting pronouncements and changes in accounting policies.

 

Accordingly, our operating results in any particular quarter may not be indicative of the results that you can expect for any other quarter or for an entire year.

 

Our industry is highly competitive.

 

The electrical equipment manufacturing industry is highly competitive. Principal competitors in our markets in the T&D Solutions segment include Crown Electric Engineering and Manufacturing, LLC, Industrial Electric Machinery, LLC, RESA Power, LLC, Powell Industries, Inc. and Eaton Corporation. Many of these competitors, as well as other companies in the broader electrical equipment manufacturing and service industry where we expect to compete, are significantly larger and have substantially greater resources than we do and are able to achieve greater economies of scale and lower cost structures than us and may, therefore, be able to provide their products and services to customers at lower prices than we are able to. Moreover, our competitors could develop the expertise, experience and resources to offer products that are superior in both price and quality to our products. While we seek to compete by providing more customized, highly-engineered products, there are few technical or other barriers to prevent much larger companies in our industry from putting more emphasis on this same strategy. Similarly, we cannot be certain that we will be able to market our business effectively in the face of competition or to maintain or enhance our competitive position within our industry, maintain our customer base at current levels or increase our customer base. Our inability to manage our business in light of the competitive forces we face could have a material adverse effect on our results of operations.

 

We currently derive a significant portion of our revenues from one customer. Loss of business from this customer could have an adverse effect on our business, financial condition and operating results.

 

We depend on CleanSpark for a large portion of our business, and any change in the level of orders from this customer can have a significant impact on our results of operations. CleanSpark accounted for 34% of our net sales in the year ended December 31, 2020. Loss of business from this customer could have an adverse effect on our business, financial condition and operating results.

 

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The majority of our sales to CleanSpark were made pursuant to the Contract Manufacturing Agreement that was entered into as part of the Merger Agreement. The Contract Manufacturing agreement expired during the third quarter of 2020. We continue to do business with CleanSpark on a case by case arm’s length basis.

 

Our operations have been curtailed following the closing of the Equity Transaction, and we have limited sources of revenue following the Equity Transaction, which may negatively impact the value and liquidity of our common stock.

 

The Equity Transaction has reduced the size of our business operations, and our sources of revenue are limited to our Critical Power segment and the switchgear manufacturing business of our T&D Solutions segment following the closing of the Equity Transaction. Although our board of directors may use a portion of the proceeds from the Equity Transaction to support the business operations remaining following the Equity Transaction, there can be no assurance that we will be successful at carrying out the operations of our remaining businesses or that we will be successful at generating revenue. A failure by us to secure additional sources of revenue following the closing of the Equity Transaction could negatively impact the value and liquidity of our common stock.

 

Our remaining business units have historically generated operating losses and negative cash flows, which may result in the usage of our cash and cash equivalents.

 

After the completion of the Equity Transaction during the year ended December 31, 2019, we have two business units remaining (PCEP and Titan).  These two units have been unable to earn positive income and generate positive cash flow in their recent history. With $7.6 million of cash and cash equivalents as of December 31, 2020, any such losses will negatively impact our cash and cash equivalents.

 

The departure or loss of key personnel could disrupt our business.

 

We depend heavily on the continued efforts of Nathan J. Mazurek, our principal executive officer, and on other senior officers who are responsible for the day-to-day management of our operating subsidiaries. In addition, we rely on our current electrical and mechanical design engineers, many of whom are important to our operations and would be difficult to replace. We cannot be certain that any of these individuals will continue in their respective capacities for any particular period of time. The departure or loss of key personnel, or the inability to hire and retain qualified employees, could negatively impact our ability to manage our business.

 

Fluctuations in the price and supply of raw materials used to manufacture our products may reduce our profits.

 

Our raw material costs represented approximately 54% and 55% of our revenues for the years ended December 31, 2020 and 2019, respectively. The principal raw materials purchased by us are copper, cells, sensors, breakers, meters, relays, switches, fuses, protectors and circuit breakers. These raw materials and components are available from, and supplied by, numerous sources at competitive prices. Unanticipated increases in raw material prices or disruptions in supply could increase production costs and adversely affect our profitability. We cannot provide any assurances that we will not experience difficulties sourcing our raw materials in the future.

 

We may not be able to fully realize the revenue value reported in our backlog.

 

We routinely have a backlog of work to be completed on contracts representing a significant portion of our annual sales. As of December 31, 2020, our order backlog was $12.7 million. Orders included in our backlog are represented by customer purchase orders and service contracts that we believe to be firm. Backlog consists of customer orders that either (1) have not yet been started or (2) are in progress and are not yet completed. In the latter case, the revenue value reported in backlog is the remaining value associated with work that has not yet been billed. From time to time, customer orders are canceled that appeared to have a high certainty of going forward at the time they were recorded as new business taken. In the event of a customer order cancellation, we may be reimbursed for certain costs but typically have no contractual right to the total revenue reflected in our backlog. In addition to us being unable to recover certain direct costs, canceled customer orders may also result in additional unrecoverable costs due to the resulting underutilization of our assets.

 

We are subject to pricing pressure from our larger customers.

 

We face significant pricing pressures in all of our business segments from our larger customers, including CleanSpark. Because of their purchasing size, our larger customers can influence market participants to compete on price terms. Such customers also use their buying power to negotiate lower prices. If we are not able to offset pricing reductions resulting from these pressures by improved operating efficiencies and reduced expenditures, those price reductions may have an adverse impact on our financial results.

 

Deterioration in the credit quality of several major customers could have a material adverse effect on our operating results and financial condition.

 

A significant asset included in our working capital is accounts receivable from customers. If customers responsible for a significant amount of accounts receivable become insolvent or are otherwise unable to pay for products and services, or become unwilling or unable to make payments in a timely manner, our operating results and financial condition could be adversely affected. A significant deterioration in the economy could have an adverse effect on these accounts receivable, which could result in longer payment cycles, increased collection costs and defaults in excess of management’s expectations. Deterioration in the credit quality of CleanSpark or of any other major customers could have a material adverse effect on our operating results and financial condition.

 

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We rely on third parties for key elements of our business whose operations are outside our control.

 

We rely on arrangements with third party shippers and carriers such as independent shipping companies for timely delivery of our products to our customers. As a result, we may be subject to carrier disruptions and increased costs due to factors that are beyond our control, including labor strikes, inclement weather, natural disasters and rapidly increasing fuel costs. If the services of any of these third parties become unsatisfactory, we may experience delays in meeting our customers’ product demands and we may not be able to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure to deliver products to our customers in a timely and accurate manner may damage our reputation and could cause us to lose customers.

 

We also utilize third party distributors to sell, install and service certain of our products. While we are selective in whom we choose to represent us, it is difficult for us to ensure that our distributors consistently act in accordance with the standards we set for them. To the extent any of our end-customers have negative experiences with any of our distributors or manufacturer’s representatives; it could reflect poorly on us and damage our reputation, thereby negatively impacting our financial results.

 

Our business may face cybersecurity risk generally associated with our information technology systems which could materially affect our business, and our results of operations could be materially affected if our information technology systems (or third-party systems we rely on) are interrupted, damaged by unforeseen events, or fail for any extended period of time.

 

We rely on information systems (“IS”) in our business to obtain, rapidly process, analyze, manage and store data to among other things:

 

 

receive, process and ship orders on a timely basis;

 

manage the accurate billing and collections from our customers.

 

IS risks have generally increased in recent years, and a cyberattack that bypasses our IS security systems causing an IS security breach may lead to a material disruption of our business operations and/or the loss of business information resulting in a material effect on our business.

 

In addition, we develop products and provide services to our customers that are technology-based, and a cyberattack that bypasses the IS security systems of our products or services causing a security breach and/or perceived security vulnerabilities in our products or services could also cause significant reputational harm, and actual or perceived vulnerabilities may lead to claims against us by our customers. Perceived or actual security vulnerabilities in our products or services, or the perceived or actual failure by us or our customers who use our products to comply with applicable legal requirements, may not only cause us significant reputational harm, but may also lead to claims against us by our customers and involve fines and penalties, costs for remediation, and settlement expenses.

 

Our IS utilize certain third party service organizations that manage a portion of our information systems, and our business may be materially affected if these third party service organizations are subject to an IS security breach. Risks associated with these and other IS security breaches may include, among other things:

 

 

future results could be materially affected due to theft, destruction, loss, misappropriation or release of confidential data or intellectual property;

 

operational or business delays resulting from the disruption of information systems and subsequent clean-up and mitigation activities;

 

we may incur claims, fines and penalties, and costs for remediation, or substantial defense and settlement expenses; and

 

negative publicity resulting in reputation or brand damage with our customers, partners or industry peers.

 

We have various insurance policies, covering risks in amounts that we consider adequate. There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost. Successful claims for misappropriation or release of confidential or personal data brought against us in excess of available insurance or fines or other penalties assessed or any claim that results in significant adverse publicity against us could have a material adverse effect on our business and our reputation.

 

Our business requires skilled labor, and we may be unable to attract and retain qualified employees.

 

Our ability to maintain our productivity and profitability will be limited by our ability to employ, train and retain skilled personnel necessary to meet our requirements. We may experience shortages of qualified personnel. We cannot be certain that we will be able to maintain an adequate skilled labor force necessary to operate efficiently and to support our growth strategy or that our labor expenses will not increase as a result of a shortage in the supply of skilled personnel. Labor shortages, increased labor costs or loss of our most skilled workers could impair our ability to deliver on time to our customers (thereby creating a risk that we lose our customers to competition) and would inhibit our ability to maintain our business or grow our revenues, and may adversely impact our profitability.

 

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Our business operations are dependent upon our ability to engage in successful collective bargaining with our unionized workforce.

 

If we are unable to renew our collective bargaining agreements, or if additional segments of our workforce become unionized, we may be subject to work interruptions or stoppages. Strikes or labor disputes with our employees may adversely affect our ability to conduct our business.

 

Risks Relating to Our Organization

 

Our common stock is listed on the Nasdaq Capital Market, and we take advantage of the “controlled company” exemption to the corporate governance rules for NASDAQ-listed companies. As a controlled Company, our common stock may be less attractive to some investors or otherwise harm our stock price.

 

Because we qualify as a “controlled company” under the corporate governance rules for NASDAQ-listed companies, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, our board of directors has determined not to have a majority of independent directors or an independent nominating or compensation committee and to have the full board of directors be directly responsible for compensation matters and for nominating members of our board. Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all the corporate governance rules for NASDAQ-listed companies. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

 

Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

 

Our board of directors is authorized to issue shares of preferred stock in one or more series and to fix the voting powers, preferences and other rights and limitations of the preferred stock. Accordingly, we may issue shares of preferred stock with a preference over our common stock with respect to dividends or distributions on liquidation or dissolution, or that may otherwise adversely affect the voting or other rights of the holders of common stock. Issuances of preferred stock, depending upon the rights, preferences and designations of the preferred stock, may have the effect of delaying, deterring or preventing a change of control, even if that change of control might benefit our stockholders. In addition, we are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.

 

Section 203 could delay or prohibit mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.

 

Your ability to influence corporate decisions may be limited because Provident Pioneer Partners, L.P. owns a controlling percentage of our common stock.

 

Provident Pioneer Partners, L.P., which is controlled by Nathan J. Mazurek, our chief executive officer, president and chairman of the board of directors, beneficially owns approximately 52.3% of our outstanding common stock as of March 30, 2021. As a result of this stock ownership, Provident Pioneer Partners, L.P. and Mr. Mazurek can control all matters submitted to our stockholders for approval, including the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire. In addition, as the interests of Provident Pioneer Partners, L.P. and our minority stockholders may not always be the same, this large concentration of voting power may lead to stockholder votes that are inconsistent with the best interests of our minority stockholders.

