10-Q 1 ppsi-10q_093019.htm QUARTERLY REPORT

 

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

     

FORM 10-Q 

     
     

(Mark One) 

 

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

 

For the quarterly period ended September 30, 2019

 

OR

 

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

 

Commission file number: 001-35212

     

 

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)

 

(212) 867-0700 

(Registrant’s telephone number, including area code)

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
    Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

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

 

 The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of November 18, 2019 was 8,726,045. 

 

 

 

 

PIONEER POWER SOLUTIONS, INC.

Form 10-Q 

For the Quarterly Period Ended September 30, 2019

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Page
Item 1. Financial Statements 1
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 1
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018          2
Consolidated Balance Sheets at September 30, 2019 (Unaudited) and December 31, 2018           3
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018          4
Unaudited Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018          5
Notes to Unaudited Consolidated Financial Statements         6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations        21
Item 3. Quantitative and Qualitative Disclosures About Market Risk       32
Item 4. Controls and Procedures       33

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings       34
Item 1A. Risk Factors        34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds       35
Item 3. Defaults Upon Senior Securities       35
Item 4. Mine Safety Disclosures       35
Item 5. Other Information       35
Item 6. Exhibits 35

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

PIONEER POWER SOLUTIONS, INC. 

Consolidated Statements of Operations

(In thousands, except per share data) 

(Unaudited)

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2019  2018  2019  2018
Revenues  $5,569   $4,567   $13,947   $14,688 
Cost of goods sold   5,313    3,970    12,913    12,773 
Gross profit   256    597    1,034    1,915 
Operating expenses                    
Selling, general and administrative   3,843    1,764    7,613    5,780 
Total operating expenses   3,843    1,764    7,613    5,780 
Loss from continuing operations   (3,587)   (1,167)   (6,579)   (3,865)
Interest expense   84    237    548    685 
Gain on sale of subsidiaries   —      —      4,207    —   
Other expense   2,148    267    2,613    615 
Loss before taxes   (5,819)   (1,671)   (5,533)   (5,165)
  Income tax benefit   (2,567)   (267)   (2,463)   (797)
Net loss from continuing operations   (3,252)   (1,404)   (3,070)   (4,368)
Discontinued operations (Note 6)                    
(Loss) income from operations of discontinued business units   (4,329)   1,950    (2,352)   4,020 
Gain on sale of discontinued subsidiaries   17,210    —      17,210    —   
Income tax expense   2,637    488    3,171    964 
Income from discontinued operations, net of income taxes   10,244    1,462    11,687    3,056 
Net income (loss)  $6,992   $58   $8,617   $(1,312)
                     
Earnings (loss) per share:                    
Basic                    
Loss from continuing operations  $(0.37)  $(0.16)  $(0.35)  $(0.50)
Income from discontinued operations   1.17    0.17    1.34    0.35 
Net income (loss)  $0.80   $0.01   $0.99   $(0.15)
                     
Diluted                    
Loss from continuing operations  $(0.37)  $(0.16)  $(0.35)  $(0.50)
Income from discontinued operations   1.17    0.17    1.34    0.35 
Net income (loss)  $0.80   $0.01   $0.99   $(0.15)
                     
Weighted average common shares outstanding:                    
  Basic   8,726    8,726    8,726    8,726 
  Diluted   8,730    8,734    8,730    8,726 

  

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

 

1 

 

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Net income (loss)  $6,992   $58   $8,617   $(1,312)
Other comprehensive income (loss)                    
Foreign currency translation adjustments   4,704    21    4,766    (146)
Amortization of net prior service costs and net actuarial losses, net of tax   1,035    (7)   1,145    (23)
Other comprehensive income (loss)   5,739    14    5,911    (169)
  Comprehensive income (loss)  $12,731   $72   $14,528   $(1,481)

 

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

 

2 

 

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Balance Sheets 

(In thousands, except share data) 

 

   September 30,   December 31, 
   2019   2018 
ASSETS   (unaudited)      
Current assets          
Cash and cash equivalents  $13,509   $200 
Short term investments   2,028    — 
Accounts receivable, net   1,817    3,384 
Insurance receivable   1,800    — 
Inventories, net   5,248    3,678 
Prepaid expenses and other current assets   889    1,995 
Current assets of discontinued operations   —    37,667 
Total current assets   25,291    46,924 
Property, plant and equipment, net   692    878 
Deferred income taxes   2,588    2,837 
Other assets   8,343    3,098 
Intangible assets, net   93    124 
Goodwill   2,969    2,969 
Assets of discontinued operations   —    15,681 
Total assets  $39,976   $72,511 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Bank overdrafts  $136   $78 
Revolving credit facilities   —    20,755 
Accounts payable and accrued liabilities   7,198    7,256 
Deferred revenue   2,033    1,695 
Current maturities of long-term debt   —    1,174 
Income taxes payable   1,266    95 
Dividend payable   11,955    — 
Current liabilities of discontinued operations   —    21,362 
Total current liabilities   22,588    52,415 
Long-term debt, net of current maturities   —    2,619 
Other long-term liabilities   1,829    1,599 
Deferred income taxes   1,025    1,592 
Long-term liabilities of discontinued operations   —    2,335 
Total liabilities   25,442    60,560 
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 September 30, 2019 and December 31, 2018   9    9 
Cash dividend declared   (11,955)   — 
Additional paid-in capital   23,976    23,966 
Accumulated other comprehensive income (loss)   14    (5,897)
Retained earnings (accumulated deficit)   2,490    (6,127)
Total stockholders’ equity   14,534    11,951 
Total liabilities and stockholders’ equity  $39,976   $72,511 

 

 

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

 

3 

 

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

  

   Nine Months Ended
   September 30,
   2019  2018
Operating activities          
Net income (loss)  $8,617   $(1,312)
Depreciation   549    898 
Amortization of intangible assets   139    1,102 
Amortization of right-of-use assets   351    403 
Amortization of debt issuance cost   28    67 
Deferred income tax benefit   (318)   (414)
Change in receivable reserves   2,840    (374)
Change in inventory reserves   120    288 
Inventory write-off from flood damage   2,688    —   
Gain on sale of subsidiaries   (21,417)   —   
Unrealized loss on short term investments   2,180    —   
Accrued pension   114    (6)
Stock-based compensation   10    160 
Other   —      14 
Foreign currency remeasurement loss   (186)   85 
Changes in current operating assets and liabilities:          
Accounts receivable   1,942    (455)
Inventories   (1,599)   (3,558)
Prepaid expenses and other assets   408    (509)
Income taxes   1,444    42 
Accounts payable and accrued liabilities   (291)   4,947 
Customer deposits and deferred revenue   338    (811)
Net cash (used in)/provided by operating activities   (2,043)   567 
           
Investing activities          
Additions to property, plant and equipment   (148)   (369)
Proceeds from sale of subsidiairies, net   41,925    —   
Net cash provided by/(used in) investing activities   41,777    (369)
           
Financing activities          
Bank overdrafts   (1,677)   1,593 
Short term borrowings   —      (2,260)
Borrowing under debt agreement   15,329    31,696 
Repayment of debt   (40,081)   (30,462)
Payment of debt issuance cost   —      (24)
Write-off of notes receivable   600    —   
Principal repayments of financing leases   (632)   (376)
Net cash (used in)/provided by financing activities   (26,461)   167 
           
Increase in cash and cash equivalents   13,273    365 
Effect of foreign exchange on cash and cash equivalents   36    76 
Cash and cash equivalents          
Beginning of period   200    218 
End of period  $13,509   $659 
           
Supplemental cash flow information:          
Interest paid   1,258    2,040 
Income taxes paid, net of refunds   132    402 
Non-cash investing and financing activities:          
Declared dividend unpaid   11,955    —   
Securities received for sale of subsidiary   4,207    —   
Notes received for sale of subsidiary   6,558    —   

   

For assets sold and consideration received in connection with the sale of Pioneer Critical Power, Inc. and our transformer business units, see Note 3.

