10-Q 1 ppsi-10q_033120.htm QUARTER;U 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 March 31, 2020

 

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)

 

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

 

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 ☒

 

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of May 15, 2020 was 8,726,045.

 

 

 

 

 

 

PIONEER POWER SOLUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2020

 

TABLE OF CONTENTS

 

 PART I. FINANCIAL INFORMATION

 

 

Page

Item 1. Financial Statements

1

Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019

1

Unaudited Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2020 and 2019 

        2

Consolidated Balance Sheets at March 31, 2020 (Unaudited) and December 31, 2019 

         3

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 

         4

Unaudited Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019

         5

Notes to Unaudited Consolidated Financial Statements 

        6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

     19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

      26

Item 4. Controls and Procedures 

      26

 

PART II. OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings

      27

Item 1A. Risk Factors 

       27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

      28

Item 3. Defaults Upon Senior Securities

      28

Item 4. Mine Safety Disclosures

      28

Item 5. Other Information

      28

Item 6.  Exhibits

28

 

 

 

 

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

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Revenues

 

$

5,001

 

 

$

3,017

 

Cost of goods sold

 

 

4,824

 

 

 

2,761

 

Gross profit

 

 

177

 

 

 

256

 

Operating expenses

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

1,934

 

 

 

1,700

 

Foreign exchange gain

 

 

(10

)

 

 

 

Total operating expenses

 

 

1,924

 

 

 

1,700

 

Loss from continuing operations

 

 

(1,747

)

 

 

(1,444

)

Interest (income) expense

 

 

(110

)

 

 

224

 

Gain on sale of subsidiaries

 

 

 

 

 

4,207

 

Other expense (income)

 

 

1,281

 

 

 

(3,342

)

(Loss) income before taxes

 

 

(2,918

)

 

 

5,881

 

Income tax expense

 

 

3

 

 

 

1,546

 

Net (loss) income from continuing operations

 

 

(2,921

)

 

 

4,335

 

Discontinued operations

 

 

 

 

 

 

 

 

Income from operations of discontinued business units

 

 

 

 

 

1,714

 

Income tax expense

 

 

 

 

 

402

 

Income from discontinued operations, net of income taxes

 

 

 

 

 

1,312

 

Net (loss) income

 

$

(2,921

)

 

$

5,647

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.33

)

 

$

0.50

 

Income from discontinued operations

 

 

 

 

 

0.15

 

Net (loss) income

 

$

(0.33

)

 

$

0.65

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.33

)

 

$

0.50

 

Income from discontinued operations

 

 

 

 

 

0.15

 

Net (loss) income

 

$

(0.33

)

 

$

0.65

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

8,726

 

 

 

8,726

 

Diluted

 

 

8,726

 

 

 

8,730

 

 

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

 

1

 

 

PIONEER POWER SOLUTIONS, INC.  

Consolidated Statements of Comprehensive (Loss) Income  

(In thousands)  

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net (loss) income

 

$

(2,921

)

 

$

5,647

 

Other comprehensive loss

 

 

 

 

 

 

 

 

  Foreign currency translation adjustments

 

 

 

 

 

(312

)

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

 

 

 

 

 

90

 

Other comprehensive loss

 

 

 

 

 

(222

)

Comprehensive (loss) income

 

$

(2,921

)

 

$

5,425

 

 

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)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,758

 

 

$

8,213

 

Short term investments

 

 

207

 

 

 

936

 

Accounts receivable, net

 

 

3,410

 

 

 

3,716

 

Insurance receivable

 

 

351

 

 

 

1,800

 

Inventories, net

 

 

4,653

 

 

 

4,554

 

Prepaid expenses and other current assets

 

 

794

 

 

 

795

 

Total current assets

 

 

16,173

 

 

 

20,014

 

Property, plant and equipment, net

 

 

582

 

 

 

640

 

Other assets

 

 

6,935

 

 

 

7,465

 

Total assets

 

$

23,690

 

 

$

28,119

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Bank overdrafts

 

$

169

 

 

$

374

 

Accounts payable and accrued liabilities

 

 

6,770

 

 

 

7,533

 

Deferred revenue

 

 

1,745

 

 

 

1,441

 

Income taxes payable

 

 

61

 

 

 

543

 

Total current liabilities

 

 

8,745

 

 

 

9,891

 

Other long-term liabilities

 

 

1,429

 

 

 

1,793

 

Total liabilities

 

 

10,174

 

 

 

11,684

 

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 March 31, 2020 and December 31, 2019

 

 

9

 

 

 

9

 

Additional paid-in capital

 

 

23,980

 

 

 

23,978

 

Accumulated other comprehensive income

 

 

14

 

 

 

14

 

Accumulated deficit

 

 

(10,487

)

 

 

(7,566

)

Total stockholders’ equity

 

 

13,516

 

 

 

16,435

 

Total liabilities and stockholders’ equity

 

$

23,690

 

 

$

28,119

 

 

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)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net (loss) income

 

$

            (2,921

)

 

$

             5,647

 

Depreciation

 

 

58

 

 

 

205

 

Amortization of intangible assets

 

 

 

 

 

                  54

 

Amortization of right-of-use assets

 

 

219

 

 