 

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Risks Relating to our Common Stock 

 

The trading volume of our common stock has recently increased to a level that is significantly higher than our historical average. If the trading volume of our common stock decreases, we will not be able to ensure investors that an active market for our common stock will be sustained.

 

The trading volume of our common stock spiked significantly in Fiscal 2020, and our common stock has continued to trade at higher volumes than our historical average. We do not know why the trading volume of our common stock has spiked significantly; we believe, however, that the sharp spike in the trading volume of our common stock is the result of a number of factors outside our control, including recent volatility in the stock market, which continues to remain unpredictable. There has been no recent change in our financial condition or results of operations that is consistent with the increase in the trading volume of our common stock, and the recent spike in the trading volume of our common stock may not be sustained.

 

In the event of a rapid decrease in the trading volume of our common stock, there can be no assurance that an active trading market in our common stock could be maintained, and any illiquidity resulting from such a decrease in the trading volume of our common stock may result in the market price not accurately reflecting our relative value. If our common stock were to be thinly traded, even limited trading in our common stock could lead, as it has at times in the past, to dramatic fluctuations in share price, and investors might not be able to liquidate their investment in us at all or at a price that reflects the value of the business.

 

General Risk Factors

 

Our stock price may be volatile, which could result in substantial losses for investors.

 

The market price of our common stock is highly volatile and could fluctuate widely in response to various factors, many of which are beyond our control, including the following:

 

 

technological innovations or new products and services by us or our competitors;

 

additions or departures of key personnel, including Nathan J. Mazurek, our chairman, president and chief executive officer;

 

sales of our common stock, including management shares;

 

limited availability of freely-tradable “unrestricted” shares of our common stock to satisfy purchase orders and demand;

 

our ability to execute our business plan;

 

operating results that fall below expectations;

 

loss of any strategic relationship;

 

industry developments;

 

economic and other external factors;

 

our ability to manage the costs of maintaining adequate internal financial controls and procedures in connection with the acquisition of additional businesses;

 

period-to-period fluctuations in our financial results; and

 

announcements of acquisitions.

 

Moreover, the COVID-19 pandemic has resulted in significant financial market volatility and uncertainty in recent weeks. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common stock.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also significantly affect the market price of our common stock.

 

Our risk management activities may leave us exposed to unidentified or unanticipated risks.

 

Although we maintain insurance policies for our business, these policies contain deductibles and limits of coverage. We estimate our liabilities for known claims and unpaid claims and expenses based on information available as well as projections for claims incurred but not reported. However, insurance liabilities are difficult to estimate due to various factors and we may be unable to effectively anticipate or measure potential risks to our company. If we suffer unexpected or uncovered losses, any of our insurance policies or programs are terminated for any reason or are not effective in mitigating our risks, we may incur losses that are not covered by our insurance policies or that exceed our accruals or that exceed our coverage limits and could adversely impact our consolidated results of operations, cash flows and financial position.

 

Regulatory, environmental, monetary and other governmental policies could have a material adverse effect on our profitability.

 

We are subject to international, federal, provincial, state and local laws and regulations governing environmental matters, including emissions to air, discharge to waters and the generation and handling of waste. We are also subject to laws relating to occupational health and safety. The operation of manufacturing plants involves a high level of susceptibility in these areas, and there is no assurance that we will not incur material environmental or occupational health and safety liabilities in the future. Moreover, expectations of remediation expenses could be affected by, and potentially significant expenditures could be required to comply with, environmental regulations and health and safety laws that may be adopted or imposed in the future. Future remediation technology advances could adversely impact expectations of remediation expenses. We can give no assurance that any lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results. Types of potential litigation cases include product liability, contract, employment-related, labor relations, personal injury or property damage, intellectual property, stockholder claims and claims arising from any injury or damage to persons, property or the environment from hazardous substances used, generated or disposed of in the conduct of our business. Adverse outcomes in some or all of these claims may result in significant monetary damages that could adversely affect our ability to conduct our business.

 

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We face risks associated with litigation and claims, which could impact our financial results and condition.

 

Our business, results of operations and financial condition could be affected by significant litigation or claims adverse to us. Types of potential litigation cases include product liability, contract, employment-related, labor relations, personal injury or property damage, intellectual property, trade secret or unfair competition claims, stockholder claims and claims arising from any injury or damage to persons, property or the environment from hazardous substances used, generated or disposed of in the conduct of our business.

 

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

 

Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock and make it more difficult for us to raise funds through future offerings of common stock. Our stockholders and the holders of our options and warrants may sell substantial amounts of our common stock in the public market. The availability of these shares of our common stock for resale in the public market has the potential to cause the supply of our common stock to exceed investor demand, thereby decreasing the price of our common stock.

 

In addition, the fact that our stockholders, option holders and warrant holders can sell substantial amounts of our common stock in the public market, whether or not sales have occurred or are occurring, could make it more difficult for us to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

 

We are subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared.

 

We are subject to reporting and other obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires us to conduct an annual management assessment of the effectiveness of our internal controls over financial reporting. These reporting and other obligations place significant demands on our management, administrative, operational, internal audit and accounting resources. Any failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.

 

In addition, our internal controls will also include those of any company or business that we may acquire in the future. Acquired companies or businesses are likely to have different standards, controls, contracts, procedures and policies, making it more difficult to implement and harmonize company-wide financial, accounting, information and other systems. As a result, our internal controls may become more complex and we may require significantly more resources to ensure they remain effective. Failure to implement required new or improved controls, or difficulties encountered in their implementation, either in our existing business or in businesses that we may acquire, could harm our operating results or cause us to fail to meet our reporting obligations.

 

We will continue to incur the expense of complying with public company reporting requirements following the closing of the Equity Transaction.

 

After the Equity Transaction in 2019, Pioneer Power continues to be required to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, even though compliance with such reporting requirements is economically burdensome.

 

There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.

 

The ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 require us to identify material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Our management, including our chief executive officer and interim chief financial officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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In addition, discovery and disclosure of a material weakness, by definition, could have a material adverse impact on our financial statements. Such an occurrence could discourage certain customers or suppliers from doing business with us and adversely affect how our stock trades. This could in turn negatively affect our ability to access equity markets for capital.

 

Any acquisitions that we have completed, or may complete in the future, may not perform as planned and could disrupt our business and harm our financial condition and operations.

 

In an effort to effectively compete in the specialty electrical equipment manufacturing and service businesses, where increasing competition and industry consolidation prevail, we have sought to acquire complementary businesses in the past and will continue to do so in the future. In the event of any future acquisitions, we could:

 

 

issue additional securities that would dilute our current stockholders’ percentage ownership or provide the purchasers of the additional securities with certain preferences over those of common stockholders, such as dividend or liquidation preferences;

 

incur debt and assume liabilities; and

 

incur large and immediate write-offs of intangible assets, accounts receivable or other assets.

 

These events could result in significant expenses and decreased revenue, which could adversely affect the market price of our common stock. In addition, integrating acquired businesses and completing any future acquisitions involve numerous operational and financial risks. These risks include difficulty in assimilating acquired operations, diversion of management’s attention, and the potential loss of key employees or customers of acquired operations. Furthermore, companies acquired by us may not generate financial results consistent with our management’s plans at the time of acquisition.

 

The success of our business depends on achieving our strategic objectives, including dispositions.

 

We continue to evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or executing alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives. Alternatively, we may dispose of a business at a price or on terms that are less than we had anticipated, or with the exclusion of assets that must be divested separately. After reaching an agreement with a buyer for the disposition of a business, the transaction remains subject to the satisfaction of pre-closing conditions, which may prevent us from completing the transaction. Dispositions may also involve continued financial involvement in the divested business, such as through continuing equity ownership, transition service agreements, guarantees, indemnities or other current or contingent financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside our control could affect our future financial results.

 

If we do not conduct an adequate due diligence investigation of a target business that we acquire, we may be required subsequently to take write downs or write-offs, restructuring, and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and our stock price, which could cause you to lose some or all of your investment.

 

As part of our acquisition strategy, we will need to conduct a due diligence investigation of one or more target businesses. Intensive due diligence is time consuming and expensive due to the operations, accounting, finance and legal professionals who must be involved in the due diligence process. We may have limited time to conduct such due diligence. Even if we conduct extensive due diligence on a target business that we acquire, we cannot assure you that this diligence will uncover all material issues relating to a particular target business, or that factors outside of the target business and outside of our control will not later arise. If our diligence fails to identify issues specific to a target business or the environment in which the target business operates, we may be forced to write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in us reporting losses. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our common stock. In addition, charges of this nature may cause us to violate net worth or other covenants that we may be subject to as a result of assuming pre-existing debt held by a target business or by virtue of our obtaining post-combination debt financing.

15

 

 

We may be unable to generate internal growth.

 

Our ability to generate internal growth will be affected by, among other factors, our ability to attract new customers, increases or decreases in the number or size of orders received from existing customers, hiring and retaining skilled employees and increasing volume utilizing our existing facilities. Many of the factors affecting our ability to generate internal growth may be beyond our control, and we cannot be certain that our strategies will be implemented with positive results or that we will be able to generate cash flow sufficient to fund our operations and to support internal growth. If we do not achieve internal growth, our results of operations will suffer and we will likely not be able to expand our operations or grow our business.

 

In the event that we fail to satisfy any of the listing requirements of the NASDAQ Capital Market, our common stock may be delisted, which could affect our market price and liquidity.

 

Our common stock is listed on the NASDAQ Capital Market. In order to maintain the listing of Pioneer Power’s common stock on NASDAQ, Pioneer Power’s common stock must comply with certain continued listing requirements, including having:

 

 

at least two registered and active market makers, one of which may be a market maker entering a stabilizing bid;

 

a minimum bid price of at least $1.00 per share;

 

at least 300 total holders (including both beneficial holders and holders of record, but excluding any holder who is directly or indirectly an executive officer, director or the beneficial holder of more than 10% of the total shares outstanding); and

 

at least 500,000 publicly held shares with a market value of at least $1.0 million (excluding any shares held directly or indirectly by officers, directors or any person who is the beneficial owner of more than 10% of the total shares outstanding).

 

Pioneer Power must also meet at least one of the following continued listing standards:

 

stockholders’ equity of at least $2.5 million;

 

market value of Pioneer Power’s common stock of at least $35 million; or

 

net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years.

 

No assurances can be given that Pioneer Power will continue to satisfy these requirements as some of these requirements are outside of Pioneer Power’s direct control, such as the bid price of its common stock, the number of holders of its common stock and the value of its publicly held shares. If Pioneer Power is unable to meet these requirements, NASDAQ may take action to delist Pioneer Power’s common stock. In such a case, Pioneer Power may appeal NASDAQ’s determination to delist its common stock, but such appeal may not be successful.

 

If Pioneer Power’s common stock is delisted from NASDAQ, Pioneer Power expects that its common stock would begin trading on the over-the-counter markets. The delisting of Pioneer Power’s common stock could result in a reduction in its trading price and would substantially limit the liquidity of Pioneer Power’s common stock. In addition, delisting could materially adversely impact Pioneer Power’s ability to raise capital or pursue strategic restructuring, refinancing or other transactions. Delisting from NASDAQ could also have other negative results, including the potential loss of confidence by institutional investors.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

 

Not applicable.

 

ITEM 2.   PROPERTIES.

 

Location   Description   Approximate Square Footage     Owned or Lease Expiration Date  
Santa Fe Springs, California   Manufacturing, sales, engineering and administration     40,000     September 2021  
Champlin, Minnesota   Sales, service and warehouse     16,000     March 2026  
Miami, Florida   Sales and service     3,600     December 2021  
Fort Lee, New Jersey   Corporate management and sales office     2,700     November 2022  

   

We believe our facilities are well maintained, in proper condition to operate at higher than current levels and are adequately insured. We do not anticipate significant difficulty in renewing or extending existing leases as they expire, or in replacing them with equivalent facilities or office locations.