 

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

 

4 

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands)

(Unaudited) 

 

               Accumulated       Accumulated     
           Additional   other    Cash   deficit/   Total 
   Common Stock   paid-in   comprehensive   Dividend   Retained   stockholders’ 
   Shares   Amount   capital   income (loss)   Declared   Earnings   equity 
Balance - June 30, 2018   8,726,045   $9   $23,947   $(5,981)  $—   $(1,833)  $16,142 
Net income   —    —    —    —    —    58    58 
Stock-based compensation   —    —    14    —    —    —    14 
Foreign currency translation adjustment   —    —    —    21    —    —    21 
Pension adjustment, net of taxes   —    —    —    (7)   —    —    (7)
Balance - September 30, 2018   8,726,045   $9   $23,961   $(5,967)  $—   $(1,775)  $16,228 
                                    
Balance - June 30, 2019   8,726,045    9    23,974    (5,725)   —    (4,502)   13,756 
Net income   —    —    —    —    —    6,992    6,992 
Stock-based compensation   —    —    2    —    —    —    2 
Foreign currency translation adjustment   —    —    —    4,704    —    —    4,704 
Pension adjustment, net of taxes   —    —    —    1,035    —    —    1,035 
Cash dividend declared   —    —    —    —    (11,955)   —    (11,955)
Balance - September 30, 2019   8,726,045   $9   $23,976   $14   $(11,955)  $2,490   $14,534 
                                    
Balance - December 31, 2017   8,726,045   $9   $23,801   $(5,798)  $—   $(463)  $17,549 
Net loss   —    —    —    —    —    (1,312)   (1,312)
Stock-based compensation   —    —    160    —    —    —    160 
Foreign currency translation adjustment   —    —    —    (146)   —    —    (146)
Pension adjustment, net of taxes   —    —    —    (23)   —    —    (23)
Balance - September 30, 2018   8,726,045   $9   $23,961   $(5,967)  $—   $(1,775)  $16,228 
                                    
Balance - December 31, 2018   8,726,045    9    23,966    (5,897)   —    (6,127)   11,951 
Net income   —    —    —    —    —    8,617    8,617 
Stock-based compensation   —    —    10    —    —    —    10 
Foreign currency translation adjustment   —    —    —    4,766    —    —    4,766 
Pension adjustment, net of taxes   —    —    —    1,145    —    —    1,145 
Cash dividend declared   —    —    —    —    (11,955)   —    (11,955)
Balance - September 30, 2019   8,726,045   $9   $23,976   $14   $(11,955)  $2,490   $14,534 

  

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

 

5 

 

PIONEER POWER SOLUTIONS, INC. 

Notes to Consolidated Financial Statements 

September 30, 2019 (unaudited)

 

1. BASIS OF PRESENTATION

 

Overview

 

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 five (5) additional locations in the U.S. for manufacturing, centralized distribution, engineering, sales and administration.

 

We have two reportable segments as defined in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2019: Transmission and Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).

 

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 purchases 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 Company has revalued the notes for an appropriate imputed interest rate, resulting in a reduction to the value of the notes at September 30, 2019 of $942, for a carrying value of $6.6 million, which is included within other long term assets as of September 30, 2019. After certain adjustments and expenses of sale, the Company received net consideration from the sale of $48.5 million.

 

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.

 

Presentation

 

The accompanying unaudited 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 September 30, 2019. 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 interim consolidated financial statements have been included. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP for a year-end balance sheet.

 

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

 

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

 

Operating results of the liquid-filled and dry-type transformer manufacturing businesses have been previously included in the T&D Segment, which have now been reclassified as discontinued operations for all periods presented. See Note 6 – Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q. Unless noted otherwise, discussions in these notes pertain to our continuing operations.

 

6 

 

 

These unaudited consolidated financial statements should be read in conjunction with the risk factors under the heading “Part II – Item 1A. Risk Factors” and the risk factors and the audited consolidated financial statements and notes thereto of the Company and its subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

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 nine months ended September 30, 2019, the Company has retained earnings of $2.5 million and has working capital of $2.7 million. As of September 30, 2019, the Company had no debt and $13.5 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 under our revolving credit facilities. Our cash requirements are generally for operating activities, debt repayment, capital improvements and acquisitions. As further discussed in Note 11 - Debt in Part I of this Form 10-Q all outstanding amounts under our credit facilities were paid in full on August 16, 2019, using proceeds from the Equity Transaction, and the underlying debt agreements were terminated.

 

During the quarter ended September 30, 2019 the Company declared a cash dividend of approximately $12 million in aggregate which was subsequently enjoined by ruling of the courts in connection with the litigation with Myers Power Products, Inc., (see Note 16). As a result of the court order, the cash dividend was cancelled by the Company during the fourth quarter of 2019. Excluding the dividend payable the Company believes it has sufficient cash on hand to fund ongoing operations for no less than 12 months from the issuance of this report. However, 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.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company’s significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes in the Company’s accounting policies during this fiscal quarter of 2019. 

 

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.

 

Leases. In February 2016, the FASB issued 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.

 

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. The Company does not anticipate material impact of adopting this ASU on its consolidated financial statements.

 

Disclosure Requirements for Defined Benefit Plans. In August 2018, the FASB issued amended guidance under Subtopic 715-20 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The amended guidance removes the requirements to disclose: amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; the amount and timing of plan assets expected to be returned to the entity; and the effects of a one-percentage point change in assumed health care cost trend rates. The amended guidance requires disclosure of an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This guidance is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The amended guidance is required to be applied on a retrospective basis to all periods presented. We are currently evaluating this guidance to determine the impact on our disclosures.

 

7 

 

 

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 is effective for fiscal years beginning after December 15, 2019, 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. We do 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) 1,750,000 shares of common stock, par value $0.001 per share (“Common Stock”), of CleanSpark, (ii) a five-year warrant to purchase 500,000 shares of Common Stock at an exercise price of $1.60 per share, and (iii) a five-year warrant to purchase 500,000 shares of Common Stock at an exercise price of $2.00 per share.

 

The Merger Agreement also contains representations, warranties and covenants of the parties customary for transactions similar to those contemplated by the Merger Agreement. Such representations and warranties are made solely for purposes of the Merger Agreement and, in some cases, may be subject to qualifications and limitations agreed to by the parties in connection with the negotiated terms of the Merger Agreement and may have been qualified by disclosures that were made in connection with the parties’ entry into the Merger Agreement.

 

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 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 addition, the Company agreed to indemnify and hold harmless CleanSpark and the surviving company of the Merger and their respective officers, directors, agents, members and employees, and the heirs successors and assigns of the foregoing from and against all losses incurred by reason of claims made by Myers Power Products, Inc. as presented or substantially similar to that presented in the Myers Powers Case that are brought against CleanSpark or the surviving company of the Merger after the closing of the Merger. The Indemnity Agreement expires five years from the date of the Indemnity Agreement.

 

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, but all purchases of Products will have a target price of 91% of the CleanSpark customer’s purchase order price and will not be more than 109% of the Company’s cost. The Contract Manufacturing Agreement has a term of 18 months and may be extended by mutual agreement of the Company and CleanSpark.

 

8 

 

 

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 common stock of CleanSpark was determined using quoted market prices and warrants were established using a Black Scholes model.

 

From the date of sale through September 30, 2019, the estimated fair value of the warrants and common stock decreased to $2.0 million and an unrealized mark to market loss of $2.2 million was recognized within other expense for the nine months ended September 30, 2019. For the three months ended September 30, 2019, the unrealized mark to market loss recognized within other expense was $1.9 million. 

 

4. REVENUES

 

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606.

 

Financial Statement Impact of Adopting ASC 606

 

The Company adopted ASC 606 using the modified retrospective method. There was no adjustment to opening retained earnings due to the impact of adopting Topic 606.

 

Nature of our products and services

 

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

 

Products

 

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

 

9 

 

 

We provide customers with an advanced data collection and monitoring platform for power generation equipment which is used 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.

 

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 equipment 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.

 

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The following table presents our revenues disaggregated by revenue discipline:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Products  $2,896   $1,662   $7,147   $7,029 
Services   2,673    2,905    6,800    7,659 
Total Revenue  $5,569   $4,567   $13,947   $14,688 

 

See Note 14 - Business Segment and Geographic Information in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.

 

5. OTHER EXPENSE

 

Other expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the three months ended September 30, 2019, other non-operating expense was $2.1 million, as compared to $267 during the three months ended September 30, 2018. For the three months ended September 30, 2019, included in other non-operating expense was a loss of $1.9 million related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the Merger of PCPI, CleanSpark and the Merger Sub.

 

For the nine months ended September 30, 2019, other non-operating expense was $2.6 million, as compared to $615 during the nine months ended September 30, 2018. For the nine months ended September 30, 2019, included in other non-operating expense was a loss of $2.2 million related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the Merger of PCPI, CleanSpark and the Merger Sub.

 

6. 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 Cash Flows, 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 September 30, 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 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.

 

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 aggregate principal amount of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million (the “Seller Notes”), 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. The Company has revalued the Seller Notes for an appropriate imputed interest rate, resulting in a reduction to the value of the notes at September 30, 2019 of $942, for a carrying value of $6.6 million. In addition, pursuant to the terms of the Stock Purchase Agreement, as amended by the Amendment, 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. No such losses are expected as of September 30, 2019.

 

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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 tax matters, debt held by the Disposed Companies, transaction expenses, breaches of representations and warranties that are not covered by the Buyer’s representation and warranty insurance because the Buyer had knowledge of such breach (only to the extent such Losses would have been covered by the representation and warranty insurance had the Buyer not known of such breach) (“Interim Breaches”), certain matters related to Electrogroup’s operations, certain legal proceedings, certain matters related to Nexus Custom Magnetics, L.L.C., a wholly owned subsidiary of Jefferson, and certain matters concerning end-user software utilized by the Disposed Companies.