 

213

 

Amortization of debt issuance cost

 

 

 

 

 

                    8

 

Interest income on notes receivable

 

 

(111

)

 

 

 

Deferred income tax expense

 

 

 

 

 

             1,577

 

Change in receivable reserves

 

 

29

 

 

 

(74

)

Change in inventory reserves

 

 

               (231

)

 

 

                  32

 

Gain on sale of subsidiary

 

 

 

 

 

(4,207

)

Change in long term payables

 

 

                 (92

)

 

 

 

Change in insurance receivable

 

 

1,449

 

 

 

 

Unrealized loss (gain) on investments

 

 

             1,143

 

 

 

            (3,341

)

Accrued pension

 

 

 

 

 

(30

)

Stock-based compensation

 

 

                    2

 

 

 

                    5

 

Foreign currency remeasurement gain

 

 

10

 

 

 

 

Changes in current operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

276

 

 

 

(885

)

Inventories

 

 

                132

 

 

 

               (238

)

Prepaid expenses and other assets

 

 

(2

)

 

 

(120

)

Income taxes

 

 

               (481

)

 

 

                  12

 

Accounts payable and accrued liabilities

 

 

(820

)

 

 

968

 

Customer deposits and deferred revenue

 

 

                304

 

 

 

             1,045

 

Net cash (used in)/provided by operating activities

 

 

(1,036

)

 

 

871

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

 

 

 

                 (56

)

Net cash used in investing activities

 

 

 

 

 

(56

)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Bank overdrafts

 

 

               (205

)

 

 

            (1,294

)

Short term borrowings

 

 

 

 

 

1,785

 

Borrowing under debt agreement

 

 

 

 

 

             5,259

 

Repayment of debt

 

 

 

 

 

(6,403

)

Principal repayments of financing leases

 

 

               (214

)

 

 

               (128

)

Net cash used in financing activities

 

 

(419

)

 

 

(781

)

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

 

(1,455

)

 

 

34

 

Effect of foreign exchange on cash and cash equivalents

 

 

 

 

 

                 (70

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

             8,213

 

 

 

                211

 

End of period

 

$

            6,758

 

 

$

               175

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

 

 

 

 

             2,603

 

Income taxes paid, net of refunds

 

 

477

 

 

 

587

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Additional

 

other

 

 

 

 

 

Total

 

 

 

Common Stock

 

paid-in

 

comprehensive

 

 

Accumulated

 

 

stockholders’

 

 

 

Shares

 

Amount

 

capital

 

income (loss)

 

 

deficit

 

 

equity

 

Balance - December 31, 2018

 

 

8,726,045

 

 

$

    9

 

 

$

        23,966

 

 

$

       (5,897

)

 

$

       (6,127

)

 

$

        11,951

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,647

 

 

 

5,647

 

Stock-based compensation

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(312

)

 

 

 

 

 

(312

)

Pension adjustment, net of taxes

 

 

 

 

 

 

 

 

 

 

 

90

 

 

 

 

 

 

90

 

Balance - March 31, 2019

 

 

8,726,045

 

 

$

    9

 

 

$

        23,971

 

 

$

       (6,119

)

 

$

          (480

)

 

$

        17,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2019

 

 

8,726,045

 

 

$

    9

 

 

$

        23,978

 

 

$

               14

 

 

$

       (7,566

)

 

$

        16,435

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,921

)

 

 

(2,921

)

Stock-based compensation

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Balance - March 31, 2020

 

 

8,726,045

 

 

$

    9

 

 

$

        23,980

 

 

$

               14

 

 

$

     (10,487

)

 

$

        13,516

 

 

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

 

5

 

 

PIONEER POWER SOLUTIONS, INC.  

Notes to Consolidated Financial Statements  

March 31, 2020 (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, 2019, as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020: 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. During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.7 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.3 million. The Company has revalued the notes for an appropriate imputed interest rate, resulting in a change to the value of the notes at March 31, 2020 of $111, for a carrying value of $5.2 million as compared to a carrying value of $5.1 million for the year ended December 31, 2019, which is included within other long term assets (see Note 10 - Other Assets).

 

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

 

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

 

Presentation

 

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

 

6

 

 

These unaudited consolidated financial statements should be read in conjunction with 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, 2019.

 

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 three months ended March 31, 2020, the Company had $6.8 million of cash and cash equivalents on hand, generated primarily from the completion of the Equity Transaction, and working capital of $7.4 million. 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 year ended December 31, 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 and capital improvements.

 

There are two appeals pending in the California Court of Appeals for the Second Appellate District in connection with the litigation with Myers Power Products, Inc., which includes an appeal of an order modifying a previously issued preliminary injunction and an order enjoining the Company to obtain and post a $12 million bond in connection with the modified preliminary injunction. While the Company intends to defend itself vigorously, due to the uncertainties of litigation, the Company can give no assurance that it will prevail on the appeals which could have an adverse impact on the Company’s financial position. These appeals are currently scheduled to be heard later in calendar year 2021, after the underlying case is likely to be heard and decided during the third quarter of fiscal 2020.

 

The full impact of the COVID-19 outbreak continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak at this time, however, if the pandemic continues, it may have an adverse effect on the Company’s results of operations, financial condition, or liquidity for fiscal year 2020.