 

16

 

 

ITEM 3.   LEGAL PROCEEDINGS

 

From time to time, we may become involved in lawsuits, investigations and claims that arise in the ordinary course of business.

 

On January 11, 2016, Myers Power Products, Inc., a specialty electrical products manufacturer, filed suit with the Superior Court of the State of California, County of Los Angeles, against us, PCEP and two PCEP employees who are former employees of Myers Power Products, Inc., Geo Murickan, the president of PCEP (“Murickan”), and Brett DeChellis (“DeChellis”), alleging, among other things, that Murickan wrongly used and retained confidential business information of Myers Power Products, Inc. for the benefit of us and PCEP, in breach of their confidentiality agreement and/or employment agreement entered into with Myers Power Products, Inc., and that we and PCEP knowingly received and used such confidential business information. Myers Power Products, Inc. sought injunctive relief enjoining us, PCEP and our employees from using its confidential business information and compensatory damages of an unspecified unlimited amount; however, the Company recognized approximately $1.2 million for expected costs related to this litigation in the prior two fiscal years.

 

On October 4, 2019, the dividend that was payable by the Company was enjoined by court order of the Superior Court of California related to the foregoing case. On October 16, 2019, Myers Power Products, Inc. filed an ex parte application arguing the Company had violated, or intended to violate the modified preliminary injunction and sought an order from the court for the Company to post a bond in an amount of $30,000 or more (which was not granted). The Company cancelled the dividend as the result of this court order.

 

There were also two related appeals in the California Court of Appeal for the Second Appellate District (“Court of Appeal”). Case no. B301494 was an appeal of the October 4, 2019 order modifying a previously issued preliminary injunction. Case no. B302943 was an appeal of the November 26, 2019 order requiring Pioneer Power Solutions, Inc. and Pioneer Custom Electrical Products Corp. to obtain and post a $12 million bond. On April 10, 2020, the Court of Appeal granted our motion to combine the two appeals.

 

On November 20, 2020, the Company entered into a settlement and release agreement with Myers Power Products, Inc. As part of the settlement, all injunctions were dissolved, and all litigation and appeals related to the action were dismissed with prejudice. The parties executed full releases of all known and unknown claims, thereby eliminating all such restrictions on the Company. Terms of the settlement were not disclosed; however, the Company agreed to pay Myers Power Products, Inc. an amount that did not differ significantly from the $1.2 million of expected costs the Company recognized as a legal contingency during the year ended December 31, 2018. This payment was made during the fourth quarter of 2020.

 

We can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results.

 

As of the date hereof, we are not aware of or a party to any legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, nor are we aware of any such threatened or pending litigation or any such proceedings known to be contemplated by governmental authorities that we believe could have a material adverse effect on our business, financial condition or operating results.

 

We are not aware of any material proceedings in which any of our directors, officers or affiliates or any registered or beneficial shareholder of more than 5% of our common stock is an adverse party or has a material interest adverse to our interest.

 

ITEM 4.   MINE SAFETY DISCLOSURES.

 

Not applicable.

 

17

 

 

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Our common stock has been listed on the Nasdaq Capital Market under the symbol “PPSI” since September 19, 2013. Prior to that time, it was quoted on the OTCQB. The last reported sales price of our common stock on the Nasdaq Capital Market on March 29, 2021, was $4.42 per share. As of March 29, 2021, there were 20 holders of record of our common stock.

 

The timing and amount of future dividends could require the Company to seek capital funding to support its ongoing operations as the Company’s historical credit arrangements were terminated in connection with the Equity Transaction.

 

We did not repurchase any of our equity securities during the fourth quarter of the fiscal year ended December 31, 2020.

 

ITEM 6.  SELECTED FINANCIAL DATA.

 

Not applicable.

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

 

Overview

 

We manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. We are headquartered in Fort Lee, New Jersey and operate from three (3) additional locations in the U.S. for manufacturing, service and maintenance, engineering, sales and administration.

 

Our operations are divided into two reportable segments: T&D Solutions segment and Critical Power segment. Our T&D Solutions business provides equipment solutions that help customers effectively and efficiently manage their electrical power distribution systems to desired specifications. These solutions are marketed principally through our PCEP brand name. Our Critical Power business performs service and maintenance on our customers’ sophisticated power generation equipment and also provides customers with new and used power generation equipment intended to ensure smooth uninterrupted power to operations during times of emergency. These solutions are marketed by our operations headquartered in Minnesota, currently doing business under the Titan brand name.

 

Discontinued Operations

 

Operating results for our liquid-filled transformer and dry-type transformer manufacturing businesses, which have been previously included in the T&D Solutions segment, have now been reclassified as discontinued operations for all periods presented. See Note 8 - Discontinued Operations.

 

Recent Developments

 

In October 2020, we filed a registration statement on Form S-3 including a base prospectus which covers the offering, issuance and sale of up to $25 million of common stock including any common stock sold under the sales agreement (as defined below), preferred stock, warrants and/or units; and a sales agreement prospectus covering the offering, issuance and sale of up to a maximum aggregate offering price of $9 million of common stock that may be issued and sold under the At The Market Offering Agreement (the “sales agreement”) with H.C. Wainwright & Co., LLC (“Wainwright”), from time to time in an at-the-market offering. Wainwright will offer our common stock at prevailing market prices subject to the terms and conditions of the sales agreement as agreed upon by us and Wainwright. Under the sales agreement we will designate the number of shares which we desire to sell, the time period during which sales are requested to be made, any limitation on the number of shares that may be sold in one day and any minimum price below which sales may not be made. Subject to the terms and conditions of the sales agreement, Wainwright will use its commercially reasonable efforts consistent with its normal trading and sales practices to sell on our behalf all of the shares of common stock requested to be sold by us. We have not sold any shares of common stock under the sales agreement. There is no assurance that the Company will be able to sell shares from the sales agreement.

   

18

 

 

Critical Accounting Policies

 

Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The financial statements include estimates based on currently available information and our judgment as to the outcome of future conditions and circumstances. Significant estimates in these financial statements include, inventory provisions, useful lives and impairment of long-lived assets, warranty accruals, income tax provision, goodwill impairment analysis, stock-based compensation, and allowance for doubtful accounts. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions.

 

Revenue Recognition. Revenue is recognized when (1) a contract with a customer exists, (2) performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer, (3) the transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer, (4) the transaction price is allocated to the performance obligations in the contract and (5) the Company satisfies performance obligations. Substantially all of our product revenue is recognized at a point of time, as the promised product passes to the customer. Service revenues include maintenance contracts that are recognized over time based on the contract term and repair services which are recognized as services are delivered.

 

Inventories. A substantial portion of the Company’s inventory includes raw materials and parts utilized to support the manufacturing process at PCEP and equipment sales and service offerings at Titan. We value inventories at the lower of cost or net realizable value. If a write down to the current market value is necessary, the market value cannot be greater than the net realizable value, which is defined as selling price less costs to complete and dispose, and cannot be lower than the net realizable value less a normal profit margin. We also continually evaluate the composition of our inventory and identify obsolete, slow-moving and excess inventories. Inventory items identified as obsolete, slow-moving or excess are evaluated to determine if reserves are required. If we were not able to achieve our expectations of the net realizable value of the inventory at current market value, we would have to adjust our reserves accordingly. We attempt to accurately estimate future product demand to properly adjust inventory levels for our standard products. However, significant unanticipated changes in demand could have a significant impact on the value of inventory and of operating results.

 

Impairment of Long-Lived Assets. We review long-lived assets for impairment including intangible assets with determinable useful lives whenever events or changes in circumstances indicate that the carrying value of the corresponding asset group may not be realizable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset group are compared to the asset group’s carrying amount to determine if an impairment of such asset is necessary. This requires us to make long-term forecasts of the future revenues and costs related to the assets groups subject to review. Forecasts require assumptions about demand for our products and future market conditions. Estimating future cash flows requires significant judgment, and our projections may vary from cash flows eventually realized. Future events and unanticipated changes to assumptions could require a provision for impairment in a future period. The effect of any impairment would be reflected in operating income in the Consolidated Statements of Operations. In addition, we estimate the useful lives of our long-lived assets and other intangibles and periodically review these estimates to determine whether these lives are appropriate.

 

Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires, among other things, a lessee to recognize a liability representing future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, a lessee will be required to recognize at inception a right-of-use asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Upon adoption, a reporting entity should apply the provisions of ASU 2016-02 at the beginning of the earliest period presented using a modified retrospective approach, which includes certain optional practical expedients that an entity may elect to apply. We adopted this standard in our first quarter of 2018 using the modified retrospective approach.

 

Stock Compensation. In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The updated standard is effective for the Company beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption of the new guidance is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company adopted this guidance on January 1, 2019. The adoption of this ASU did not have a material impact on the consolidated financial statements.

 

19

 

 

Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements for fair value measurements. The ASU is effective for all annual and interim periods beginning January 1, 2020, with early adoption permitted.

 

Measurement of Credit Losses on Financial Instrument. In June 2016, the FASB issued amended guidance to ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. This amended guidance for small reporting companies is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company does not expect that the amended guidance will have a material effect on our consolidated financial statements and related disclosures.

 

Income Taxes. We account for income taxes under the asset and liability method, based on the income tax laws and rates in the countries in which operations are conducted and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using expected rates in effect for the tax year in which the differences are expected to reverse. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. A valuation allowance was recorded to reduce our deferred tax assets to zero at December 31, 2020. If we were to subsequently determine that we would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis. Our judgments and tax strategies are subject to audit by various taxing authorities.

 

Rounding

 

All dollar amounts (except share and per share data) presented are stated in thousands of dollars, unless otherwise noted. Amounts may not foot due to rounding.

 

20

 

 

RESULTS OF OPERATIONS

 

Overview of 2020 Operating Results

 

Selected financial and operating data for our reportable business segments for the most recent two years is summarized below. This information, as well as the selected financial data provided in Note 17 and our Consolidated Financial Statements and related notes included in this Annual Report on Form 10-K, should be referred to when reading our discussion and analysis of results of operations below. Our summary of operating results during the years ended 2020 and 2019 are as follows:

 

 

 

For the Year Ended December 31,

 

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

T&D Solutions

 

$

10,257

 

 

$

8,985

 

Critical Power Solutions

 

 

9,233

 

 

 

11,597

 

Consolidated

 

 

19,490

 

 

 

20,582

 

Cost of goods sold

 

 

 

 

 

 

 

 

T&D Solutions

 

 

10,630

 

 

 

9,522

 

Critical Power Solutions

 

 

7,979

 

 

 

9,895

 

Consolidated

 

 

18,609

 

 

 

19,417

 

Gross profit

 

 

881

 

 

 

1,165

 

Selling, general and administrative expenses

 

 

5,028

 

 

 

12,681

 

Depreciation and amortization expense

 

 

137

 

 

 

237

 

Total operating expenses

 

 

5,165

 

 

 

12,918

 

Operating loss from continuing operations

 

 

(4,284

)

 

 

(11,753

)

Interest (income) expense

 

 

(334

)

 

 

396

 

Gain on sale of subsidiaries

 

 

 

 

 

4,207

 

Other (income) expense

 

 

(969

)

 

 

2,817

 

Loss before taxes

 

 

(2,981

)

 

 

(10,759

)

Income tax expense

 

 

5

 

 

 

1,278

 

Net loss from continuing operations

 

 

(2,986

)

 

 

(12,037

)

Discontinued operations

 

 

 

 

 

 

 

 

Loss from operations of discontinued business units

 

 

 

 

 

(2,351

)

Gain on sale of discontinued business units

 

 

 

 

 

13,686

 

Income tax expense

 

 

 

 

 

330

 

Income from discontinued operations, net of income taxes

 

 

 

 

 

11,005

 

Net loss

 

$

(2,986

)

 

$

(1,032

)

 

Backlog . Our backlog is based on firm orders from our customers expected to be delivered in the future, most of which is expected to occur during the next twelve months. Backlog may vary significantly from reporting period to reporting period due to the timing of customer commitments. The time between receipt of an order and actual delivery, or completion, of our products and services varies from one or more days, in the case of inventoried standard products, in the case of certain custom engineered equipment solutions, and up to one year or more under our service contracts.

