UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

FORM 10-K

(Mark One)

 

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

 

For the fiscal year ended: December 31, 20162019

 

or

 

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

 

For the transition period from              to ----              

 

Commission file number: 333-155375

 

 image

 

PIONEER POWER SOLUTIONS, INC.

(Exact name of registrant as specified in its charter) 

 

Delaware

27-1347616

(State or other jurisdiction of incorporation or organization)

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

 

400 Kelby Street, 12th Floor

Fort Lee, New Jersey 07024

(Address of principal executive offices, including zip code)

 

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

 

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

 

Title of each class

Name of each exchange on which registered

Common Stock, par value $.001 per share

Nasdaq Stock Market LLC (Nasdaq Capital Market)

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock

PPSI

Nasdaq Capital Market

 

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

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “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 Act). Yes ☐     No 

 

As of June 30, 2016,2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the price at which the common equity was last sold on the Nasdaq Capital Market on such date, was approximately $21.5$19.2 million. For purposes of this computation only, all officers, directors and 10% or greater stockholders of the registrant are deemed to be affiliates.

 

As of March 28, 2017, 8,712,71230, 2020, 8,726,045 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the 2017 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2016.

 

 

 

 

PIONEER POWER SOLUTIONS, INC.

 

Form 10-K

 

For the Fiscal Year Ended December 31, 20162019

 

TABLE OF CONTENTS

 

Page

Special Note Regarding Forward-Looking Statements

1

PART I

Item 1.

Business

Item 1A.

Risk Factors

10 

Item 1B.

Unresolved Staff Comments

20 

16 

Item 2.

Properties

21 

17 

Item 3.

Legal Proceedings

21 

17 

Item 4.

Mine Safety Disclosures

21 

17 

PART II

Item 5.

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

22 

18 

Item 6.

Selected Financial Data

22 

18 

Item 7.

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

22 

18 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

33 

28 

Item 8.

Financial Statements and Supplementary Data

34 

29 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

67 

59 

Item 9A.

Controls and Procedures

67 

59 

Item 9B.

Other Information

68 

60 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

68 

61 

Item 11.

Executive Compensation

68 

63 

Item 12.

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

68 

69 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

69 

70 

Item 14.

Principal Accounting Fees and Services

69 

71 

PART IV

Item 15.

Exhibits, Financial Statement Schedules

69 

72 

Item 16.

Form 10-K Summary

69 

72 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

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

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

We depend on Siemens Industry, Inc.Verizon Inc (“Siemens”Verizon”) and CleanSpark, Inc (“CleanSpark”) for a large portion of our business, and any change in the level of orders from SiemensVerizon or CleanSpark could have a significant impact on our results of operations. We have been advised the agreement with Verizon for their preventative maintenance service will not be renewed, and the current term expires on March 31, 2020.

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

Our ability to expand our business through strategic acquisitions.
Our ability to integrate acquisitions and related businesses.

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.

Restrictive loan covenants and/or our ability to repay or refinance debt under our credit facilities could limit our future financing options and liquidity position and may limit our ability to grow our business.

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.

A significant portion of our revenue and expenditures are derived or spent in Canadian dollars. However, we report our financial condition and results of operations in U.S. dollars. As a result, fluctuations between the U.S. dollar and the Canadian dollar will impact the amount of our revenues and net income (loss).

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.

Material weaknesses in internal controls.

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

The liquidity and trading volume of our common stock.

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

 

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


PART I

 

ITEM 1.  BUSINESS

 

Overview

 

Pioneer Power Solutions, Inc. and its wholly owned subsidiaries (“Pioneer,(referred to herein as the “Company,” “Pioneer,” “we,” “us,” “our,” or “the Company”“our” and “us”) manufactures, sellsmanufacture, sell and servicesservice 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 custom-engineered electrical transformers, switchgear and engine-generator sets and controls, complemented by a national field-service network to maintain and repair power generation assets. We areThe Company is headquartered in Fort Lee, New Jersey and operateoperates from twelve (12)five (5) additional locations in the U.S., Canada and Mexico for manufacturing, service, centralized distribution, engineering, sales and administration.

 

Our largest customers include a number of recognized national and regional utilities, industrial companies and engineering, procurement and construction firms located in North America. In addition, we sell our products through hundreds of electrical distributors served by our network of stocking locations throughout the U.S. and Canada. We intend to grow our business through internal product development, and expansion of our sales force coverage and through acquisitions to increase the scope and relevance of highly-engineered solutions and technical service we offer our customers for their specific electrical applications.

 

Description of Business Segments

 

In 2016, we hadWe have two reportable segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”). 

 

Our T&D Solutions business provides equipment solutions that help customers effectively and efficiently manage their electrical power distribution systems to desired specifications. The reporting segment is comprised of two primary product categories: electrical transformers and switchgear. These solutions are marketed principally through our Pioneer Transformers Ltd. (“PTL”), Jefferson Electric, Inc. (“Jefferson”), Bemag Transformers, Inc. (“Bemag”), Pioneer Critical Power, Inc. (“PCPI”) and Pioneer Custom Electric Products, Inc. (“PCEP”) brand names. As a result of the restructuring plans implemented during calendar year 2015, the activities of our PCPI switchgear operations have been transferred from the Critical Power segment to the T&D Solutions segment as of January 1, 2016.  For comparison purposes, prior periods presented have been adjusted to reflect this reclassification.name.

Our Critical Power business provides customers withperforms service on our customer’s sophisticated power generation equipment and an advanced data collection and monitoring platform, the combination of which is used to ensure smooth, uninterrupted power to operations during times of emergency.equipment. These solutions are marketed by our operations headquartered in Minnesota, currently doing business under the Titan Energy Systems Inc. (“Titan”) brand name.

Disposition of Business Units

Sale of PCPI

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, of CleanSpark (“CleanSpark Common Stock”), (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The share quantities and exercise prices of warrants reflect the 10:1 stock split completed by CleanSpark in December 2019.

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

In connection with the Merger Agreement, the Company, CleanSpark and PCPI entered into an Indemnity Agreement (the “Indemnity Agreement”), dated January 22, 2019, pursuant to which the Company agreed to assume the liabilities and obligations related to the claims made by Myers Powers Products, Inc. in the case titled Myers Power Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical Products, Corp., et al., Los Angeles County Superior Court Case No. BC606546 (the “Myers Power Case”) as they may relate to PCPI or CleanSpark after the closing of the Merger. In addition, the Company agreed to indemnify and hold harmless CleanSpark and the surviving company of the Merger and their respective officers, directors, agents, members and employees, and the heirs successors and assigns of the foregoing from and against all losses incurred by reason of claims made by Myers Power Products, Inc. as presented or substantially similar to that presented in the Myers Powers Case that are brought against CleanSpark or the surviving company of the Merger after the closing of the Merger. The Indemnity Agreement expires five years from the date of the Indemnity Agreement.

In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Contract Manufacturing Agreement (the “Contract Manufacturing Agreement”), dated as of January 22, 2019, pursuant to which the Company agreed to manufacture paralleling switchgear, automatic transfer switches and related control and circuit protective equipment (collectively, “Products”) exclusively for purchase by CleanSpark. CleanSpark agreed to purchase the Products via purchase orders issued to the Company at any time and from time to time. Pursuant to the Contract Manufacturing Agreement, the price for the Products payable by CleanSpark to the Company are negotiated on a case by case basis, but all purchases of Products have a target price of 91% of the CleanSpark customer’s purchase order price and are not to 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.


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

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

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

From the date of sale through December 31, 2019, the estimated fair value of the warrants and common stock decreased to $1.4 million and an unrealized mark to market loss of $2.8 million was recognized within other expense for the year ended December 31, 2019.

Sale of Transformer Business Units

On June 28, 2019, the Company entered into the Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek, Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”). Pursuant to the Stock Purchase Agreement, the Company agreed to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer (collectively, the “Equity Transaction”).

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

On August 13, 2019, Pioneer Power, the Buyer and the Disposed Companies entered into Amendment No. 1 to the Stock Purchase Agreement (the “Amendment”). Pursuant to the Amendment, (i) the base purchase price was increased from $65.5 million to $68.0 million, (ii) the target working capital amount of the Disposed Companies was increased from $21.2 million to $29.6 million, (iii) the parties agreed to an estimated closing net working capital amount of $23.6 million, (iv) the increase in the base purchase price was to be paid in the form of an additional Seller Note in the aggregate principal amount of $2.5 million to be issued to Pioneer Power at the closing, (v) a $150 deductible was added with respect to the indemnification obligations of Pioneer Power and the Disposed Companies concerning certain legal matters, (vi) Pioneer Power agreed to pay any difference between the final net purchase price and the closing date net purchase price in immediately available funds rather than causing the Buyer to set off the amount of such difference against any amounts due and payable to Pioneer Power under the Seller Note, subject to certain exceptions, (vii) the definition of Applicable Adverse Event was amended to exclude certain events related to Pioneer Power’s financial performance through the second quarter (subject to certain exceptions, such items were also excluded from the post-closing indemnity under the Stock Purchase Agreement) and (viii) the parties agreed to the allocation of the $1.8 million insurance proceeds still to be received from the June 2019 flood at Pioneer Power’s facility in Reynosa, Mexico. The Buyer is only required to set-off any indemnifiable losses the Buyer suffers as a result of certain actions, omissions, or misrepresentations by Pioneer Power or the Disposed Companies against the first Seller Note in the aggregate principal amount of $5.0 million.


On August 16, 2019, the Company completed the Equity Transaction pursuant to the terms and conditions of the Stock Purchase Agreement, as amended by the Amendment. As consideration for the Disposed Companies, Buyer paid the Company a base aggregate purchase price of $68.0 million, consisting of (i) $60.5 million of cash, (ii) the issuance by the Buyer of a subordinated promissory note to Pioneer Power in the aggregate principal amount of $5.0 million and (iii) the issuance by the Buyer of a subordinated promissory note to Pioneer Power in the aggregate principal amount of $2.5 million. The subordinated promissory notes accrue interest 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. 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. After these adjustments, and expenses of sale, we received net proceeds from the sale of $45.2 million. Subsequent to finalizing the working capital adjustment during the fourth quarter of 2019 the gain recognized on the Equity Transaction amounted to $13.7 million and is reflected within discontinued operations.

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

T&D Solutions Segment

 

We design, develop, manufacture and sell a wide range of electrical transmission and distribution equipment and our emphasis is to provide custom engineered, manufactured-to-order solutions, which we estimate currently represents over two-thirdsall of our T&D revenue. We believe that demand for our custom solutions is driven primarily by end user maintenance programs to repair, replace or retrofit aging equipment, as well as to upgrade or expand their electrical distribution systems to accommodate growth and other changes in their operations. In addition, a significant portion of our custom solutions revenue is derived from the production of magnetic subassemblies incorporated by original equipment manufacturers (“OEMs”) into the systems they sell, systems which in the case of our customers are principally being used for data center, elevator control and electric drive applications.  The remainder of our T&D Solutions revenue is derived from our catalogue of standard transformer designs, models which are sold primarily through electrical distributors and to brand label customers. These products are manufactured to stock and are used in general purpose electrical applications, with demand being driven by the overall pace of new commercial construction.

