Company Quick10K Filing
Pioneer Power Solutions
Price5.70 EPS1
Shares9 P/E6
MCap50 P/FCF-24
Net Debt-14 EBIT7
TEV36 TEV/EBIT6
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-14
10-Q 2020-03-31 Filed 2020-05-15
10-K 2019-12-31 Filed 2020-03-30
10-Q 2019-09-30 Filed 2019-11-18
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-03-29
10-Q 2018-09-30 Filed 2018-11-09
10-Q 2018-06-30 Filed 2018-08-10
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-04-02
10-Q 2017-09-30 Filed 2017-11-13
10-Q 2017-06-30 Filed 2017-08-11
10-Q 2017-03-31 Filed 2017-05-12
10-K 2016-12-31 Filed 2017-03-29
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-12
10-Q 2016-03-31 Filed 2016-05-13
10-K 2015-12-31 Filed 2016-03-31
10-Q 2015-09-30 Filed 2015-11-23
10-Q 2015-06-30 Filed 2015-08-12
10-Q 2015-03-31 Filed 2015-05-15
10-K 2014-12-31 Filed 2015-04-02
10-Q 2014-09-30 Filed 2014-11-12
10-Q 2014-06-30 Filed 2014-08-07
10-Q 2014-03-31 Filed 2014-05-15
10-K 2013-12-31 Filed 2014-03-14
10-Q 2013-09-30 Filed 2013-11-12
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-15
10-K 2012-12-31 Filed 2013-04-01
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-15
10-K 2011-12-31 Filed 2012-03-30
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-15
10-Q 2010-06-30 Filed 2010-08-16
10-Q 2010-03-31 Filed 2010-05-17
10-K 2009-12-31 Filed 2010-04-15
8-K 2020-03-26
8-K 2019-11-22
8-K 2019-10-07
8-K 2019-10-06
8-K 2019-09-13
8-K 2019-09-05
8-K 2019-08-16
8-K 2019-08-13
8-K 2019-06-28
8-K 2019-02-15
8-K 2019-01-22
8-K 2018-12-27
8-K 2018-07-16
8-K 2018-06-29
8-K 2018-05-14
8-K 2018-05-02
8-K 2018-04-26
8-K 2018-03-28

PPSI 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II – Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

Pioneer Power Solutions Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
856851341702012201420172020
Assets, Equity
3525155-5-152012201420172020
Rev, G Profit, Net Income
4530150-15-302012201420172020
Ops, Inv, Fin

10-Q 1 ppsi-10q_063020.htm QUARTERLY REPORT ppsi-10q_063020.htm
 

 

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 June 30, 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 August 14, 2020 was 8,726,045.

 

 

 

 

 

 

PIONEER POWER SOLUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended June 30, 2020

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

  Page
Item 1. Financial Statements 1
Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019  1
Unaudited Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2020 and 2019           2
Consolidated Balance Sheets at June 30, 2020 (Unaudited) and December 31, 201          3
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019           4
Unaudited Consolidated Statement of Stockholders’ Equity for the Three and Six Months Ended June 30, 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         20
Item 3. Quantitative and Qualitative Disclosures About Market Risk       27
Item 4. Controls and Procedures       27

 

PART II. OTHER INFORMATION

 


 

 

 

 

 

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     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Revenues   $ 5,087     $ 5,360     $ 10,088     $ 8,378  
Cost of goods sold                              
Cost of goods sold     4,838       4,839       9,662       7,600  
Write down of inventory     546       —        546       —   
Total cost of goods sold     5,384       4,839       10,208       7,600  
Gross (loss) profit     (297 )     521       (120 )     778  
Operating expenses                                
Selling, general and administrative     877       2,071       2,812       3,771  
Foreign exchange loss     10                    
Total operating expenses     887       2,071       2,812       3,771  
Loss from continuing operations     (1,184 )     (1,550 )     (2,932 )     (2,993 )
Interest (income) expense     (77 )     240       (188 )     463  
Gain on sale of subsidiaries                       4,207  
Other (income) expense     (449 )     3,807       832       465  
(Loss) income before taxes     (658 )     (5,597 )     (3,576 )     286  
Income tax expense (benefit)     2       (1,442 )     5       104  
Net (loss) income from continuing operations     (660 )     (4,155 )     (3,581 )     182  
Discontinued operations                                
Income from operations of discontinued business units           263             1,976  
Income tax expense           131             533  
Income from discontinued operations, net of income taxes           132             1,443  
Net (loss) income   $ (660 )   $ (4,023 )   $ (3,581 )   $ 1,625  
                                 
Earnings (loss) per share:                                
Basic                                
(Loss) income from continuing operations   $ (0.08 )   $ (0.48 )   $ (0.41 )   $ 0.02  
Income from discontinued operations           0.02             0.17  
Net (loss) income   $ (0.08 )   $ (0.46 )   $ (0.41 )   $ 0.19  
                                 
Diluted                                
(Loss) income from continuing operations   $ (0.08 )   $ (0.48 )   $ (0.41 )   $ 0.02  
Income from discontinued operations           0.02             0.17  
Net (loss) income   $ (0.08 )   $ (0.46 )   $ (0.41 )   $ 0.19  
                                 
Weighted average common shares outstanding:                                
  Basic     8,726       8,726       8,726       8,726  
  Diluted     8,726       8,726       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     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Net (loss) income   $ (660 )   $ (4,023 )   $ (3,581 )   $ 1,625  
Other comprehensive income                                
  Foreign currency translation adjustments           374             62  
  Amortization of net prior service costs and net actuarial losses, net of tax           20             110  
Other comprehensive income           394             172  
  Comprehensive (loss) income   $ (660 )   $ (3,629 )   $ (3,581 )   $ 1,797  

 

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)

(Unaudited)

 