 

The full impact of the COVID-19 pandemic continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s order backlog. During 2020, the Company experienced a decline in customer orders for its products and services due to delays caused by the pandemic. Management is actively monitoring the global situation on its overall financial condition and order backlog. While there has been some return to normal operations throughout 2020, the Company continues to experience some disruption to its business as a result of the pandemic.

 

21

 

 

Our order backlog at December 31, 2020 was $12.7 million, as compared to $15.9 million at December 31, 2019 for continuing operations. Our backlog is based on orders expected to be delivered in the future, most of which is expected to occur during 2020. The following table represents the progression of our backlog, by reporting segment, for the periods ended as indicated:

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

T&D Solutions

 

$

5,881

 

 

$

6,450

 

Critical Power Solutions

 

 

6,792

 

 

 

9,406

 

Total order backlog

 

$

12,673

 

 

$

15,856

 

 

Revenue

 

The following table represents our revenues by reporting segment and major product category for the periods indicated (in thousands, except percentages):

 

 

 

For the Year Ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

Variance

 

 

%

 

T&D Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Switchgear

 

$

10,257

 

 

$

8,985

 

 

$

1,272

 

 

 

14.2

 

 

 

 

10,257

 

 

 

8,985

 

 

 

1,272

 

 

 

14.2

 

Critical Power Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment

 

 

1,574

 

 

 

1,416

 

 

 

158

 

 

 

11.2

 

Service

 

 

7,659

 

 

 

10,181

 

 

 

(2,522

)

 

 

(24.8

)

 

 

 

9,233

 

 

 

11,597

 

 

 

(2,364

)

 

 

(20.4

)

Total revenue

 

$

19,490

 

 

$

20,582

 

 

$

(1,092

)

 

 

(5.3

)

 

For the year ended December 31, 2020, our consolidated revenue decreased by $1.1 million, or 5.3% to $19.5 million, down from $20.6 million during the year ended December 31, 2019.

 

T&D Solutions. During the year ended December 31, 2020, revenue from our switchgear product lines increased by $1.3 million, or 14.2%, as compared to the year ended December 31, 2019, as a result of increased sales of our transfer switches offset by decreased sales of our low and medium voltage switchgear.

 

Critical Power. For the year ended December 31, 2020, revenue for our equipment sales increased by $158, or 11.2%, as compared to the prior year, mainly due to increased sales of our refurbished pre-owned equipment and an increase in residential equipment sales.

 

For the year ended December 31, 2020, our service revenue decreased by $2.5 million, or 24.8%, as compared to the same period in the prior year, primarily due to the loss of the Verizon preventative maintenance business.

 

Gross (Loss) Profit and Gross Margin

 

The following table represents our gross (loss) profit by reporting segment for the periods indicated (in thousands, except percentages):

 

 

 

For the Year Ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

Variance

 

 

%

 

T&D Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loss

 

$

(373

)

 

$

(537

)

 

$

164

 

 

 

30.5

 

Gross margin%

 

 

(3.6

)

 

 

(6.0

)

 

 

2.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Critical Power Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

1,254

 

 

 

1,702

 

 

 

(448

)

 

 

(26.3

)

Gross margin%

 

 

13.6

 

 

 

14.7

 

 

 

(1.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated gross profit

 

$

881

 

 

$

1,165

 

 

$

(284

)

 

 

(24.4

)

Consolidated gross margin%

 

 

4.5

 

 

 

5.7

 

 

 

(1.2

)

 

 

 

 

22

 

 

For the year ended December 31, 2020, our gross margin percentage was 4.5% of revenues, compared to 5.7% during the year ended December 31, 2019.

 

T&D Solutions. For the year ended December 31, 2020, our gross margin increased by 2.4%, primarily due to increased sales of our transfer switches which generate higher gross margins as compared to the year ended December 31, 2019. This increase was partially offset by the $546 write down of inventory recognized during the second quarter of the year ended December 31, 2020 as a result of management’s strategic decisions to rationalize its traditional product offerings.

                                                                              

Critical Power. For the year ended December 31, 2020, our gross margin decreased by 1.1%, to 13.6%, from 14.7% for the prior year,  predominately due to the loss of the Verizon preventative maintenance business which historically has resulted in higher gross margins.

 

Operating Expenses

 

The following table represents our operating expenses by reportable segment for the periods indicated (in thousands, except percentages):

 

 

 

For the Year Ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

Variance

 

 

%

 

T&D Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

$

1,516

 

 

$

2,539

 

 

$

(1,023

)

 

 

(40.3

)

Depreciation and amortization expense

 

 

45

 

 

 

67

 

 

 

(22

)

 

 

(32.8

)

Segment operating expense

 

$

1,561

 

 

$

2,606

 

 

$

(1,045

)

 

 

(40.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Critical Power Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

$

1,624

 

 

$

5,161

 

 

$

(3,537

)

 

 

(68.5

)

Depreciation and amortization expense

 

 

60

 

 

 

122

 

 

 

(62

)

 

 

(50.8

)

Segment operating expense

 

$

1,684

 

 

$

5,283

 

 

$

(3,599

)

 

 

(68.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated Corporate Overhead Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

$

1,888

 

 

$

4,981

 

 

$

(3,093

)

 

 

(62.1

)

Depreciation and amortization expense

 

 

32

 

 

 

48

 

 

 

(16

)

 

 

(33.3

)

Segment operating expense

 

$

1,920

 

 

$

5,029

 

 

$

(3,109

)

 

 

(61.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

$

5,028

 

 

$

12,681

 

 

$

(7,653

)

 

 

(60.4

)

Depreciation and amortization expense

 

 

137

 

 

 

237

 

 

 

(100

)

 

 

(42.2

)

Consolidated operating expense

 

$

5,165

 

 

$

12,918

 

 

$

(7,753

)

 

 

(60.0

)

 

Selling, General and Administrative Expense. For the year ended December 31, 2020, consolidated selling, general and administrative expense, before depreciation and amortization, decreased by approximately $7.7 million, or 60.4%, to $5.0 million, as compared to $12.7 million during the year ended December 31, 2019. As a percentage of our consolidated revenue, selling, general and administrative expense decreased to 25.8% in 2020, as compared to 61.6% in the year ended December 31, 2019.

 

The selling, general and administrative expense in our T&D Solutions segment decreased by $1.0 million, or 40.3%, during the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily due to a reduction in professional fees related to the Myers Power Case, which was settled on November 20, 2020.

 

The selling, general and administrative expense in our Critical Power segment decreased by $3.5 million, or 68.5% as compared to 2019, primarily due to a reduction in professional fees and $3.1 million of intangible impairment write-offs that were recognized during the year ended December 31, 2019 and no intangible impairment write-offs being recognized in the year ended December 31, 2020.

 

Depreciation and Amortization Expenses. Depreciation and amortization expense consists primarily of depreciation of fixed assets and amortization of definite-lived intangible assets and right-of-use assets related to our finance leases and excludes amounts included in cost of sales. For the year ended December 31, 2020, consolidated depreciation and amortization expense decreased by $100, or 42.2%, as compared to the year ended December 31, 2019 primarily due to a reduction in amortization expense as a result of intangible impairment write-offs that were recognized in the year ended December 31, 2019.

 

23

 

 

Operating Loss

 

The following table represents our operating loss by reportable segment for the periods indicated:

 

 

 

For the Year Ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

Variance

 

 

%

 

T&D Solutions

 

$

(1,934

)

 

$

(3,143

)

 

$

1,209

 

 

 

38.5

 

Critical Power Solutions

 

 

(430

)

 

 

(3,581

)

 

 

3,151

 

 

 

88.0

 

Unallocated corporate overhead expenses

 

 

(1,920

)

 

 

(5,029

)

 

 

3,109

 

 

 

61.8

 

Total operating loss

 

$

(4,284

)

 

$

(11,753

)

 

$

7,469

 

 

 

63.5

 

 

T&D Solutions. Operating loss from our T&D Solutions segment decreased by $1.2 million, or 38.5%, in the year ended December 31, 2020 as compared to the year ended December 31, 2019, due to increased sales of our transfer switches, which generate high margins, and a decrease in professional fees.

 

Critical Power. Operating loss from our Critical Power segment decreased by $3.2 million, or 88.0%, during the year ended December 31, 2020, primarily due to intangible impairment write-offs that were recognized during the year ended December 31, 2019 and no intangible impairment write-offs being recognized in the year ended December 31, 2020.

 

General Corporate Expense. Our general corporate expenses consist primarily of executive management, corporate accounting and human resources personnel, office expenses, financing and corporate development activities, payroll and benefits administration, treasury, tax compliance, legal, stock-based compensation and public reporting costs, and costs not specifically allocated to reportable business segments. During the year ended December 31, 2020, our unallocated corporate overhead expense decreased by $3.1 million, or 61.8%, as compared to the year ended December 31, 2019, primarily due to $1.4 million of one-time executive bonuses that were recorded during the year ended December 31, 2019, as well as a reduction in bad debt expense of approximately $1 million during the year ended December 31, 2020 as compared to December 31, 2019 (pertaining to certain notes receivable deemed uncollectible).

 

Non-Operating (Income) Expense

 

Interest (Income) Expense. For the year ended December 31, 2020, we had interest income of approximately $334, as compared to interest expense of $396 during the year ended December 31, 2019. The decrease in our interest expense was due to the retirement of our bank indebtedness with the proceeds from the sale of the transformer business units in August 2019.

 

Other (Income) Expense. Other (income) expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the year ended December 31, 2020, other non-operating income was $969, as compared to other non-operating expense of $2.8 million during the year ended December 31, 2019. For the year ended December 31, 2020, included in other income was a gain of $968 related to the sale and mark to market adjustment on the fair value of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock it received in connection with the Merger Agreement, as compared to a loss of $2.8 million for the year ended December 31, 2019, related to the mark to market adjustment on the fair value of those securities.

 

Provision for Income Taxes. Our provision reflects an effective tax rate on loss before taxes of (0.2)% for the year ended December 31, 2020, as compared to (11.9)% for the year ended December 31, 2019, as set forth below:

 

 

 

For the Year Ended

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

Variance

 

Loss before income taxes

 

$

(2,981

)

 

$

(10,759

)

 

$

7,778

 

Income tax expense

 

 

5

 

 

 

1,278

 

 

 

(1,273

)

Effective income tax rate %

 

 

(0.2

)

 

 

(11.9

)

 

 

11.7

 

 

The (11.9)% effective tax rate for the year ended December 31, 2019 is primarily due to establishment of additional valuation allowances.

 

Net Loss per Share from Continuing Operations

 

We generated a net loss from continuing operations of $3.0 million for the year ended December 31, 2020, as compared to a net loss from continuing operations of $12.0 million during the year ended December 31, 2019.

 

Our net loss from continuing operations per basic and diluted share for the year ended December 31, 2020 was $0.34 compared to $1.38 for the year ended December 31, 2019.

 

24

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

General. As of December 31, 2020, we had $7.6 million of cash and cash equivalents on hand. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings. Our cash requirements have been generally applied toward operating activities, debt repayment, capital improvements and acquisitions.