 

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

 

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, 2019. There have been no significant changes in the Company’s accounting policies during the first quarter of 2020. 

 

Recent Accounting Pronouncements

 

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

 

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

 

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 became effective for the Company beginning after December 15, 2018, including interim periods within that fiscal year. 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.

 

7

 

 

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

 

Measurement of Credit Losses on Financial Instrument. In June 2016, the FASB issued amended guidance to ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. This amended guidance for small reporting companies is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. 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) 175,000 shares of common stock, par value $0.001 per share (“CleanSpark Common Stock”), of CleanSpark, (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split completed by CleanSpark in December 2019.

 

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

 

 

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.

 

At March 31, 2020, the estimated fair value of the warrants and CleanSpark common stock decreased to $324 and an unrealized mark to market loss of $1.1 million was recognized within other expense for the period ended March 31, 2020. The PCPI entity was a dormant business unit at the time of this sale; therefore this sale has no impact to the discontinued operations presented within the financial statements.

 

4. FAIR VALUE MEASUREMENTS

 

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

 

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

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

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

 

At March 31, 2020, the Company’s financial instruments included the right to receive (i) 175,000 shares of common stock, par value $0.001 per share, of CleanSpark Common Stock, (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The carrying amounts reported in the accompanying financial statements for cash and cash equivalents, receivables, inventories, accounts payable and accrued expenses and other current liabilities approximate their respective fair values because of the short-term nature of these accounts. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split which was completed by CleanSpark in December 2019.

 

The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets that are measured at fair value on a recurring basis:

 

 

 

March 31, 2020

 

 

 

Fair Value Measurements Using

 

 

 

Quoted prices in
active markets for
identical assets

 

 

Significant other
observable
inputs

 

 

Significant
unobservable
inputs

 

 

 

 

(Level 1)

 

 

 

(Level 2)

 

 

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Common shares

 

$

207

 

 

$

 

 

$

 

Warrants

 

 

 

 

 

 

 

 

117

 

 

Level 3 Valuation

 

The warrant asset (which relates to warrants to purchase shares of common stock) is marked-to-market each reporting period with the change in fair value recorded to other income (expense) in the accompanying statements of operations until the warrants are exercised. The fair value of the warrant asset is estimated using a Black-Scholes option-pricing model. The significant assumptions used in preparing the option pricing model for valuing the warrant asset as of March 31, 2020, include (i) volatility of 306%, (ii) risk free interest rate of 0.34%, (iii) strike price ($16.00 and $20.00), (iv) fair value of common stock ($1.20), and (v) expected life of 3.8 years.

 

9

 

 

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the CleanSpark warrants for the three months ended March 31, 2020:

 

 

 

CleanSpark
Warrants

 

Balance at December 31, 2019

 

$

531

 

Issuance of warrants

 

 

 

Change in fair value

 

 

(414

)

Balance at March 31, 2020

 

$

117

 

 

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

 

5. REVENUES

 

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 helps customers effectively and efficiently manage their electrical power distribution systems to desired specifications.

 

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.

 

10

 

 

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

 

The following table presents our revenues disaggregated by revenue discipline:

 

 

 

Three Months Ended

 

 

 

2020

 

 

2019

 

Products

 

$

3,132

 

 

$

1,246

 

Services

 

 

1,869

 

 

 

1,771

 

Total revenue

 

$

5,001

 

 

$

3,017

 

 

See Note 13 - Business Segment and Geographic Information in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.

 

6. OTHER (INCOME) EXPENSE

 

Other expense in the unaudited consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the three months ended March 31, 2020, other expense was $1.3 million, as compared to other income of $3.3 million during the three months ended March 31, 2019. For the three months ended March 31, 2020, included in other expense was a loss of $1.1 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 as compared to a gain of $3.3 million for the three months ended March 31, 2019.

 

7. 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 and for the three months ended March 31, 2019.

 

11

 

 

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 principal amounts 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. In addition, pursuant to the terms of the Stock Purchase Agreement, as amended, the Buyer may set-off on a dollar-for-dollar basis any indemnifiable losses the Buyer suffers as a result of certain actions or omissions by Pioneer Power or the Disposed Companies against the first Seller Note in the aggregate principal amount of $5.0 million, and such right of set-off is the Buyer’s sole source of recovery with respect to losses resulting from inaccuracies or breaches of the Company’s representations and warranties, except for breaches of certain fundamental warranties, claims of fraud and breaches of representations, warranties or covenants relating to taxes, and claims for certain specific indemnities. No such losses are expected as of March 31, 2020.

 

During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.7 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.3 million. The Company has revalued the notes for an appropriate imputed interest rate, resulting in a change to the value of the notes at March 31, 2020 of $111, for a carrying value of $5.2 million, as compared to a carrying value of $5.1 million for the year ended December 31, 2019, which is included within other long term assets (see Note 10 - Other Assets).

 

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.