    June 30,     December 31,  
    2020     2019  
    (Unaudited)     (Revised See Note #6)  
ASSETS                
Current assets                
Cash and cash equivalents   $ 7,537     $ 8,213  
Short term investments     453       936  
Accounts receivable, net     2,002       3,716  
Insurance receivable     33       1,800  
Inventories, net     3,318       4,554  
Income taxes receivable     407       360  
Prepaid expenses and other current assets     774       795  
Total current assets     14,524       20,374  
Property, plant and equipment, net     525       640  
Other assets     6,912       7,465  
Total assets   $ 21,961     $ 28,479  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities                
Bank overdrafts   $     $ 374  
Accounts payable and accrued liabilities     4,837       7,533  
Deferred revenue     1,344       1,441  
Income taxes payable     16       496  
Total current liabilities     6,197       9,844  
Long-term debt     1,407        
Other long-term liabilities     1,094       1,793  
Total liabilities     8,698       11,637  
Stockholders’ equity                
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued            
Common stock, $0.001 par value, 30,000,000 shares authorized;
8,726,045 shares issued and outstanding on June 30, 2020 and December 31, 2019
    9       9  
Additional paid-in capital     23,980       23,978  
Accumulated other comprehensive income     14       14  
Accumulated deficit     (10,740 )     (7,159 )
Total stockholders’ equity     13,263       16,842  
Total liabilities and stockholders’ equity   $ 21,961     $ 28,479  

 

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)

 

    Six Months Ended
    June 30,
    2020   2019
Operating activities                
Net (loss) income   $ (3,581 )   $ 1,625  
Depreciation     115       413  
Amortization of intangible assets     —         106  
Amortization of right-of-use assets     294       285  
Amortization of debt issuance cost     —         14  
Interest income on notes receivable     (234 )     —    
Interest expense from PPP loan     2       —    
Deferred income tax expense     —         184  
Change in receivable reserves     (55 )     (55 )
Change in inventory reserves     (333 )     143  
Write down of inventory     546       —    
Inventory write-off from flood damage     —         3,313  
Gain on sale of subsidiary     —         (4,207 )
Change in long term payables     (102 )     —    
Change in insurance receivable     1,767       (2,400 )
Unrealized loss on investments     759       285  
Stock-based compensation     2       7  
Payroll tax deferral     65       —    
Changes in current operating assets and liabilities:                
Accounts receivable     1,769       (1,707 )
Inventories     1,023       (974 )
Prepaid expenses and other assets     32       (284 )
Income taxes     (527 )     433  
Accounts payable and accrued liabilities     (2,652 )     1,714  
Deferred revenue     (97 )     2,512  
Net cash (used in)/provided by operating activities     (1,207 )     1,407  
                 
Investing activities                
Additions to property, plant and equipment     —         (122 )
Change in note receivable     194       —    
Net cash provided by/(used in) investing activities     194       (122 )
                 
Financing activities                
Bank overdrafts     (374 )     (144 )
Borrowing under debt agreement     —         13,714  
Funding from PPP loan     1,404       —    
Repayment of debt     —         (14,098 )
Payment of deferred purchase price     (397 )     —    
Principal repayments of financing leases     (296 )     (244 )
Net cash provided by/(used in) financing activities     337       (772 )
                 
(Decrease) increase in cash and cash equivalents     (676 )     513  
Effect of foreign exchange on cash and cash equivalents     —         (223 )
Cash and cash equivalents                
Beginning of period     8,213       200  
End of period   $ 7,537     $ 490  

 

 

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

 

4  

 

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

 

                Accumulated   Accumulated    
            Additional   other compre-   deficit/   Total
    Common Stock   paid-in   hensive   Retained   stockholders'
    Shares   Amount   capital   income (loss)   Earnings   equity
Balance - March 31, 2019     8,726,045     $ 9     $ 23,971     $ (6,119 )   $ (480 )   $ 17,381  
Net loss     —         —         —         —         (4,023 )     (4,023 )
Stock-based compensation     —         —         3       —         —         3  
Foreign currency translation adjustment     —         —         —         374       —         374  
Pension adjustment, net of taxes     —         —         —         20       —         20  
Balance - June 30, 2019     8,726,045     $ 9     $ 23,974     $ (5,725 )   $ (4,502 )   $ 13,756  
                                                 
Balance - March 31, 2020 (Revised)     8,726,045     $ 9     $ 23,980     $ 14     $ (10,080 )   $ 13,923  
Net loss     —         —         —         —         (660 )     (660 )
Balance - June 30, 2020     8,726,045     $ 9     $ 23,980     $ 14     $ (10,740 )   $ 13,263  

 

 

                      Accumulated              
                Additional     other           Total  
    Common Stock     paid-in     comprehensive     Accumulated     stockholders’  
    Shares     Amount     capital     income (loss)     deficit     equity  
Balance - January 1, 2019     8,726,045     $ 9     $ 23,966     $ (5,897 )   $ (6,127 )   $ 11,951  
Net income                             1,625       1,625  
Stock-based compensation                 8                   8  
Foreign currency translation adjustment                       62             62  
Pension adjustment, net of taxes                       110             110  
Balance - June 30, 2019     8,726,045     $ 9     $ 23,974     $ (5,725 )   $ (4,502 )   $ 13,756  
                                                 
Balance - January 1, 2020 (Revised)     8,726,045     $ 9     $ 23,978     $ 14     $ (7,159 )   $ 16,842  
Net loss                             (3,581 )     (3,581 )
Stock-based compensation                 2                   2  
Balance - June 30, 2020     8,726,045     $ 9     $ 23,980     $ 14     $ (10,740 )   $ 13,263  

 

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

 

5  

 

 

PIONEER POWER SOLUTIONS, INC.

