Notes to Consolidated Financial Statements
March 31, 2020 (Unaudited)
1. BASIS OF PRESENTATION
Overview
Pioneer Power Solutions, Inc. and its wholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,” “Pioneer Power,” “we,” “our” and “us”) manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. The Company is headquartered in Fort Lee, New Jersey and operates from five (5) additional locations in the U.S. for manufacturing, centralized distribution, engineering, sales and administration.
We have two reportable segments as defined in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020: Transmission and Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).
Sale of Transformer Business Units
On June 28, 2019, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek (Chief Executive Officer of the Company), Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”). Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer (the “Equity Transaction”), for a purchase price of $68.0 million. Included in the purchases price, the Company received two subordinated promissory notes, issued by the Buyer, in the aggregate principal amount of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million. During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.7 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.3 million. The Company has revalued the notes for an appropriate imputed interest rate, resulting in a change to the value of the notes at March 31, 2020 of $111, for a carrying value of $5.2 million as compared to a carrying value of $5.1 million for the year ended December 31, 2019, which is included within other long term assets (see Note 10 - Other Assets).
The transaction was consummated on August 16, 2019. Pioneer sold to the Buyer all of the assets and liabilities associated with its liquid-filled transformer and dry-type transformer manufacturing businesses within the Company’s T&D Solutions segment. Pioneer Power retained its switchgear manufacturing business within the T&D Solutions segment, as well as all of the operations associated with its Critical Power segment.
For presentation within these statements, the Disposed Companies are being presented as discontinued operations for all periods presented.
Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of March 31, 2020. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim consolidated financial statements have been included. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP for a year-end balance sheet.
All dollar amounts (except share and per share data) presented in the notes to our unaudited consolidated financial statements are stated in thousands of dollars, unless otherwise noted. Amounts may not foot due to rounding.
These unaudited consolidated financial statements include the accounts of Pioneer and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
These unaudited consolidated financial statements should be read in conjunction with the risk factors and the audited consolidated financial statements and notes thereto of the Company and its subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Liquidity
The accompanying financial statements have been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements as of the three months ended March 31, 2020, the Company had $6.8 million of cash and cash equivalents on hand, generated primarily from the completion of the Equity Transaction, and working capital of $7.4 million. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings under our revolving credit facilities. Our cash requirements historically were generally for operating activities, debt repayment, capital improvements and acquisitions. As all outstanding amounts under our credit facilities have been paid in full with the proceeds from the Equity Transaction during the year ended December 31, 2019, we expect to meet our cash needs with our working capital and cash flows from our operating activities. We expect our cash requirements to be generally for operating activities and capital improvements.
There are two appeals pending in the California Court of Appeals for the Second Appellate District in connection with the litigation with Myers Power Products, Inc., which includes an appeal of an order modifying a previously issued preliminary injunction and an order enjoining the Company to obtain and post a $12 million bond in connection with the modified preliminary injunction. While the Company intends to defend itself vigorously, due to the uncertainties of litigation, the Company can give no assurance that it will prevail on the appeals which could have an adverse impact on the Company’s financial position. These appeals are currently scheduled to be heard later in calendar year 2021, after the underlying case is likely to be heard and decided during the third quarter of fiscal 2020.
The full impact of the COVID-19 outbreak continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak at this time, however, if the pandemic continues, it may have an adverse effect on the Company’s results of operations, financial condition, or liquidity for fiscal year 2020.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, appropriates funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment. On April 13, 2020, the Company received funding in the amount of $1.4 million from the Paycheck Protection Program after determining we met the qualifications for this loan program due to the impact that COVID-19 will have on our financial condition, results of operations, and/or liquidity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes in the Company’s accounting policies during the first quarter of 2020.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements not yet adopted by the Company which would have a material impact on the Company’s financial statements.
Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The ASU is effective for all annual and interim periods beginning December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact but does not anticipate there will be an impact of the adoption of this standard on its results of a material impact to the consolidated financial statements once implemented.