 

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 year ended December 31, 2019, and $1.4 million of these insurance proceeds were received during the first quarter ended March 31, 2020. While the net loss on inventory damaged amounting to approximately $782 has been reflected within the Cost of goods sold in discontinued operations during the year ended December 31, 2019, the corresponding insurance receivable of $351 has been recognized as an asset from continuing operations as of March 31, 2020. The amount of damaged inventory and insurance proceeds are based upon management’s best estimate, and the actual amount of damaged inventory and insurance proceeds may differ from such estimates.

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Revenues

 

$

 

 

$

21,681

 

Costs and Expenses

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

 

 

 

17,839

 

Selling, general and administrative

 

 

 

 

 

2,439

 

Foreign exchange gain

 

 

 

 

 

(631

)

Interest expense

 

 

 

 

 

275

 

Other expense

 

 

 

 

 

45

 

Total costs and expenses

 

 

 

 

 

19,967

 

Income before provision for income taxes

 

 

 

 

 

1,714

 

Income tax expense

 

 

 

 

 

402

 

Income from discontinued operations, net of income taxes

 

$

 

 

$

1,312

 

  

12

 

 

Depreciation, capital expenditures, and significant non cash items of the discontinued operations by period were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Depreciation and amortization

 

$

 

 

$

387

 

Capital expenditures

 

 

 

 

 

56

 

 

8. INVENTORIES

 

The components of inventories are summarized below:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials

 

$

2,341

 

 

$

2,309

 

Work in process

 

 

2,928

 

 

 

2,628

 

Finished goods

 

 

 

 

 

46

 

Provision for excess and obsolete inventory

 

 

(616

)

 

 

(429

)

Total inventories

 

$

4,653

 

 

$

4,554

 

 

Inventories are stated at the lower of cost or a net realizable value determined on a FIFO method. A net realizable value adjustment of $113 and $418 was recognized in cost of goods sold of the T&D Solutions segment during the three months ended March 31, 2020 and the year ended December 31, 2019, respectively.

 

9. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized below:

 

    March 31,     December 31,  

 

 

2020

 

 

2019

 

Machinery and equipment

 

$

1,225

 

 

$

1,225

 

Furniture and fixtures

 

 

205

 

 

 

205

 

Computer hardware and software

 

 

682

 

 

 

682

 

Leasehold improvements

 

 

337

 

 

 

337

 

 

 

 

2,449

 

 

 

2,449

 

Less: Accumulated depreciation

 

 

(1,867

)

 

 

(1,809

)

Total property, plant and equipment, net

 

$

582

 

 

$

640

 

 

Depreciation expense was $58 and $70 for the period ended March 31, 2020 and 2019, respectively.

 

10. OTHER ASSETS

 

Included in other assets at March 31, 2020 and December 31, 2019 are right-of-use asset, net, of $1.6 and $1.8 million, respectively, related to our lease obligations.

 

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 subordinated promissory notes accrue interests at a rate of 4.0% per annum with a final payment of all unpaid principal and interest becoming fully due and payable at December 31, 2022. The Company determined the fair value of the notes based on market conditions and prevailing interest rates. During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.7 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.3 million. The Company has revalued the notes for an appropriate imputed interest rate, resulting in an increase to the value of the notes at March 31, 2020 of $111, for a carrying value of $5.2 million.

 

13

 

 

Other assets are summarized below:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Right of use assets

 

$

1,587

 

 

$

1,806

 

Notes receivable, net

 

 

5,207

 

 

 

5,096

 

CleanSpark warrants

 

 

117

 

 

 

531

 

Deposits

 

 

24

 

 

 

32

 

Other assets

 

$

6,935

 

 

$

7,465

 

 

11. STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company had 8,726,045 shares of common stock, $0.001 par value per share, outstanding as of March 31, 2020 and December 31, 2019.

 

Stock-Based Compensation

 

A summary of stock option activity under the 2011 Long-Term Incentive Plan as of March 31, 2020, and changes during the three months ended March 31, 2020, are presented below:

 

 

 

Stock
Options

 

 

Weighted average
exercise price

 

 

Weighted
average remaining
contractual term

 

 

Aggregate
intrinsic value

 

Outstanding as of January 1, 2020

 

 

379,800

 

 

$

7.54

 

 

 

6.1

 

 

$

22

 

Granted

 

 

70,000

 

 

 

1.68

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(2,000

)

 

 

15.05

 

 

 

 

 

 

 

 

 

Outstanding as of March 31, 2020

 

 

447,800

 

 

$

6.59

 

 

 

7.50

 

 

$

 

Exercisable as of March 31, 2020

 

 

374,467

 

 

$

7.50

 

 

 

6.90

 

 

$

 

 

As of March 31, 2020, there were 225,867 shares available for future grants under the Company’s 2011 Long-Term Incentive Plan.

 

Stock-based compensation expense recorded for the three months ended March 31, 2020 and 2019 was approximately $2 and $5, respectively. At March 31, 2020, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of operations of approximately $1.