Notes to Consolidated Financial Statements

June 30, 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 (the “Seller Notes”). During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.8 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.2 million. The Company recognized an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the Company during the three months ended June 30, 2020. The Company has revalued the notes for an appropriate imputed interest rate, resulting in a change to the value of the notes at June 30, 2020 of $40, for a carrying value of $5.1 million, which is included within other long term assets (see Note 11 - Other Assets).

 

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

 

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

 

Presentation

 

The accompanying 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 June 30, 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.

 

6

 

 

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

 

Operating results of liquid-filled and dry-type transformer manufacturing businesses have been previously included in the T&D Segment, which have now been reclassified as discontinued operations for all periods presented. See Note 8 - Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q. Discussions in these notes pertain to our continuing operations unless noted otherwise.  

 

These unaudited consolidated financial statements should be read in conjunction with the risk factors under the heading “Part II - Item 1A. Risk Factors” and the risk factors and the audited consolidated financial statements and notes thereto of the Company and its subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 six months ended June 30, 2020, the Company had $7.5 million of cash and cash equivalents on hand, generated primarily from the completion of the Equity Transaction, and working capital of $8.3 million. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings. Our cash requirements historically were generally for operating activities, debt repayment, capital improvements and acquisitions. As all outstanding amounts under our credit facilities have been paid in full with the proceeds from the 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. 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.

 

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. During the three months ended June 30, 2020, the Company experienced a decline in market demand for its products and services. Additionally, we have experienced an impact to productivity as a result of implementing social distancing guidelines and personal protective measures. Notwithstanding, the Company has been able to operate substantially at capacity during the COVID-19 outbreak. 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 contain its spread, the Company is not able to estimate the full 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 (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 the full magnitude of the pandemic’s effect on the Company’s future results of operations is uncertain, the Company had experienced certain declines in service sales and commitments to purchase equipment. The Company 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, however, no assurance is provided that the Company will apply for, or obtain forgiveness for, any portion of the PPP Loan.

 

The Company has accounted for the PPP Loan as a debt instrument in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470, Debt. At June 30, 2020, $1.4 million of principal payments due starting in the third quarter of 2021 have been recorded as long-term debt in accordance with the enactment of the Paycheck Protection Program Flexibility Act of 2020. The Company does not expect to incur any material interest expense under the PPP Loan.

 

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 this fiscal 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 a material impact to the consolidated financial statements once implemented.

 

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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.

 

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

 

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.

 

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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 June 30, 2020, the estimated fair value of the warrants and CleanSpark common stock amounted to $708 and an unrealized mark to market gain of $384 and an unrealized mark to market loss of $759 was recognized within other expense for the three and six months ended June 30, 2020, respectively. 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 June 30, 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:

 

  June 30, 2020
    Fair Value Measurements Using  
    Quoted prices in   Significant other     Significant  
    active markets for   observable     unobservable  
    identical assets   inputs     inputs  
    (Level 1)   (Level 2)     (Level 3)  
Assets                      
Common shares   $ 453   $     $  
Warrants               255  

 

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 June 30, 2020, include (i) volatility of 290%, (ii) risk free interest rate of 0.24%, (iii) strike price ($16.00 and $20.00), (iv) fair value of common stock ($2.59), and (v) expected life of 3.6 years.

 

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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 six months ended June 30, 2020:

 

    CleanSpark  
    Warrants  
Balance at December 31, 2019   $ 531  
Issuance of warrants      
Change in fair value     (276 )
Balance at June 30, 2020   $ 255  

 

No other changes in valuation techniques or inputs occurred during the six months ended June 30, 2020. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the six months ended June 30, 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.

 

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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     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Products   $ 3,212     $ 3,004     $ 6,344     $ 4,251  
Services     1,875       2,356       3,744       4,127  
Total revenue   $ 5,087     $ 5,360     $ 10,088     $ 8,378  

 

See Note 15 - Business Segment and Geographic Information in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.

 

6. REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS

 

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

 

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

 

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

 

    As of December 31, 2019
Consolidated Balance Sheets   As Reported   Adjustment   As Revised
Income taxes receivable   $ —       $ 360     $ 360  
Total current assets     20,014       360       20,374  
Total assets     28,119       360       28,479  
Income taxes payable     543       (47 )     496  
Total current liabilities     9,891       (47 )     9,844  
Total liabilities     11,684       (47 )     11,637  
Accumulated deficit     (7,566 )     407       (7,159 )
Total stockholders’ equity     16,435       407       16,842  
                         
Consolidated Statements of Operations                        
Income tax expense from discontinued operations   $ 737     $ (407 )   $ 330  
Income from discontinued operations, net of income taxes     10,598       407       11,005  
Net loss     (1,439 )     407       (1,032 )
Basic and diluted loss from continuing operations     (1.38 )     —         (1.38 )
Basic and diluted income from discontinued operations     1.21       0.05       1.26  
Basic and diluted net loss     (0.17 )     0.05       (0.12 )

 

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

 

The identified adjustment does not impact any other prior periods.

 

7. OTHER (INCOME) EXPENSE

 

Other 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 June 30, 2020, other income was $449, as compared to other expense of $3.8 million during the three months ended June 30, 2019. For the three months ended June 30, 2020, included in other income was a gain of $384 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 loss of $3.7 million for the three months ended June 30, 2019.

 

For the six months ended June 30, 2020, other expense was $832, as compared to $465 during the six months ended June 30, 2019. For the six months ended June 30, 2020, included in other expense was a loss of $759 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 loss of $325 for the six months ended June 30, 2019.

 

8. DISCONTINUED OPERATIONS

 

A discontinued operation is a component of the Company’s business that represents a separate major line of business that had been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Consolidated Statement of Operations, Consolidated Statement of 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 for the three and six months ended June 30, 2019.