Stock Compensation. In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The updated standard became effective for the Company beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted this guidance on January 1, 2019. The adoption of this ASU did not have a material impact on the consolidated financial statements.
Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements for fair value measurements.
The Company adopted this guidance on January 1, 2020. The adoption of this ASU did not have a material impact on the consolidated financial statements.
Measurement of Credit Losses on Financial Instrument. In June 2016, the FASB issued amended guidance to ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. This amended guidance for small reporting companies is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. We do not expect that the amended guidance will have a material effect on our consolidated financial statements and related disclosures.
3. DIVESTITURES
Pioneer Critical Power, Inc.
On January 22, 2019, Pioneer Critical Power, Inc., a Delaware corporation (“PCPI”), a wholly-owned subsidiary of the Company within the T&D Solutions segment, CleanSpark and CleanSpark Acquisition, Inc., a Delaware corporation (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, among other things, Merger Sub merged with and into PCPI, with PCPI becoming a wholly-owned subsidiary of the CleanSpark and the surviving company of the merger (the “Merger”).
At the effective date of the Merger, all of the issued and outstanding shares of common stock of PCPI, par value $0.01 per share, were converted into the right to receive (i) 175,000 shares of common stock, par value $0.001 per share (“CleanSpark Common Stock”), of CleanSpark, (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split completed by CleanSpark in December 2019.
In connection with the Merger Agreement, the Company, CleanSpark and PCPI entered into an Indemnity Agreement (the “Indemnity Agreement”), dated January 22, 2019, pursuant to which the Company agreed to assume the liabilities and obligations related to the claims made by Myers Powers Products, Inc. in the case titled Myers Power Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical Products, Corp., et al., Los Angeles County Superior Court Case No. BC606546 (the “Myers Power Case”) as they may relate to PCPI or CleanSpark after the closing of the Merger. In addition, the Company agreed to indemnify and hold harmless CleanSpark and the surviving company of the Merger and their respective officers, directors, agents, members and employees, and the heirs successors and assigns of the foregoing from and against all losses incurred by reason of claims made by Myers Power Products, Inc. as presented or substantially similar to that presented in the Myers Powers Case that are brought against CleanSpark or the surviving company of the Merger after the closing of the Merger. The Indemnity Agreement expires five years from the date of the Indemnity Agreement.
In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Contract Manufacturing Agreement (the “Contract Manufacturing Agreement”), dated as of January 22, 2019, pursuant to which the Company will manufacture paralleling switchgear, automatic transfer switches and related control and circuit protective equipment (collectively, “Products”) exclusively for purchase by CleanSpark. CleanSpark will purchase the Products via purchase orders issued to the Company at any time and from time to time. The price for the Products payable by CleanSpark to the Company will be negotiated on a case by case basis, but all purchases of Products will have a target price of 91% of the CleanSpark customer’s purchase order price and will not be more than 109% of the Company’s cost. The Contract Manufacturing Agreement has a term of 18 months and may be extended by mutual agreement of the Company and CleanSpark.
The Merger resulted in the deconsolidation of PCPI and a gain of $4.2 million in the first quarter of 2019. The fair value of the investment in the common stock of CleanSpark was determined using quoted market prices and warrants were established using a Black Scholes model.
At March 31, 2020, the estimated fair value of the warrants and CleanSpark common stock decreased to $324 and an unrealized mark to market loss of $1.1 million was recognized within other expense for the period ended March 31, 2020. The PCPI entity was a dormant business unit at the time of this sale; therefore this sale has no impact to the discontinued operations presented within the financial statements.
4. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
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●
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Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.
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●
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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.
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●
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Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
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At March 31, 2020, the Company’s financial instruments included the right to receive (i) 175,000 shares of common stock, par value $0.001 per share, of CleanSpark Common Stock, (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The carrying amounts reported in the accompanying financial statements for cash and cash equivalents, receivables, inventories, accounts payable and accrued expenses and other current liabilities approximate their respective fair values because of the short-term nature of these accounts. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split which was completed by CleanSpark in December 2019.