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic (the “COVID-19 pandemic”), based on the rapid increase in exposure globally.

 

The full impact of the COVID-19 pandemic continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. During the year ended December 31, 2020, the Company experienced a decline in customer orders for its products and services due to delays caused by the pandemic. Additionally, the Company experienced an impact to productivity as a result of implementing social distancing guidelines and personal protective measures. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 pandemic and the global responses to contain its spread, the Company is not able to estimate the full effects of the COVID-19 pandemic at this time, however, if the pandemic continues, it may continue to have an adverse effect on the Company’s results of operations, financial condition, or liquidity.

 

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act” (the “CARES Act”) The CARES Act, among other things, appropriates funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment. On April 13, 2020, after having determined that it met the qualifications for this loan program due to the impact that COVID-19 would have on our financial condition, results of operations, and/or liquidity and applying for relief, the Company received a loan under the SBA Paycheck Protection Program (the “PPP Loan”) in the amount of $1.4 million.

 

The Company has accounted for the PPP Loan as a debt instrument in accordance with Financial Accounting Standards Board Accounting Standards Codification 470, Debt. At December 31, 2020, $633 of principal payments due has been recorded as long-term debt and $780 as current debt in accordance with the enactment of the Paycheck Protection Program Flexibility Act of 2020. The Company does not expect to incur any material interest expense under the PPP Loan. Under the terms of the PPP Loan, the Company believes it is eligible for full or partial loan forgiveness. We have applied for full loan forgiveness during the fourth quarter of 2020, however no assurance can be provided that any portion of the PPP Loan will ultimately be forgiven.

 

Cash Used in Operating Activities. Cash used in our operating activities was $3.6 million during the year ended December 31, 2020, as compared to $5.6 million during the year ended December 31, 2019. The decrease in cash used in our operating activities is primarily due to the recognition of insurance proceeds of $1.8 million as well as working capital fluctuations, partially offset by a settlement payment that was made during the year ended December 31, 2020 (see Note 13 - Commitments and Contingencies).

 

Cash Provided by Investing Activities. Cash provided by investing activities during the year ended December 31, 2020 was $2.6 million, as compared to $39.8 million during the year ended December 31, 2019. The decrease in cash provided by investing activities is due to realizing $39.9 million of proceeds from the sale of the transformer business units during the year ended December 31, 2019, and there were no comparable proceeds from a business unit sale during the year ended December 31, 2020. The primary source of cash in investing activities for the year ended December 31, 2020 were proceeds from the sale of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock in the amount of $2.4 million.

 

Cash Provided by (Used in) Financing Activities. Cash provided by our financing activities was $337 during the year ended December 31, 2020, as compared to cash used in our financing activities of $26.2 million during the year ended December 31, 2019. The primary source of cash in financing activities for the year ended December 31, 2020 was funding from the Payroll Protection Program. The change in cash provided by (used in) financing activities is primarily due to the repayment of our debt in the prior year period as a result of the sale of the transformer business units.

 

Working Capital. As of December 31, 2020, we had working capital of $8.4 million, including $7.6 million of cash and cash equivalents, compared to working capital of $10.5 million, including $8.2 million of cash and cash equivalents at December 31, 2019. At December 31, 2020 and December 31, 2019, we no longer had a revolving credit facility, as it was paid in full and terminated in August 2019 with the proceeds from the sale of the transformer business units.

 

Assessment of Liquidity. At December 31, 2020, we had $7.6 million of cash and cash equivalents on hand generated primarily from the sale of the transfer business units during the year ended December 31, 2019, sale of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock, proceeds from insurance and the funding from the Payroll Protection Program. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings. Our cash requirements historically were generally for operating activities, debt repayment, capital improvements and acquisitions. As all outstanding amounts under our credit facilities have been paid in full with the proceeds from the sale of the transformer business units during the year ended December 31, 2019, and the credit facilities terminated, we expect to meet our cash needs with our working capital and cash flows from our operating activities. We expect our cash requirements to be generally for operating activities and capital improvements. We expect that our cash balance is sufficient to fund operations for the next twelve months.

 

25

 

 

On October 20, 2020, we entered into the sales agreement, pursuant to which we may offer and sell shares of common stock having an aggregate price of up to $9 million from time to time through Wainwright, acting as agent or principal. As the date of this report, we have not sold any shares of common stock under the sales agreement. There can be no assurance that the Company will be able to sell shares from the sales agreement.

 

Capital Expenditures 

 

We had no additions to property, plant and equipment during the year ended December 31, 2020, as compared to additions of $153 during the year ended December 31, 2019.

 

Factors That May Affect Future Operations

 

We believe that our future operating results will continue to be subject to quarterly variations based upon a wide variety of factors, including the cyclical nature of the electrical equipment industry and the markets for our products and services. Our operating results could also be impacted by changing customer requirements and exposure to fluctuations in prices of important raw supplies, such as copper, steel and aluminum. We have various insurance policies, including cybersecurity, covering risks in amounts that we consider adequate. In addition to these measures, we attempt to recover other cost increases through improvements to our manufacturing efficiency and through increases in prices where competitively feasible. Lastly, other economic conditions we cannot foresee may affect customer demand. We predominately sell to customers in the industrial production and commercial construction markets. Accordingly, changes in the condition of any of our customers may have a greater impact than if our sales were more evenly distributed between different end markets. For a further discussion of factors that may affect future operating results see the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

 

Off Balance Sheet Transactions and Related Matters

 

We have no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

New Accounting Pronouncements

 

The information required by this Item is provided in “Note 2 - Summary of Significant Accounting Policies” to our audited financial statements for the year ended December 31, 2020 included in this Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

There have been no recent accounting pronouncements not yet adopted by the Company which would have a material impact on the Company’s financial statements.

 

Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The ASU is effective for all annual and interim periods beginning December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact but does not anticipate there will be a material impact to the consolidated financial statements once implemented.

 

Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements for fair value measurements. The Company adopted this guidance on January 1, 2020. The adoption of this ASU did not have a material impact on the consolidated financial statements.

 

26

 

 

Measurement of Credit Losses on Financial Instrument. In June 2016, the FASB issued amended guidance to ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. This amended guidance for small reporting companies is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company does not expect that the amended guidance will have a material effect on our consolidated financial statements and related disclosures.

  

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not Applicable.

 

27

 

 

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Page

 

Consolidated Financial Statements for the Years Ended December 31, 2020 and 2019

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm 

 

29

 

Consolidated Statements of Operations 

 

31

 

Consolidated Statements of Comprehensive (Loss) Income  

 

32

 

Consolidated Balance Sheets

 

33

 

Consolidated Statements of Cash Flows

 

34

 

Consolidated Statements of Stockholders’ Equity

 

35

 

Notes to the Consolidated Financial Statements

 

36

 

 

28

 

 

Report of Independent Registered Public Accounting Firm

 

Shareholders and Board of Directors

Pioneer Power Solutions, Inc.

Fort Lee, New Jersey

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Pioneer Power Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

 

Provision for Excess and Obsolete Inventory

 

As described in Note 9 to the consolidated financial statements, as of December 31, 2020, the Company recorded a provision for excess and obsolete inventory of $736,000 on gross inventories of $3,139,000. The provision for excess and obsolete inventory is comprised of an obsolescence reserve and any net realizable value reserve, as necessary. A substantial portion of the Company’s inventory includes raw materials and parts utilized to support the manufacturing process at Pioneer Custom Electrical Products Corp (PCEP) and equipment sales and service offerings at Titan Energy Systems, Inc. (Titan) to which the provision for excess and obsolete inventory relates. The remaining inventories relate to items that have been purchased and labor capitalized to fulfill commitments to existing customer orders, or customer orders that are work-in-process at PCEP. Management analyzes work-in-process inventory to identify circumstances whereby the capitalized inventory cost exceeds its net realizable value. If management determines that the cost of the work-in-process inventory will not be recoverable, a reserve to adjust the inventory to net realizable value is required to be recognized.

 

29

 

 

We identified the provision for excess and obsolete inventory at PCEP as a critical audit matter.  Management’s determination of the obsolescence reserve includes an assessment of the current and forecasted production requirements based on customer demand and the Company’s strategic plans to determine if the cost is recoverable from future sales of the Company’s products upon fair market value. In determining the net realizable value reserve over PCEP work-in-process inventory, critical estimates for estimated costs to complete projects are applied to open work orders. The evaluation over the need for a reserve requires management to develop and utilize assumptions in its determination of estimates to complete the open work orders based upon an assessment of project status and efforts required to complete the assembly of the finished product. Auditing the critical assumptions used by management in determining the provision for excess and obsolete inventory involved especially challenging auditor judgment due to the nature and extent of audit effort needed to evaluate the reasonableness of the assumptions and judgments made by management.

 

The primary procedures we performed to address this critical audit matter included:

 

Identifying any slow moving raw material and parts inventory during the attendance of physical inventory observations.

 

 

Obtaining a listing of certain low voltage switch gear, switch boards, and panel boards that the Company does not expect to sell in the future and for which corresponding parts and inventory have been included in the obsolescence reserve. Testing the completeness of the obsolescence reserve listing by obtaining historical bill of materials for related products and comparing against management’s calculation.

 

Testing a sample of PCEP work-in-progress inventory on hand at year end and comparing expected completed costs to current market prices through the examination of relevant source documents 

 

 

Testing the completeness and accuracy of the underlying costs incurred to date on PCEP work-in-progress inventory on hand at year end through the examination of relevant source documents including bill of materials and actual costs incurred to date.

 

 

Evaluating management’s conclusion of estimated projects to complete on a sample of PCEP work-in-progress inventory on hand at year end through inquiries of operating project managers, and vouching subsequent costs incurred through the examination of relevant source documents.

 

 

Evaluating the reasonableness of management’s estimates and current period costs estimates of the provision for excess and obsolete inventory by performing a retrospective comparison of prior estimates to current period activity to assess management’s ability to estimate provision for excess and obsolete inventory. 

 

We have served as the Company’s auditor since 2014.