 

14

 

 

12. 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
March 31,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,921

)

 

$

4,335

 

Income from discontinued operations, net of income taxes

 

 

 

 

 

1,312

 

Net (loss) income

 

$

(2,921

)

 

$

5,647

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average basic shares outstanding

 

 

8,726

 

 

 

8,726

 

Denominator for diluted net (loss) income per common share

 

 

8,726

 

 

 

8,730

 

 

 

 

 

 

 

 

 

 

(Loss) income per share:

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.33

)

 

$

0.50

 

Income from discontinued operations

 

 

 

 

 

0.15

 

Net (loss) income

 

$

(0.33

)

 

$

0.65

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.33

)

 

$

0.50

 

Income from discontinued operations

 

 

 

 

 

0.15

 

Net (loss) income

 

$

(0.33

)

 

$

0.65

 

 

13. 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 Critical Power reportable segment is the Company’s Titan Energy Systems Inc. business unit. The T&D Solutions reportable segment is the Company’s Pioneer Custom Electrical Products, Inc. business unit, together with sales and expenses attributable to strategic sales group for its T&D Solutions marketing activities.

 

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

 

15

 

 

The following tables present information about segment income and loss:

 

 

 

Three Months Ended
March 31,

 

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

T&D Solutions

 

 

 

 

 

 

 

 

Switchgear

 

$

2,877

 

 

$

1,073

 

 

 

$

2,877

 

 

$

1,073

 

Critical Power Solutions

 

 

 

 

 

 

 

 

Equipment

 

 

255

 

 

 

173

 

Service

 

 

1,869

 

 

 

1,771

 

 

 

 

2,124

 

 

 

1,944

 

Consolidated

 

$

5,001

 

 

$

3,017

 

 

 

 

 

Three Months Ended
March 31,

 

 

 

2020

 

 

2019

 

Depreciation and Amortization

 

 

 

 

 

 

 

 

T&D Solutions

 

$

34

 

 

$

34

 

Critical Power Solutions

 

 

79

 

 

 

36

 

Unallocated Corporate Overhead Expenses

 

 

9

 

 

 

14

 

Consolidated

 

$

122

 

 

$

84

 

 

 

 

Three Months Ended
March 31,

 

 

 

2020

 

 

2019

 

Operating Loss

 

 

 

 

 

 

 

 

T&D Solutions

 

$

(777

)

 

$

(232

)

Critical Power Solutions

 

 

(200

)

 

 

(402

)

Unallocated Corporate Overhead Expenses

 

 

(770

)

 

 

(810

)

Consolidated

 

$

(1,747

)

 

$

(1,444

)

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

United States

 

$

5,001

 

 

$

3,017

 

Total

 

$

5,001

 

 

$

3,017

 

  

16

 

 

14. LEASES

 

The company leases certain offices, facilities and equipment under operating and financing leases. Our leases have remaining terms of 1 year to 7 years some of which contain options to extend up to 10 years. As of March 31, 2020 and 2019, assets recorded under finance leases were $1.3 million and $989, respectively, and accumulated amortization associated with finance leases were $579 and $414, respectively. As of March 31, 2020 and 2019, assets recorded under operating leases were $2.1 million and $2.1 million, respectively, and accumulated amortization associated with operating leases were $1.2 million and $888, respectively. Such amounts are included within other assets.

 

The components of the lease expense were as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2020

 

 

2019

 

Operating lease cost

 

$

169

 

 

$

169

 

 

 

 

 

 

 

 

 

 

Finance lease cost

 

 

 

 

 

 

 

 

 Amortization of right-of-use asset

 

$

64

 

 

$

67

 

 Interest on lease liabilities

 

 

13

 

 

 

12

 

Total finance lease cost

 

$

77

 

 

$

79

 

 

Other information related to leases was as follows:

 

Supplemental Cash Flows Information

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 Operating cash flows from operating leases

 

$

171

 

 

$

167

 

 Operating cash flows from finance leases

 

 

13

 

 

 

12

 

 Financing cash flows from finance leases

 

 

58

 

 

 

62

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

 

 

 

 

 Operating leases

 

 

155

 

 

 

147

 

 Finance leases

 

 

62

 

 

 

54

 

 

Weighted Average Remaining Lease Term

 

 

March 31,

 

2020

 

2019

Operating leases

2 years

 

3 years

Finance leases

2 years

 

3 years

 

Weighted Average Discount Rate

 

 

March 31,

 

2020

 

2019

Operating leases

5.50%

 

5.50%

Finance leases

6.90%

 

6.70%

 

 

17

 

 

Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows:

 

 

 

Operating
Leases

 

 

Finance
Leases

 

2020

 

$

506

 

 

$

212

 

2021

 

 

401

 

 

 

330

 

2022

 

 

91

 

 

 

140

 

2023

 

 

 

 

 

124

 

 Total future minmum lease payments

 

 

998

 

 

 

806

 

Less imputed interest

 

 

(48

)

 

 

(80

)

 Total future minmum lease payments

 

$

950

 

 

$

726

 

 

Reported as of March 31, 2020:

 

 

 

Operating
Leases

 

 

Finance
Leases

 

Accounts payable and accrued liabilities

 

$

594

 

 

$

332

 

Other long-term liabilities

 

 

356

 

 

 

394

 

Total

 

$

950

 

 

$

726

 

 

15. SUBSEQUENT EVENTS

 

The Company negotiated and received $317 of the insurance proceeds due from the June 2019 flood at the Company’s facility in Reynosa, Mexico during the second quarter of 2020.