The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets that are measured at fair value on a recurring basis:
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March 31, 2020
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|
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Fair Value Measurements Using
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|
|
|
Quoted prices in
active markets for
identical assets
|
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Significant other
observable
inputs
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|
Significant
unobservable
inputs
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|
|
|
|
(Level 1)
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|
|
|
(Level 2)
|
|
|
|
(Level 3)
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Assets
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|
|
|
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|
|
|
|
|
|
|
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Common shares
|
|
$
|
207
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
117
|
|
Level 3 Valuation
The warrant asset (which relates to warrants to purchase shares of common stock) is marked-to-market each reporting period with the change in fair value recorded to other income (expense) in the accompanying statements of operations until the warrants are exercised. The fair value of the warrant asset is estimated using a Black-Scholes option-pricing model. The significant assumptions used in preparing the option pricing model for valuing the warrant asset as of March 31, 2020, include (i) volatility of 306%, (ii) risk free interest rate of 0.34%, (iii) strike price ($16.00 and $20.00), (iv) fair value of common stock ($1.20), and (v) expected life of 3.8 years.
The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the CleanSpark warrants for the three months ended March 31, 2020:
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|
CleanSpark
Warrants
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|
Balance at December 31, 2019
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|
$
|
531
|
|
Issuance of warrants
|
|
|
—
|
|
Change in fair value
|
|
|
(414
|
)
|
Balance at March 31, 2020
|
|
$
|
117
|
|
No other changes in valuation techniques or inputs occurred during the three months ended March 31, 2020
. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the three months ended March 31, 2020.
5. REVENUES
Nature of our products and services
Our principal products and services include custom-engineered engine-generator sets and controls, complemented by a national field-service network to maintain and repair power generation assets.
Products
We provide switchgear that helps customers effectively and efficiently manage their electrical power distribution systems to desired specifications.
Services
Power generation systems represent considerable investments that require proper maintenance and service in order to operate reliably during a time of emergency. Our power maintenance programs provide preventative maintenance, repair and support service for our customers’ power generation systems.
Our principal source of revenue is derived from sales of products and fees for services. We measure revenue based upon the consideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of our products when the risk of loss or control for the product transfers to the customer and for services as they are performed. Under ASC 606, revenue is recognized when a customer obtains control of promised products or services in an amount that reflects the consideration we expect to receive in exchange for those products or services. To achieve this core principal, the Company applies the following five steps:
1) Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products or services to be transferred and identifies the payment terms related to these products or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for products or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products or services, the Company must apply judgment to determine whether promised products or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised products or services are accounted for as a combined performance obligation.
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:
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|
Three Months Ended
|
|
|
|
2020
|
|
|
2019
|
|
Products
|
|
$
|
3,132
|
|
|
$
|
1,246
|
|
Services
|
|
|
1,869
|
|
|
|
1,771
|
|
Total revenue
|
|
$
|
5,001
|
|
|
$
|
3,017
|
|
See Note 13 - Business Segment and Geographic Information in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.
6. OTHER (INCOME) EXPENSE
Other expense in the unaudited consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the three months ended March 31, 2020, other expense was $1.3 million, as compared to other income of $3.3 million during the three months ended March 31, 2019. For the three months ended March 31, 2020, included in other expense was a loss of $1.1 million related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the Merger of PCPI, CleanSpark and the Merger Sub as compared to a gain of $3.3 million for the three months ended March 31, 2019.
7. DISCONTINUED OPERATIONS
A discontinued operation is a component of the Company’s business that represents a separate major line of business that had been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Consolidated Statement of Operations, Consolidated Statement of Cash Flows, and Consolidated Balance Sheets are presented as if the operation had been discontinued from the start of the comparative year. Based upon the authoritative guidance, the Company concluded that the operations of the liquid-filled and dry-type transformer business should be presented as discontinued operations as of and for the three months ended March 31, 2019.