 

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

Summary of T&D Solutions Segment Offerings

Product CategorySolutions

Liquid-filled Transformers

Product Category

▪ Small & medium power: substation class units for utilities and large industrial applications

▪ Padmount: used in utility distribution networks, underground and in renewable projects

▪ Network: Subway/vault-type units used to ensure reliability of utility service 

▪ Unitized Padmount: an equipment combination used in place of a conventional substation

▪ Others: mini-pad, platform-mount and other specialty low voltage designs

Dry-Type 

Transformers

▪ Medium voltage & power-dry: custom-designed for applications where a liquid-filled transformer is not suitable for safety concerns and/or other constraints

▪ OEM: custom designed and manufactured magnetic components and subassemblies incorporated by customers into their product offering

▪ Power quality: harmonic-eliminating and mitigating transformers, passive filters, K-factor, control, drive isolation and other magnetically-driven power quality solutions

▪ Low voltage standard: catalogue of ventilated, encapsulated and other designs sold to electrical distributors and brand label customers for general purpose electrical loads 

▪ Low voltage custom: quick-turn, low voltage distribution transformers manufactured to customer electro-mechanical specifications

Solutions

Switchgear

 

▪ Traditional low voltage panel boards, switchboards and switchgear, using electrical components from major manufacturers. 

▪ Unit substations and other specialty solutionsmanufacturers

▪ Custom manufactured and U.L. approved NemaNEMA electrical enclosures 

▪ Paralleling switchgear (PSG):  low & medium voltage for managing multiple power sources

▪ Automatic Transfer Switches: provides models manufactured by Pioneer and by other major manufacturers equipment

▪ Other equipment: controls, load banks, surge protection and related equipmentequip ment for power   conditioning and reliability

Overview of Electrical Transformers

Our liquid-filled and dry-type power, distribution and specialty electrical transformers are magnetic products used in the control and conditioning of electrical current for critical processes. An electric transformer is used to increase or decrease the voltage of electricity traveling through a power line. This change in voltage is accomplished by transferring electric energy from one internal coil or winding to another coil through electromagnetic induction. Electric power generating plants use generator transformers to “step-up,” or increase, voltage that is transferred through power lines in order to transmit the electricity more efficiently over long distances. When high voltage electricity nears its final destination, a “step-down” transformer reduces its voltage. A distribution transformer makes a final step-down in voltage to a level usable in businesses and homes.

Transformers are integral to every electrical transmission and distribution system. Electric utilities use transformers for the construction and maintenance of their power networks. Industrial firms use transformers to supply factories with electricity and to distribute power to production machinery. The renewable energy industry uses transformers to connect new sources of electricity generation to the power grid. The construction industry uses transformers for the supply of electricity to new homes and buildings and original equipment manufacturers use custom transformers as a component part of the systems they make.

We manufacture liquid-filled transformers at our facility in Granby, Quebec. Liquid-filled transformers are typically used for applications handling utility or industrial-level electrical loads, such as in a substation, and are most commonly found in outdoor settings given the risk of leakage and the flammable properties of the liquid coolant, typically mineral oil. We manufacture these products in electrical power ranges from 25 kVA (kilovolt amperes) to 30 MVA (megavolt amperes) and at up to 69 kV (kilovolts) in voltage. In recent years, we have focused primarily on the small power market, generally considered to include transformers between 1 MVA and 10 MVA, as well as on specialty transformers such as network and submersible designs used by utilities to withstand harsh environments and ensure reliability of service. We sell these products to electrical utilities, independent power providers, electrical co-ops, industrial companies, commercial users and electric equipment wholesalers. All of our liquid-filled transformers are designed and manufactured specifically to a customer order.

We manufacture dry-type transformers and custom magnetics at our facilities in Farnham, Quebec and Reynosa, Mexico. The largest and longest-standing component of our dry-type transformer revenue consists of low voltage, standard distribution units sold from our catalogue of over 1,000 designs. These units are typically used indoors to handle general loads for powering commercial and industrial machinery and equipment requiring 50 VA (volt amperes) through 1 MVA of power transformation capacity in voltages at or below 600 V (volts). In recent years, we have focused primarily on custom-engineered solutions – including equipment for OEM applications, and transformers in the medium voltage and power-dry product classes where our range extends to 10 MVA and to 35 kV in voltage. Medium voltage and power-dry transformers are conventionally used for indoor applications and in metropolitan areas, and are increasingly being used outdoors and indoors for commercial, industrial, manufacturing and production process applications.  They are engineered to meet the most onerous duty requirements and are well-suited to operate in harsh environmental conditions, a situation which occurs frequently when the transformer needs to be installed close to the area where the power will ultimately be used, such as in down-hole mining or on drilling rigs. 

We also offer a broad array of magnetically-driven solutions to ensure clean power and eliminate potential issues caused by harmonics and transients, including proprietary solutions that incorporate our patented technology through the use of power electronics.  Our power quality solutions are for use in industrial, commercial and institutional settings where sensitive automation equipment is being used and clean, efficient power is required.

Overview of Switchgear

 

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

 

We design and manufacture low voltage electric power distribution panel boards, low and medium voltage switchgear and switchboards manufactured at our facility in Southern California. This location specializes in quick-turn, manufactured-to-order circuit protection and control equipment, primarily serving electrical distributors in the region. In addition, it incorporates transformers manufactured at other Pioneer locations into specialty products, such as unit substations, and also serves to supply our PSG solutions with several classes of switchgear used in its customer projects.

 

Additional product categories include paralleling switchgear (PSG), automatic transfer switches (ATS) and provide other necessary equipment to create a reliable and dependable power generation system.  The primary function of our PSG solutions is to reliably switch the power source to the load, protect and operate the power generation source(s), meter output and provide paralleling and load sharing capability between multiple on-site power sources and the utility grid. Our PSG solution specializes in customized equipment and controls for complex primary power applications, enabling on-site users to parallel multiple power sources with the utility power grid, in combined heat, power and cooling applications, and for peak shaving and demand/load side management of electrical power.  PSG is an integral component to ensuring optimal power generation and electrical distribution system performance, both for primary and backup power installations. Installations requiring a PSG solution typically involve more complex and redundant power schemes, such as in data centers, hospitals, industrial facilities, remote locations not connected to the power grid and other sites where emergency backup power sources are a necessity to protect operations from the consequences of blackouts or brownouts. Our focus is on larger installations where a single engine generator, or “genset”, is not sufficient or where multiple gensets may be required to provide system resilience. We believe that our PSG solutions represent a scalable, cost-effective and intelligent automation option through their embedded programming and logic to synchronize multiple on-site power sources and the capability to operate them in concert with the utility feed(s).

Critical Power Segment

 

Our Critical Power segment is engaged in designing, manufacturing, selling, commissioning and aftermarketbusiness performs service of onsiteon our customer’s sophisticated power generation and control equipment. OurThese systems are used to maintain reliable emergency standby power at facilities where it is either required or where the potential consequences of a power outage make it necessary – such as at data centers, hospitals, communications facilities, factories, national retailers, military sites, office complexes and other critical operations. 


Depending on the needsSummary of our customers, we offer our solutions on a complete equipment package basis, or as a standalone equipment or service solution that addresses one or more requirements of an overall power project. We believe that our value proposition to customers is differentiated by our use of advanced communications and automated data collection technologies to provide a highly-sophisticated remote monitoring, automated control and reporting platform to our customers.Critical Power Segment Offerings

 4
Product CategorySolutions

Power Generation
Equipment

 

 

▪ Engine-generator sets:  power generation equipment with up to 2 MW of power output per genset, sourced from Generac Industrial Power and all major manufacturers.  Available individually or in multi-unit paralleled configurations. Fuel options include natural gas, diesel and bi-fuel. Product Category

▪ Uninterruptible Power Supply (UPS) systems

▪ Proprietary technology solutions: GenMax®

Solutions

Service

 

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

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

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

▪ UPS systems from major manufacturers

Remote Monitoring

▪ Proprietary real-time remote monitoring, metering and control system for onsite power sources and associated equipment

▪ Comprehensive asset management solution, including automated audit and inventory tracking and reporting services  

▪ Scalable solution, ideally-suited to large customers owning critical power systems across multiple locations

 

Power Generation EquipmentService

We provide our industrial and commercial customers with a variety of power generation equipment and fuel options which, depending on their needs and applications, can range from several kilowatts to 2 MW of output per genset. Using the PSG capabilities of our switchgear business unit, we excel in projects requiring multiple gensets in side-by-side arrangements that are paralleled for synchronous operation. 

Our Critical Power business is the sole authorized distributor for the Industrial Power equipment and parts of Generac Power Systems Inc. (“Generac”) in the states of Minnesota, Iowa, Illinois, Wisconsin and Nebraska, and one of only 32 such distributors throughout North America. Outside of these five Midwestern states, we sell power generation equipment made by all major manufacturers, including Generac. In order to more competitively serve our customers, we regularly provide Pioneer-manufactured power distribution equipment to each project, including switchgear and transformers. We also offer niche solutions such as GenMax® – our proprietary harmonic suppression technology that resolves power reliability and genset capacity issues frequently encountered when new gensets are introduced to a system of existing gensets, where the make, model and power output of the gensets within the system are different.

To fully meet the onsite power reliability needs of our customers, we realize a small portion of our revenue from the sale of uninterruptible power supply (UPS) systems. UPS systems are used by data-intensive businesses to provide battery backup power to servers until the emergency backup genset(s) come online. Once the gensets are producing proper voltage and frequency, the UPS switches the load onto the gensets. For UPS system sales, we are an authorized dealer for GE and also represent Toshiba, Eaton-Powerware and other manufacturers.

Service

 

Power generation systems represent considerable investments that require proper maintenance and service in order to operate reliably during a time of emergency. Our power maintenance programs provide preventative maintenance, repair and support service for our customers’ power generation systems. To support our customers in managing their critical infrastructure, we maintain inventories of equipment andrepair parts, a fleet of service vehicles and a staff of certified field service technicians in the Midwest and Florida. To complete our geographic coverage, we maintain a network of field service partners located in other regions, enabling us to provide quick-response, 24/7 service capability that can effectively service any make and model of back-up power equipment in any city of the United States. Our field service organization services more than 7,5005,500 generators owned by more than 1,2001,000 customers located throughout the United States, including for multi-site, multi-state customers such as Target Corporation and Verizon Corporation.customers.

 

We recognize discrete revenue streams from service contracts, installation and maintenance services, and we offer service contracts to all owners of power generation and related equipment, whether or not the equipment was originally sold by us. Our service agreements have terms ranging from one to five years in duration, provideproviding us with a recurring revenue stream, and generally yield higher margins as compared to genset equipment sales. These service contracts may also include remote monitoring services that allow owners to be informed of the condition and operations of their equipment at any time and from any place.

Remote Monitoring and Automated Control

 

We have dedicated considerable resources to developing and engineering our proprietary remote monitoring and automated control system for onsite power generation. We believe this system enables us to provide a technologically superior service program that benefits our customer from a cost and quality standpoint. In addition, we have developed specialized asset management and auditing tools to more efficiently and cost effectively provide our customers with detailed information about their onsite power systems.  We believe these tools provide us with an advantage over service companies that do not have these technologies, allowing us to compete for work more efficiently, maintain higher service levels and realize higher margins by using these tools.