 

The indemnification obligations of Pioneer Power with respect to Losses of the Buyer 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, are subject to (i) a true deductible equal to $330,000, (ii) a cap equal to $330,000, and (iii) a per-claim threshold amount of $50,000, and any such Losses shall be satisfied solely through a set-off to the first Seller Note with the principal amount of $5 million.  In addition, the indemnification rights of the Buyer with respect to Interim Breaches are subject to a cap equal to $5.0 million, and the indemnification rights of the Buyer with respect to Losses resulting from certain legal matters are subject to a true deductible equal to $150,000 and a cap equal to $5.0 million.

 

The indemnification obligations of the Buyer, except with respect to breaches of certain fundamental representations and warranties and claims of fraud, are subject to a true deductible equal to $330,000 and a cap equal to $3.3 million. In addition, each party’s total indemnification obligation is subject to a cap equal to the purchase price, except for claims of fraud.

 

The Buyer has obtained a customary representation and warranty insurance policy insuring the Buyer against losses resulting from a breach of representations and warranties by Pioneer Power and the Disposed Companies, and the Buyer is required to use commercially reasonable efforts to utilize the representation and warranty insurance to cover any Losses resulting from such a breach.

 

Other Provisions

 

The Stock Purchase Agreement also contains customary representations and warranties, and provisions governing certain other matters between the parties.

 

The foregoing description of the Stock Purchase Agreement does not purport to be complete is qualified in its entirety by reference to the full text of the Stock Purchase Agreement, a copy of which is filed as Exhibit 2.1 on Form 8-K filed with the Security and Exchange Commission on July 1, 2019 and is incorporated by reference herein.

 

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

 

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The components of assets and liabilities that are attributable to discontinued operations are as follows (in thousands):

 

   September 30,   December 31, 
   2019   2018 
Assets of discontinued operations:          
Cash and cash equivalents  $—   $11 
Accounts receivable - trade, net   —    12,944 
Inventories, net   —    23,632 
Income taxes receivable   —    566 
Prepaid expenses   —    514 
Property, plant and equipment, net   —    4,406 
Right of use asset   —    2,124 
Deferred income taxes   —    134 
Intangible assets, net   —    3,460 
Goodwill   —    5,557 
Assets of discontinued operations  $—   $53,348 
           
Liabilities of discontinued operations:          
Bank overdrafts  $—   $1,690 
Accounts payable and accrued liabilities   —    18,894 
Income taxes payable   —    778 
Pension deficit   —    148 
Other long-term liabilities   —    2,187 
Liabilities of discontinued operations  $—   $23,697 

 

During the quarter ended June 30, 2019 the Company’s Reynosa Facility was damaged by a flood resulting in damages to inventory. This loss has been partially offset by $2.4 million of insurance proceeds that the Company expects to receive. The Company received $600 of these insurance proceeds during the quarter ended September 30, 2019. While the net loss on inventory damaged amounting to approximately $782 has been reflected within the Cost of goods sold in discontinued operations, the corresponding insurance receivable of $1.8 million has been recognized as an asset from continuing operations as of September 30, 2019. The amount of damaged inventory and insurance proceeds are based upon the management’s best estimate, and the actual amount of damaged inventory and insurance proceeds may differ from such estimates.

 

During the quarter ended September 30, 2019, the Company determined that there was substantial doubt over our ability to collect $2.3 million due from our former Asian manufacturing partner as the Company no longer retains a relationship with this entity subsequent to the sale of the Transformer business. While the Company will continue to pursue collection of the amount, based upon discussions with the supplier during the third quarter the recognition of a reserve was deemed appropriate.

 

The following table presents the discontinued operations of the liquid-filled and dry-type transformer manufacturing businesses in the Consolidated Statement of Operations (in thousands):

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2019  2018  2019  2018
Revenues  $5,948   $22,663   $46,631   $65,193 
Costs and Expenses                    
   Cost of goods sold   6,029    18,349    39,915    52,098 
Selling, general and administrative   4,493    2,755    9,207    8,150 
Foreign exchange gain   (342)   (890)   (833)   (618)
Interest expense   103    489    653    1,437 
Other (income) expense   (6)   10    41    106 
Total costs and expenses   10,277    20,713    48,983    61,173 
Gain on sale of discontinued subsidiaries   17,210    —      17,210    —   
Income before provision for income taxes   12,881    1,950    14,858    4,020 
Income tax expense   2,637    488    3,171    964 
Income from discontinued operations, net of income taxes  $10,244   $1,462   $11,687   $3,056 

  

 

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The following table presents the discontinued operations of the liquid-filled and dry-type transformer manufacturing businesses in the Consolidated Statements of Cash Flows (in thousands):

 

   Nine Months Ended September 30, 
   2019   2018 
Net cash (used in)/provided by operating activities  $(2,043)  $567 
Net cash provided by/(used in) investing activities   41,777    (369)
Net cash (used in)/provided by financing activities   (26,461)   167 
Effect of foreign exchange on cash and cash equivalents   36   76 
   Increase in cash and cash equivalents  $13,309   $441 

 

7. INVENTORIES

 

The components of inventories are summarized below:

 

   September 30,   December 31, 
   2019   2018 
Raw materials  $2,151   $2,049 
Work in process   3,463    1,949 
Finished goods   46    46 
Provision for excess and obsolete inventory   (412)   (366)
Total inventories  $5,248   $3,678 

 

Inventories are stated at the lower of cost or a net realizable value determined on a FIFO method. Included in work in process at September 30, 2019 and December 31, 2018 are goods in transit of approximately $65 and $120, respectively.

 

8. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized below:

   September 30,   December 31, 
   2019   2018 
Machinery and equipment   1,219    1,219 
Furniture and fixtures   205    205 
Computer hardware and software   682    682 
Leasehold improvements   337    312 
    2,443    2,418 
Less: Accumulated depreciation   (1,751)   (1,540)
Total property, plant and equipment, net  $692   $878 

 

Depreciation expense was $211 and $126 for the period ended September 30, 2019 and 2018, respectively.

 

9. OTHER ASSETS

 

Included in other assets at September 30, 2019 and December 31, 2018 are right-of-use assets, net, of $1.8 million and $2.2 million, respectively, related to our lease obligations.

 

In December 2011 and January 2012, the Company made two secured loans, each in the amount of $300 to a developer of a renewable energy project in the U.S, secured by assets of the developer. The promissory notes accrue interest at a rate of 4.5% per annum with a final payment of all unpaid principal and interest becoming fully due and payable upon the earlier to occur of (i) the four year anniversary of the issuance date of the promissory notes, or (ii) an event of default. As defined in the promissory notes, an event of default includes, but is not limited to, the following: any bankruptcy, reorganization or similar proceeding involving the borrower, a sale or transfer of substantially all the assets of the borrower, a default by the borrower relating to any indebtedness due to third parties, the incurrence of additional indebtedness by the borrower without the Company’s written consent and failure of the borrower to perform its obligations pursuant to its other agreements with the Company, including its purchase order for pad mount transformers. The Company has determined that the probability of recovering the secured loans is unlikely, and has written-off the balance of $600 during the quarter ended September 30, 2019.

 

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As a result of the Company entering into the Stock Purchase Agreement on June 28, 2019, as amended (see Note 3 – Divestitures), we have received two subordinated promissory notes in the aggregate principal amount of $7.5 million, subject to certain adjustments. The Company determined the fair value of the notes based on market conditions and prevailing interest rates. As of September 30, 2019, the net value of the subordinated promissory notes was $6.6 million and is included in other assets.

 

10. GOODWILL AND OTHER INTANGIBLE ASSETS

 

There were no changes in the carrying values of goodwill for the nine months ended September 30, 2019.

 

   Critical Power     
   Solutions   Total 
   Segment   Goodwill 
Gross Goodwill:          
Balance as of January 1, 2019  $2,969   $2,969 
No activity   —    — 
Balance as of September 30, 2019  $2,969   $2,969 

 

Changes in the carrying values of intangible assets for the nine months ended September 30, 2019, were as follows:

 

   Critical Power   Total 
   Solutions   Intangible 
   Segment   Assets 
Balance as of January 1, 2019, net  $124   $124 
Amortization   (31)   (31)
Balance as of September 30, 2019, net  $93   $93 

 

The components of intangible assets as of September 30, 2019 are summarized below:

 

   Weighted
Average Amortization Years		   Gross Carrying Amount   Accumulated Amortization   Net Book Value 
Internally developed software   7   $289   $(196)  $93 
Total intangible assets       $289   $(196)  $93 

  

The amortization of intangible assets expense was $31 and $1.0 million for the nine months ended September 30, 2019 and 2018, respectively.