 

/s/ BDO USA, LLP

New York, New York

March 30, 2021

 

 

30

 

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Operations

(In thousands, except per share data)

 

 

 

For the Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

(Revised See Note #6)

 

Revenues

 

$

19,490

 

 

$

20,582

 

Cost of goods sold

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

18,063

 

 

 

19,417

 

Write down of inventory

 

 

546

 

 

 

 

Total cost of goods sold

 

 

18,609

 

 

 

19,417

 

Gross profit

 

 

881

 

 

 

1,165

 

Operating expenses

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,165

 

 

 

12,918

 

Total operating expenses

 

 

5,165

 

 

 

12,918

 

Loss from continuing operations

 

 

(4,284

)

 

 

(11,753

)

Interest (income) expense

 

 

(334

)

 

 

396

 

Gain on sale of subsidiaries

 

 

 

 

 

4,207

 

Other (income) expense

 

 

(969

)

 

 

2,817

 

Loss before taxes

 

 

(2,981

)

 

 

(10,759

)

Income tax expense

 

 

5

 

 

 

1,278

 

Net loss from continuing operations

 

 

(2,986

)

 

 

(12,037

)

Discontinued operations (Note 8)

 

 

 

 

 

 

 

 

Loss from operations of discontinued business units

 

 

 

 

 

(2,351

)

Gain on sale of discontinued subsidiaries

 

 

 

 

 

13,686

 

Income tax expense

 

 

 

 

 

330

 

Income from discontinued operations, net of income taxes

 

 

 

 

 

11,005

 

Net loss

 

$

(2,986

)

 

$

(1,032

)

 

 

 

 

 

 

 

 

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.34

)

 

$

(1.38

)

Income from discontinued operations

 

 

 

 

 

1.26

 

Net loss

 

$

(0.34

)

 

$

(0.12

)

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.34

)

 

$

(1.38

)

Income from discontinued operations

 

 

 

 

 

1.26

 

Net loss

 

$

(0.34

)

 

$

(0.12

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

8,726

 

 

 

8,726

 

Diluted

 

 

8,726

 

 

 

8,726

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

31

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

 

 

 

For the Year Ended December 31,  

 

 

 

2020

 

 

2019

 

Net loss

 

$

(2,986

)

 

$

(1,032

)

Other comprehensive income

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

4,766

 

Amortization of net prior service costs and net actuarial losses, net of tax

 

 

 

 

 

1,145

 

Other comprehensive income

 

 

 

 

 

5,911

 

Comprehensive (loss) income

 

$

(2,986

)

 

$

4,879

 

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

32

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Balance Sheets

(In thousands)

 

 

 

December 31,  

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

(Revised See Note #6)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,567

 

 

$

8,213

 

Short term investments

 

 

 

 

 

936

 

Accounts receivable, net

 

 

2,587

 

 

 

3,716

 

Insurance receivable

 

 

95

 

 

 

1,800

 

Inventories, net

 

 

2,403

 

 

 

4,554

 

Income taxes receivable

 

 

407

 

 

 

360

 

Prepaid expenses and other current assets

 

 

897

 

 

 

795

 

Total current assets

 

 

13,956

 

 

 

20,374

 

Property, plant and equipment, net

 

 

433

 

 

 

640

 

Other assets

 

 

6,898

 

 

 

7,465

 

Total assets

 

$

21,287

 

 

$

28,479

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Bank overdrafts

 

$

 

 

$

374

 

Accounts payable and accrued liabilities

 

 

4,027

 

 

 

7,533

 

Deferred revenue

 

 

714

 

 

 

1,441

 

Current maturities of long-term debt

 

 

780

 

 

 

 

Income taxes payable

 

 

17

 

 

 

496

 

Total current liabilities

 

 

5,538

 

 

 

9,844

 

Long-term debt

 

 

633

 

 

 

 

Other long-term liabilities

 

 

1,257

 

 

 

1,793

 

Total liabilities

 

 

7,428

 

 

 

11,637

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued

 

 

 

 

 

 

Common stock, $0.001 par value, 30,000,000 shares authorized; 8,726,045 shares issued and outstanding on December 31, 2020 and 2019

 

 

9

 

 

 

9

 

Additional paid-in capital

 

 

23,981

 

 

 

23,978

 

Accumulated other comprehensive income

 

 

14

 

 

 

14

 

Accumulated deficit

 

 

(10,145

)

 

 

(7,159

)

Total stockholders’ equity

 

 

13,859

 

 

 

16,842

 

Total liabilities and stockholders’ equity

 

$

21,287

 

 

$

28,479

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

33

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

For the Year Ended December 31,  

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(2,986

)

 

$

(1,032

)

Depreciation

 

 

203

 

 

 

607

 

Amortization of intangible assets

 

 

 

 

 

150

 

Amortization of right-of-use assets

 

 

261

 

 

 

354

 

Amortization of debt issuance cost

 

 

 

 

 

43

 

Amortization of imputed interest

 

 

(448

)

 

 

(166

)

Interest expense from PPP Loan

 

 

9

 

 

 

 

Deferred income tax expense

 

 

 

 

 

1,245

 

 Non-cash cost of operating leases     622       619  

Change in receivable reserves

 

 

(57

)

 

 

3,093

 

Change in inventory reserves

 

 

(535

)

 

 

361

 

Write down of inventory

 

 

546

 

 

 

 

Inventory write-off from flood damage

 

 

 

 

 

2,688

 

Gain on sale of subsidiary

 

 

 

 

 

(17,893

)

Change in long term payables

 

 

4

 

 

 

 

Change in insurance receivable

 

 

1,705

 

 

 

(1,800

)

(Gain) loss on investments

 

 

(968

)

 

 

2,750

 

Accrued pension

 

 

 

 

 

114

 

Stock-based compensation

 

 

3

 

 

 

12

 

Other

 

 

3

 

 

 

 

Intangible asset impairment

 

 

 

 

 

83

 

Goodwill impairment

 

 

 

 

 

2,969

 

Foreign currency remeasurement gain

 

 

 

 

 

(100

)

Changes in current operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,158

 

 

 

1,855

 

Inventories

 

 

2,139

 

 

 

(1,145

)

Prepaid expenses and other assets

 

 

(692

)

 

 

(543

)

Income taxes

 

 

(501

)

 

 

420

 

Accounts payable and accrued liabilities

 

 

(3,352

)

 

 

(3

)

Deferred revenue

 

 

(727

)

 

 

(254

)

Net cash used in operating activities

 

 

(3,613

)

 

 

(5,573

)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

 

 

 

(153

)

Proceeds from sale of subsidiaries, net

 

 

 

 

 

39,923

 

Proceeds from sale of investments

 

 

2,436

 

 

 

 

Change in note receivable

 

 

194

 

 

 

 

Net cash provided by investing activities

 

 

2,630

 

 

 

39,770

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Bank overdrafts

 

 

(374

)

 

 

(1,439

)

Borrowing under debt agreement

 

 

 

 

 

15,329

 

Funding from PPP Loan

 

 

1,404

 

 

 

 

Repayment of debt

 

 

 

 

 

(40,070

)

Payment of debt issuance cost

 

 

 

 

 

(15

)

Payment of deferred purchase price

 

 

(397

)

 

 

 

Write-off of notes receivable

 

 

 

 

 

600

 

Principal repayments of financing leases

 

 

(296

)

 

 

(635

)

Net cash provided by/(used in) financing activities

 

 

337

 

 

 

(26,230

)

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

 

(646

)

 

 

7,967

 

Effect of foreign exchange on cash and cash equivalents

 

 

 

 

 

35

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

8,213

 

 

 

211

 

End of period

 

$

7,567

 

 

$

8,213

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

 

28

 

 

 

1,106

 

Income taxes paid, net of refunds

 

 

507

 

 

 

477

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Securities received for sale of subsidiary

 

 

 

 

 

4,207

 

Notes receivable recognized upon Equity Transaction

 

 

 

 

 

4,929

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

34

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

 

 

 

 


Common Stock
 

 

 

 

 

Additional
paid-in

capital  

 

 

 

 

Accumulated
other
compre
hensive
income (loss )

 

 

 

 

Accumulated
deficit  

 

 

 

 

Total
stockholders

equity  

 

 

Shares

 

 

 Amount

 

Balance - January 1, 2019

 

 

8,726,045

 

 

$

9

 

 

$

23,966

 

 

$

(5,897

)

 

$

(6,127

)

 

$

11,951

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,032

)

 

 

(1,032

)

Stock-based compensation

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

4,766

 

 

 

 

 

 

4,766

 

Pension adjustment, net of taxes

 

 

 

 

 

 

 

 

 

 

 

1,145

 

 

 

 

 

 

1,145

 

Balance - December 31, 2019 (Revised)

 

 

8,726,045

 

 

$

9

 

 

$

23,978

 

 

$

14

 

 

$

(7,159

)

 

$

16,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2020 (Revised)

 

 

8,726,045

 

 

$

9

 

 

$

23,978

 

 

$

14

 

 

$

(7,159

)

 

$

16,842

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,986

)

 

 

(2,986

)

Stock-based compensation

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Balance - December 31, 2020

 

 

8,726,045

 

 

$

9

 

 

$

23,981

 

 

$

14

 

 

$

(10,145

)

 

$

13,859

 

 

 The accompanying notes are an integral part of these consolidated financial statements.

 

35

 

 

 

PIONEER POWER SOLUTIONS, INC.

Notes to Consolidated Financial Statements

 

1. BASIS OF PRESENTATION

 

Pioneer Power Solutions, Inc. and its wholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,” “Pioneer Power,” “we,” “our” and “us”) manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. The Company is headquartered in Fort Lee, New Jersey and operates from three (3) additional locations in the U.S. for manufacturing, service and maintenance, engineering, sales and administration.

 

NASDAQ Listing

 

On September 24, 2013, the Company completed an underwritten public offering of 1,265,000 shares of its common stock at a gross sales price of $7.00 per share, resulting in net proceeds to the Company of approximately $7.9 million, after deducting underwriting discounts and commissions and other offering expenses. In connection with the public offering, the Company’s common stock began trading on the Nasdaq Capital Market under the symbol PPSI.

 

Segments

 

In determining operating and reportable segments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting (“ASC 280”), the Company concluded that it has two reportable segments, which are also our operating segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”). Financial information about the Company’s segments is presented in Note 17 - Business Segment, Geographic and Customer Information.

 

Sale of Transformer Business Units

 

On June 28, 2019, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek (Chief Executive Officer of the Company), Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”). Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer (the “Equity Transaction”), for a purchase price of $68.0 million. Included in the purchase price, the Company received two subordinated promissory notes, issued by the Buyer, in the aggregate principal amount of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million (the “Seller Notes”) . During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.8 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.2 million. During the second quarter of 2020, the Company recognized an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the Company. Including the reduction to the principal amount for the valid claim, the Company has revalued the Seller Notes for an appropriate imputed interest rate, resulting in a change to the value of the Seller Notes at December 31, 2020 of $254, for a carrying value of $5.3 million, which is included within other long term assets (see Note 11 - Other Assets).

 

The transaction was consummated on August 16, 2019. Pioneer sold to the Buyer all of the assets and liabilities associated with its liquid-filled transformer and dry-type transformer manufacturing businesses within the Company’s T&D Solutions segment. Pioneer Power retained its switchgear manufacturing business within the T&D Solutions segment, as well as all of the operations associated with its Critical Power segment.

 

For presentation within these statements, the Disposed Companies are being presented as discontinued operations for all periods presented.

 

Presentation

 

The accompanying audited consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of December 31, 2020. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the audited consolidated financial statements have been included.

 

 

36

 

 

These audited consolidated financial statements include the accounts of Pioneer and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Liquidity

 

The accompanying financial statements have been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements as of the year ended December 31, 2020, the Company had $7.6 million of cash and cash equivalents on hand, and working capital of $8.4 million. The cash on hand was generated primarily from the completion of the Equity Transaction during the year ended December 31, 2019, proceeds from the sale of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock, proceeds from insurance and the funding from the Payroll Protection Program recognized during the year ended December 31, 2020. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings. Our cash requirements historically were for operating activities, debt repayment and capital improvements. As all outstanding amounts under our credit facilities have been paid in full with the proceeds from the Equity Transaction during the year ended December 31, 2019, and the credit facilities terminated, we expect to meet our cash needs with our working capital and cash flows from our operating activities. We expect our cash requirements to be generally for operating activities and capital improvements. The Company expects that its current cash balance is sufficient to fund operations for the next twelve months.

 

In March 2021, the Company executed a cash collateral security agreement with a commercial bank which required us to pledge cash collateral as security for all unpaid reimbursement obligations owing to the commercial bank for an irrevocable standby letter of credit in the amount of $1.8 million.

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic (the “COVID-19 pandemic”), based on the rapid increase in exposure globally.

 

The full impact of the COVID-19 pandemic continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. During the year ended December 31, 2020, the Company experienced a decline in customer orders for its products and services due to delays caused by the pandemic. Additionally, the Company experienced an impact to productivity as a result of implementing social distancing guidelines and personal protective measures. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 pandemic and the global responses to contain its spread, the Company is not able to estimate the full effects of the COVID-19 pandemic at this time, however, if the pandemic continues, it may continue to have an adverse effect on the Company’s results of operations, financial condition, or liquidity.