Our monitoring and control system performs 24/7,  capturing and monitoring data from up to 100 critical points and functions on the genset,  PSG, ATS and UPS, from metering electrical output to emissions.  This data is displayed in continuously updated, fully customizable, easy-to-read web-based reporting that provide a complete picture of our customers’ power generation system condition. By tracking and trending real-time performance indicators in combination with the ability to remotely test, start and stop onsite power systems, our network operations center is able to avert potential failures before they occur and immediately respond to emergency situations before a customer calls. Our monitoring and control system is instrumental to ensure that our servicing programs are being administered appropriately in order to optimize system reliability on behalf of our customers. In addition, because our system is completely scalable, we are able to monitor one to thousands of generators nationwide, a solution which is ideally-suited to service our national account customers.

Our customers use our monitoring and control system for access to our monitoring dashboard, to view generator performance in real-time, to receive alerts and notifications, track work orders and submit support requests. These capabilities have been combined with automated electronic audit and inventory reporting to form a comprehensive asset management program for our customers, enabling them to quickly and efficiently record, categorize and retrieve vital information about their power generation assets across their facilities. We believe the advantage of these reporting systems is that they help us and our customers to better protect their equipment, while increasing system reliability in times of need and reducing ongoing operating costs for service and repairs through preventative maintenance.

Business Strategy

 

We believe we have established a stable platform from which to develop and grow our business lines, revenues, net income and shareholder value. We intend to expand rapidly over the next several years through a two-pronged strategy. First, we are focused on internal growth through operating efficiencies, new product development, customer focus and our continued migration towards more highly-engineered products and specialized services. We intend to significantly increase the percentage of our sales derived from engineered-to-order products and differentiated services and believe this can be accomplished by targeting market segments, such as data centers and independent power producers, which have growth characteristics exceeding the norm in our industry. The second element of our growth strategy is to pursue strategic acquisitions that provide us with complementary product and service offerings, new sales channels, end-markets and scalable operations.

 

OverDuring 2019, the last five years, through internal developmentCompany completed the sales of the transformer and acquisitions, we believe we have broadened the array and sophistication of our product and service offerings.  Our strategy isPCPI business units. The Company continues to continue to expand the portfolio of solutions we offer in order to address more elements of every electrical infrastructure project. We believe this approach makes us more relevant to our customers, allows us to compete more effectively and increases the number of sales opportunitiesexplore strategic alternatives for our products and solutions.its remaining business units.

 

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

 

Evolving from a product-oriented to a customer and market-centric, solutions-oriented organization;

Establishing a scalable organizational infrastructure to support our expected growth;

Driving incremental sales in new channels and markets through our corporate selling group;

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

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

Capitalizing on inter-segment manufacturing efficiencies and shared utilization of our facilities;

Expanding our margins through outsourcing production for our standard products;

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

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

T&D Solutions Segment

 

We intend to accomplish our growth objectives within our T&D Solutions business by emphasizing our capabilities in OEM equipment solutions, by continuing to invest in engineering resources and product development to increase our pipeline of recurring order customers that integrate our magnetic subassemblies and/or components into the following areas:products they sell. Our key focus areas for this solution category include providers of motor control/drive systems, factory automation equipment, power distribution units and UPS systems for data centers, HVAC systems, and power quality and conditioning equipment.

5  

 

OEM Equipment Solutions ‒ Continue to invest in engineering resources and product development to increase our pipeline of recurring order customers that integrate our magnetic subassemblies and/or components into the products they sell. Our key focus areas for this solution category include providers of motor control/drive systems, factory automation equipment, power distribution units and UPS systems for data centers, HVAC systems, and power quality and conditioning equipment. 
Medium Voltage Dry-type Transformers ‒ We acquired this competence in 2011.  Growth in this product class will be predicated on expanding our market penetration, particularly in the U.S. where in 2013 we began adding dedicated medium voltage and liquid-filled transformer sales personnel and new independent sales representatives.
Liquid-filled Transformers ‒ Sales of more network, subsurface, small and medium power transformers to new and existing utility and industrial customers, particularly in the U.S. In 2012 we completed a facility expansion in order to increase our production capacity for these higher voltage and more complex solutions.

Paralleling Switchgear (PSG) ‒ Increase our product range to include traditional low voltage and medium voltage, metal clad and metal enclosed switchgear, to be used both in conventional electrical distribution applications, in unitized substations, as well as for supply to our Critical Power business.

We believe we excel at large projects for mission critical facilities that require sophisticated standby and primary power redundancy schemes. These projects generally demand higher engineering content due to the necessary customization of the switchgear and related controls, which we believe provides us a stronger basis upon which to compete than in more straight-forward applications.  We intend to grow our sales in this product line by adding to our staff of professional sales persons and growing our network of independent manufacturers’ representatives who specialize in critical power.

Critical Power Segment

 

Within our Critical Power business, we intend to accomplish our growth objectives by implementing the following business initiatives:

National Service Accounts ‒ We intend to increase the number of national account customers we have by leveraging our scalable, nationwide network of partners which allows us to service standby power systems anywhere in the United States. We are actively marketing our preventive maintenance and technology-enabled monitoring and control services to new national accounts including: major national retailers, telecommunications companies, data centers, banks, hospitals and health care facilities, educational institutions and property management companies.
Power generation equipment ‒ Increase our sales of power generation and associated equipment in our existing and new market territories by recruiting qualified, professional sales people, and by broadening the range of ancillary equipment options they have available for sale, including related equipment solutions manufactured by us. We believe that these sales will also create opportunities for us to secure long-term service contracts and deploy our monitoring technologies, programs that generate recurring revenue at attractive profit margins.

Acquisitions

 

We believe a disciplined acquisition program is a key component to accelerating our growth and we intend to acquire businesses that broaden the range of customer solutions we provide, increase our market share or expand our geographic reach. In addition to switchgear and transformer manufacturers, we also intend to acquire manufacturing and service businesses focused on other technically-advanced, customized, ancillary or complementary products that address market segments where we seek further penetration, such as in data centers, backup power equipment and service, traction power, renewable energy and natural resources. We operate in a highly fragmented industry that is served by a few global diversified electrical equipment manufacturers and numerous small manufacturing companies that provide niche products and services to various sub-segments of the power transmission and distribution market. We favor candidates that have competencies and business characteristics similar to our own, and those that we expect will benefit from some of the major trends affecting our industry. Our acquisitions since 2010 are examples of the implementation of our acquisition strategy.

Our Industry

 

The market for our largest business segment, electrical T&D equipment, is substantial and has grown over the last several decades. According to a February 2015 study by The Freedonia Group, a market research firm, total U.S. demand for electric T&D equipment was $25.5 billion in 2014 and was distributed by product category as follows: switchgear (54%), transformers (33%), meters (7%) and pole/transmission line hardware (6%). The Freedonia Group forecasts demand for switchgear and for transformers to climb 6.1%  and 4.5% annually to $28.9 billion collectively in 2019,  as compared to 5.5% and 2.0% annual growth for these categories between 2009 and 2014, driven by rising utilization of renewable energy sources and increasing demand from the industrial and non-utility generator markets.

Most of our business today consists of manufacturing power, distribution and non-utility transformers, although we have become increasingly engaged in producing conventional and certain specialty categories of electrical switchgear. Utilities, industrial and commercial firms purchase transformers to replace old equipment, maintain system reliability, achieve efficiency improvements and for substation or grid expansion. Demand is also sensitive to overall economic conditions, particularly with respect to the level of industrial production and investment in commercial and residential construction. Other market demand factors include voltage conversion, voltage unit upgrades, electrical equipment failures, higher energy costs, stricter environmental regulations and investment in sources of renewable and distributed energy generation.

 

The market for switchgear and related equipment is significantly larger and more complex given the number and classes of solutions available. Within our Critical Power segment, we believe that our PSG and ATS switchgear offerings, together with our service programs for power generation and ancillary equipment, addresses annual U.S. demand exceeding $2.0 billion.

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

 

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

 

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

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

Growth in Critical Power Applications and the Data Center Market— The number of mission-critical facilities, sites where a power disturbance or outage could cause failure of business operations, safety concerns or regulatory non-compliance, continues to grow exponentially worldwide. In the U.S., the single largest driver for demand in critical power applications is the data center market, followed by the health care industry. The amount of information managed by data centers is expected to grow, fueled by increasing needs for data storage (for corporate data, content delivery, social networking, handheld devices, online retail and gaming) and the information technology evolution (cloud computing and outsourced hosting). Coinciding with demand for mission-critical facilities is the need for efficient, reliable primary power to support their essential applications, and for backup generator plants in case the utility feed becomes unavailable. Electricity is the highest operating cost of a data center, a factor supporting investment in on-site alternative energy systems to reduce peak-demand expenses. These systems require paralleling switchgear, such as we provide, operated by hardware embedded with sophisticated programming and logic to synchronize multiple power sources reliably and efficiently.

Customers

 

For the year ended December 31, 2016 approximately 27% of our sales were to Canadian customers, including many of Canada’s electrical utilities, municipal power systems, large industrial companies, engineering and construction firms and a number of electrical distributors. Another 72%2019, 100% of our sales in 20162019 were to U.S. customers, represented in large part by companies involved in commercial construction. Less than 1% of our sales were to export customers primarily serving the Central and Latin American markets. During the year ended December 31, 2016,2019, we sold our electrical equipment and services to over 2,200900 individual customers and our twenty largest customers represented approximately 51%75% of our consolidated revenue.


For the year ended December 31, 2018, 100% of our sales in 2018 were to U.S. customers, represented in large part by companies involved in commercial construction. During the year ended December 31, 2018, we sold our electrical equipment and services to over 1,000 individual customers and our twenty largest customers represented approximately 70% of our consolidated revenue.

Approximately 15%13% and 10%15% of our sales in the years ended December 31, 20162019 and 2015,2018, respectively, were made to SiemensVerizon and its affiliated companies. Our pricing agreement with Siemens doesVerizon outlines the services to be provided for their equipment and frequently results in additional sales opportunities for service work that is outside the scope of the agreement. This agreement represents the majority of the sales and profits the Company received from Verizon. The agreement with Verizon for their preventative maintenance service will not obligate Siemensbe renewed, and the current term expires on March 31, 2020. If we cannot find alternative sources of business or reduce our expenses, the loss of the Verizon business is expected to purchase transformers from ushave a material adverse impact on our results of operations. We are seeking an opportunity to reclaim this portion of the business after March 31, 2021; however, there is no assurance that we will be able to reclaim any portion of the business after March 31, 2021.

Approximately 18% of our sales in quantities consistentthe year ended December 31, 2019 were made to CleanSpark Inc. The majority of our sales to CleanSpark are made pursuant to the Contract Manufacturing Agreement that was entered into as part of the sale of PCPI. The agreement continues until July 22, 2020. The Company anticipates negotiating an extension of this agreement before it expires, but there is no assurance that the Company will be able to extend the agreement with the past or at all.CleanSpark.

 

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

 

Marketing, Sales and Distribution

 

A substantial portion of the transformers manufactured by us, and most of the switchgear products we offer are sold directly to customers by our 183 full-time marketing and sales personnel and 6 members of our executive management team operating from our office locations in the U.S. andFollowing the sale of the transformer business units, we no longer have office locations or employees in Canada. Our products are also sold through our network of more than 64 independent sales agencies throughout North America that sell primarily to full-line electrical distributors and to maintenance, repair and overhaul organizations. Our direct sales force markets to end users and to third parties, such as original equipment manufacturers and engineering firms that prescribe the specifications and parameters that control the applications of our products.