Overview
On August 16, 2019, the Company completed the Equity Transaction pursuant to the Stock Purchase Agreement, by and among the Company, the Disposed Companies, Nathan Mazurek, and the Buyer. Pursuant to the terms of the Stock Purchase Agreement, the Company sold (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer.
Upon completion of the Equity Transaction, Pioneer Power sold to the Buyer all of the assets and liabilities associated with its liquid-filled transformer and dry-type transformer manufacturing businesses within the Company’s T&D Segment. Pioneer Power retained its switchgear manufacturing business within the T&D Solutions segment, as well as all of the operations associated with its Critical Power segment.
Consideration
The consideration paid by the Buyer in the Equity Transaction is a base cash purchase price of $60.5 million, as well as the issuance by the Buyer of two subordinated promissory notes to Pioneer Power in the principal amounts of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million (the “Seller Notes”), in each case subject to adjustment pursuant to the terms of the Stock Purchase Agreement. Pursuant to the terms of the Stock Purchase Agreement, the Seller Notes will bear interest at an annualized rate of 4.0%, to be paid-in-kind annually, and will have a maturity date of December 31, 2022. In addition, pursuant to the terms of the Stock Purchase Agreement, as amended, the Buyer may set-off on a dollar-for-dollar basis any indemnifiable losses the Buyer suffers as a result of certain actions or omissions by Pioneer Power or the Disposed Companies against the first Seller Note in the aggregate principal amount of $5.0 million, and such right of set-off is the Buyer’s sole source of recovery with respect to losses resulting from inaccuracies or breaches of the Company’s representations and warranties, except for breaches of certain fundamental warranties, claims of fraud and breaches of representations, warranties or covenants relating to taxes, and claims for certain specific indemnities. No such losses are expected as of March 31, 2020.
During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.7 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.3 million. The Company has revalued the notes for an appropriate imputed interest rate, resulting in a change to the value of the notes at March 31, 2020 of $111, for a carrying value of $5.2 million, as compared to a carrying value of $5.1 million for the year ended December 31, 2019, which is included within other long term assets (see Note 10 - Other Assets).
Operating results of the liquid-filled and dry-type transformer manufacturing businesses previously included in the T&D Solutions segment, have now been reclassified as discontinued operations for all periods presented.
During the quarter ended June 30, 2019 the Company’s Reynosa Facility was damaged by a flood resulting in damages to inventory. This loss has been partially offset by $2.4 million of insurance proceeds that the Company expects to receive. The Company received $600 of these insurance proceeds during the year ended December 31, 2019, and $1.4 million of these insurance proceeds were received during the first quarter ended March 31, 2020. While the net loss on inventory damaged amounting to approximately $782 has been reflected within the Cost of goods sold in discontinued operations during the year ended December 31, 2019, the corresponding insurance receivable of $351 has been recognized as an asset from continuing operations as of March 31, 2020. The amount of damaged inventory and insurance proceeds are based upon management’s best estimate, and the actual amount of damaged inventory and insurance proceeds may differ from such estimates.