 

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act” (the “Cares Act”). The CARES Act, among other things, appropriates funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment. On April 13, 2020, after having determined that it met the qualifications for this loan program due to the impact that COVID-19 would have on our financial condition, results of operations, and/or liquidity and applying for relief the Company received funding in the amount of $1.4 million from the SBA Paycheck Protection Program. While the full magnitude of the pandemic’s effect on the Company’s future results of operations is uncertain, the Company has experienced certain declines in service sales and commitments to purchase equipment. The Company made this assertion in good faith based upon all available guidance. The Company used the proceeds from the PPP Loan to retain employees, maintain payroll and make lease, rent and utility payments. Under the terms of the PPP Loan, the Company believes it is eligible for full or partial loan forgiveness and applied for full loan forgiveness during the fourth quarter of 2020. There can be no assurance however that the loan will be forgiven in full or in part.

 

The Company has accounted for the PPP Loan as a debt instrument in accordance with FASB ASC 470, Debt. At December 31, 2020, $633 of principal payments due have been recorded as long-term debt and $780 as current debt in accordance with the enactment of the Paycheck Protection Program Flexibility Act of 2020. The Company does not expect to incur any material interest expense under the PPP Loan.

 

Rounding

 

All dollar amounts (except share and per share data, and with respect to Item 11, Agreements with Executive Officers) presented are stated in thousands of dollars, unless otherwise noted. Amounts may not foot due to rounding.

 

37

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

General

 

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain reclassifications have been made in prior years’ financial statements to conform to the presentation used in the current year. These reclassifications have not resulted in any changes to the previously reported net income for any year.

 

Use of Estimates

 

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The financial statements include estimates based on currently available information and management’s judgment as to the outcome of future conditions and circumstances. Significant estimates in these financial statements include allowance for doubtful accounts receivable, inventory provision, useful lives and impairment of long-lived assets, income tax provision, and goodwill impairment.

 

Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions.

 

Revenue Recognition

 

Revenue is recognized when (1) a contract with a customer exists, (2) performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer, (3) the transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer, (4) the transaction price is allocated to the performance obligations in the contract and (5) the Company satisfies performance obligations. Substantially all of our revenue is recognized at a point of time, as the promised product passes to the customer. Service revenues include maintenance contracts that are recognized over time based on the contract term and repair services which are recognized as services are delivered.

 

Cost of Goods Sold

 

Cost of goods sold for the T&D Solutions and Critical Power segments primarily includes charges for materials, direct labor and related benefits, freight (inbound and outbound), direct supplies and tools, purchasing and receiving costs, inspection costs, internal transfer costs, warehousing costs and utilities related to production facilities and, where appropriate, an allocation of overhead. Cost of goods sold for Critical Power Solutions also includes indirect labor and infrastructure cost related to the provision of field services.

 

Financial Instruments

 

The Company’s financial instruments consist primarily of cash and cash equivalents, receivables, payables and debt instruments. The carrying values of these financial instruments approximate their respective fair values as they are either short-term in nature or carry interest rates which are periodically adjusted to market rates. Unless otherwise indicated, the carrying value of these financial instruments approximates their fair market value.

 

At December 31, 2019, the carrying amount reported in the consolidated balance sheet for shares held in CleanSpark, Inc., which are accounted for in accordance with the adoption of ASU 2016-01, of $936 included within short term investment approximates fair value as the asset had a readily determinable market value and as such was considered a Level 1 asset. The estimated fair value of the warrants held in CleanSpark, Inc. of approximately $531 was considered a Level 3 asset due to unobservable inputs. The Company sold all of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock during the year ended December 31, 2020.

 

38

 

 

Cash and Cash Equivalents

 

Cash and cash equivalents comprise cash on hand, demand deposits and investments with an original maturity at the date of purchase of three months or less.

 

Accounts Receivable

 

The Company accounts for trade receivables at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. The Company writes off trade receivables when they are deemed uncollectible. The Company records recoveries of trade receivables previously written off when it receives them. Management considers the Company’s allowance for doubtful accounts, which was $69 and $77 as of December 31, 2020 and 2019, respectively, to appropriately measure the uncertainty in certain accounts receivable.

 

Long-Lived Assets

 

Depreciation and amortization for property, plant and equipment, and finite life intangible assets, is computed and included in cost of goods sold and in selling and administrative expense, as appropriate. Long-lived assets, consisting primarily of property, plant and equipment, are stated at cost less accumulated depreciation. Property, plant and equipment are depreciated using the straight line method, based on the estimated useful lives of the assets (buildings - 25 years, machinery and equipment - 5 to 15 years, computer hardware and software - 3 to 5 years, furniture & fixtures 5 to 7 years, leasehold improvements – term of lease). Depreciation commences in the year the assets are ready for their intended use. As a convention, in the initial year an asset is placed in service, the Company takes one half year of depreciation.

 

Historically, finite life intangible assets have consisted primarily of customer relationships in multiple categories that are specific to the businesses acquired and for which estimated useful lives were determined based on actual historical customer attrition rates. These finite life intangible assets were amortized by the Company over periods ranging from four to ten years.

 

Long-lived assets and finite life intangible assets are reviewed for impairment whenever events or circumstances have occurred that indicate the remaining useful life of the asset may warrant revision or that the remaining balance of the asset may not be recoverable. Upon indications of impairment, or in the normal course of annual testing, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The measurement of possible impairment is generally estimated by the ability to recover the balance of an asset group from its expected future operating cash flows on an undiscounted basis. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value thereof. Determining asset groups and underlying cash flows requires the use of significant judgment.

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method, based on the income tax laws and rates in the countries in which operations are conducted and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company believes that the deferred tax asset recorded as of December 31, 2020 and 2019 is realizable through future reversals of existing taxable temporary differences. If the Company was to subsequently determine that it would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made. The Company will continue to assess the adequacy of the valuation allowance on a quarterly basis. The Company’s tax filings are subject to audit by various taxing authorities.

 

The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences or events that have been recognized in the Company’s financial statements or tax returns. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position (see “Unrecognized Tax Benefits” below).

 

Income tax related interest and penalties are grouped with interest expense on the consolidated statement of operations.

 

39

 

 

Unrecognized Tax Benefits

 

The Company accounts for unrecognized tax benefits in accordance with FASB ASC “Income Taxes” (“ASC 740”). ASC 740 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon ultimate settlement with a taxing authority, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

 

Additionally, ASC 740 requires the Company to accrue interest and related penalties, if applicable, on all tax positions for which reserves have been established consistent with jurisdictional tax laws. The Company’s policy is to recognize interest and penalties related to income tax matters as interest expense. See Note 16 - Income Taxes.

 

Share-Based Payments

 

The Company accounts for share based payments in accordance with the provisions of FASB ASC 718 “Compensation – Stock Compensation” and accordingly recognizes in its financial statements share based payments at their fair value. In addition, it recognizes in the financial statements an expense based on the grant date fair value of stock options granted to employees and directors. The expense is recognized on a straight line basis over the expected option life while taking into account the vesting period and the offsetting credit is recorded in additional paid-in capital. Upon exercise of options, the consideration paid together with the amount previously recorded as additional paid-in capital is recognized as capital stock. The Company estimates its forfeiture rate in order to determine its compensation expense arising from stock based awards. The Company uses the Black-Scholes Merton option pricing model to determine the fair value of the options. Non-employee members of the Board of Directors are deemed to be employees for the purposes of recognizing share-based compensation expense.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value using weighted average method and include the cost of materials, labor and manufacturing overhead. The Company uses estimates in determining the level of reserves required to state inventory at the lower of cost or market. The Company estimates are based on market activity levels, production requirements, the physical condition of products and technological innovation. Changes in any of these factors may result in adjustments to the carrying value of inventory. See Note 9 - Inventories.

 

Income (Loss) Per Share

 

Basic income (loss) per share is computed by dividing the income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing the income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. (See Note 18 - Basic and Diluted Net Loss Per Share).

 

Fair Value Measurements

 

FASB ASC 820 “Fair Value Measurement and Disclosure” applies to all assets and liabilities that are being measured and reported on a fair value basis. ASC 820 establishes a framework for measuring fair value in U.S GAAP, and expands disclosure about fair value measurements. ASC 820 enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. ASC 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to ASC 820. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

 

The fair value represents management’s best estimates based on a range of methodologies and assumptions. The carrying value of receivables and payables arising in the ordinary course of business approximate fair value because of the relatively short period of time between their origination and expected realization.

 

40

 

 

The Company’s financial instruments consist primarily of cash and cash equivalents, receivables, notes receivable in connection with the Equity Transaction, payables and debt instruments. The carrying values of these financial instruments approximate their respective fair values as they are either short-term in nature or carry interest rates which are periodically adjusted to market rates. Unless otherwise indicated, the carrying value of these financial instruments approximates their fair market value.

 

At December 31, 2019, the carrying amount reported in the consolidated balance sheet for shares held in CleanSpark, Inc. of $936 included within short term investment approximates fair value as the asset had a readily determinable market value and as such was considered a Level 1 asset. The estimated fair value of the warrants held in CleanSpark, Inc. of approximately $531 were considered a Level 3 asset due to unobservable inputs. The Company sold all of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock during the year ended December 31, 2020.

 

Recent Accounting Pronouncements

 

There have been no recent accounting pronouncements not yet adopted by the Company which would have a material impact on the Company’s financial statements.

 

Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The ASU is effective for all annual and interim periods beginning December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact but does not anticipate there will be a material impact to the consolidated financial statements once implemented.

 

Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements for fair value measurements. The Company adopted this guidance on January 1, 2020. The adoption of this ASU did not have a material impact on the consolidated financial statements.

 

Measurement of Credit Losses on Financial Instrument. In June 2016, the FASB issued amended guidance to ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. This amended guidance for small reporting companies is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company does not expect that the amended guidance will have a material effect on our consolidated financial statements and related disclosures.  

3. DIVESTITURES

 

Pioneer Critical Power, Inc.

 

On January 22, 2019, Pioneer Critical Power, Inc., a Delaware corporation (“PCPI”), a wholly-owned subsidiary of the Company within the T&D Solutions segment, CleanSpark and CleanSpark Acquisition, Inc., a Delaware corporation (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, among other things, Merger Sub merged with and into PCPI, with PCPI becoming a wholly-owned subsidiary of the CleanSpark and the surviving company of the merger (the “Merger”).

 

At the effective date of the Merger, all of the issued and outstanding shares of common stock of PCPI, par value $0.01 per share, were converted into the right to receive (i) 175,000 shares of common stock, par value $0.001 per share (“CleanSpark Common Stock”), of CleanSpark, (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split completed by CleanSpark in December 2019.

 

During the year ended December 31, 2020, the Company sold all of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock it received in connection with the Merger Agreement and recorded proceeds of $2.4 million. The gain from the sale was partially offset by a mark to market adjustment of $1.4 million resulting in a net gain of $968 to other (income) expense in the accompanying statements of operations. Warrants at fair value were previously recorded at inception as long term within other assets.

 

In connection with the Merger Agreement, the Company, CleanSpark and PCPI entered into an Indemnity Agreement (the “Indemnity Agreement”), dated January 22, 2019, pursuant to which the Company agreed to assume the liabilities and obligations related to the claims made by Myers Powers Products, Inc. in the then-pending case titled Myers Power Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical Products, Corp., et al., Los Angeles County Superior Court Case No. BC606546 (the “Myers Power Case”) as they may relate to PCPI or CleanSpark after the closing of the Merger.

 

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In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Contract Manufacturing Agreement (the “Contract Manufacturing Agreement”), dated as of January 22, 2019, pursuant to which the Company will manufacture paralleling switchgear, automatic transfer switches and related control and circuit protective equipment (collectively, “Products”) exclusively for purchase by CleanSpark. CleanSpark will purchase the Products via purchase orders issued to the Company at any time and from time to time. The price for the Products payable by CleanSpark to the Company will be negotiated on a case by case basis. The Contract Manufacturing Agreement had a term of 18 months and expired during the third quarter of 2020.