 

Sales Backlog

 

Backlog reflects the amount of revenue we expect to realize upon the shipment of customer orders for our products that are not yet complete or for which work has not yet begun. Our sales backlog as of December 31, 20162019 was approximately $38.6$15.9 million, as compared to $28.7$15.7 million as of December 31, 2015.2018 for our continuing operations. We anticipate that most of our current backlog will be delivered during 2017.2020. Orders included in our sales backlog are represented by customer purchase orders and contracts that we believe to be firm.

 

Competition

 

We experience intense competition from a large number of electrical equipment manufacturers and from distributors and servicers of such equipment. The number and size of our competitors varies considerably by product line and service category, with many of our competitors tending to be small, highly specialized or focused on a certain geographic market area or customer. However, several of our competitors have substantially greater financial and technical resources than us, including some of the world’s largest electrical products and industrial equipment manufacturing companies. A representative list of our competitors in our T&D Solutions segment includes ABB Ltd.Crown Electric Engineering and Manufacturing, LLC , Carte International,Industrial Electric Machinery, LLC , RESA Power, LLC , Powell Industries, Inc., and Eaton Corporation plc, General Electric Company, Schneider Electric SA, Hammond Power Solutions Inc., Howard Industries, Inc. and Partner Technologies, Inc. In the sale of onsite power systems and service, our Critical Power segment competes with larger, more established regional companies that represent Caterpillar, Cummins, Kohler and other generator manufacturers..

 

We believe that we compete primarily on the basis of technical support and application expertise, engineering, manufacturing and service capabilities, equipment rating, quality, scheduling and price. In all our businesses, our objective is to focus our efforts on more specialized, challenging and complex applications. Accordingly, a critical element to the success of our business is responsiveness and flexibility in providing custom-engineered solutions to satisfy customer needs. We believe that our strongest product niches are in the manufacture and design of small power and distribution electrical transformers, custom-manufactured panel board and switchboard products and in paralleling switchgear solutions for on-site power applications serving data centers, hospitals and other businesses with critical power needs. As a result of our long-time presence in the industry, we possess a number of special designs and libraries of programming code for our equipment that were engineered and developed specifically for our customers. We believe these factors give us a competitive advantage and that they are a major contributor to our frequency of repeat customer orders and the longevity of our customer relationships.

 

Raw Materials and Suppliers

 

The principal raw materials purchased by us are core steel, copper, wire, aluminum strip, insulating materials including transformer oilcells, sensors, breakers, meters and sheet metal.relays. We also purchase certain electrical components from a variety of suppliers including bushings, switches, fuses, protectors and circuit breakers. These raw materials and components are available from and supplied by numerous sources at competitive prices, although there are more limited sources of supply for electrical core steel and transformer oil.prices. Unanticipated increases in raw material prices or disruptions in supply could increase production costs and adversely affect our profitability. We attempt to minimize the effect on our profit margins of unanticipated changes in the prices of raw materials by including index clauses in our customer contracts that allow us to increase or reduce our prices if the costs of raw materials unexpectedly rise or decrease. Approximately 31% of our annual sales are made pursuant to contracts that contain such index clauses, which, subject to various formulae and limitations, permit us to adjust the final prices we charge. We do not anticipate any significant difficulty in satisfying our raw material requirements on reasonable terms and have not experienced any such difficulty in the past several years. Our largest suppliers during the year ended December 31, 20162019 included SumitomoEaton Corporation Generac, Essex Group, Metelec Ltée , Industrial Connections & Solutions, LLC , Thyssenkrupp Materials NA , ABB, Inc. and Rea Magnet Wire Co. Inc. and our distribution transformer supplier from a low cost production location in Asia.Schweitzer Engineering Laboratories, Inc .


Employees

 

As of December 31, 2016,2019, we had 41595 employees consisting of 12925 salaried staff and 28670 hourly workers. Our hourly employees located at our plant in Farnham, Quebec, Canada are covered by a collective bargaining agreement with a provincial labor union that expires in March 2017. This agreement will not be renewed as we are planning to relocate our production from this facility to our lower cost facility in Reynosa Mexico. Our hourly employees located at our plant in Granby, Quebec, Canada are covered by a collective bargaining agreement with the United Steel Workers of America Local 9414 that expires in May 2020. The hourly employees located at our manufacturing facility in Reynosa, Mexico are also covered by a collective bargaining agreement with a local labor union that has an indefinite term, subject to annual review and negotiation of key provisions. In addition, certainCertain of our hourly employees located at our manufacturing facility in Santa Fe Springs, California are covered by a collective bargaining agreement with Local Union 1710 of the International Brotherhood of Electrical Workers, AFL-CIO that expires in June 2019.2022.

 

Environmental

 

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

 

Corporate History

 

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

 

Available Information

 

Our corporate website is located at www.pioneerpowersolutions.com.www.pioneerpowersolutions.com. On the investor relations section of our website, we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, such as us, that file electronically with the SEC at www.sec.gov.www.sec.gov.

 

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

 

ITEM 1A.  RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Before investing in our common stock you should carefully consider the following risks, together with the financial and other information contained in this Annual Report on Form 10–K for the year ended December 31, 20162019 and our other periodic filings with the Securities and Exchange Commission. Additional risks and uncertainties that we are unaware of may become important factors that affect us. If any of the following events occur, our business, financial conditions and operating results may be materially and adversely affected. In that event, the trading price of our common stock may decline, and you could lose all or part of your investment.

Risks Relating to Our Business and Industry

 

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

 

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


The commercial and industrial building and maintenance sectors began to experience a significant decline in 2008. The downturn in these segments contributed to a decline in the demand for our T&D Solutions, particularly our standard distribution transformers and general purpose switchgear products, as well as a decline in demand for power generation equipment distributed by our Critical Power reporting unit. We cannot predict the timing, duration or severity of another such downturn in these segments which may adversely impact sales, net income and cash flow.

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

 

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

 

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

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

the timing and volume of work under new agreements;

the spending patterns of customers;

customer orders received;

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

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

increases in design and manufacturing costs;

the length of our sales cycles;

the rates at which customers renew their contracts with us;

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

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

our ability to control costs, including operating expenses;

losses experienced in our operations not otherwise covered by insurance;

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

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

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

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

future accounting pronouncements and changes in accounting policies.

 

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

 

Our industry is highly competitive.

 

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

Because weWe currently derive a significant portion of our revenues from one customer, any decreasetwo customers, agreements with whom are expiring in orders2020. Loss of business from this customerthese customers could have an adverse effect on our business, financial condition and operating results.

 

We depend on SiemensVerizon and CleanSpark for a large portion of our business, and any change in the level of orders from Siemens,these customers has, in the past, had a significant impact on our results of operations. SiemensIn particular, Verizon accounted for 15%13% and 10%15% of our net sales in the years ended December 31, 20162019 and 2015,2018, respectively. In addition,CleanSpark accounted for 18% of our pricing agreement with Siemens does not obligate Siemens to purchase transformers from usnet sales in quantities consistent with the past or at all. If Siemens were to significantly cancel, delay or reduce the amountyear ended December 31, 2019. Loss of business it does with us for any reason, there would be a materialfrom these customers could have an adverse effect on our business, financial condition and operating results. Our long-term supply agreement with Verizon expires on March 31, 2020 and we have been notified by Verizon that the agreement will not be renewed with us. If we cannot find alternative sources of business or reduce our expenses, the loss of the Verizon business is expected to have a material adverse impact on our results of operations. We are seeking an opportunity to reclaim this portion of the business after March 31, 2021; however, there is no assurance that we will be able to reclaim any portion of the business after March 31, 2021.

 

The majority of our sales to CleanSpark are made pursuant to the Contract Manufacturing Agreement that was entered into as part of the sale of PCPI. The agreement continues until July 22, 2020. The Company anticipates negotiating an extension of this agreement before it expires, but there is no assurance that the Company will be able to extend the agreement with CleanSpark. 


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

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

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

After the completion of the Equity Transaction, we have two business units remaining (PCEP and TESI). These two units have been unable to earn positive income and generate positive cash flow in their recent history. With $8.2 million of cash and cash equivalents as of December 31, 2019, these losses will negatively impact our cash and cash equivalents.

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

 

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

 

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

 

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

 

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

incur debt and assume liabilities; and

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

 

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

 

We may not be able to expandThe success of our business throughdepends on achieving our strategic acquisitions, and internal growth initiatives facilitated by acquisitions, which could decrease our profitability.objectives, including dispositions.

 

A key elementWe continue to evaluate the potential disposition of assets and businesses that may no longer help us meet our strategy isobjectives. When we decide to pursue strategic acquisitions that either expandsell assets or complement oura business, we may encounter difficulty in order to increase revenue and net income. We may not be able to identify additional attractive acquisition candidatesfinding buyers or executing alternative exit strategies on acceptable terms favorable to us or in a timely manner. Wemanner, which could delay the accomplishment of our strategic objectives. Alternatively, we may require additional debtdispose of a business at a price or equity financingon terms that are less than we had anticipated, or with the exclusion of assets that must be divested separately. After reaching an agreement with a buyer for future acquisitions,the disposition of a business, the transaction remains subject to the satisfaction of pre-closing conditions, which may not be available on terms favorable toprevent us if at all. Moreover, wefrom completing the transaction. Dispositions may not be able to integrate any acquiredalso involve continued financial involvement in the divested business, such as through continuing equity ownership, transition service agreements, guarantees, indemnities or other current or contingent financial obligations. Under these arrangements, performance by the divested businesses intoor other conditions outside our business or to operate any acquired businesses profitably. Recently acquired businesses may operate at lower profit margins, whichcontrol could negatively impactaffect our results of operations. Each of these factors may contribute to our inability to grow our business through strategic acquisitions, which could ultimately result in increased costs without a corresponding contemporary increase in revenues, which would result in decreased profitability.future financial results.


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

 

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

Our revenue may be adversely affected by fluctuations in currency exchange rates.

Approximately one-third of our 2017 revenue and a significant portion of our expenditures are expected to be derived or spent in Canadian dollars. However, we report our financial condition and results of operations in U.S. dollars. As a result, fluctuations between the U.S. dollar and the Canadian dollar will impact the amount of our revenues and net income. For example, if the Canadian dollar appreciates relative to the U.S. dollar, the fluctuation will result in a positive impact on the revenues that we report. However, if the Canadian dollar depreciates relative to the U.S. dollar, which was the case during 2015 and 2016, there will be a negative impact on the revenues we report due to such fluctuation. It is possible that the impact of currency fluctuations will result in a decrease in reported consolidated sales even though we may have experienced an increase in sales transacted in the Canadian dollar. Conversely, the impact of currency fluctuations may result in an increase in reported consolidated sales despite declining sales transacted in the Canadian dollar. The exchange rate from the U.S. dollar to the Canadian dollar has fluctuated substantially in the past and may continue to do so in the future. Though we may choose to hedge our exposure to foreign currency exchange rate changes in the future, there is no guarantee such hedging, if undertaken, will be successful.

We may be unable to generate internal growth.

 

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

 

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

 

Our raw material costs represented approximately 60%55% and 59%52% of our revenues for the years ended December 31, 20162019 and 2015,2018, respectively. The principal raw materials purchased by us are electrical core steel, copper wire, aluminum strip and insulating materials including transformer oil. We also purchase certain electrical components from a variety of suppliers including bushings, switches, fuses, circuit breakers, and protectors. These raw materials and components are available from, and supplied by, numerous sources at competitive prices, although there are more limited sources of supply for electrical core steel and transformer oil.prices. Unanticipated increases in raw material prices or disruptions in supply could increase production costs and adversely affect our profitability. We cannot provide any assurances that we will not experience difficulties sourcing our raw materials in the future.