 

Overview

 

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

 

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

 

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Consideration

 

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

 

During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.8 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.2 million. The Company recognized an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the Company during the three months ended June 30, 2020. The Company has revalued the notes for an appropriate imputed interest rate, resulting in a change to the value of the notes at June 30, 2020 of $40, for a carrying value of $5.1 million, which is included within other long term assets (see Note 11 - 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 $1.8 million of these insurance proceeds were received during the six months ended June 30, 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 amounting to $1.8 million and $33 has been recognized as an asset from continuing operations as of December 31, 2019 and June 30, 2020, respectively. 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 June 30,     Six Months Ended June 30,  
    2020     2019     2020     2019  
Revenues   $     $ 19,003     $     $ 40,684  
Costs and Expenses                                
   Cost of goods sold           16,047             33,886  
Selling, general and administrative           2,275             4,715  
Foreign exchange loss (gain)           143             (491 )
Interest expense           275             550  
Other expense                       48  
Total costs and expenses           18,740             38,708  
Income before provision for income taxes           263             1,976  
Income tax expense           131             533  
Income from discontinued operations, net of income taxes   $     $ 132     $     $ 1,443  

 

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

 

    Six Months Ended June 30,  
    2020     2019  
Depreciation and amortization   $   $ 632  
Capital expenditures         98  

 

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9. INVENTORIES

 

The components of inventories are summarized below:

 

    June 30,     December 31,  
    2020     2019  
Raw materials   $ 2,392     $ 2,309  
Work in process     1,986       2,628  
Finished goods           46  
Provision for excess and obsolete inventory     (1,060 )     (429 )
Total inventories   $ 3,318     $ 4,554  

 

Inventories are stated at the lower of cost or a net realizable value determined on a FIFO method. A negative net realizable value adjustment of $349 was recognized in cost of goods sold of the T&D Solutions segment during the six months ended June 30, 2020. Additionally, a $546 write down of inventory was recognized in cost of goods sold of the T&D Solutions segment during the three months ended June 30, 2020 as a result of management’s strategic decisions to rationalize its traditional product offerings and focus on higher margin equipment sales.

 

10. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized below:

 

    June 30,     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     (1,924 )     (1,809 )
Total property, plant and equipment, net   $ 525     $ 640  

 

Depreciation expense for the three months ended June 30, 2020 and 2019 was $57 and $72, respectively.

 

Depreciation expense for the six months ended June 30, 2020 and 2019 was $115 and $142, respectively.

 

11. OTHER ASSETS

 

Included in other assets at June 30, 2020 and December 31, 2019 are right-of-use assets, net, of $1.5 million 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 $1.8 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.2 million. The Company recognized an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the Company during the three months ended June 30, 2020. The Company has revalued the notes for an appropriate imputed interest rate, resulting in a change to the value of the notes at June 30, 2020 of $40, for a carrying value of $5.1 million.

 

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Other assets are summarized below:

 

    June 30,     December 31,  
    2020     2019  
Right of use assets   $ 1,512     $ 1,806  
Notes receivable, net     5,136       5,096  
CleanSpark warrants     255       531  
Deposits     9       32  
Other assets   $ 6,912     $ 7,465  

 

12. DEBT

 

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 the PPP Loan in the amount of $1.4 million 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 experienced a decline in market demand for its products and services during the three months ended June 30, 2020. Additionally, we have experienced an impact to productivity as a result of implementing social distancing guidelines and personal protective measures. 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 fourth quarter of 2020, however, no assurance is provided that the Company will apply for, or obtain forgiveness for, any portion of the PPP Loan.

 

The Company has accounted for the PPP Loan as a debt instrument in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470, Debt. At June 30, 2020, $1.4 million of principal payments due starting in the third quarter of 2021 have been recorded as long-term debt in accordance with the enactment of the Paycheck Protection Program Flexibility Act of 2020. The Company does not expect to incur any material interest expense under the PPP Loan.

 

13. STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company had 8,726,045 shares of common stock, $0.001 par value per share, outstanding as of June 30, 2020 and December 31, 2019.

 

Stock-Based Compensation

 

A summary of stock option activity under the 2011 Long-Term Incentive Plan as of June 30, 2020, and changes during the six months ended June 30, 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 June 30, 2020       447,800     $ 6.59       6.30     $ 6  
Exercisable as of June 30, 2020       377,800     $ 7.50       5.60     $  

 

As of June 30, 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 and six months ended June 30, 2020 and 2019 was insignificant. As of June 30, 2020, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of operations of approximately $1.

 

15

 

 

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

 

Basic and diluted (loss) income 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 (loss) income per share (in thousands, except per share data):

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Numerator:                
Net (loss) income   $ (660 )   $ (4,155 )   $ (3,581 )   $ 182  
Income from discontinued operations, net of income taxes           132             1,443  
Net (loss) income   $ (660 )   $ (4,023 )   $ (3,581 )   $ 1,625  
                                 
Denominator:                                
Weighted average basic shares outstanding     8,726       8,726       8,726       8,726  
Effect of dilutive securities - equity based compensation plans                       4  
Denominator for diluted net (loss) income per common share     8,726       8,726       8,726       8,730  
                                 
(Loss) income per share:                                
Basic                                
(Loss) income from continuing operations   $ (0.08 )   $ (0.48 )   $ (0.41 )   $ 0.02  
Income from discontinued operations           0.02             0.17  
Net (loss) income   $ (0.08 )   $ (0.46 )   $ (0.41 )   $ 0.19  
                                 
Diluted                                
(Loss) income from continuing operations   $ (0.08 )   $ (0.48 )   $ (0.41 )   $ 0.02  
Income from discontinued operations           0.02             0.17  
Net (loss) income   $ (0.08 )   $ (0.46 )   $ (0.41 )   $ 0.19  

 

16

 

 

15. 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.