 

11. DEBT

 

Canadian Credit Facilities

 

In April 2016, our wholly owned subsidiary, Pioneer Electrogroup Canada Inc., entered into an Amended and Restated Credit Agreement (“CAD ARCA”) with Bank of Montreal (“BMO”) with respect to our existing Canadian credit facilities (as amended and restated, the “Canadian Facilities”) that replaced and superseded all of our businesses’ prior financing arrangements with the bank. This CAD ARCA extended the maturity date of our Canadian Facilities to July 31, 2017. The CAD ARCA was further amended (the “2017 CAD ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 CAD ARCA Amendment”). The 2018 CAD ARCA Amendment extended the term of our Canadian Facilities to April 1, 2020. On August 8, 2019, BMO agreed to a temporary borrowing base increase until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities and the U.S. Facilities, and (ii) August 31, 2019.

 

Our Canadian Facilities provided for up to $8.2 million Canadian dollars (“CAD”) (approximately $6.3 million expressed in U.S. dollars) consisting of a revolving $7.0 million CAD revolving credit facility (“Facility A”) to finance ongoing operations, a $471 CAD term credit facility (“Facility B”) that financed a plant expansion, and a $712 USD Facility (“Facility C”) that financed a business acquisition and the purchase and expansion of its manufacturing facilities. The 2017 CAD ARCA Amendment increased the Facility A to $8.0 million CAD, increasing the total amount of loans available under the Canadian Facilities to $9.2 million CAD. We made the final principal payment under Facility B on April 30, 2018, and the outstanding principal balance under Facility C with proceeds received from the sale of the Farnham, Quebec, Canada, building in December 2018. All outstanding amounts under Facility A were paid in full on August 16, 2019, using proceeds from the Equity Transaction, and the underlying debt agreements were terminated.

 

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United States Credit Facilities

 

In April 2016, we entered into an Amended and Restated Credit Agreement (“US ARCA”) with BMO with respect to our existing U.S. facilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank (the “U.S. Facilities”).The US ARCA was further amended (the “2017 US ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 US ARCA Amendment”). The 2018 US ARCA Amendment extended the term of our US Facilities to April 1, 2020.

 

Our U.S. Facilities, as amended and restated, provided for up to $19.1 million USD consisting of a $14.0 million USD demand revolving credit facility (“USD Facility A”) to finance ongoing operations, a $5.0 million USD term loan facility (“USD Facility B”) that financed the acquisition of Titan, and a new $100 revolving credit facility provided pursuant to a MasterCard is to be used to pay for and temporarily finance our day-to-day business expenses and for no other purpose. The 2017 US ARCA Amendment increased the USD Facility A to $15.0 million, increasing the total amount of loans available under the U.S. Facilities to $20.1 million USD. All outstanding amounts under USD Facilities A and B were paid in full on August 16, 2019, using proceeds from the Equity Transaction, and the underlying debt agreements were terminated.

 

12. STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company had 8,726,045 shares of common stock, $0.001 par value per share, outstanding as of September 30, 2019 and December 31, 2018.

 

Stock-Based Compensation

 

A summary of stock option activity under the 2011 Long-Term Incentive Plan as of September 30, 2019, and changes during the nine months ended September 30, 2019, are presented below:

 

    Stock
Options		   Weighted average
exercise price		   Weighted
average remaining
contractual term		   Aggregate
intrinsic value		 
Outstanding as of January 1, 2019    424,800   $8.30    6.5   $22 
Granted    —    —           
Exercised    —    —           
Forfeited    —    —           
Outstanding as of September 30, 2019    424,800   $8.30    5.70   $25 
Exercisable as of September 30, 2019    421,467   $8.31    5.70   $25 

 

As of September 30, 2019, there were 248,867 shares available for future grants under the Company’s 2011 Long-Term Incentive Plan.

 

Stock-based compensation expense recorded for the three and nine months ended September 30, 2019 was approximately $2 and $10, respectively, as compared to the expense of approximately $14 and $160, during the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of operations of approximately $4.

 

Cash Dividend Declared

 

On September 5, 2019, the Board of Directors of the Company declared a special cash dividend of $1.37 per share, payable to shareholders of record on September 16, 2019. The dividend was payable on October 7, 2019.

 

On October 4, 2019, the dividend was enjoined by court order of the Superior Court of California related to the case titled Myers Power Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical Products Corp., et al. The Company continues to contest the order; however, as a result of the order the dividend payable has been reversed during the fourth quarter of 2019.

 

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13. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE

 

Basic and diluted income (loss) per common share is calculated based on the weighted average number of shares outstanding during the period. The Company’s employee and director stock option awards, as well as incremental shares issuable upon exercise of warrants, are not considered in the calculations if the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2019  2018  2019  2018
Numerator:            
Net loss  $(3,252)  $(1,404)  $(3,070)  $(4,368)
Income from discontinued operations, net of income taxes   10,244    1,462    11,687    3,056 
Net income (loss)  $6,992   $58   $8,617   $(1,312)
                     
Denominator:                    
Weighted average basic shares outstanding   8,726    8,726    8,726    8,726 
Effect of dilutive securities - equity based compensation plans   4    8    4    —   
Denominator for diluted net income per common share   8,730    8,734    8,730    8,726 
                     
Income (loss) per share:                    
Basic                    
Loss from continuing operations  $(0.37)  $(0.16)  $(0.35)  $(0.50)
Income from discontinued operations   1.17    0.17    1.34    0.35 
    Net income (loss)  $0.80   $0.01   $0.99   $(0.15)
                     
Diluted                    
Loss from continuing operations  $(0.37)  $(0.16)  $(0.35)  $(0.50)
Income from discontinued operations   1.17    0.17    1.34    0.35 
    Net income (loss)  $0.80   $0.01   $0.99   $(0.15)

  

14. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

 

The Company follows ASC 280 - Segment Reporting in determining its reportable segments. The Company considered the way its management team, most notably its chief operating decision maker, makes operating decisions and assesses performance and considered which components of the Company’s enterprise have discrete financial information available. As the Company makes decisions using a manufactured products vs. distributed products and services group focus, its analysis resulted in two reportable segments: T&D Solutions and Critical Power. The T&D Solutions reportable segment is our switchgear business unit. The Critical Power reportable segment is the Company’s Titan Energy Systems Inc. business unit.

 

The T&D Segment is involved in the design, manufacture and distribution of switchgear used primarily by utilities, large industrial and commercial operations to manage their electrical power distribution needs. The Critical Power segment provides power generation equipment, and aftermarket field-services primarily to help customers ensure smooth, uninterrupted power to operations during times of emergency.

 

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The following tables present information about segment loss: 

                 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Revenues                
T&D Solutions                    
Switchgear  $2,597   $1,274   $6,408   $5,858 
    2,597    1,274    6,408    5,858 
Critical Power Solutions                    
Equipment   299    388    739    1,171 
Service   2,673    2,905    6,800    7,659 
    2,972    3,293    7,539    8,830 
Consolidated  $5,569   $4,567   $13,947   $14,688 

 

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Depreciation and Amortization                    
T&D Solutions  $37   $71   $108   $252 
Critical Power Solutions   63    369    136    1,122 
Unallocated Corporate Overhead Expenses   11    16    39    49 
Consolidated  $111   $456   $283   $1,423 

 

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Operating Loss                    
T&D Solutions  $(1,154)  $(667)  $(1,928)  $(1,231)
Critical Power Solutions   (162)   140    (310)   (534)
Unallocated Corporate Overhead Expenses   (2,271)   (640)   (4,341)   (2,100)
Consolidated  $(3,587)  $(1,167)  $(6,579)  $(3,865)

  

Revenues are attributable to countries based on the location of the Company’s customers:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Revenues                
United States  $5,569   $4,567   $13,947   $14,688 

 

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15. LEASES

 

The Company leases certain offices, facilities and equipment under operating and financing leases. Our leases have remaining terms of 1 year to 4 years. As of September 30, 2019 and 2018, assets recorded under finance leases were $1.0 million and $1.1 million, respectively, and accumulated amortization associated with finance leases were $507 and $453, respectively. As of September 30, 2019 and 2018, assets recorded under operating leases were $2.1 million and $2.5 million, respectively and accumulated amortization associated with operating leases were $899 and $654, respectively. Such amounts are included within other assets.