 

In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Non-Competition and Non-Solicitation Agreement (the “Non-Compete Agreement”), dated January 22, 2019, pursuant to which the Company agreed not to, among other things, own, manage, operate, finance, control, advise, render services to or guarantee the obligations of any person or entity that engages in or plans to engage in the design, manufacture, distribution and service of paralleling switchgear, automatic transfer switches, and related products (the “Restricted Business”). The Company agreed not to engage in the Restricted Business within any state or county within the United States in which CleanSpark or the surviving company of the Merger conducts such Restricted Business for a period of four (4) years from the date of the Non-Compete Agreement.

 

In addition, the Company also agreed, for a period of four (4) years from the date of the Non-Compete Agreement, not to, among other things, directly or indirectly (i) solicit, induce, or attempt to induce customers, suppliers, licensees, licensors, franchisees, consultants of the Restricted Business as conducted by the Company, CleanSpark or the surviving company to cease doing business with the surviving company or CleanSpark or (ii) solicit, recruit, or encourage any of the surviving company’s or CleanSpark’s employees, or independent contractors to discontinue their employment or engagement with the surviving company or CleanSpark.

 

The Merger resulted in the deconsolidation of PCPI and a gain of $4.2 million in the first quarter of 2019. The fair value of the investment in the CleanSpark Common Stock was determined using quoted market prices, and the fair value of the investment in the warrants was established using a Black Scholes model.

 

The PCPI entity was a dormant business unit at the time of this sale; therefore this sale has no impact to the discontinued operations presented within the financial statements.

 

4. FAIR VALUE MEASUREMENTS

 

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:

 

 

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.

 

Level 2 - inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.

 

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.

 

On January 22, 2019, we entered into an Agreement and Plan of Merger with Merger Sub, which resulted in the Company receiving financial instruments that included the right to receive (i) 175,000 shares of CleanSpark Common Stock, (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split which was completed by CleanSpark in December 2019.

 

During the year ended December 31, 2020, the Company sold all of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock it received in connection with the Merger Agreement and recorded proceeds of $2.4 million. The gain from the sale was partially offset by a mark to market adjustment of $1.4 million resulting in a net gain of $968 to other (income) expense in the accompanying statements of operations. Warrants at fair value were previously recorded at inception as long term within other assets.

 

No other changes in valuation techniques or inputs occurred during the year ended December 31, 2020. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the year ended December 31, 2020.

 

42

 

 

5. REVENUES

 

Nature of our products and services

 

Our principal products and services include switchgear and engine-generator controls, complemented by a national field-service network to maintain and repair power generation assets.

 

Products

 

We provide switchgear that helps customers effectively and efficiently manage their electrical power distribution systems to desired specifications.

 

Additionally, we provide our customers with new and used sophisticated power generation equipment intended to ensure smooth, uninterrupted power to operations during times of emergency.

 

Services

 

Power generation systems represent considerable investments that require proper maintenance and service in order to operate reliably during a time of emergency. Our power maintenance programs provide preventative maintenance, repair and support service for our customers’ power generation systems.

 

Our principal source of revenue is derived from sales of products and fees for services. We measure revenue based upon the consideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of our products when the risk of loss or control for the product transfers to the customer and for services as they are performed. Under ASC 606, revenue is recognized when a customer obtains control of promised products or services in an amount that reflects the consideration we expect to receive in exchange for those products or services. To achieve this core principal, the Company applies the following five steps:

 

1)             Identify the contract with a customer

 

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products or services to be transferred and identifies the payment terms related to these products or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for products or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

 

2)             Identify the performance obligations in the contract

 

Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products or services, the Company must apply judgment to determine whether promised products or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised products or services are accounted for as a combined performance obligation.

 

3)             Determine the transaction price

 

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer. The customer payments are generally due in 30 days.

 

4)             Allocate the transaction price to performance obligations in the contract

 

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis or cost of the product or service. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

 

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5)            Recognize revenue when or as the Company satisfies a performance obligation

 

The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised product or service to a customer.

 

Substantially all of our revenue from the sale of switchgear and power generation equipment is recognized at a point of time. Revenues are recognized at the point in time that the customer obtains control of the good which is when it has taken title to the products and has assumed the risks and rewards of ownership specified in the purchase order or sales agreement. Service revenues include maintenance contracts that are recognized over time based on the contract term and repair services which are recognized as services are delivered.

 

The following table presents our revenues disaggregated by revenue discipline:

 

 

 

For the Year Ended

 

 

December 31,

 

 

2020

 

2019

Products

 

$

11,831

 

$

10,401

Services

 

 

7,659

 

 

10,181

Total revenue

 

$

19,490

 

$

20,582

 

See Note 17 - Business Segment, Geographic and Customer Information.

 

6. REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS

 

In connection with the preparation of our consolidated interim financial statements for the quarter ended June 30, 2020, we identified a revision as of December 31, 2019 in the calculation of the tax expense related to the Equity Transaction. The revision resulted in a net loss for tax purposes and created additional deferred tax assets related to these tax losses, as well as a reduction in the income tax expense, all recorded as part of discontinued operations. The recognition of additional deferred tax assets requires an increase to the valuation allowance as at December 31, 2019, consistent with the Company’s position on the future realization of these assets.

 

In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the revision and determined that the related impact was not material to our results of operations or financial position for any prior annual or interim period, but that correcting the $407 cumulative impact of the revision would be material to our results of operations for the three months ended June 30, 2020. Accordingly, we have corrected the consolidated balance sheets and consolidated statement of operations as of December 31, 2019.

 

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The impact to the consolidated balance sheets and consolidated statements of operations as of December 31, 2019 is as follows:

 

 

 

As of December 31, 2019

 

Consolidated Balance Sheets

 

As Reported

 

 

Adjustment

 

 

As Revised

 

Income taxes receivable

 

$

 

 

$

360

 

 

$

360

 

Total current assets

 

 

20,014

 

 

 

360

 

 

 

20,374

 

Total assets

 

 

28,119

 

 

 

360

 

 

 

28,479

 

Income taxes payable

 

 

543

 

 

 

(47

)

 

 

496

 

Total current liabilities

 

 

9,891

 

 

 

(47

)

 

 

9,844

 

Total liabilities

 

 

11,684

 

 

 

(47

)

 

 

11,637

 

Accumulated deficit

 

 

(7,566

)

 

 

407

 

 

 

(7,159

)

Total stockholders’ equity

 

 

16,435

 

 

 

407

 

 

 

16,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense from discontinued operations

 

$

737

 

 

$

(407

)

 

$

330

 

Income from discontinued operations, net of income taxes

 

 

10,598

 

 

 

407

 

 

 

11,005

 

Net loss

 

 

(1,439

)

 

 

407

 

 

 

(1,032

)

Basic and diluted loss from continuing operations

 

 

(1.38

)

 

 

 

 

 

(1.38

)

Basic and diluted income from discontinued operations

 

 

1.21

 

 

 

0.05

 

 

 

1.26

 

Basic and diluted net loss

 

 

(0.17

)

 

 

0.05

 

 

 

(0.12

)

 

Subsequent to the December 31, 2019 revision described above, the March 31, 2020 consolidated balance sheet was also revised to reflect an increase in other currents assets of $360 to $16,533, a decrease in other current liabilities of $47 to $8,698, and an increase to stockholders’ equity of $407 to $13,923.

 

The identified adjustment does not impact any other prior periods.

 

7. OTHER (INCOME) EXPENSE

 

Other (income) expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the year ended December 31, 2020, other income was $969, as compared to other expense of $2.8 million during the year ended December 31, 2019. For the year ended December 31, 2020, included in other income was a gain of $968 related to the sale and mark to market adjustment on the fair value of CleanSpark Common Stock and warrants, as compared to a loss of $2.8 million for the year ended December 31, 2019, related to the mark to market adjustment on the fair value of the common stock and warrants.

 

8. DISCONTINUED OPERATIONS

 

A discontinued operation is a component of the Company’s business that represents a separate major line of business that had been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Consolidated Statement of Operations, Consolidated Statement of Comprehensive Income (Loss), Consolidated Statement of Cash Flows, Consolidated Statement of Stockholders’ Equity and Consolidated Balance Sheets are presented as if the operation had been discontinued from the start of the comparative year. Based upon the authoritative guidance, the Company concluded that the operations of the liquid-filled and dry-type transformer business should be presented as discontinued operations as of December 31, 2019.

 

Overview

 

On August 16, 2019, the Company completed the Equity Transaction pursuant to the Stock Purchase Agreement, by and among the Company, the Disposed Companies, Nathan Mazurek, and the Buyer. Pursuant to the terms of the Stock Purchase Agreement, the Company sold (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer.

 

Upon completion of the Equity Transaction, Pioneer Power sold to the Buyer all of the assets and liabilities associated with its liquid-filled transformer and dry-type transformer manufacturing businesses within the Company’s T&D Solutions segment. Pioneer Power retained its switchgear manufacturing business within the T&D Solutions segment, as well as all of the operations associated with its Critical Power segment.

 

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Consideration

 

The consideration paid by the Buyer in the Equity Transaction is a base cash purchase price of $60.5 million, as well as the issuance by the Buyer of two subordinated promissory notes to Pioneer Power in the principal amounts of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million, in each case subject to adjustment pursuant to the terms of the Stock Purchase Agreement. Pursuant to the terms of the Stock Purchase Agreement, the Seller Notes will bear interest at an annualized rate of 4.0%, to be paid-in-kind annually, and will have a maturity date of December 31, 2022. In addition, pursuant to the terms of the Stock Purchase Agreement, as amended, the Buyer may set-off on a dollar-for-dollar basis any indemnifiable losses the Buyer suffers as a result of certain actions or omissions by Pioneer Power or the Disposed Companies against the first Seller Note in the aggregate principal amount of $5.0 million, and such right of set-off is the Buyer’s sole source of recovery with respect to losses resulting from inaccuracies or breaches of the Company’s representations and warranties, except for breaches of certain fundamental warranties, claims of fraud and breaches of representations, warranties or covenants relating to taxes, and claims for certain specific indemnities.

 

During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.8 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.2 million. During the second quarter of 2020, the Company recognized an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the Company. Including the reduction to the principal amount for the valid claim, the Company has revalued the Seller Notes for an appropriate imputed interest rate, resulting in a change to the value of the Seller Notes at December 31, 2020 of $254, for a carrying value of $5.3 million, which is included within other long term assets (see Note 11 - Other Assets).

 

Covenants

 

In addition, pursuant to the Stock Purchase Agreement, each of Pioneer Power, its affiliates and Nathan Mazurek, Pioneer Power’s President, Chief Executive Officer and Chairman of the Board of Directors, have agreed to a non-solicitation provision that generally prohibits such persons, for a three-year period, from, among other things, soliciting or attempting to hire employees of the Disposed Companies or the Buyer or engaging in the business operated by the Disposed Companies within certain geographic areas, subject to certain limitations and exceptions.

 

Indemnification

 

Pursuant to the Stock Purchase Agreement, Pioneer Power and the Buyer have each agreed to indemnify one another for any and all liabilities, losses, damages, claims, demands, suits, actions, judgments, fines, penalties, deficiencies, awards, taxes, assessments, costs or expenses (including reasonable attorney’s or other professional fees and expenses) (“Losses”) resulting from any inaccuracy or breach of the respective party’s representations and warranties or any breach or nonperformance of the respective party’s covenants and agreements in the Stock Purchase Agreement or its related ancillary agreements.

 

In addition, Pioneer Power has agreed to indemnify the Buyer and its affiliated parties for Losses resulting from, among other things, certain pre-closing