 

The following tables present information about segment income and loss:

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Revenues                        
T&D Solutions                                
Switchgear   $ 2,987     $ 2,737     $ 5,864     $ 3,810  
      2,987       2,737       5,864       3,810  
Critical Power Solutions                                
Equipment     225       267       480       441  
Service     1,875       2,356       3,744       4,127  
      2,100       2,623       4,224       4,568  
Consolidated   $ 5,087     $ 5,360     $ 10,088     $ 8,378  

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Depreciation and Amortization                                
T&D Solutions   $ 33     $ 37     $ 68     $ 71  
Critical Power Solutions     84       37       163       73  
Unallocated Corporate Overhead Expenses     8       14       17       28  
Consolidated   $ 125     $ 88     $ 248     $ 172  

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Operating (loss) income                                
T&D Solutions   $ (626 )   $ (543 )   $ (1,403 )   $ (777 )
Critical Power Solutions     (199 )     251       (399 )     (149 )
Unallocated Corporate Overhead Expenses     (359 )     (1,258 )     (1,130 )     (2,067 )
Consolidated   $ (1,184 )   $ (1,550 )   $ (2,932 )   $ (2,993 )

 

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

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Revenues                        
United States   $ 5,087     $ 5,360     $ 10,088     $ 8,378  

 

17  

 

16. LEASES

 

The Company leases certain offices, facilities and equipment under operating and financing leases. Our leases have remaining terms of 1 year to 2 years some of which contain options to extend up to 10 years. As of June 30, 2020 and 2019, assets recorded under finance leases were $1.4 million and $1.0 million, respectively, and accumulated amortization associated with finance leases were $648 and $475, respectively. As of June 30, 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 $1.4 million and $748, respectively. Such amounts are included within other assets.

 

The components of the lease expense were as follows:

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Operating lease cost   $ 169     $ 169     $ 339     $ 339  
                                 
Finance lease cost                                
Amortization of right-of-use asset   $ 69     $ 61     $ 133     $ 135  
Interest on lease liabilities     14       13       28       27  
Total finance lease cost   $ 83     $ 74     $ 161     $ 162  

 

Other information related to leases was as follows:

 

Supplemental Cash Flows Information

 

    June 30,  
    2020     2019  
Cash paid for amounts included in the measurement of lease liabilities            
Operating cash flow payments for operating leases   $ 341     $ 334  
Operating cash flow payments for finance leases     28       27  
Financing cash flow payments for finance leases     120       127  
Right-of-use assets obtained in exchange for lease obligations:                
Operating leases     312       296  
Finance leases     69       61  

 

Weighted Average Remaining Lease Term

 

    June 30,  
      2020       2019  
Operating leases     1 years       2 years  
Finance leases     2 years       2 years  

 

Weighted Average Discount Rate

 

    June 30,  
    2020     2019  
Operating leases   5.50%   5.50%
Finance leases   6.70%   6.72%

 

18  

 

Future minimum lease payments under non-cancellable leases as of June 30, 2020 were as follows:

 

    Operating     Finance  
    Leases     Leases  
2020     335       144  
2021     401       317  
2022     91       184  
2023           247  
Total future minmum lease payments     827       892  
Less imputed interest     (35 )     (89 )
Total future minmum lease payments   $ 792     $ 803  

 

Reported as of June 30, 2020:

 

    Operating     Finance  
    Leases     Leases  
Accounts payable and accrued liabilities   $ 557     $ 281  
Other long-term liabilities     235       522  
Total   $ 792     $ 803  

   

19  

 

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. 

 

20  

 

 

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 8 - 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.

 

21  

 

 

RESULTS OF OPERATIONS

 

Overview of the Three and Six 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 15 - Business Segment and Geographic Information and in our unaudited Consolidated Financial Statements and related notes included in this Quarterly Report on Form 10-Q, should be referred to when reading our discussion and analysis of results of operations below.

 

Our summary of operating results during the three and six months ended June 30, 2020 and 2019 are as follows:

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
Revenues                        
T&D Solutions   $ 2,987     $ 2,737     $ 5,864     $ 3,810  
Critical Power Solutions     2,100       2,623       4,224       4,568  
Consolidated     5,087       5,360       10,088       8,378  
Cost of goods sold                                
T&D Solutions     3,468       2,914       6,440       3,825  
Critical Power Solutions     1,916       1,925       3,768       3,775  
Consolidated     5,384       4,839       10,208       7,600  
Gross (loss) profit     (297 )     521       (120 )     778  
Selling, general and administrative expenses     839       2,007       2,734       3,645  
Depreciation and amortization expense     38       64       78       126  
Foreign exchange loss     10                    
Total operating expenses     887       2,071       2,812       3,771  
Operating loss from continuing operations     (1,184 )     (1,550 )     (2,932 )     (2,993 )
Interest (income) expense     (77 )     240       (188 )     463  
Gain on sale of subsidiaries                       4,207  
Other (income) expense     (449 )     3,807       832       465  
(Loss) income before taxes     (658 )     (5,597 )     (3,576 )     286  
Income tax expense (benefit)     2       (1,442 )     5       104  
Net (loss) income from continuing operations     (660 )     (4,155 )     (3,581 )     182  
Discontinued operations                                
Income from operations of discontinued business units           263             1,976  
Income tax expense           131             533  
Income from discontinued operations, net of income taxes           132             1,443  
Net (loss) income   $ (660 )   $ (4,023 )   $ (3,581 )   $ 1,625  

 

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:

 