 

The components of the lease expense were as follows:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Operating lease cost  $169   $143   $508   $423 
                     
Finance lease cost                    
   Amortization of right-of-use asset  $87   $48   $222   $132 
   Interest on lease liabilities   12    10    38    29 
Total finance lease cost  $99   $58   $260   $161 

 

Other information related to leases was as follows:

 

Supplemental Cash Flows Information

 

   September 30, 
   2019   2018 
Cash paid for amounts included in the measurement of lease liabilities        
   Operating cash flows from operating leases  $495   $430 
   Operating cash flows from finance leases   38    29 
   Financing cash flows from finance leases   223    121 
Right-of-use assets obtained in exchange for lease obligations:          
   Operating leases   446    370 
   Finance leases   87    48 

 

Weighted Average Remaining Lease Term

 

  September 30,
  2019   2018
Operating leases 2 years   3 years
Finance leases 2 years   3 years

 

Weighted Average Discount Rate

 

  September 30, 
  2019  2018 
Operating leases  5.50%  5.50%
Finance leases  6.77%  6.50%

 

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Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows:

 

   Operating   Finance 
   Leases   Leases 
2019   170    60 
2020   677    231 
2021   401    280 
2022   91    90 
2023   —    37 
Thereafter   —    — 
   Total future minmum lease payments   1,339    698 
Less imputed interest   (79)   (66)
   Total future minmum lease payments  $1,260   $632 

 

Reported as of September 30, 2019:

 

   Operating   Finance 
   Leases   Leases 
Accounts payable and accrued liabilities  $624   $199 
Other long-term liabilities   636    433 
Total  $1,260   $632 

 

16. CONTINGENCIES

 

Litigation and Claims

 

The Company is from time to time party to various lawsuits, claims and other proceedings that arise in the ordinary course of our 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. is seeking injunctive relief enjoining us, PCEP and our employees from using its confidential business information and compensatory damages of an unspecified unlimited amount (exceeding $25,000); however, the Company has recognized approximately $1.2 million for expected costs related to this litigation. On March 18, 2016, we filed an answer to the complaint, denying generally each and every allegation and relief sought by Myers Power Products, Inc. and seeking dismissal based on, among other things, failure to state facts sufficient to constitute a cause of action. We intend to contest the matter vigorously. Due to the uncertainties of litigation, however, we can give no assurance that we, PCEP and our employees will prevail on any claims made against us, PCEP and our employees in any such lawsuit. As of the filing of this report, this action is scheduled for trial in the first quarter of 2020. Also, 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. We cannot execute the sale of PCEP until the lawsuit has been resolved.

 

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. The Company continues to contest the order. As of the date of this filing, this court order remains in place. 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 order from the court for the Company to post a bond in an amount of $20,000 or more. The court has not taken any action on this request and the Company intends to vigorously defend its rights in the event the order is granted.

 

With respect to all such lawsuits, claims and proceedings, the Company records a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that the resolution of any currently pending lawsuits, claims and proceedings, either individually or in the aggregate, will have a material adverse effect on its financial position, results of operations or liquidity. However, the outcomes of any currently pending lawsuits, claims and proceedings cannot be predicted, and therefore, there can be no assurance that this will be the case.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated interim financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 29, 2019.

 

Unless the context requires otherwise, references in this Form 10-Q to the “Company,” “Pioneer,” “Pioneer Power,” “we,” “our” and “us” refer to Pioneer Power Solutions, Inc. and its subsidiaries.

 

Special Note Regarding Forward-Looking Statements

 

This Form 10-Q 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.

 

●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 common stock may be delisted from NASDAQ if we do not maintain compliance with the NASDAQ Capital Market’s listing standards.

 

●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, duties and tariffs on the importation of products we sell into the United States, 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.

 

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 “Part II - Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.

 

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Business 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. 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. We are headquartered in Fort Lee, New Jersey and operate from 5 additional locations in the U.S. for manufacturing, service, centralized distribution, engineering, sales and administration.

 

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. The reporting segment is comprised of switchgear business. These solutions are marketed principally through our Pioneer Custom Electric Products, Inc (“PCEP”) brand name.

 

●Our Critical Power business provides customers with an advanced data collection and monitoring platform, which is used to ensure smooth, uninterrupted power to operations during times of emergency and service of on-site power generation equipment. These solutions are marketed by our operations headquartered in Minnesota, currently doing business under the Titan Energy Systems Inc. (“Titan”), as well as the Pioneer Critical Power brand names.

 

Recent Events

 

Equity Transaction and Termination of Credit Facilities

 

On June 28, 2019, the Company entered into the 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, 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 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 (collectively, the “Equity Transaction”).

 

Under the terms of the Stock Purchase Agreement, the consideration for the Equity Transaction consisted of a base cash purchase price of $60.5 million, as well as the issuance by the Buyer of a subordinated promissory note to Pioneer Power in the aggregate principal amount of $5.0 million, in each case subject to adjustment pursuant to the terms of the Stock Purchase Agreement. The Buyer was to have the right to set-off amounts owed to Pioneer Power under the Seller Note in the aggregate principal amount of $5.0 million on a dollar-for-dollar basis by the amount of any indemnifiable losses Buyer suffers as a result of certain actions or omissions by Pioneer Power or the Disposed Companies.

 

On August 13, 2019, Pioneer Power, the Buyer and the Disposed Companies entered into Amendment No. 1 to the Stock Purchase Agreement (the “Amendment”). Pursuant to the Amendment, (i) the base purchase price was increased from $65.5 million to $68.0 million, (ii) the target working capital amount of the Disposed Companies was increased from $21,205,000 to $29,558,000, (iii) the parties agreed to an estimated closing net working capital amount of $23,558,000, (iv) the increase in the base purchase price was to be paid in the form of an additional Seller Note in the aggregate principal amount of $2.5 million to be issued to Pioneer Power at the closing, (v) a $150,000 deductible was added with respect to the indemnification obligations of Pioneer Power and the Disposed Companies concerning certain legal matters, (vi) Pioneer Power agreed to pay any difference between the final net purchase price and the closing date net purchase price in immediately available funds rather than causing the Buyer to set off the amount of such difference against any amounts due and payable to Pioneer Power under the Seller Note, subject to certain exceptions, (vii) the definition of Applicable Adverse Event was amended to exclude certain events related to Pioneer Power’s financial performance through the second quarter (subject to certain exceptions, such items were also excluded from the post-closing indemnity under the Stock Purchase Agreement) and (viii) the parties agreed to the allocation of the $1.8 million insurance proceeds still to be received from the June 2019 flood at Pioneer Power’s facility in Reynosa, Mexico. The Buyer is only required to set-off any indemnifiable losses the Buyer suffers as a result of certain actions, omissions, or misrepresentations by Pioneer Power or the Disposed Companies against the first Seller Note in the aggregate principal amount of $5.0 million.

 

24

 

 

On August 16, 2019, the Company completed the Equity Transaction pursuant to the terms and conditions of the Stock Purchase Agreement, as amended by the Amendment. As consideration for the Disposed Companies, Buyer paid the Company a base aggregate purchase price of $68.0 million, consisting of (i) $60.5 million of cash, (ii) the issuance by the Buyer of a subordinated promissory note to Pioneer Power in the aggregate principal amount of $5.0 million and (iii) the issuance by the Buyer of a subordinated promissory note to Pioneer Power in the aggregate principal amount of $2.5 million. After certain adjustments as described more fully in the Stock Purchase Agreement and expenses of sale, we received net proceeds from the sale of $48.5 million.

 

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.

 

In addition, concurrently with the closing of the Equity Transaction, on August 16, 2019, all existing credit facilities granted by Bank of Montreal (BMO) under the Canadian Facilities (as defined below) and the U.S. Facilities (as defined below) were repaid in full.

 

Special Cash Dividend

 

On September 5, 2019, the board of directors of the Company declared a special cash dividend of $1.37 per share of the Company’s common stock, which was to be paid on October 7, 2019, to stockholders of record as of the close of business on September 16, 2019. Such special cash dividend has been enjoined by court order, in connection with the ongoing Myers Power Products, Inc. legal proceeding. See “Part II—Item 1. Legal Proceedings.”

 

Discontinued Operations

 

Operating results for 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 6 – Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.

 

During the quarter ended June 30, 2019 the Company’s Reynosa Facility was damaged by a flood resulting in damages to inventory. This loss has been partially offset by $2.4 million of insurance proceeds that the Company expects to receive. During the quarter ended September 30, 2019, the Company received $600 of these insurance proceeds. While the net loss on inventory damaged amounting to approximately $782 has been reflected within the Cost of goods sold in discontinued operations, the corresponding insurance receivable of $1.8 million has been recognized as an asset from continuing operations. The amount of damaged inventory and insurance proceeds are based upon the management’s best estimate, and the actual amount of damaged inventory and insurance proceeds may differ from such.

 

Foreign Currency Exchange Rates

 

Although we report our results in accordance with U.S. GAAP and in U.S. dollars, PTL and Bemag are Canadian operations whose functional currency is the Canadian dollar. As such, the financial position, results of operations, cash flows and equity of these operations are initially consolidated in Canadian dollars. Their assets and liabilities are then translated from Canadian dollars to U.S. dollars by applying the foreign currency exchange rate in effect at the balance sheet date, while the results of their operations and cash flows are translated to U.S. dollars by applying weighted average foreign currency exchange rates in effect during the reporting period. The resulting translation adjustments are included in other comprehensive income or loss.