The following table presents the discontinued operations of the liquid-filled and dry-type transformer manufacturing businesses
in the Consolidated Statement of Operations:
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Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
21,681
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
—
|
|
|
|
17,839
|
|
Selling, general and administrative
|
|
|
—
|
|
|
|
2,439
|
|
Foreign exchange gain
|
|
|
—
|
|
|
|
(631
|
)
|
Interest expense
|
|
|
—
|
|
|
|
275
|
|
Other expense
|
|
|
—
|
|
|
|
45
|
|
Total costs and expenses
|
|
|
—
|
|
|
|
19,967
|
|
Income before provision for income taxes
|
|
|
—
|
|
|
|
1,714
|
|
Income tax expense
|
|
|
—
|
|
|
|
402
|
|
Income from discontinued operations, net of income taxes
|
|
$
|
—
|
|
|
$
|
1,312
|
|
Depreciation, capital expenditures, and significant non cash items of the discontinued operations by period were as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Depreciation and amortization
|
|
$
|
—
|
|
|
$
|
387
|
|
Capital expenditures
|
|
|
—
|
|
|
|
56
|
|
8. INVENTORIES
The components of inventories are summarized below:
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March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
2,341
|
|
|
$
|
2,309
|
|
Work in process
|
|
|
2,928
|
|
|
|
2,628
|
|
Finished goods
|
|
|
—
|
|
|
|
46
|
|
Provision for excess and obsolete inventory
|
|
|
(616
|
)
|
|
|
(429
|
)
|
Total inventories
|
|
$
|
4,653
|
|
|
$
|
4,554
|
|
Inventories are stated at the lower of cost or a net realizable value determined on a FIFO method. A net realizable value adjustment of $113 and $418 was recognized in cost of goods sold of the T&D Solutions segment during the three months ended March 31, 2020 and the year ended December 31, 2019, respectively.
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized below:
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|
March 31,
|
|
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December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Machinery and equipment
|
|
$
|
1,225
|
|
|
$
|
1,225
|
|
Furniture and fixtures
|
|
|
205
|
|
|
|
205
|
|
Computer hardware and software
|
|
|
682
|
|
|
|
682
|
|
Leasehold improvements
|
|
|
337
|
|
|
|
337
|
|
|
|
|
2,449
|
|
|
|
2,449
|
|
Less: Accumulated depreciation
|
|
|
(1,867
|
)
|
|
|
(1,809
|
)
|
Total property, plant and equipment, net
|
|
$
|
582
|
|
|
$
|
640
|
|
Depreciation expense was $58 and $70 for the period ended March 31, 2020 and 2019, respectively.
10. OTHER ASSETS
Included in other assets at March 31, 2020 and December 31, 2019 are right-of-use asset, net, of $1.6 and $1.8 million, respectively, related to our lease obligations.
As a result of the Company entering into the Stock Purchase Agreement on June 28, 2019, as amended (see Note 3 – Divestitures), we have received two subordinated promissory notes in the aggregate principal amount of $7.5 million, subject to certain adjustments. The subordinated promissory notes accrue interests at a rate of 4.0% per annum with a final payment of all unpaid principal and interest becoming fully due and payable at December 31, 2022. The Company determined the fair value of the notes based on market conditions and prevailing interest rates. During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.7 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.3 million. The Company has revalued the notes for an appropriate imputed interest rate, resulting in an increase to the value of the notes at March 31, 2020 of $111, for a carrying value of $5.2 million.
Other assets are summarized below:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Right of use assets
|
|
$
|
1,587
|
|
|
$
|
1,806
|
|
Notes receivable, net
|
|
|
5,207
|
|
|
|
5,096
|
|
CleanSpark warrants
|
|
|
117
|
|
|
|
531
|
|
Deposits
|
|
|
24
|
|
|
|
32
|
|
Other assets
|
|
$
|
6,935
|
|
|
$
|
7,465
|
|
11. STOCKHOLDERS’ EQUITY
Common Stock
The Company had 8,726,045 shares of common stock, $0.001 par value per share, outstanding as of March 31, 2020 and December 31, 2019.
Stock-Based Compensation
A summary of stock option activity under the 2011 Long-Term Incentive Plan as of March 31, 2020, and changes during the three months ended March 31, 2020, are presented below:
|
|
Stock
Options
|
|
|
Weighted average
exercise price
|
|
|
Weighted
average remaining
contractual term
|
|
|
Aggregate
intrinsic value
|
|
Outstanding as of January 1, 2020
|
|
|
379,800
|
|
|
$
|
7.54
|
|
|
|
6.1
|
|
|
$
|
22
|
|
Granted
|
|
|
70,000
|
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,000
|
)
|
|
|
15.05
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2020
|
|
|
447,800
|
|
|
$
|
6.59
|
|
|
|
7.50
|
|
|
$
|
—
|
|
Exercisable as of March 31, 2020
|
|
|
374,467
|
|
|
$
|
7.50
|
|
|
|
6.90
|
|
|
$
|
—
|
|
As of March 31, 2020, there were 225,867 shares available for future grants under the Company’s 2011 Long-Term Incentive Plan.