    June 30,     March 31,     December 31,     September 30,     June 30,  
    2020     2020     2019     2019     2019  
T&D Solutions   $ 4,725     $ 7,632     $ 6,450     $ 7,714     $ 10,120  
Critical Power Solutions     7,420       7,068       9,406       4,832       4,844  
Order backlog   $ 12,145     $ 14,700     $ 15,856     $ 12,546     $ 14,964  
Discountinued operations                             35,672  
Total order backlog   $ 12,145     $ 14,700     $ 15,856     $ 12,546     $ 50,635  

 

22  

 

 

Revenue

 

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

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     Variance     %     2020     2019     Variance     %  
T&D Solutions                                                                
Switchgear   $ 2,987     $ 2,737     $ 250       9.1     $ 5,864     $ 3,810     $ 2,054       53.9  
      2,987       2,737       250       9.1       5,864       3,810       2,054       53.9  
Critical Power Solutions                                                                
Equipment     225       267       (42 )     (15.7 )     480       441       39       8.8  
Service     1,875       2,356       (481 )     (20.4 )     3,744       4,127       (383 )     (9.3 )
      2,100       2,623       (523 )     (20.0 )     4,224       4,568       (344 )     (7.5 )
Total revenue   $ 5,087     $ 5,360     $ (273 )     (5.1 )   $ 10,088     $ 8,378     $ 1,710       20.4  

 

For the three months ended June 30, 2020, our consolidated revenue decreased by $273, or 5.1%, to $5.1 million, down from $5.4 million during the three months ended June 30, 2019. For the six months ended June 30, 2020, our consolidated revenue increased by $1.7 million, or 20.4%, to $10.1 million, up from $8.4 million during the six months ended June 30, 2019.

 

T&D Solutions. During the three months ended June 30, 2020, revenue from our switchgear product lines increased by $250, or 9.1%, as compared to the three months ended June 30, 2019, as a result of increased sales of our transfer switches offset by decreased sales of our low and medium voltage switchgear.

 

During the six months ended June 30, 2020, revenue from our switchgear product lines increased by $2.1 million, or 53.9% as compared to the six months ended June 30, 2019, as result of increased sales of our transfer switches offset by decreased sales of our low and medium voltage switchgear.

 

Critical Power. For the three months ended June 30, 2020, revenue for our equipment sales decreased by $42, or 15.7%, as compared to the same period in the prior year. For the six months ended June 30, 2020, equipment sales increased by $39, or 8.8%, as compared to the same period in 2019.

 

For the three and six months ended June 30, 2020, our service revenue decreased by $481, or 20.4%, and $383, or 9.3%, respectively, as compared to the same periods in the prior year due to the loss of the Verizon preventative maintenance business.

 

Gross (Loss) Profit and Gross Margin

 

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

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     Variance     %     2020     2019     Variance     %  
T&D Solutions                                                                
Gross loss   $ (481 )   $ (177 )   $ (304 )     (171.8 )   $ (576 )   $ (15 )   $ (561 )     (3,740.0 )
Gross margin %     (16.1 )     (6.5 )     (9.6 )             (9.8 )     (0.4 )     (9.4 )        
                                                                 
Critical Power Solutions                                                                
Gross profit     184       698       (514 )     (73.6 )     456       793       (337 )     (42.5 )
Gross margin %     8.8       26.6       (17.8 )             10.8       17.4       (6.6 )        
                                                                 
Consolidated gross (loss) profit   $ (297 )   $ 521     $ (818 )     (157.0 )   $ (120 )   $ 778     $ (898 )     (115.4 )
Consolidated gross margin %     (5.8 )     9.7       (15.5 )             (1.2 )     9.3       (10.5 )        

 

For the three months ended June 30, 2020, our consolidated gross margin was (5.8%) of revenues, compared to 9.7% during the three months ended June 30, 2019. The 15.5% reduction in our consolidated gross margin percentage is predominantly due to the reduction in our T&D Solutions gross margin.

 

For the six months ended June 30, 2020, our gross margin was (1.2%) of revenues, compared to 9.3% for the six months ended June 30, 2019. The 10.5% reduction in our consolidated gross margin percentage is predominantly due to the reduction in our T&D Solutions gross margin.

 

T&D Solutions. The reduction in our T&D Solutions gross margin resulted primarily from the shipment of lower margin orders, providing customer discounts and an increase to the segment’s obsolescence reserve of $546 as a result of management’s strategic decisions to rationalize its traditional product offerings and focus on higher margin equipment sales.

 

23  

 

 

Critical Power. During the three and six months ended June 30, 2020, the gross margin decreased by 17.8% and 6.6%, respectively, as compared to the same period in 2019, primarily due to the loss of the Verizon preventative maintenance business which historically has provided higher gross margins.

 

Operating Expenses

 

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

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     Variance     %     2020     2019     Variance     %  
T&D Solutions                                                                
Selling, general and administrative expense   $ 131     $ 348     $ (217 )     (62.4 )   $ 798     $ 727     $ 71       9.8  
Depreciation and amortization expense     14       17       (3 )     (17.6 )     29       33       (4 )     (12.1 )
Segment operating expense   $ 145     $ 365     $ (220 )     (60.3 )   $ 827     $ 760     $ 67       8.8  
                                                                 
Critical Power Solutions                                                                
Selling, general and administrative expense   $ 367     $ 413     $ (46 )     (11.1 )   $ 824     $ 876     $ (52 )     (5.9 )
Depreciation and amortization expense     16       33       (17 )     (51.5 )     31       65       (34 )     (52.3 )
Segment operating expense   $ 383     $ 446     $ (63 )     (14.1 )   $ 855     $ 941     $ (86 )     (9.1 )
                                                                 
Unallocated Corporate Overhead Expenses                                                                
Selling, general and administrative expense   $ 341     $ 1,246     $ (905 )     (72.6 )   $ 1,112     $ 2,042     $ (930 )     (45.5 )
Depreciation expense     8       14       (6 )     (42.9 )     18       28       (10 )     (35.7 )
Foreign exchange gain     10             10                                
Segment operating expense   $ 359     $ 1,260     $ (901 )     (71.5 )   $ 1,130     $ 2,070     $ (940 )     (45.4 )
                                                                 