 

Our Critical Power solutions segment, through our wholly-owned subsidiary Titan Energy Systems Inc., currently derives a significant portion of its revenues pursuant to a distributor agreement with Generac; a termination or expiration of our distributor agreement with Generac , or any reduction in market acceptance of products sold by us pursuant to the distributor agreement could have an adverse effect on our financial condition and operating results.  

Under the terms of our distributor agreement with Generac, we are responsible for marketing, distributing and servicing the Generac Industrial Power line of products in the states Minnesota, Iowa, Illinois, Wisconsin and Nebraska. Our agreement has an initial term expiring on March 31, 2018, and automatically expires unless extended by Generac, with 90 days’ prior notice, for at least an additional one-year (1) periods. Approximately 37% of Titan’s business involves the sale of Generac products. As such, Titan’s business is dependent on market acceptance of Generac products. We believe that Generac has a solid reputation as a manufacturer, with excellent brand recognition and customer support and a growing market share in many of the markets it serves. However, there can be no assurance that Generac will be able to maintain its reputation and grow its market position in the future. If Generac is unsuccessful in developing and enhancing its product lines to meet evolving and sophisticated customer needs, is unable to maintain the quality of its products, or if it is unable to provide its products at competitive prices, the market acceptance for Generac products may deteriorate over time. Any resulting decrease in the demand for Generac products could have a material adverse impact on our business, results of operations and future prospects.

We are also dependent on Generac for the timely supply of parts and equipment to fulfill its deliveries to our customers and meet the requirements of our service maintenance contracts. From time to time, during periods of intense demand, Generac finds it necessary to allocate its supply of particular products among its dealers. Such allocations of supply have not, in the past, proven to be a significant impediment to us in conducting our business. However, there can be no assurance that Generac will continue to supply its products in the quantities and timeframes required by our customers.  While delays in the availability of product supply in sufficient quantities may adversely affect our business, results of operations and financial condition, historically this has not been an issue for us.

We have, and expect to continue to have, credit facilities with restrictive loan covenants that may impact our ability to operate our business and to pursue our business strategies, and our failure to comply with these covenants could result in an acceleration of our indebtedness.

We will continue to rely on our credit facilities with Bank of Montreal (“BMO”) for a significant portion of the working capital to operate our business and execute our strategy. These credit facilities contain certain covenants that restrict our ability to, among other things:

undergo a change in control;
incur new indebtedness or other obligations, subject to certain exceptions;
pay cash dividends;
create or incur new liens, subject to certain exceptions;
make new acquisitions or investments in other entities, subject to certain exceptions;
wind up, liquidate or dissolve our affairs;
change the nature of our core business;
alter our capital structure in a manner that would be materially adverse to our lenders; and
make investments or advancements to affiliated or related companies.

The majority of the liquidity derived from our credit facilities is based on availability determined by a borrowing base. Specifically, the availability of credit is dependent upon eligible receivables, inventory and certain liens. We may not be able to maintain adequate levels of eligible assets to support our required liquidity.

In addition, our credit facilities require us to meet certain financial ratios, including working capital ratios, EBITDA levels and effective tangible net worth levels. Our ability to meet these financial provisions may be affected by events beyond our control. If, as or when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our credit facilities, our lenders could institute foreclosure proceedings against the assets securing borrowings under those facilities, which would harm our business, financial condition and results of operations.

The indebtedness under our credit facilities with BMO is secured by substantially all of our consolidated assets. As a result of these security interests, such assets would only be available to satisfy claims of our general creditors or to holders of our equity securities if we were to become insolvent to the extent the value of such assets exceeded the amount of our indebtedness and other obligations. In addition, the existence of these security interests may adversely affect our financial flexibility.

Indebtedness under our credit facilities with BMO is secured by a lien on substantially all of our assets. Accordingly, if an event of default were to occur under our credit facilities, BMO would have a prior right to our assets, to the exclusion of our general creditors in the event of our bankruptcy, insolvency, liquidation, or reorganization. In that event, our assets would first be used to repay in full all indebtedness and other obligations secured by them (including all amounts outstanding under our senior secured credit agreement), resulting in all or a portion of our assets being unavailable to satisfy the claims of our unsecured indebtedness. Only after satisfying the claims of our unsecured creditors and our subsidiaries’ unsecured creditors is any amount available for our equity holders. The pledge of these assets and other restrictions may limit our flexibility in raising capital for other purposes. Because substantially all of our assets are pledged under these financing arrangements, our ability to incur additional secured indebtedness or to sell or dispose of assets to raise capital may be impaired, which could have an adverse effect on our financial flexibility.

We depend upon the availability of capital under our revolving credit facilities and term loans with BMO to finance our operations. Any additional financing that we have requested from BMO may not be available on favorable terms or at all.

In addition to cash flow provided by operations, we finance our working capital and general corporate needs through our Canadian Facilities and U.S. Facilities with BMO. On April 29, 2016 we and BMO restated and amended these credit agreements to revise covenants and funding amounts to finance our cash requirements for anticipated operating activities, restructuring and integration plans, capital improvements and scheduled principal repayments of long-term debt. On March 15, 2017, the expiration date of this credit facility was extended until July 31, 2018.

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

 

We routinely have a backlog of work to be completed on contracts representing a significant portion of our annual sales. As of December 31, 2016,2019, our order backlog was $38.6$15.9 million. Orders included in our backlog are represented by customer purchase orders and service contracts that we believe to be firm. Backlog develops as a result of new business taken, which represents the revenue value of new customer orders received by us during a given period. Backlog consists of customer orders that either (1) have not yet been started or (2) are in progress and are not yet completed. In the latter case, the revenue value reported in backlog is the remaining value associated with work that has not yet been completed.billed. From time to time, customer orders are canceled that appeared to have a high certainty of going forward at the time they were recorded as new business taken. In the event of a customer order cancellation, we may be reimbursed for certain costs but typically have no contractual right to the total revenue reflected in our backlog. In addition to us being unable to recover certain direct costs, canceled customer orders may also result in additional unrecoverable costs due to the resulting underutilization of our assets.

 

We are subject to pricing pressure from our larger customers.

 

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

 

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

 

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


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

 

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

 

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

 

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

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

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 products for the energy sector.

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

While we cannot guarantee that we will continue to be considered an “essential business”, this guidance and exception allow work at our facilities to continue in order to provide critical infrastructure products that enable the safe and reliable delivery of electricity into millions of homes at this time.

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

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

 

maintain and manage our systems to facilitate the purchase and distribution of inventory items from various distribution centers;

provide remote monitoring and automated control to our customers;

receive, process and ship orders on a timely basis;

manage the accurate billing and collections from our customers.

 

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

 

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

 

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

 

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

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

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


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

 

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

 

We may face impairment charges if economic environments in which our business operates and key economic and business assumptions substantially change.

Assessment of the potential impairment of property, plant and equipment, goodwill and other identifiable intangible assets is an integral part of our normal ongoing review of operations. Testing for potential impairment of long-lived assets is dependent on numerous assumptions and reflects our best estimates at a particular point in time, which may vary from testing date to testing date. The economic environments in which our businesses operate and key economic and business assumptions with respect to projected product selling prices and materials costs, market growth and inflation rates, can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time at which such impairments are recognized. Future changes in the economic environment and the economic outlook for the assets being evaluated could also result in additional impairment charges. Any significant asset impairments would adversely impact our financial results.

 15

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

 

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

 

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

 

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

 

We are subject to the risks of owning real property.

We own real property, including the land and buildings at two of our manufacturing locations. The ownership of real property subjects us to risks, including: the possibility of environmental contamination and the costs associated with fixing any environmental problems and the risk of damages resulting from such contamination; adverse changes in the value of the property due to interest rate changes, changes in the neighborhood in which the property is located or other factors; ongoing maintenance expenses and costs of improvements; the possible need for structural improvements in order to comply with zoning, seismic, disability act or other requirements; and possible disputes with neighboring owners or others.

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

 

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

 

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

 

We are subject to international, federal, provincial, state and local laws and regulations governing environmental matters, including emissions to air, discharge to waters and the generation and handling of waste. We are also subject to laws relating to occupational health and safety. The operation of manufacturing plants involves a high level of susceptibility in these areas, and there is no assurance that we will not incur material environmental or occupational health and safety liabilities in the future. Moreover, expectations of remediation expenses could be affected by, and potentially significant expenditures could be required to comply with, environmental regulations and health and safety laws that may be adopted or imposed in the future. Future remediation technology advances could adversely impact expectations of remediation expenses. 

We face risks associated with litigation and claims.

Our business, results of operations and financial condition could be affected by significant litigation or claims adverse to us. There is a lawsuit filed against us, PCEP, PCEP’s president and a PCEP employee by Myers Power Products, Inc. in January 2016, seeking injunctive relief and compensatory damages of an unspecified unlimited (exceeding $25,000) amount, alleging, among other things, that our employees wrongly used and retained confidential business information of Myers Power Products, Inc. for the benefit of us and PCEP, and that we and PCEP knowingly received and used such confidential business information. See “Business — Legal Proceedings” for more information. 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. Types of potential litigation cases include product liability, contract, employment-related, labor relations, personal injury or property damage, intellectual property, stockholder claims and claims arising from any injury or damage to persons, property or the environment from hazardous substances used, generated or disposed of in the conduct of our business. Adverse outcomes in some or all of these claims may result in significant monetary damages that could adversely affect our ability to conduct our business.

 

 16

Our international operations subject us to additionalWe face risks associated with litigation and claims, which riskscould impact our financial results and costs may differ in each country in which we do business and may cause our profitability to decline.condition.

 

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

There are manufactured at our facilities in Canada and Mexico, and we depend on a number of suppliers for raw materials and component parts that are located outside of the U.S., including Asia and Western Europe. We generate a significant portion of our revenue from our operations in Canada and currently derive most of our revenuealso two appeals pending in the U.S. from productsCalifornia Court of Appeal for the Second Appellate District as referenced in Item 3 - Legal Proceedings, which includes an appeal of an order modifying a previously issued preliminary injunction and an order enjoining us to obtain and post a $12 million bond in connection with the modified preliminary injunction. Due to the uncertainties of litigation, we manufacture in Mexico and source internationally. Our international operations are subject to a variety of riskscan give no assurance that we do not facewill prevail on the appeals. Also, we can give no assurance that any other lawsuits or claims brought in the U.S., and that we may face only to a limited degree in Canada, including:

building and managing highly experienced foreign workforces and overseeing and ensuring the performance of foreign subcontractors;
increased travel, infrastructure and legal and compliance costs associated with multiple international locations;
additional withholding taxes or other taxesfuture will not have an adverse effect on our foreign income, and tariffs or other restrictions on foreign trade or investment;
imposition of, or unexpected adverse changes in, foreign laws or regulatory requirements, many of which differ from those in the U.S.;
changes in foreign currency exchange rates, principally fluctuations in the Canadian dollar, Indian rupee and Mexican peso;
longer payment cycles for sales in some foreign countries and potential difficulties in enforcing contracts and collecting accounts receivable;
difficulties in repatriating overseas net income;
general economic conditions in the countries in which we operate; and
political unrest, civil disturbances, corruption, crime, war, incidents of terrorism, or responses to such events.