 

25

 

 

The following table provides actual end of period exchange rates used to translate the financial position of our Canadian operations at the end of each period reported. The average exchange rates presented below, as provided by the Bank of Canada, are indicative of the weighted average rates we used to translate the revenues and expenses of our Canadian operations into U.S. dollars (rates expressed as the number of U.S. dollars to one Canadian dollar for each period reported):

 

    2019   2018 
        Statements of Operations and       Statements of Operations and 
    Balance Sheet   Comprehensive Income   Balance Sheet   Comprehensive Income 
              Cumulative           Cumulative 
Quarter Ended   End of Period   Period Average   Average   End of Period   Period Average   Average 
March 31   $0.7483   $0.7523   $0.7523   $0.7756   $0.7906   $0.7906 
June 30   $0.7641   $0.7477   $0.7500   $0.7594   $0.7745   $0.7825 
August 15   $0.7505   $0.7587   $0.7522    —    —    — 
September 30    —    —    —   $0.7725   $0.7652   $0.7766 

 

With the sale of our liquid filled and dry type manufacturing businesses, we no longer have exposure to Canadian dollar fluctuations.

 

Critical Accounting Policies

 

There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

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RESULTS OF OPERATIONS

 

Overview of the Three and Nine Month Results

 

Selected financial and operating data for our reportable business segments for the most recent reporting period is summarized below. This information, as well as the selected financial data provided in Note 14 – Business Segment and Geographic Information and in our unaudited Consolidated Financial Statements and related notes included in this Quarterly Report on Form 10-Q, should be referred to when reading our discussion and analysis of results of operations below.

 

Our summary of operating results during the three and nine months ended September 30, 2019 and 2018 are as follows:

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2019  2018  2019  2018
Revenues            
T&D Solutions  $2,597   $1,274   $6,408   $5,858 
Critical Power Solutions   2,972    3,293    7,539    8,830 
Consolidated   5,569    4,567    13,947    14,688 
Cost of goods sold                    
T&D Solutions   2,677    1,502    6,503    5,587 
Critical Power Solutions   2,636    2,468    6,410    7,186 
Consolidated   5,313    3,970    12,913    12,773 
Gross profit   256    597    1,034    1,915 
Selling, general and administrative expenses   3,793    1,395    7,426    4,617 
Depreciation and amortization expense   50    369    187    1,163 
Total operating expenses   3,843    1,764    7,613    5,780 
Operating loss from continuing operations   (3,587)   (1,167)   (6,579)   (3,865)
Interest expense   84    237    548    685 
Gain on sale of subsidiaries   —      —      4,207    —   
Other expense   2,148    267    2,613    615 
Loss before taxes   (5,819)   (1,671)   (5,533)   (5,165)
Income tax benefit   (2,567)   (267)   (2,463)   (797)
Net loss from continuing operations   (3,252)   (1,404)   (3,070)   (4,368)
Discontinued operations (Note 6)                    
  (Loss) income from operations of discontinued business units   (4,329)   1,950    (2,352)   4,020 
  Gain on sale of discontinued subsidiaries   17,210    —      17,210    —   
  Income tax expense   2,637    488    3,171    964 
Income from discontinued operations, net of income taxes   10,244    1,462    11,687    3,056 
Net income (loss)  $6,992   $58   $8,617   $(1,312)

  

As discussed above under “Note 6 - Discontinued Operations”, the excluded revenue for the liquid-filled transformer and dry-type transformer manufacturing businesses previously reported in T&D Solutions was $5.9 million and $22.7 million for the three months ended September 30, 2019 and 2018, respectively, and $46.6 million and $65.2 million for the nine months ended September 30, 2019 and 2018, respectively. The excluded income, net of income taxes from the liquid-filled transformer and dry-type transformer manufacturing businesses was $10.2 million for the three months ended September 30, 2019, as compared to the excluded income, net of income taxes of $1.5 million for the three months ended September 30, 2018. The excluded income, net of income taxes from the liquid-filled transformer and dry-type transformer manufacturing businesses was $11.7 million and $3.0 million for the nine months ended September 30, 2019 and 2018, respectively.

 

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, to three to nine months, in the case of certain custom engineered equipment solutions, and up to one year or more under our service contracts.

 

The following table represents the progression of our backlog, by reporting segment, as of the end of the last five quarters:

 

   September 30,   June 30,   March 31,   December 31,   September 30, 
   2019   2019   2019   2018   2018 
T&D Solutions  $7,714   $10,120   $9,876   $9,486   $9,626 
Critical Power Solutions   4,832    4,844    4,274    6,171    11,522 
Order backlog  $12,546   $14,964   $14,150   $15,657   $21,148 
Discountinued Operation   —    35,672    34,466    31,834    29,449 
Total order back log  $12,546   $50,635   $48,616   $47,491   $50,597 

 

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Revenue

 

The following table represents our revenues by reporting segment and major product category for the periods indicated:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   Variance   %   2019   2018   Variance   % 
T&D Solutions                                        
Switchgear  $2,597   $1,274   $1,323    103.8   $6,408   $5,858   $550    9.4 
    2,597    1,274    1,323    103.8    6,408    5,858    550    9.4 
Critical Power Solutions                                        
Equipment   299    388    (89)   (22.9)   739    1,171    (432)   (36.9)
Service   2,673    2,905    (232)   (8.0)   6,800    7,659    (859)   (11.2)
    2,972    3,293    (321)   (9.7)   7,539    8,830    (1,291)   (14.6)
Total revenue  $5,569   $4,567   $1,002    21.9   $13,947   $14,688   $(741)   (5.0)

 

For the three months ended September 30, 2019, our consolidated revenue increased by $1.0 million, or 21.9%, to $5.6 million, up from $4.6 million during the three months ended September 30, 2018. For the nine months ended September 30, 2019, our consolidated revenue decreased by $741, or 5.0%, to $13.9 million, down from $14.7 million during the nine months ended September 30, 2018.

 

T&D Solutions. During the three months ended September 30, 2019, revenue from switchgear increased by $1.3 million, or 103.8%, as compared to the three months ended September 30, 2018 due to timing of shipments.

 

During the nine months ended September 30, 2019, revenue from switchgear increased by $550, or 9.4% as compared to the nine months ended September 30, 2018 due to higher volume of sales.

 

Critical Power. Titan is the only business unit in the Critical Power segment. For the three months ended September 30, 2019, equipment sales decreased by $89, or 22.9%, as compared to the same period in the prior year. For the nine months ended September 30, 2019, equipment sales were down by $432, or 36.9%, as compared to the same period in 2018 resulting from a reduced focus on equipment sales included in the Titan revenue stream.

 

For the three and nine months ended September 30, 2019, service revenue decreased by $232, or 8.0%, and $859, or 11.2%, respectively, as compared to the same periods in the prior year.

 

Gross Profit and Gross Margin

 

The following table represents our gross profit by reporting segment for the periods indicated:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   Variance   %   2019   2018   Variance   % 
T&D Solutions                                        
Gross profit  $(80)  $(228)  $148    (64.9)  $(95)  $271   $(366)   (135.1)
Gross margin %   (3.1)   (17.9)   14.8         (1.5)   4.6    (6.1)     
                                         
Critical Power Solutions                                        
Gross profit   336    825    (489)   (59.3)   1,129    1,644    (515)   (31.3)
Gross margin %   11.3    25.1    (13.8)        15.0    18.6    (3.6)     
                                         
Consolidated gross profit  $256   $597   $(341)   (57.1)  $1,034   $1,915   $(881)   (46.0)
Consolidated gross margin %   4.6    13.1    (8.5)        7.4    13.0    (5.6)     

 

For the three months ended September 30, 2019, our consolidated gross margin was 4.6% of revenues, compared to 13.1% during the three months ended September 30, 2018. For the nine months ended September 30, 2019, our gross margin was 7.4% of revenues, compared to 13.0% for the nine months ended September 30, 2018. The decrease in our consolidated gross margin percentage is further explained below.

 

T&D Solutions. During the three and nine months ended September 30, 2019 the negative gross margin decreased by 14.8% and the positive gross margin decreased by 6.1%, respectively, as compared to the same periods in 2018. The improvement in our T&D Solutions gross margin of 14.8% for the three months ended September 30, 2019 as compared to the same period in 2018 resulted primarily from higher revenues. The decrease in our T&D Solutions gross margin of 6.1% for the nine months ended September 30, 2019 as compared to the same period in 2018 resulted primarily from higher costs.

 

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Critical Power. During the three and nine months ended September 30, 2019, the gross margin decreased by 13.8% and 3.6%, respectively, as compared to the same period in 2018, primarily due to higher costs.