Consolidated                                                                
Selling, general and administrative expense   $ 839     $ 2,007     $ (1,168 )     (58.2 )   $ 2,734     $ 3,645     $ (911 )     (25.0 )
Depreciation and amortization expense     38       64       (26 )     (40.6 )     78       126       (48 )     (38.1 )
Foreign exchange gain     10             10                                
Consolidated operating expense   $ 887     $ 2,071     $ (1,184 )     (57.2 )   $ 2,812     $ 3,771     $ (959 )     (25.4 )

 

Selling, General and Administrative Expense. For the three months ended June 30, 2020, consolidated selling, general and administrative expense, before depreciation and amortization, decreased by $1.2 million, or 58.2%, to $839, due to fewer payroll related costs and a reduction in professional fees, as compared to $2.0 million during the three months ended June 30, 2019. As a percentage of our consolidated revenue, selling, general and administrative expense before depreciation and amortization decreased to 16.5% in the three months ended June 30, 2020, as compared to 37.4% in the three months ended June 30, 2019.

 

During the six months ended June 30, 2020, consolidated selling, general and administrative expense, before depreciation and amortization, decreased by $911, or 25.0%, to $2.7 million due to a reduction in professional fees, as compared to $3.6 million during the six months ended June 30, 2019. As a percentage of our consolidated revenue, selling, general and administrative expense before depreciation and amortization decreased to 27.1% in the six months ended June 30, 2020, as compared to 43.5% in the six months ended June 30, 2019.

 

Depreciation and Amortization Expenses. Depreciation and amortization expense consists primarily of depreciation of fixed assets and amortization of definite-lived intangible assets and right-of-use assets related to our finance leases and excludes amounts included in cost of sales. For the three and six months ended June 30, 2020, depreciation and amortization expense decreased by $26, or 40.6%, and $48, or 38.1%, respectively, as compared to the same periods in 2019 primarily due to an intangible asset becoming fully amortized in our Critical Power segment during 2019.

 

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Operating Loss

 

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

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     Variance     %     2020     2019     Variance     %  
T&D Solutions   $ (626 )   $ (543 )   $ (83 )     15.3     $ (1,403 )   $ (777 )   $ (626 )     (80.6 )
Critical Power Solutions     (199 )     251       (450 )     179.3       (399 )     (149 )     (250 )     (167.8 )
Unallocated Corporate Overhead Expenses     (359 )     (1,258 )     899       71.5       (1,130 )     (2,067 )     937       45.3  
Total operating loss   $ (1,184 )   $ (1,550 )   $ 366       (23.6 )   $ (2,932 )   $ (2,993 )   $ 61       2.0  

 

T&D Solutions. During the three and six months ended June 30, 2020, our T&D Solutions segment generated an operating loss of $626 and $1.4 million, respectively, as compared to $543 and $777 for the same respective periods in 2019. The increase in the operating loss for the three and six months ended June 30, 2020, as compared to the same period in 2019, is primarily due to an increase in the segment’s obsolescence reserve, offset by lower legal fees related to ongoing litigation.

 

Critical Power. During the three and six months ended June 30, 2020, our Critical Power segment generated an operating loss of $199 and $399, respectively, as compared to operating income of $251 and an operating loss of $149 during the three and six months ended June 30, 2019, respectively. The increase in the operating loss for the three and six months ended June 30, 2020 is due primarily to the loss of the Verizon preventative maintenance business which has historically generated higher operating income.

 

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 and six months ended June 30, 2020, our unallocated corporate overhead expense decreased by $899, or 71.5%, and by $937, or 45.3%, as compared to the same periods in 2019, primarily due to a reduction in professional fees related to the Equity Transaction that was entered into in 2019.

 

Non-Operating (Income) Expense

 

Interest (Income) Expense. For the three and six months ended June 30, 2020, the Company had interest income of approximately $77 and $188, respectively, as compared to interest expense of $240 and $463, respectively, during the three and six months ended June 30, 2019. 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 June 30, 2020, other non-operating income was $449, as compared to other non-operating expense of $3.8 million during the three months ended June 30, 2019. For the three months ended June 30, 2020, included in other non-operating income was a gain of $384 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 loss of $3.7 million during the three months ended June 30, 2019.

 

For the six months ended June 30, 2020, other non-operating expense was $832, as compared to $465 during the six months ended June 30, 2019. For the six months ended June 30, 2020 and 2019, included in other non-operating expense was a loss of $759 and $325, respectively, 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 (Benefit). Our effective income tax expense rate was (0.3%) for the three months ended June 30, 2020, compared to an income tax benefit rate of 25.8% during the same period in 2019. For the six months ended June 30, 2020, our effective income tax expense rate was (0.1%), as compared to an income tax expense rate of 36.4% during the same period in 2019, as set forth below:

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     Variance     2020     2019     Variance  
(Loss) income before income taxes   $ (658 )   $ (5,597 )   $ 4,939     $ (3,576 )   $ 286     $ (3,862 )
Income tax expense (benefit)     2       (1,442 )     1,444       5       104       (99 )
Effective income tax rate %     (0.3 )     25.8       (26.1 )     (0.1 )     36.4       (36.5 )

 

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Net (Loss) Income per Share from Continuing Operations

 

We generated a net loss from continuing operations of $660 and $3.6 million during the three and six months ended June 30, 2020, respectively, as compared to net loss from continuing operations of $4.2 million and net income from continuing operations $182 during the three and six months ended June 30, 2019, respectively.