We may be unable to maintain policies and strategies that will be effective in managing these risks in each country where we do business. Our failure to manage these risks could cause us to fail to reap our investments in these markets and could harm our international operations, reduce our international sales and increase our costs, thus adversely affecting our international and overall business, financial condition, andliquidity or operating results.

Market disruptions caused by domestic Adverse outcomes in some or international financial crisesall of these claims may result in significant monetary damages that could adversely affect our ability to meetconduct our liquidity needs at a reasonable costbusiness. These appeals are currently scheduled to be heard later in calendar year 2021, after the underlying case is likely to be heard and our ability to meet long-term commitments, which could adversely affect our financial condition anddecided; we expect that the results of operations.the case will be known before the appeals are heard and decided.

 

We rely on credit facilities with our lenders, amongst other avenues, to satisfy our liquidity needs. Disruptions in the domestic or international credit markets or deterioration of the banking industry’s financial condition (such as occurred beginning in 2008), may discourage or prevent our lenders and other lenders from meeting their existing lending commitments, extending the terms of such commitments or agreeing to new commitments, such as for acquisitions or to refinance existing credit facilities. Market disruptions may also limit our ability to issue debt securities in the capital markets. We can provide no assurances that our lenders or any other lenders we may have will meet their existing commitments or that we will be able to access the credit markets in the future on terms acceptable to us or at all.

Longer term disruptions in the domestic or international capital and credit markets as a result of uncertainty, reduced financing alternatives or failures of significant financial institutions could adversely affect our access to the liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the market stabilizes or until alternative financing can be arranged. Such measures could include deferring capital expenditures and reducing other discretionary expenditures. Market disruptions could cause a broad economic downturn that may lead to increased incidence of customers’ failure to pay for services delivered, which could adversely affect our financial condition, results of operations and cash flow.

Capital market disruptions could result in increased costs related to variable rate debt. As a result, continuation of market disruptions could increase our interest expense and adversely impact our results of operations. Disruption in the capital markets and its actual or perceived effects on particular businesses and the greater economy also adversely affects the value of the investments held within our pension plans. Significant declines in the value of the investments held within our pension plans may require us to increase contributions to those plans in order to meet future funding requirements if the actual asset returns do not recover these declines in value in the foreseeable future. These trends may also adversely impact our results of operations, net cash flows and financial positions, including our stockholders’ equity.

 17

Risks Relating to Our Organization

 

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


 

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

 

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

 

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

 

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

 

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

 

Provident Pioneer Partners, L.P., which is controlled by Nathan J. Mazurek, our chief executive officer, president and chairman of the board of directors, beneficially owns approximately 52.5%52.4% of our outstanding common stock as of March 28, 2017.30, 2020. As a result of this stock ownership, Provident Pioneer Partners, L.P. and Mr. Mazurek can control all matters submitted to our stockholders for approval, including the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire. In addition, as the interests of Provident Pioneer Partners, L.P. and our minority stockholders may not always be the same, this large concentration of voting power may lead to stockholder votes that are inconsistent with the best interests of our minority stockholders or the best interest of us as a whole. stockholders.

 

Furthermore, pursuant to the terms of our credit agreement with BMO, we are restricted from, among other things, entering into merger agreements or agreements for the sale of any or all of our assets outside the course of ordinary business. As such, even if certain corporate transactions may be approved by our stockholders, BMO, as the lender under our credit agreement, has final authority to approve or reject certain of our transactions. This could lead to us not being able to effect certain transactions that may be in the best interests of our stockholders or our business.

 18

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

 

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

 

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

 

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


The ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 require us to identify material weaknesses in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting or effective disclosure controls, this could have a material adverse effect on our business.

As discussed in Item 9A “Controls and Procedures”, we concluded there are material weaknesses in the design and operating effectiveness of our internal control over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, suchwhich is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Our management, including our chief executive officer and chief financial officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a reasonable possibility thatcontrol may be inadequate because of changes in conditions, such as growth of the company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

In addition, discovery and disclosure of a material misstatement ofweakness, by definition, could have a company’s annualmaterial adverse impact on our financial statements. Such an occurrence could discourage certain customers or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

We cannot assure you that we will be able to remediatesuppliers from doing business with us and adversely affect how our existing material weaknessesstock trades. This could in a timely manner, if at all, or that in the future additional material weaknesses will not exist, reoccur or otherwise be discovered, a risk that is significantly increased in light of the complexity of our business. If our efforts to remediate these material weaknesses, as described in Item 9A “Controls and Procedures”, are not successful or if other deficiencies occur,turn negatively affect our ability to accurately and timely report our financial position, results of operations, cash flows or key operating metrics could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements or other corrective disclosures. Additional impacts could include a decline in our stock price, suspension of trading or delisting of our common stock by the Nasdaq Capital Market, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity. Furthermore, if we continue to have these existing material weaknesses, other material weaknesses or significant deficiencies in the future, it could create a perception that our financial results do not fairly state our financial condition or results of operations. Any of the foregoing could have an adverse effect on the value of our stock.access equity markets for capital.

 

Risks Relating to our Common Stock  

 

There has been a limited market for our common stock and we cannot ensure investors that an active market for our common stock will be sustained.

 

There has been limited trading in our common stock and there can be no assurance that an active trading market in our common stock will be maintained. Due to the illiquidity of our common stock, the market price may not accurately reflect our relative value. There can be no assurance that an active market for our shares of common stock will develop in the future. Because our common stock is so thinly traded, even limited trading in our shares has in the past, and might in the future, lead to dramatic fluctuations in share price and investors may not be able to liquidate their investment in us at all or at a price that reflects the value of the business.

 

While our common stock became listed on the Nasdaq Capital Market as of September 2013, we cannot assure you that we will maintain compliance with all of the requirements for our common stock to remain listed. Additionally, there can be no assurance that trading of our common stock on such market will be sustained or desirable.

 

 19

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

 

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

 

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

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

sales of our common stock, including management shares;

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

our ability to execute our business plan;

operating results that fall below expectations;

loss of any strategic relationship;

industry developments;

economic and other external factors;

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

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

announcements of acquisitions.

 

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


 

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

 

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

 

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

We do not expect to pay cash dividends in the future. As a result, any return on investment may be limited to the value of our common stock.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our net income, financial condition and other business and economic factors as our board of directors may consider relevant. In addition, our credit agreement with BMO restricts our abilityMoreover, 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 pay cash dividends.a pending litigation, and as a result, the Company cancelled the dividend as the result of such court order. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.

 

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

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

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research aboutIn the event that we fail to satisfy any of the listing requirements of the NASDAQ Capital Market, our business,common stock may be delisted, which could affect our stockmarket price and trading volume could decline.liquidity.

 

The trading market for ourOur common stock will depend in partis listed on the research and reports that securities or industry analysts publish about us or our business. We do not currently have research coverage by securities and industry analysts and you should not invest in ourNASDAQ Capital Market. In order to maintain the listing of Pioneer Power’s common stock in anticipation that we will obtain such coverage. If we obtain securitieson NASDAQ, Pioneer Power’s common stock must comply with certain continued listing requirements, including having:

●            

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

●            

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

●           

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

●           

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

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

●            

stockholders’ equity of at least $2.5 million;

●            

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

●            

net income from continuing operations of $500,000 in the most recently completed fiscal year or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or morein two of the three most recently completed fiscal years.

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

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

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

Not applicable.

 20


 

ITEM 2.  PROPERTIES

 

Location

Description

Approximate
Square
Footage

Owned or

Square

Lease

Location

Description

Footage

Expiration Date

Granby, QuebecManufacturing and administration50,000Owned
Farnham, QuebecManufacturing and administration69,000Owned
Reynosa, MexicoManufacturing52,000December 2026
Reynosa, MexicoManufacturing35,000December 2026

Santa Fe Springs, California

Manufacturing, sales, engineering and administration

40,000

August 2018

40,000

September 2021

Brooklyn Park, Minnesota

Manufacturing, sales, engineering and administration

16,000

16,000

December 2020

Pharr, TexasDistribution warehouse24,000August 2020

Omaha, Nebraska

Sales and service

6,800

6,800

December 2020

Duluth, Minnesota

Sale, service and warehouse

4,600

4,600

July 2020

Doral,

Miami, Florida

Sales and service

2,400

August 2017

3,600

December 2021

Franklin, WisconsinSales, marketing, engineering and adminstration5,000December 2018
Mississauga, OntarioSales and engineering1,400July 2021

Fort Lee, New Jersey

Corporate management and sales office

2,700

2,700

November 2022

 

We believe our manufacturing and distribution facilities are well maintained, in proper condition to operate at higher than current levels and are adequately insured. We do not anticipate significant difficulty in renewing or extending existing leases as they expire, or in replacing them with equivalent facilities or office locations. Of the owned properties, both are subject to encumbrances with a bank, in amounts that we do not believe are material to our operations.operations.

 

ITEM 3.  LEGAL PROCEEDINGS.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’sPCEP 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) amount.; however, the Company has recognized approximately $1.2 million for expected costs related to this litigation. On March 18, 2016, we filed an answer to the complaint, denying generally each and every allegation and relief sought by Myers Power Products, Inc. and seeking dismissal based on, among other things, failure to state facts sufficient to constitute a cause of action. We intend to contest the matter vigorously. Due to the uncertainties of litigation, however, we can give no assurance that we, PCEP and our employees will prevail on any claims made against us, PCEP and our employees in any such lawsuit. As of the filing of this report, this action is scheduled for trial in the second quarter of 2020. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results. See Note 11 ‒ Commitments and Contingencies included inWe cannot execute the notes to our consolidated financial statements included in this Annual Report on Form 10-K.sale of PCEP until the lawsuit has been resolved.

 

On October 4, 2019, the dividend that was payable by the Company was enjoined by court order of the Superior Court of California related to the foregoing case. The Company continues to contest the order. As of the date of this filing, this court order remains in place. On October 16, 2019, Myers Power Products, Inc. filed an ex parte application arguing the Company had violated, or intended to violate the modified preliminary injunction and sought order from the court for the Company to post a bond in an amount of $20,000 or more. The court has not taken any action on this request and the Company intends to vigorously defend its rights in the event the order is granted. The Company cancelled the dividend as the result of this court order.

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

With respect to all such lawsuits, claims and proceedings, the Company records a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. However, the outcomes of any currently pending lawsuits, claims and proceedings cannot be predicted, and therefore, there can be no assurance that this will be the case.

As of the date hereof, we are not aware of or a party to any other material 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 other than the foregoingforgoing 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 12 – 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 4.  MINE SAFETY DISCLOSURES.DISCLOSURES

 

Not applicable.

17  

 

21

 

PART II

 

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

 

Our common stock has been listed on the Nasdaq Capital Market under the symbol “PPSI” since September 19, 2013. Prior to that time, it was quoted on the OTCQB. The following table sets forth the high and low sales prices for our common stock as reported on the Nasdaq Capital Market for the periods indicated.