 

Operating Expenses

 

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

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   Variance   %   2019   2018   Variance   % 
T&D Solutions                                        
Selling, general and administrative expense  $1,056   $388   $668    172.2   $1,782   $1,309   $473    36.1 
Depreciation and amortization expense   18    51    (33)   (64.7)   51    193    (142)   (73.6)
Segment operating expense  $1,074   $439   $635    144.6   $1,833   $1,502   $331    22.0 
                                         
Critical Power Solutions                                        
Selling, general and administrative expense  $466   $383   $83    21.7   $1,342   $1,257   $85    6.8 
Depreciation and amortization expense   32    302    (270)   (89.4)   97    921    (824)   (89.5)
Segment operating expense  $498   $685   $(187)   (27.3)  $1,439   $2,178   $(739)   (33.9)
                                         
Unallocated Corporate Overhead Expenses                                        
Selling, general and administrative expense  $2,271   $624   $1,647    263.9   $4,302   $2,051   $2,251    109.8 
Depreciation expense   —    16    (16)   (100.0)   39    49    (10)   (20.4)
Segment operating expense  $2,271   $640   $1,631    254.8   $4,341   $2,100   $2,241    106.7 
                                         
Consolidated                                        
Selling, general and administrative expense  $3,793   $1,395   $2,398    171.9   $7,426   $4,617   $2,809    60.8 
Depreciation and amortization expense   50    369    (319)   (86.4)   187    1,163    (976)   (83.9)
Consolidated operating expense  $3,843   $1,764   $2,079    117.9   $7,613   $5,780   $1,833    31.7 

 

Selling, General and Administrative Expense. For the three months ended September 30, 2019, consolidated selling, general and administrative expense, before depreciation and amortization, increased by $2.4 million, or 171.9%, to $3.8 million, as compared to $1.4 million during the three months ended September 30, 2018. As a percentage of our consolidated revenue, selling, general and administrative expense before depreciation and amortization increased to 68.1% in the three months ended September 30, 2019, as compared to 30.5% in the three months ended September 30, 2018. The increase is due to increases in one-time executive bonuses and costs related to our ongoing litigation.

 

During the nine months ended September 30, 2019, consolidated selling, general and administrative expense, before depreciation and amortization, increased by $2.8 million, or 60.8%, to $7.4 million, as compared to $4.6 million during the nine months ended September 30, 2018. As a percentage of our consolidated revenue, selling, general and administrative expense before depreciation and amortization increased to 53.3% in the nine months ended September 30, 2019, as compared to 31.4% in the nine months ended September 30, 2018. The increase is due to increases in wages and costs related to our ongoing litigation.

 

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 three and nine months ended September 30, 2019, depreciation and amortization expense decreased by $319, or 86.4%, and $976, or 83.9%, respectively, as compared to the same periods in 2018. Included in depreciation and amortization expense for the three and nine months ended September 30, 2018 was amortization of customer relationship intangible assets of $270 and $810, respectively, related to acquisition of Titan. The Titan customer relationship intangible asset was fully amortized by December 31, 2018.

 

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Operating (Loss) Income

 

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

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2019   2018   Variance   %   2019   2018   Variance   % 
T&D Solutions  $(1,154)  $(667)  $(487)   73.0   $(1,928)  $(1,231)  $(697)   56.6 
Critical Power Solutions   (162)   140    (302)   215.7    (310)   (534)   224    41.9 
Unallocated Corporate Overhead Expenses   (2,271)   (640)   (1,631)   (254.8)   (4,341)   (2,100)   (2,241)   (106.7)
Total operating loss  $(3,587)  $(1,167)  $(2,420)   207.4   $(6,579)  $(3,865)  $(2,714)   70.2 

 

T&D Solutions. During the three and nine months ended September 30, 2019, T&D segment operating loss was $1.2 million and $1.9 million, respectively, as compared to $667 and $1.2 million, respectively, for the same respective periods in 2018. The increase in the operating loss for the three months ended September 30, 2019, as compared to the same period in 2018, is primarily due to higher selling, general and administrative expense. The increase in the operating loss for the nine months ended September 30, 2019, as compared to the same period in 2018, is primarily due to higher manufacturing costs.

 

Critical Power. During the three and nine months ended September 30, 2019, our Critical Power segment generated an operating loss of $162 and $310, respectively, as compared to an operating income of $140 and an operating loss $534, respectively, during the three and nine months ended September 30, 2018. The increase in the operating loss for the three months ended September 30, 2019 is primarily due to more outsourced service costs and use tax. The decrease in the operating loss for the nine months ended September 30, 2019 is primarily due to lower amortization expense as a result of the full amortization of the Titan customer relationship intangible asset by December 31, 2018.

 

Unallocated Corporate Overhead Expenses. Our 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 three and nine months ended September 30, 2019, our Unallocated Corporate Overhead Expenses increased by $1.6 million, or 254.8%, and by $2.2 million, or 106.7%, as compared to the same periods in 2018, primarily due to higher professional fees and one-time executive bonuses.

 

Non-Operating Expense

 

Interest Expense. For the three and nine months ended September 30, 2019, interest expense was approximately $84 and $548, respectively, as compared to $237 and $685, respectively, during the three and nine months ended September 30, 2018. The decease in our interest expense was due to repayment of credit facilities in August 2019.

 

Other Expense. For the three months ended September 30, 2019, other non-operating expense was $2.1 million, as compared to $267 during the three months ended September 30, 2018. For the three months ended September 30, 2019, included in other non-operating expense was a loss of $1.9 million related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the merger of PCPI, CleanSpark and the Merger Sub, which closed in January 2019.

 

For the nine months ended September 30, 2019, other non-operating expense was $2.6 million as compared to $615 during the nine months ended September 30, 2018. For the nine months ended September 30, 2019, included in other non-operating expense was a loss of $2.2 million related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the merger of PCPI, CleanSpark and the Merger Sub. See Note 3 - Divestitures.

 

Income Tax Expense (Benefit). Our effective income tax benefit rate was 44.1% for the three months ended September 30, 2019, compared to 16.0% during the same period in 2018. For the nine months ended September 30, 2019, our effective income tax benefit rate was 44.5%, as compared to 15.4% during the same period in 2018, as set forth below (dollars in thousands):

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2019  2018  Variance  2019  2018  Variance
Loss before income taxes  $(5,819)  $(1,671)  $(4,148)  $(5,533)  $(5,165)  $(368)
Income tax benefit   (2,567)   (267)   (2,300)   (2,463)   (797)   (1,666)
Effective income tax rate %   44.1    16.0    28.1    44.5    15.4    29.1 

 

 

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Our effective income tax rate increased by 28.1% and 29.1% during the three and nine months ended September 30, 2019, respectively, as compared to the same period of the prior year.

 

Net (Loss) Income

 

We generated a net income of $7.0 million and $8.6 million during the three and nine months ended September 30, 2019, respectively, as compared to net income of $58 and a net loss of $1.3 million during the three and nine months ended September 30, 2018, respectively. Our earnings per basic and diluted share for the three months ended September 30, 2019, and September 30, 2018, was $0.80 and $0.01, respectively. Our earnings per basic and diluted share for the nine months ended September 30, 2019 was $0.99, as compared to a loss per basic and diluted share of $0.15 for the nine months ended September 30, 2018.

 

Our loss per share from continuing operations basic and diluted for the three months ended September 30, 2019 was $0.37, as compared to $0.16 for the three months ended September 30, 2018. Our loss per share from continuing operations basic and diluted for the nine months ended September 30, 2019 was $0.35 compared to $0.50 for the nine months ended September 30, 2018.

 

Our earnings per share from discontinued operations basic and diluted for the three months ended September 30, 2019 was $1.17, as compared to $0.17 for the three months ended September 30, 2018. Our earnings per share from discontinued operations basic and diluted for the nine months ended September 30, 2019 and 2018 were $1.34 and $0.35, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

General. As of September 30, 2019, we had $13.5 million of cash and cash equivalents on hand. We have historically met our cash needs through a combination of cash flows from operating activities, bank borrowings under our revolving credit facilities and distributions between our U.S. and foreign subsidiaries. Our cash requirements are generally for operating activities, debt repayment, capital improvements and acquisitions.

 

Cash (Used in)/ Provided by Operating Activities. Cash used in our operating activities was $2.0 million during the nine months ended September 30, 2019, as compared to cash provided of $567 during the nine months ended September 30, 2018.

 

Cash Provided by/ (Used in) Investing Activities. Cash provided by investing activities during the nine months ended September 30, 2019 was $41.8 million generated primarily from the completion of the Equity Transaction, as compared to cash used by investing activities of $369 during the nine months ended September 30, 2018. During the nine months ended September 30, 2019, additions to our property, plant and equipment were $148.

 

Cash (Used in)/ Provided by Financing Activities. Cash used in our financing activities was $26.5 million during the nine months ended September 30, 2019, as compared to $167 of cash provided by financing activities during the nine months ended September 30, 2018. The primary use of cash in financing activities for the nine months ending September 30, 2019 was repayment of debt.

 

Working Capital/(Deficit). As of September 30, 2019, we had working capital of $2.7 million, including $13.5 million of cash and equivalents, compared to working deficit of $5.5 million, including $200 of cash and equivalents at December 31, 2018. At September 30, 2019, we had no debt. At December 31, 2018, we had $388 of available and unused borrowing capacity from our revolving credit facilities, without taking into account cash and equivalents on hand.