 

Our net loss from continuing operations per basic and diluted share for the three months ended June 30, 2020, and June 30, 2019 was $0.08 and $0.48, respectively. Our net loss from continuing operations per basic and diluted share for the six months ended June 30, 2020 was $0.41, as compared to an income from continuing operations per basic and diluted share of $0.02 for the six months ended June 30, 2019.

 

LIQUIDITY AND CAPITAL RESOURCES

 

General. As of June 30, 2020, we had $7.5 million of cash and cash equivalents on hand. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings. Our cash requirements have been generally applied toward operating activities, debt repayment, capital improvements and acquisitions.

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (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. During the three months ended June 30, 2020, the Company experienced a decline in market demand for its products and services. Additionally, we have experienced an impact to productivity as a result of implementing social distancing guidelines and personal protective measures. Notwithstanding, the Company has been able to operate substantially at capacity during the COVID-19 outbreak. 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 contain its spread, the Company is not able to estimate the full 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 the PPP Loan in the amount of $1.4 million 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.

 

The Company has accounted for the PPP Loan as a debt instrument in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470, Debt. At June 30, 2020, $1.4 million of principal payments due starting in the third quarter of 2021 have been recorded as long-term debt in accordance with the enactment of the Paycheck Protection Program Flexibility Act of 2020. The Company does not expect to incur any material interest expense under the PPP Loan.

 

Cash (Used in)/ Provided by Operating Activities. Cash used in our operating activities was $1.2 million during the six months ended June 30, 2020, as compared to cash provided by our operating activities of $1.4 million during the six months ended June 30, 2019. The increase in cash used in operations during the six months ended June 30, 2020 occurred as a result of an increase of cash used for working capital when compared to the six months ended June 30, 2019.

 

Cash Provided by/ (Used in) Investing Activities. Cash provided by investing activities during the six months ended June 30, 2020 was $194, as compared to cash used in investing activities of $122 during the six months ended June 30, 2019.

 

Cash Provided by/ (Used in) Financing Activities. Cash provided by our financing activities was $337 during the six months ended June 30, 2020, as compared to cash used in our financing activities of $772 during the six months ended June 30, 2019. The primary source of cash in financing activities for the six months ending June 30, 2020 was funding from the Payroll Protection Program.

 

Working Capital. As of June 30, 2020, we had working capital of $8.3 million, including $7.5 million of cash and equivalents, compared to working capital of $10.1 million, including $8.2 million of cash and equivalents at December 31, 2019. At June 30, 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 June 30, 2020, we had $7.5 million of cash and cash equivalents on hand generated primarily from the completion of the Equity Transaction. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings. 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.

 

26  

 

 

Capital Expenditures 

 

The Company had no additions to property, plant and equipment during the six months ended June 30, 2020, as compared to additions of $122 during the six months ended June 30, 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 June 30, 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 June 30, 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 June 30, 2020 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

27

 

 

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. A pre-trial status conference is scheduled to be held on August 18, 2020. 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. 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 $30,000 or more. The court continued the hearing, and ultimately ordered the companies to post a $12 million bond. The Company has cancelled the dividend in lieu of posting the bond.

 

There are also two appeals pending in the California Court of Appeal for the Second Appellate District (“Court of Appeal”) in connection with the litigation with Myers Power Products, Inc. Case no. B301494 is an appeal of the October 4, 2019 order modifying a previously issued 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. On April 10, 2020, the Court of Appeal granted our motion to combine the two appeals. The combined opening brief is due August 24, 2020. We currently do not expect these appeals to be scheduled to be heard until early 2021.

 

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.

 

28

 

 

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

 

The ongoing global coronavirus pandemic could continue to have a negative impact on our revenues and operating results. This pandemic could result in disruptions and damage to our business, caused by both the negative impact to our ability to obtain cost effective raw materials, supplies and component parts necessary to operate our business and the negative impact on our ability to operate our facility should the coronavirus spread more broadly in the regions we are located, thereby creating an increased risk of exposure to our workforce which cannot operate our facility remotely. The full impact of the COVID-19 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 our financial condition, liquidity, and future results of operations. During the three months ended June 30, 2020, we experienced a decline in market demand for our products and services. Additionally, we have experienced an impact to productivity as a result of implementing social distancing guidelines and personal protective measures. Given the daily evolution of the COVID-19 outbreak and the global responses to contain its spread, we are not able to estimate the full effects of the COVID-19 outbreak at this time, however, if the pandemic continues, it may have an adverse effect on our results of operations, financial condition, or liquidity for fiscal year 2020. Mitigation efforts will not completely prevent our business from being adversely affected, and the longer the pandemic impacts supply and demand and the more broadly the pandemic spreads, it is more likely that the impact on our business, revenues and operating results will become increasingly negative.

Per the guidance issued from the Cybersecurity and Infrastructure Security Agency (“CISA”), part of the United States Department of Homeland Security, 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.

 

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.  

 

29

 

 

EXHIBIT INDEX

 

Exhibit    
No.   Description
3.1   Composite Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Registration Statement on Form S-1 of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on June 21, 2011).
     
3.2   Bylaws (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 2, 2009).
     
31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Interim Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101*   The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in XBRL (eXtensible Business Reporting Language), (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Comprehensive (Loss) Income, (iv) Consolidated Statements of Cash Flows and, (v) Notes to the Consolidated Financial Statements.

 

 

+ Management contract or compensatory plan or arrangement.

* Filed herewith.

 

 

 

SIGNATURES

 

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

 

    PIONEER POWER SOLUTIONS, INC.
     
Date: August 14, 2020 By: /s/ Nathan J. Mazurek
    Name: Nathan J. Mazurek
    Title: Chief Executive Officer

 

Date: August 14, 2020 /s/ Walter Michalec
  Name: Walter Michalec
 

Title: Interim Chief Financial Officer

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