Fiscal Year  Period  High  Low 
2016  First Quarter Ended March 31  $5.73  $2.78 
   Second Quarter Ended June 30   6.38   4.40 
   Third Quarter Ended September 30   6.00   4.85 
   Fourth Quarter Ended December 31   5.99   4.85 
             
2015  First Quarter Ended March 31   9.99   8.67 
   Second Quarter Ended June 30   8.91   6.75 
   Third Quarter Ended September 30   7.80   3.60 
   Fourth Quarter Ended December 31   4.50   3.06 

The last reported sales price of our common stock on the Nasdaq Capital Market on March 28, 2017,27, 2020, was $6.90$1.67 per share. As of March 28, 2017,27, 2020, there were 3022 holders of record of our common stock.

 

We have notDuring the quarter ended September 30, 2019 the Company declared or paida cash dividends on our common stockdividend of approximately $12 million in aggregate which was subsequently enjoined by ruling of the courts in connection with the litigation with Myers Power Products, Inc., (see Note 13). As a result of the court order, the cash dividend was cancelled by the Company during the two most recent fiscal years,fourth quarter of 2019. However, the timing and we do not intendamount of future dividends could require the Company to pay any cash dividends on our common stock duringseek capital funding to support its ongoing operations as the foreseeable future. Rather, we intend to retain future net income (if any) to fundCompany’s historical credit arrangements were terminated in connection with the operation and expansion of our business and for general corporate purposes. Subject to legal and contractual limits, our board of directors will make any decision as to whether to pay dividends in the future. In addition, our credit agreement with BMO, dated April 29, 2016, restricts our ability to pay cash dividends.Equity Transaction.

 

We did not repurchase any of our equity securities during the fourth quarter of the fiscal year ended December 31, 2016.2019.

 

ITEM 6.  SELECTED FINANCIAL DATA.

 

Not applicable.

 

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

 

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

 

Overview

 

We manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. Our principal products and services include custom-engineered electrical transformers, switchgear and engine-generator sets and 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 12five (5) additional locations in the U.S., Canada and Mexico for manufacturing, service, centralized distribution, engineering, sales and administration.

 

Our operations are divided into two reportable segments: Transmission & DistributionT&D Solutions segment and Critical Power.Power segment. Our T&D Solutions business provides equipment solutions that help customers effectively and efficiently manage their electrical power distribution systems to desired specifications. These solutions are marketed principally through our PTL, Jefferson, Bemag, PCPI and PCEP brand names. As a result of the restructuring plans implemented during calendar year 2015, the activities of our PCPI switchgear operations have been transferred from the Critical Power segment to the T&D Solutions segment as of January 1, 2016.name. Our Critical Power business provides customers with services for their sophisticated power generation equipment related electrical distribution infrastructure, preventative maintenance services and an advanced data collection and monitoring platform, the combination of which is used to ensure smooth, uninterrupted power to operations during times of emergency. These solutions areThis solution is marketed by our operations headquartered in Minnesota, currently doing business under the Titan brand name.

 

Disposition of Business Units

Sale of PCPI

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, of CleanSpark (“CleanSpark Common Stock”), (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The share quantities and exercise prices of warrants reflect the 10:1 stock split completed by CleanSpark in December 2019.

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


In connection with the Merger Agreement, the Company, CleanSpark and PCPI entered into an Indemnity Agreement (the “Indemnity Agreement”), dated January 22, 2019, pursuant to which the Company agreed to assume the liabilities and obligations related to the claims made by Myers Powers Products, Inc. in the case titled Myers Power Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical Products, Corp., et al., Los Angeles County Superior Court Case No. BC606546 (the “Myers Power Case”) as they may relate to PCPI or CleanSpark after the closing of the Merger. In addition, the Company agreed to indemnify and hold harmless CleanSpark and the surviving company of the Merger and their respective officers, directors, agents, members and employees, and the heirs successors and assigns of the foregoing from and against all losses incurred by reason of claims made by Myers Power Products, Inc. as presented or substantially similar to that presented in the Myers Powers Case that are brought against CleanSpark or the surviving company of the Merger after the closing of the Merger. The Indemnity Agreement expires five years from the date of the Indemnity Agreement.

In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Contract Manufacturing Agreement (the “Contract Manufacturing Agreement”), dated as of January 22, 2019, pursuant to which the Company agreed to manufacture paralleling switchgear, automatic transfer switches and related control and circuit protective equipment (collectively, “Products”) exclusively for purchase by CleanSpark. CleanSpark agreed to purchase the Products via purchase orders issued to the Company at any time and from time to time. Pursuant to the Contract Manufacturing Agreement, the price for the Products payable by CleanSpark to the Company are negotiated on a case by case basis, but all purchases of Products have a target price of 91% of the CleanSpark customer’s purchase order price and are not to 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.

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

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

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

From the date of sale through December 31, 2019, the estimated fair value of the warrants and common stock decreased to $1.4 million and an unrealized mark to market loss of $2.8 million was recognized within other expense for the year ended December 31, 2019.

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 reduction to the value of the notes at December 31, 2019 of $651, for a carrying value of $5.1 million, which is included within other long term assets. After certain adjustments and expenses of sale, the Company received net consideration from the sale of $45.2 million. Subsequent to finalizing the working capital adjustment during the fourth quarter of 2019 the gain recognized on the Equity Transaction amounted to $13.7 million and is reflected within discontinued operations.


 

Foreign Currency Exchange Rates

Although we report our results in accordance with U.S. GAAP and in U.S. dollars, twoThe transaction was consummated on August 16, 2019. Pioneer sold to the Buyer all of our business subsidiaries are Canadian operations whose functional currency is the Canadian dollar.  As such, the financial position, results of operations, cash flows and equity of these operations are initially consolidated in Canadian dollars. Their assets and liabilities are then translated from Canadian dollars to U.S. dollars by applyingassociated with its liquid-filled transformer and dry-type transformer manufacturing businesses within the foreign currency exchange rate in effect atCompany’s T&D Solutions segment. Pioneer Power retained its switchgear manufacturing business within the balance sheet date, whileT&D Solutions segment, as well as all of the results of their operations and cash flows are translated to U.S. dollars by applying weighted average foreign currency exchanges rates in effect during the reporting period. The resulting translation adjustments are included in other comprehensive income or loss. associated with its Critical Power segment.

 

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

 

   2016  2015 
   Balance Sheet  Statements of Operations,
Comprehensive Income
and Cash Flow
  Balance Sheet  Statements of Operations,
Comprehensive Income
and Cash Flow
 
         Cumulative        Cumulative 
Quarter Ended  End of Period  Period Average  Average  End of Period  Period Average  Average 
March 31  $0.7700  $0.7274  $0.7274  $0.7895  $0.8057  $0.8057 
June 30  $0.7742  $0.7760  $0.7509  $0.8006  $0.8134  $0.8095 
September 30  $0.7624  $0.7662  $0.7560  $0.7493  $0.7638  $0.7937 
December 31  $0.7448  $0.7497  $0.7544  $0.7225  $0.7489  $0.7820 

Critical Accounting Policies

 

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

 

Revenue Recognition. Revenue is recognized when (1) persuasive evidence of an arrangementa contract with a customer exists , (2) delivery occurs, (3) the sales price is fixed or determinable, (4) collectability is reasonably assured and (5) customer acceptance criteria, if any, has been successfully demonstrated. Revenue is recognizedperformance obligations promised in a contract are identified based on the sale of goods, when the significant risks and rewards of ownership have beenproducts or services that will be transferred to the buyer upon delivery, provided that customer , (3) the Company maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold. There are no further obligations on the part of the Company subsequent to revenue recognition, except when customers have the right of return or when the Company warrants the product. The Company records a provision for future returns, based on historical experience at the time of shipment of products to customers. The Company warrants some of its products against defects in design, materials and workmanship for periods ranging from one to three years depending on the model. The Company records a provision for estimated future warranty coststransaction price is determined based on the historical relationshipconsideration to which the Company will be entitled in exchange for transferring products or services to the customer , (4) the transaction price is allocated to the performance obligations in the contract and (5)the Company satisfies performance obligations . Substantially all of warranty claimsour product revenue is recognized at a point of time, as the promised product passes to sales at the customer. Service revenues include maintenance contracts that are recognized over time of shipment of products to customers. The Company periodically reviewsbased on the adequacy of its product warrantiescontract term and adjusts, if necessary, the warranty percentage and accrued warranty reserve for actual experience.repair services which are recognized as services are delivered.

 

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

 

23

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

 

Goodwill and Indefinite lived intangible Assets. Goodwill and other intangible assets with indefinite useful lives are not amortized, but are evaluated for impairment annually, or immediately if conditions indicate that impairment could exist. The evaluation requires a two-stepan impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss. The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measureCompany measures the amount of the impairment loss. Both steps of theThe goodwill impairment testing involveinvolves significant estimates. The Company recorded an impairment charge of $3.0 million to the goodwill at the TESI business unit in 2019, based in part by the loss of the Verizon agreement, which is recorded in continuing operations within selling, general, and administrative expense. The Company recorded a $1.4 million impairment to intangible assets during the year ended December 31, 2018 at the PCEP business unit. At December 31, 2019 the Company reported no intangible assets.

 

Income Taxes. We account for income taxes under the asset and liability method, based on the income tax laws and rates in the countries in which operations are conducted and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using expected rates in effect for the tax year in which the differences are expected to reverse. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. A valuation allowance iswas recorded to reduce our deferred tax assets to the amount that is more likely than not to be realized. We believe that the deferred tax asset recorded as ofzero at December 31, 2016, is realizable through future reversals of existing taxable temporary differences and future taxable income.2019. If we were to subsequently determine that we would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis. Our judgments and tax strategies are subject to audit by various taxing authorities.


As of December 31, 2016, we have recorded $204 for uncertain tax positions. We do not believe the total of unrecognized tax positions will significantly increase or decrease during the next 12 months.

Changes in Accounting Principles

 

In 2015, weOn January 1, 2018, the Company adopted a changeAccounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) and Accounting Standards Update 2016-02, Leases (Topic 842). The effects of goodwill testing date and ASU No. 2015-17, Income Taxes (topic 740). No other significant changesthe adoptions are described in accounting principles were adopted during 2016 and 2015.Note 2 to the consolidated financial statements.

 

Classification of Expenses

As the Company implemented the remediation plans discussed under the heading “Item 9A. Controls and Procedures” of this Annual Report on Form 10-K, the Company has determined that there were inconsistencies in classification of expenses between its business units. As a result, the Company has reclassified certain expenses from cost of goods sold to operating expenses for the year ended December 31, 2016. The Company has made the same reclassification to the results for the year ended December 31, 2015, resulting in an increase to gross profit of $332, or 0.31% as a percentage of sales as presented for this period.