 

Assessment of Liquidity. At September 30, 2019, we had $13.5 million of cash and cash equivalents on hand generated primarily from the completion of the Equity Transaction. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings under our revolving credit facilities. 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 Equity Transaction during the quarter ended September 30, 2019, 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, capital improvements and acquisitions.

 

During the quarter ended September 30, 2019 the Company declared a cash dividend of approximately $12 million in aggregate which was subsequently enjoined by ruling of the courts in connection with the litigation with Myers Power Products, Inc., (see Note 16). As a result of the court order, the cash dividend was cancelled by the Company during the fourth quarter of 2019. Excluding the dividend payable the Company believes it has sufficient cash on hand to fund ongoing operations for no less than 12 months from the issuance of this report. However, 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.

 

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Credit Facilities and Long-Term Debt

 

Canadian Credit Facilities

 

In April 2016, our wholly owned subsidiary, Pioneer Electrogroup Canada Inc., entered into an Amended and Restated Credit Agreement (“CAD ARCA”) with Bank of Montreal (“BMO”) with respect to our existing Canadian credit facilities (as amended and restated, the “Canadian Facilities”) that replaced and superseded all of our businesses’ prior financing arrangements with the bank. This CAD ARCA extended the maturity date of our Canadian Facilities to July 31, 2017. The CAD ARCA was further amended (the “2017 CAD ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 CAD ARCA Amendment”). The 2018 CAD ARCA Amendment extended the term of our Canadian Facilities to April 1, 2020. On August 8, 2019, BMO agreed to a temporary borrowing base increase until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities and the U.S. Facilities, and (ii) August 31, 2019.

 

Our Canadian Facilities provided for up to $8.2 million Canadian dollars (“CAD”) (approximately $6.3 million expressed in U.S. dollars) consisting of a revolving $7.0 million CAD revolving credit facility (“Facility A”) to finance ongoing operations, a $471 CAD term credit facility (“Facility B”) that financed a plant expansion, and a $712 USD Facility (“Facility C”) that financed a business acquisition and the purchase and expansion of its manufacturing facilities. The 2017 CAD ARCA Amendment increased the Facility A to $8.0 million CAD, increasing the total amount of loans available under the Canadian Facilities to $9.2 million CAD. We made the final principal payment under Facility B on April 30, 2018, and the outstanding principal balance under Facility C with proceeds received from the sale of the Farnham, Quebec, Canada, building in December 2018. All outstanding amounts under Facility A were paid in full on August 16, 2019, using proceeds from the Equity Transaction, and the underlying debt agreements were terminated.

 

United States Credit Facilities

 

In April 2016, we entered into an Amended and Restated Credit Agreement (“US ARCA”) with BMO with respect to our existing U.S. facilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank (the “U.S. Facilities”).The US ARCA was further amended (the “2017 US ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 US ARCA Amendment”). The 2018 US ARCA Amendment extended the term of our US Facilities to April 1, 2020.

 

Our U.S. Facilities, as amended and restated, provided for up to $19.1 million USD consisting of a $14.0 million USD demand revolving credit facility (“USD Facility A”) to finance ongoing operations, a $5.0 million USD term loan facility (“USD Facility B”) that financed the acquisition of Titan, and a new $100 revolving credit facility provided pursuant to a MasterCard is to be used to pay for and temporarily finance our day-to-day business expenses and for no other purpose. The 2017 US ARCA Amendment increased the USD Facility A to $15.0 million, increasing the total amount of loans available under the U.S. Facilities to $20.1 million USD. All outstanding amounts under USD Facilities A and B were paid in full on August 16, 2019, using proceeds from the Equity Transaction, and the underlying debt agreements were terminated.

 

Capital Expenditures 

 

Our additions to property, plant and equipment were $148 during the nine months ended September 30, 2019, as compared to $369 during the nine months ended September 30, 2018. We have no major future capital projects planned, or significant replacement spending anticipated during the rest of 2019. Additions were a result of supporting the day to day needs of the Company.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

 

We conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2019, the end of the period covered by this Quarterly Report on Form 10-Q. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. As of September 30, 2019, based on the evaluation of these disclosure controls and procedures, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

 

Management believes that the consolidated financial statements in this quarterly report on Form 10-Q fairly present, in all material respects, the Company’s financial condition as of the Evaluation Date, and results of its operations and cash flows for the Evaluation Date, in conformity with United States Generally Accepted Accounting Principles (“GAAP”).

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. 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’s 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. is seeking injunctive relief enjoining us, PCEP and our employees from using its confidential business information and compensatory damages of an unspecified unlimited (exceeding $25,000) amount. On March 18, 2016, we filed an answer to the complaint, denying generally each and every allegation and relief sought by Myers Power Products, Inc. and seeking dismissal based on, among other things, failure to state facts sufficient to constitute a cause of action. We intend to contest the matter vigorously. Due to the uncertainties of litigation, however, we can give no assurance that we and PCEP will prevail on any claims made against us and PCEP in any such lawsuit. As of the filing of this report, this action is scheduled for trial in the first quarter of 2020. Also, 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. We cannot execute the divestiture of PCEP until the lawsuit has been resolved. On October 4, 2019, we received an order of the Superior Court of California related to this case enjoining distributions to our shareholders, including the one-time special cash dividend of $1.37 per share which was to be paid on October 7, 2019 to stockholders of record as of September 16, 2019. The Company continues to contest the order. As of the date of this filing, this court order remains in place.

 

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 other than the forgoing suit filed by Myers Power Products, Inc. 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 1A. RISK FACTORS

 

Except as set forth below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

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 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.

 

The litigation in connection to which the payment of a special dividend has been enjoined is pending, which may further delay or prevent the special dividend from getting paid.

On September 5, 2019, the board of directors of the Company declared a special cash dividend of $1.37 per share of the Company’s common stock, which was to be paid on October 7, 2019, to stockholders of record as of the close of business on September 16, 2019.  Such special cash dividend has been enjoined by court order, in connection with the ongoing Myers Power Products, Inc. legal proceeding. 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., Murickan, the president of PCEP, and 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. is seeking injunctive relief enjoining us, PCEP and our employees from using its confidential business information and compensatory damages of an unspecified unlimited (exceeding $25,000) amount. On March 18, 2016, we filed an answer to the complaint, denying generally each and every allegation and relief sought by Myers Power Products, Inc. and seeking dismissal based on, among other things, failure to state facts sufficient to constitute a cause of action. As of the filing of this report, this action is scheduled for trial in the first quarter of 2020.

Although we continue to contest the court order enjoining the payment of the special dividend, the court may not act on our efforts to lift the injunction prior to trial, or the court may require the funds subject to the dividend be bonded or deposited in escrow, which may further delay or prevent the special dividend from getting paid. In addition, due to the uncertainties of litigation, we can give no assurance that we, PCEP and our employees will prevail on any claims made against us, PCEP and our employees in any such lawsuit and that the court will lift the enjoinment of the payment of the special dividend. The court order enjoining the payment of the special dividend may remain in place until the trial is over, and in the event a judgment is entered against the company, the funds subject to the dividend may become subject to judgment enforcement.

 

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, Pioneer Power will continue 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.

 

34

 

 

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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.  

 

35

 

 

EXHIBIT INDEX

 

Exhibit No.

   Description
2.1   Amendment No. 1 to Stock Purchase Agreement, dated as of August 13, 2019, by and among Pioneer Power Solutions, Inc., Electrogroup Canada, Inc., Jefferson Electric, Inc., JE Mexican Holdings, Inc., Pioneer Transformers L.P. and Pioneer Acquireco ULC. (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on August 13, 2019).
     
3.1   Composite Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Registration Statement on Form S-1 of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on June 21, 2011).
     
3.2   Bylaws (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 2, 2009).
     
10.1   Temporary Amendment to Borrowing Base in the PPSI Credit Agreement, dated August 8, 2019, by and between Bank of Montreal, Pioneer Power Solutions, Inc., Pioneer Electrogroup Canada Inc., Jefferson Electric, Inc., Pioneer Critical Power Inc., Pioneer Custom Electrical Products Corp. and Titan Energy Systems, Inc. (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on August 14, 2019).
     
10.2   Waiver Letter dated August 8, 2019, from Bank of Montreal, Montreal Branch, as lender (Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on August 14, 2019).
     
31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101*   The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language), (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Financial Statements.

 

 

* Filed herewith.

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  PIONEER POWER SOLUTIONS, INC.
     
Date: November 18, 2019 By: /s/ Nathan J. Mazurek
    Name: Nathan J. Mazurek
    Title: Chief Executive Officer

 

Date: November 18, 2019 /s/ Thomas Klink
  Name: Thomas Klink
 

Title:

Chief Financial Officer

(Principal Financial Officer duly authorized to sign on behalf of Registrant)