Stock-based compensation expense recorded for the three months ended March 31, 2020 and 2019 was approximately $2 and $5, respectively. At March 31, 2020, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of operations of approximately $1.
12. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Basic and diluted income (loss) per common share is calculated based on the weighted average number of shares outstanding during the period. The Company’s employee and director stock option awards, as well as incremental shares issuable upon exercise of warrants, are not considered in the calculations if the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,921
|
)
|
|
$
|
4,335
|
|
Income from discontinued operations, net of income taxes
|
|
|
—
|
|
|
|
1,312
|
|
Net (loss) income
|
|
$
|
(2,921
|
)
|
|
$
|
5,647
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
8,726
|
|
|
|
8,726
|
|
Denominator for diluted net (loss) income per common share
|
|
|
8,726
|
|
|
|
8,730
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(0.33
|
)
|
|
$
|
0.50
|
|
Income from discontinued operations
|
|
|
—
|
|
|
|
0.15
|
|
Net (loss) income
|
|
$
|
(0.33
|
)
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(0.33
|
)
|
|
$
|
0.50
|
|
Income from discontinued operations
|
|
|
—
|
|
|
|
0.15
|
|
Net (loss) income
|
|
$
|
(0.33
|
)
|
|
$
|
0.65
|
|
13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company follows ASC 280 Segment Reporting in determining its reportable segments. The Company considered the way its management team, most notably its chief operating decision maker, makes operating decisions and assesses performance and considered which components of the Company’s enterprise have discrete financial information available. As the Company makes decisions using a manufactured products vs. distributed products and services group focus, its analysis resulted in two reportable segments: T&D Solutions and Critical Power. The Critical Power reportable segment is the Company’s Titan Energy Systems Inc. business unit. The T&D Solutions reportable segment is the Company’s Pioneer Custom Electrical Products, Inc. business unit, together with sales and expenses attributable to strategic sales group for its T&D Solutions marketing activities.
The T&D Solutions segment is involved in the design, manufacture and distribution of switchgear used primarily by large industrial and commercial operations to manage their electrical power distribution needs. The Critical Power segment provides aftermarket field-services primarily to help customers ensure smooth, uninterrupted power to operations during times of emergency.
The following tables present information about segment income and loss:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
|
|
T&D Solutions
|
|
|
|
|
|
|
|
|
Switchgear
|
|
$
|
2,877
|
|
|
$
|
1,073
|
|
|
|
$
|
2,877
|
|
|
$
|
1,073
|
|
Critical Power Solutions
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
255
|
|
|
|
173
|
|
Service
|
|
|
1,869
|
|
|
|
1,771
|
|
|
|
|
2,124
|
|
|
|
1,944
|
|
Consolidated
|
|
$
|
5,001
|
|
|
$
|
3,017
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
T&D Solutions
|
|
$
|
34
|
|
|
$
|
34
|
|
Critical Power Solutions
|
|
|
79
|
|
|
|
36
|
|
Unallocated Corporate Overhead Expenses
|
|
|
9
|
|
|
|
14
|
|
Consolidated
|
|
$
|
122
|
|
|
$
|
84
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating Loss
|
|
|
|
|
|
|
|
|
T&D Solutions
|
|
$
|
(777
|
)
|
|
$
|
(232
|
)
|
Critical Power Solutions
|
|
|
(200
|
)
|
|
|
(402
|
)
|
Unallocated Corporate Overhead Expenses
|
|
|
(770
|
)
|
|
|
(810
|
)
|
Consolidated
|
|
$
|
(1,747
|
)
|
|
$
|
(1,444
|
)
|
Revenues are attributable to countries based on the location of the Company’s customers:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
5,001
|
|
|
$
|
3,017
|
|
Total
|
|
$
|
5,001
|
|
|
$
|
3,017
|
|
14. LEASES
The company leases certain offices, facilities and equipment under operating and financing leases. Our leases have remaining terms of 1 year to 7 years some of which contain options to extend up to 10 years. As of March 31, 2020 and 2019, assets recorded under finance leases were $1.3 million and $989, respectively, and accumulated amortization associated with finance leases were $579 and $414, respectively. As of March 31, 2020 and 2019, assets recorded under operating leases were $2.1 million and $2.1 million, respectively, and accumulated amortization associated with operating leases were $1.2 million and $888, respectively. Such amounts are included within other assets.