 

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, appropriates funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment. On April 13, 2020, the Company received funding in the amount of $1.4 million from the Paycheck Protection Program (the “PPP Loan”) after determining we met the qualifications for this loan program due to the impact that COVID-19 will have on our financial condition, results of operations, and/or liquidity. While it is uncertain as to the full magnitude that the pandemic will have on the Company’s future results of operations, the Company has experienced certain declines in service sales and commitments to purchase equipment. The Company has made this assertion in good faith based upon all available guidance, however management will continue to assess the Company’s continued qualification if and when updated guidance is released by the Treasury Department. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease, rent and utility payments. Under the terms of the PPP loan, the Company may be eligible for full or partial loan forgiveness in the second quarter of 2020, however, no assurance is provided that the Company will apply for, or obtain forgiveness for, any portion of the PPP Loan.

 

18

 

 

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, 2019, which was filed with the Securities and Exchange Commission on March 30, 2020.

 

Unless the context requires otherwise, references in this Form 10-Q to the “ Company, ” “ Pioneer, ” “ 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.

 

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

 

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

 

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

 

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

 

Our ability to realize revenue reported in our backlog.

 

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

 

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

 

The impact of geopolitical activity on the economy, changes in government regulations such as income taxes, 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.

 

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

 

  19

 

 

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 “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.

 

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 five (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. These solutions are marketed principally through our Pioneer Custom Electrical Products, Inc. (“PCEP ) brand name.

 

Our Critical Power business performs service on our customer’s sophisticated power generation equipment. These solutions are marketed by our operations headquartered in Minnesota, currently doing business under the Titan Energy Systems Inc. (“Titan ) brand name.

 


Discontinued Operations

 

Operating results for our liquid-filled transformer and dry-type transformer manufacturing businesses, which have been previously included in the T&D Solutions segment, have now been reclassified as discontinued operations for all periods presented. See Note 7 – Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.

 

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, 2019 .

 

  20

 

 

RESULTS OF OPERATIONS

 

Overview of the Three 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 13 - 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 months ended March 31, 2020 and 2019 are as follows:

 

    Three Months Ended  
    March 31,  
    2020     2019  
Revenues            
T&D Solutions   $ 2,877     $ 1,073  
Critical Power Solutions     2,124       1,944  
Consolidated     5,001       3,017  
Cost of goods sold                
T&D Solutions     2,972       910  
Critical Power Solutions     1,852       1,851  
Consolidated     4,824       2,761  
Gross profit     177       256  
Selling, general and administrative expenses     1,895       1,638  
Depreciation and amortization expense     39       62  
Foreign exchange gain     (10 )      
Total operating expenses     1,924       1,700  
Operating loss from continuing operations     (1,747 )     (1,444 )
Interest (income) expense     (110 )     224  
Gain on sale of subsidiaries           4,207  
Other expense (income)     1,281       (3,342 )
(Loss) income before taxes     (2,918 )     5,881  
Income tax expense     3       1,546  
Net (loss) income from continuing operations     (2,921 )     4,335  
Discontinued operations                
Income from operations of discontinued business units           1,714  
Income tax expense           402  
Income from discontinued operations, net of income taxes           1,312  
Net (loss) income   $ (2,921 )   $ 5,647  

 

  21

 

 

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:

 

    March 31,     December 31,     September 30,     June 30,     March 31,  
    2020     2019     2019     2019     2019  
T&D Solutions   $ 7,632     $ 6,450     $ 7,714     $ 10,120     $ 9,876  
Critical Power Solutions     7,068       9,406       4,832       4,844       4,274  
Order backlog   $ 14,700     $ 15,856     $ 12,546     $ 14,964     $ 14,150  
Discountinued Operation                       35,672       34,466  
Total order backlog   $ 14,700     $ 15,856     $ 12,546     $ 50,635     $ 48,616  

 

Revenue

 

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

 

    Three Months Ended  
    March 31,  
    2020     2019     Variance     %  
T&D Solutions                                
Switchgear   $ 2,877     $ 1,073     $ 1,804       168.1  
      2,877       1,073       1,804       168.1  
Critical Power Solutions                                
Equipment     255       173       82       47.4  
Service     1,869       1,771       98       5.5  
      2,124       1,944       180       9.3  
Total revenue   $ 5,001     $ 3,017     $ 1,984       65.8  

 

For the three months ended March 31, 2020, our consolidated revenue increased by $2.0 million, or 65.8%, to $5.0 million, up from $3.0 million during the three months ended March 31, 2019.

 

T&D Solutions. Revenue from our switchgear product lines increased by $1.8 million, or 168.1%, as result of increased sales of our transfer switches.

 

Critical Power. Revenue for our equipment sales increased by $82, or 47.4%, and our service revenue increased $98, or 5.5%, driven by earlier than expected warm weather in the Upper Midwest enabling earlier access to customers’ remote sites.