The components of the lease expense were as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
169
|
|
|
$
|
169
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
Amortization of right-of-use asset
|
|
$
|
64
|
|
|
$
|
67
|
|
Interest on lease liabilities
|
|
|
13
|
|
|
|
12
|
|
Total finance lease cost
|
|
$
|
77
|
|
|
$
|
79
|
|
Other information related to leases was as follows:
Supplemental Cash Flows Information
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
171
|
|
|
$
|
167
|
|
Operating cash flows from finance leases
|
|
|
13
|
|
|
|
12
|
|
Financing cash flows from finance leases
|
|
|
58
|
|
|
|
62
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
155
|
|
|
|
147
|
|
Finance leases
|
|
|
62
|
|
|
|
54
|
|
Weighted Average Remaining Lease Term
|
March 31,
|
|
2020
|
|
2019
|
Operating leases
|
2 years
|
|
3 years
|
Finance leases
|
2 years
|
|
3 years
|
Weighted Average Discount Rate
|
March 31,
|
|
2020
|
|
2019
|
Operating leases
|
5.50%
|
|
5.50%
|
Finance leases
|
6.90%
|
|
6.70%
|
Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows:
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
2020
|
|
$
|
506
|
|
|
$
|
212
|
|
2021
|
|
|
401
|
|
|
|
330
|
|
2022
|
|
|
91
|
|
|
|
140
|
|
2023
|
|
|
—
|
|
|
|
124
|
|
Total future minmum lease payments
|
|
|
998
|
|
|
|
806
|
|
Less imputed interest
|
|
|
(48
|
)
|
|
|
(80
|
)
|
Total future minmum lease payments
|
|
$
|
950
|
|
|
$
|
726
|
|
Reported as of March 31, 2020:
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
Accounts payable and accrued liabilities
|
|
$
|
594
|
|
|
$
|
332
|
|
Other long-term liabilities
|
|
|
356
|
|
|
|
394
|
|
Total
|
|
$
|
950
|
|
|
$
|
726
|
|
15. SUBSEQUENT EVENTS
The Company negotiated and received $317 of the insurance proceeds due from the June 2019 flood at the Company’s facility in Reynosa, Mexico during the second quarter of 2020.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, appropriates funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment. On April 13, 2020, the Company received funding in the amount of $1.4 million from the Paycheck Protection Program (the “PPP Loan”) after determining we met the qualifications for this loan program due to the impact that COVID-19 will have on our financial condition, results of operations, and/or liquidity. While it is uncertain as to the full magnitude that the pandemic will have on the Company’s future results of operations, the Company has experienced certain declines in service sales and commitments to purchase equipment. The Company has made this assertion in good faith based upon all available guidance, however management will continue to assess the Company’s continued qualification if and when updated guidance is released by the Treasury Department. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease, rent and utility payments. Under the terms of the PPP loan, the Company may be eligible for full or partial loan forgiveness in the second quarter of 2020, however, no assurance is provided that the Company will apply for, or obtain forgiveness for, any portion of the PPP Loan.