 

 

  22

 

 

Gross Profit and Gross Margin

 

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

 

    Three Months Ended  
    March 31,  
    2020     2019     Variance     %  
T&D Solutions                                
Gross profit   $ (95 )   $ 163     $ (258 )     (158.3 )
Gross margin %     (3.3 )     15.2       (18.5 )        
                                 
Critical Power Solutions                                
Gross profit     272       93       179       192.5  
Gross margin %     12.8       4.8       8.0          
                                 
Consolidated gross profit   $ 177     $ 256     $ (79 )     (30.9 )
Consolidated gross margin %     3.5       8.5       (5.0 )        

 

For the three months ended March 31, 2020, our consolidated gross margin was 3.5% of revenues, compared to 8.5% during the three months ended March 31, 2019. The 5.0% reduction in our consolidated gross margin percentage is explained predominantly by the results of our T&D Solutions segment.

 

T&D Solutions. The reduction in our T&D Solutions gross margin resulted primarily from taking on lower margin jobs and providing customer discounts. Gross profit for the three months ended March 31, 2020 also includes write downs of inventory amounting to $43.

 

Critical Power. The 192.5% increase in our Critical Power segment gross margin was driven primarily by increased sales of service, which provide higher margins than our equipment sales.

 

 

  23

 

 

Operating Expenses

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

Variance

 

 

%

 

T&D Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

$

667

 

 

$

380

 

 

$

287

 

 

 

75.5

 

Depreciation and amortization expense

 

 

15

 

 

 

15

 

 

 

 

 

 

 

Segment operating expense

 

$

682

 

 

$

395

 

 

$

287

 

 

 

72.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Critical Power Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

$

457

 

 

$

462

 

 

$

(5

)

 

 

(1.1

)

Depreciation and amortization expense

 

 

15

 

 

 

33

 

 

 

(18

)

 

 

(54.5

)

Segment operating expense

 

$

472

 

 

$

495

 

 

$

(23

)

 

 

(4.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated Corporate Overhead Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

$

771

 

 

$

796

 

 

$

(25

)

 

 

(3.1

)

Depreciation expense

 

 

9

 

 

 

14

 

 

 

(5

)

 

 

(35.7

)

Foreign exchange gain

 

 

(10

)

 

 

 

 

 

(10

)

 

 

 

Segment operating expense

 

$

770

 

 

$

810

 

 

$

(40

)

 

 

(4.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

$

1,895

 

 

$

1,638

 

 

$

257

 

 

 

15.7

 

Depreciation and amortization expense

 

 

39

 

 

 

62

 

 

 

(23

)

 

 

(37.1

)

Foreign exchange gain

 

 

(10

)

 

 

 

 

 

(10

)

 

 

 

Consolidated operating expense

 

$

1,924

 

 

$

1,700

 

 

$

224

 

 

 

13.2

 

 

Selling, General and Administrative Expense. For the three months ended March 31, 2020, consolidated selling, general and administrative expense, before depreciation and amortization, increased by $257, or 15.7%, to $1.9 million, as compared to $1.6 million during the three months ended March 31, 2019. As a percentage of our consolidated revenue, selling, general and administrative expense before depreciation and amortization decreased to 37.9% in the 2020, as compared to 54.3% in 2019.

 

The selling, general and administrative expense in our T&D Solutions segment increased by $287, or 75.5%, during the three months ended March 31, 2020, as compared to 2019, primarily due to higher legal expense related to the Myers Power Case.

 

Depreciation and Amortization Expense. 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 months ended March 31, 2020, depreciation and amortization expense decreased by $23, or 37.1%, as compared to the same period in 2019 primarily due to an intangible asset becoming fully amortized in our Critical Power segment.

 

Operating Loss

 

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

 

    Three Months Ended  
    March 31,  
    2020     2019     Variance     %  
T&D Solutions   $ (777 )   $ (232 )   $ (545 )     (234.9 )
Critical Power Solutions     (200 )     (402 )     202       50.2  
Unallocated Corporate Overhead Expenses     (770 )     (810 )     40       4.9  
Total operating loss   $ (1,747 )   $ (1,444 )   $ (303 )     (21.0 )

 

T&D Solutions. Operating loss from this segment increased by $545 during the three months ended March 31, 2020, compared to 2019, due to an increase in legal expense related to the Myers Power Case.  

 

  24

 

 

Critical Power. The Critical Power segment operating loss decreased by $202 during the three months ended March 31, 2020 from 2019 due primarily to an increase in our higher margin service revenue and lower amortization of intangible assets in 2020.

 

General Corporate Expense. Our general corporate expense consists 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 months ended March 31, 2020, our unallocated corporate overhead expense decreased by $40, primarily from decreased payroll related expenses.

 

Non-Operating (Income) Expense

 

Interest (Income) Expense. For the three months ended March 31, 2020 and 2019, the Company had interest income of $110 and interest expense of $224, respectively. The net decrease in our interest expense was due to the retirement of our bank indebtedness with the proceeds from the sale of the transformer business units in August 2019.

 

Other Expense (Income). For the three months ended March 31, 2020, other non-operating expense was $1.3 million, as compared to an income of $3.3 million during the same period in 2019. For the three months ended March 31, 2020, included in other non-operating expense was a loss of $1.1 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.

 

Income Tax Expense. Our effective income tax rate was (0.1)% for the three months ended March 31, 2020, as a result of a full valuation allowance, compared to 26.3% during the same period in 2019, as set forth below:

 

 

 

Three Months Ended
March 31,

 

 

 

2020

 

 

2019

 

 

Variance

 

(Loss) income before income taxes

 

 

$

(2,918

)

 

$

5,881

 

 

$

(8,799

)

Income tax expense

 

 

 

3

 

 

 

1,546

 

 

 

(1,543

)

Effective income tax rate %

 

 

 

(0.1

)

 

 

26.3

 

 

 

(26.4

)

 

Net (Loss) Income per Share from Continuing Operations

 

We generated a net loss from continuing operations of $2.9 million and a net income from continuing operations of $4.3 million during the three months ended March 31, 2020 and 2019, respectively. Our net loss from continuing operations per basic and diluted share for the three months ended March 31, 2020 was $0.33. Our net income from continuing operations per basic and diluted share for the three months ended March 31, 2019 was $0.50.

 

LIQUIDITY AND CAPITAL RESOURCES

 

General. At March 31, 2020, we had $6.8 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 have been generally applied toward operating activities, capital improvements and acquisitions.

 

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

 

The full impact of the COVID-19 outbreak continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak at this time, however, if the pandemic continues, it may have an adverse effect on the Company’s results of operations, financial condition, or liquidity for fiscal year 2020.

 

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

 

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Cash (Used in)/ Provided by Operating Activities. Cash used in our operating activities was $1.0 million during the three months ended March 31, 2020, as compared to cash provided by our operating activities of $871 during the three months ended March 31, 2019. The increase in cash used in operations during the three months ended March 31, 2020 occurred as a result of an increase of cash used for working capital when compared to the three months ended March 31, 2019.

 

Cash Used in Investing Activities. Cash used in investing activities during the three months ended March 31, 2020 was $0, as compared to $56 during the three months ended March 31, 2019.

 

Cash Used in Financing Activities. Cash used in our financing activities was $419 during the three months ended March 31, 2020, as compared to $781 during the three months ended March 31, 2019. The primary use of cash in financing activities for the three months ending March 31, 2020 was repayments of financing leases.

 

Working Capital. As of March 31, 2020, we had working capital of $7.4 million, including $6.8 million of cash and cash equivalents, compared to working capital of $10.1 million, including $8.2 million of cash and cash equivalents at December 31, 2019. At March 31, 2020 and December 31, 2019, we no longer had a revolving credit facility, as it was paid in full in August 2019 with the proceeds from the sale of the transformer business units.

 

Assessment of Liquidity. At March 31, 2020, we had $6.8 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 year ended December 31, 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 and capital improvements. 

 

Capital Expenditures 

 

The Company had no additions to property, plant and equipment during the three months ended March 31, 2020, as compared to additions of $56 during the three months ended March 31, 2019. We have no major future capital projects planned, or significant replacement spending anticipated during the rest of 2020.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable

 

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 March 31, 2020, 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 March 31, 2020, based on the evaluation of these disclosure controls and procedures, our chief executive officer and interim chief financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

 

Management believes that the condensed 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 March 31, 2020 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 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 third 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.

 

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. The Company cancelled the dividend as the result of this court order.

 

There are also two appeals pending in the California Court of Appeal for the Second Appellate District (“Court of Appeal”). Case no. B301494 is an appeal of the October 4, 2019 Modified Preliminary Injunction. Case no. B302943 is an appeal of the November 26, 2019 order enjoining Pioneer Power Solutions, Inc. and Pioneer Custom Electrical Products Corp. to obtain and post a $12 million bond. Pioneer’s opening brief in case no. B301494 was due March 30, 2020. On March 23, 2020 we filed a stipulated request for a 60-day extension. Pursuant to a March 20 Implement Order for Emergency Order issued by the Court of Appeal (available at http://www.courts.ca.gov/documents/Administrative-order-re-OA.pdf), all deadlines in the Court of Appeal are automatically extended by 30 days without the need for any other action. The Court of Appeal also has suspended all in-person oral arguments, temporarily transitioning to video conferencing. (Order available at http://www.courts.ca.gov/documents/Administrative-order-re-OA.pdf.)

 

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. 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.

 

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. See Note 13 - Commitments and Contingencies included in the notes to our consolidated financial statements included in this Annual Report on Form 10-K.

 

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, 2019.

 

The recent COVID-19 outbreak may adversely affect our business.

 

The recent global outbreak of the coronavirus pandemic could have a negative impact on our revenues and operating results. This outbreak could result in disruptions and damage to our business, caused by both the negative impact to our ability to obtain cost effective raw materials, supplies and component parts necessary to operate our business and the negative impact on our ability to operate our facility should the coronavirus spread more broadly in the regions we are located, thereby creating an increased risk of exposure to our workforce which cannot operate our facility remotely. Mitigation efforts will not completely prevent our business from being adversely affected, and the longer the pandemic impacts supply and demand and the more broadly the pandemic spreads, it is more likely that the impact on our business, revenues and operating results will become increasingly negative. Also, global or national health concerns, including the outbreak of pandemic or contagious disease such as the recent coronavirus outbreak, can negatively impact the global economy and demand for our services and products.

 

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

 

The guidance issued by CISA can be found at: https://www.cisa.gov/publication/guidance-essential-critical-infrastructure-workforce.

 

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

 

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

 

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.