Rounding

 

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

24


RESULTS OF OPERATIONS

 

Overview of 20162019 Operating Results

 

Selected financial and operating data for our reportable business segments for the most recent two years is summarized below. This information, as well as the selected financial data provided in Note 1617 and our Consolidated Financial Statements and related notes included in this Annual Report on Form 10-K, should be referred to when reading our discussion and analysis of results of operations below. Our summary of operating results during the years ended 20162019 and 20152018 are as follows:

 

 For the Year Ended
 For the Years Ended December 31, December 31,
 2016 2015 2019 2018
Revenues            
T&D Solutions $95,870  $84,871  $8,985  $8,747 
Critical Power Solutions  18,532   21,651   11,597   11,380 
Consolidated  114,402   106,522   20,582   20,127 
Cost of sales        
Cost of goods sold        
T&D Solutions  75,497   66,968   9,522   8,374 
Critical Power Solutions  15,494   18,117   9,895   9,859 
Consolidated  90,991   85,085   19,417   18,233 
Gross profit  23,411   21,437   1,165   1,894 
Selling, general and administrative expenses  17,852   19,365   12,681   9,494 
Depreciation and amortization expense  2,143   2,162   237   1,525 
Restructuring and integration  2,426   5,577 
Foreign exchange gain  (365)  (367)
Total operating expenses  22,056   26,737   12,918   11,019 
Operating income (loss)  1,355   (5,300)
Operating loss from continuing operations  (11,753)  (9,125)
Interest expense  1,736   748   396   916 
Other income (expense)  (205)  2,535 
Income (loss) before taxes  (176)  (8,583)
Gain on sale of subsidiaries  4,207   —   
Other expense  2,817   64 
Loss before taxes  (10,759)  (10,105)
Income tax expense (benefit)  887   (2,702)  1,278   (796)
Net income (loss) $(1,063) $(5,881)
Net loss from continuing operations  (12,037)  (9,309)
Discontinued operations (Note 7)        
(Loss) income from operations of discontinued business units  (2,351)  4,744 
Gain on sale of discontinued subsidiaries  13,686   —   
Income tax expense  737   1,099 
Income from discontinued operations, net of income taxes  10,598   3,645 
Net loss $(1,439) $(5,664)

 

Backlog. Our order backlog at December 31, 20162019 was $38.6$15.9 million, as compared to $28.7$15.7 million at December 31, 2015.2018 for continuing operations. Our backlog is based on orders expected to be delivered in the future, most of which is expected to occur during 2017.2020. The following table represents the progression of our backlog, by reporting segment, for the periods ended as indicated:

 

  December 31, 
  2016  2015 
T&D Solutions $34,588  $24,487 
Critical Power Solutions  3,970   4,180 
Total order backlog $38,558  $28,667 

  December 31,
  2019 2018
T&D Solutions $6,450  $9,486 
Critical Power Solutions  9,406   6,171 
Order backlog $15,856  $15,657 
Discountinued Operation  —     31,834 
Total order backlog $15,856  $47,491 

Revenue

 

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

 

 For the Year Ended
 For the Years Ended December 31,  December 31,
 2016 2015 Variance�� %  2019 2018 Variance %
T&D Solutions                                
Transformers $81,111  $75,598  $5,513   7.3 
Switchgear  14,759   9,273   5,486   59.2  $8,985  $8,747  $238   2.7 
  95,870   84,871   10,999   13.0   8,985   8,747   238   2.7 
Critical Power Solutions                                
Equipment  10,166   14,929   (4,763)  (31.9)  1,416   1,580   (164)  (10.4)
Service  8,366   6,722   1,644   24.5   10,181   9,800   381   3.9 
  18,532   21,651   (3,119)  (14.4)  11,597   11,380   217   1.9 
Total revenue $114,402  $106,522  $7,880   7.4  $20,582  $20,127  $455   2.3 

 

For the year ended December 31, 2016,2019, our consolidated revenue increased by $7.9 million,$455, or 7.4%,2.3% to $114.4$20.6 million, up from $106.5$20.1 million during the year ended December 31, 2015.  2018.

 

25

T&D Solutions. Revenue from our transformer product lines increased by $5.5 million, or 7.3%, driven by a 17.8% increase in sales from our U.S. operations led by significant growth in our low voltage, general purpose products. Offsetting the U.S. market increase was a decline in sales from our Canadian operations (down 3.0% in USD, but up 1.1% on a constant currency basis). Revenue from our switchgear product lines increased by $5.5 million,$238, or 59.2%2.7%, driven byas result of increased sales fromof our medium voltage switchgear offering, which was purchased in July, 2015.transfer switches.

 

Critical Power. Revenue for our equipment sales decreased by $4.8 million,$164, or 31.9%10.4%, driven by our decision to concentrate our efforts on service revenue, which provides higher profit margins. The increase in service revenue of $1.6 million,$381, or 24.5%3.9% is further confirmation of this strategy.

 

Gross Profit and Gross Margin

 

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

 

 For the Year Ended
 For the Years Ended December 31, December 31,
 2016 2015 Variance % 2019 2018 Variance %
T&D Solutions                        
Gross profit $20,373  $17,903  $2,470   13.8  $(537) $373  $(910)  (244.0)
Gross margin %  21.3   21.1   0.2       (6.0)  4.3   (10.3)    
                                
Critical Power Solutions                                
Gross profit  3,038   3,534   (496)  (14.0)  1,702   1,521   181   11.9 
Gross margin %  16.4   16.3   0.1       14.7   13.4   1.3     
                                
Consolidated gross profit $23,411  $21,437  $1,974   9.2  $1,165  $1,894  $(729)  (38.5)
Consolidated gross margin %  20.5   20.1   0.4       5.7   9.4   (3.7)    

 

For the year ended December 31, 2016,2019, our gross margin percentage was 20.5%5.7% of revenues, compared to 20.1%9.4% during the year ended December 31, 2015.2018. The 0.4% increase3.7% reduction in our consolidated gross margin percentage is explained predominantly by the results of our T&D Solutions segment.

 

T&D Solutions. The 0.2% increasereduction in our T&D Solutions gross margin resulted primarily from a favorable shifttaking on lower margin jobs, providing customer discounts and an increase in wage rates for our sales mix to more custom-engineered transformers and the continuation of an Asian supply channel, at a lower landed cost,skilled labor force. Gross profit for the highly competitive low voltage standard transformer products.year ended December 31, 2019 also includes write downs of inventory amounting to $414.

 

During 2015, we completed the development of our low voltage transformer product offering to make them comply with new Department of Energy efficiency standards coming into effect in 2016. The cost of these projects was recognized as period expenses during 2015 and prior years.

Our T&D switchgear product sales grew rapidly and at an improved gross margin during the year, as we concentrated on more profitable medium voltage projects and reduced our activity in low voltage projects in 2016, as compared to 2015. During 2016, we made the strategic decision to reduce our sales efforts in low voltage switchgear products. During the implementation of this strategic change, we incurred $97 of payroll and related costs that will be eliminated in future years.

Critical Power. The 0.1%11.9% increase in our Critical Power segment gross margin was driven primarily by the strategic shift to concentrate on higher margin service revenue while decreasing the focus onincreased sales of equipment. During 2016, we made the strategic decision to reduceservice which provide higher margins than our efforts in selling equipment. During the implementation of this strategic change, we incurred $23 of payroll and related costs that will be eliminated in future years.equipment sales.

26


Operating Expenses

 

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

 

 For the Year Ended
 For the Years Ended December 31, December 31,
 2016 2015 Variance % 2019 2018 Variance %
T&D Solutions                        
Selling, general and administrative expense $13,202  $13,508  $(306)  (2.3) $2,539  $4,225  $(1,686)  (39.9)
Depreciation and amortization expense  670   640   30   4.7   67   241   (174)  (72.2)
Restructuring and integration  2,367   5,083   (2,716)  (53.4)
Foreign exchange gain  (365)  (356)  (9)  2.5 
Segment operating expense $15,874  $18,875  $(3,001)  (15.9) $2,606  $4,466  $(1,860)  (41.6)
                                
Critical Power Solutions                                
Selling, general and administrative expense $1,539  $2,852  $(1,313)  (46.0) $5,161  $1,625  $3,536   217.6 
Depreciation and amortization expense  1,405   1,449   (44)  (3.0)  122   1,222   (1,100)  (90.0)
Restructuring and integration  32   80   (48)  (60.0)
Segment operating expense $2,976  $4,381  $(1,405)  (32.1) $5,283  $2,847  $2,436   85.6 
                                
Unallocated Corporate Overhead Expenses                                
Selling, general and administrative expense $3,111  $3,005  $106   3.5  $4,981  $3,644  $1,337   36.7 
Depreciation expense  68   73   (5)  (7)  48   62   (14)  (22.6)
Restructuring and integration  27   414   (387)  (93.5)
Foreign exchange gain  —     (11)  11   —   
Segment operating expense $3,206  $3,481  $(275)  (7.9) $5,029  $3,706  $1,323   35.7 
                                
Consolidated                                
Selling, general and administrative expense $17,852  $19,365  $(1,513)  (7.8) $12,681  $9,494  $3,187   33.6 
Depreciation and amortization expense  2,143   2,162   (19)  (0.9)  237   1,525   (1,288)  (84.5)
Restructuring and integration  2,426   5,577   (3,151)  (56.5)
Foreign exchange gain  (365)  (367)  2   (0.5)
Consolidated operating expense $22,056  $26,737  $(4,681)  (17.5) $12,918  $11,019  $1,899   17.2 

 

Selling, General and Administrative Expense. For the year ended December 31, 2016,2019, consolidated selling, general and administrative expense, before depreciation and amortization, decreasedincreased by approximately $1.5$3.2 million, or 7.8%33.6%, to $17.9$12.7 million, as compared to $19.4$9.5 million during the year ended December 31, 2015.2018. As a percentage of our consolidated revenue, selling, general and administrative expense decreasedincreased to 15.6%61.6% in 2016,2019, as compared to 18.2%47.2% in 2015.2018.

The selling, general and administrative expense in our T&D Solutions segment decreased by $1.7 million, or 39.9%, during the year ended December 31, 2019, as compared to 2018 primarily due to lower intangible impairment write-offs and payroll related costs.

 

The selling, general and administrative expense in our Critical Power segment decreasedincreased by $1.3$3.5 million, or 217.6% as compared to 2015. While implementing the strategy2018 primarily due to decrease focus on equipment sales, we incurred payrollan increase in intangible impairment write-offs and related costs of $157 during 2016. The overall decrease is from employment reductions done pursuant to this strategy to decrease focus on the equipment sales in this segment.legal costs.

 

Selling, general and administrative expense in our T&D Solutions segment decreased by $0.3 million, or 2.3%, during the year ended December 31, 2016, as compared to 2015. While implementing the strategy to reduce our low voltage switchgear sales, we incurred payroll and related costs of $555 and other costs of $152 during 2016.

Depreciation and Amortization Expenses.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 revenue. There was no material change in depreciationsales. Depreciation and amortization expense between the years ended December 31, 2016 and December 31, 2015.

Foreign Exchange (Gain) Loss. Fordecreased by $1.3 million during the year ended December 31, 2016, approximately 34% of our consolidated operating revenues were denominated in Canadian dollars, and2019 compared to the majority of our expenses were denominated and disbursed in U.S. dollars. We have not historically engaged in currency hedging activities. Fluctuations in foreign currency exchange rates between the time we initiate and then settle transactions with our customers and suppliers can have an impact on our operating results. For both of yearsyear ended December 31, 2016 and 2015, we recorded a gain of $0.4 million2018 primarily due to currency fluctuations.

Restructuring, Integration, and Impairment. In 2016, $2.4 million of restructuring expenses were incurred as a result of the relocation of the medium voltage transformer production facility to a lower cost facility. These costs were primarily from business integration costs of $2.1 million and cost over runs of $300 on the 2015 restructuring accruals. In 2015, an additional $5.6 million of restructuring expenses were incurred as the result of three plant consolidations. These costs were mainly the result of write down of the carrying value of fixed assets ($2.8 million), business integration costs ($1.5 million), employee severance and related costs ($0.6 million) and lease termination and relocation costs for the balance.intangible asset becoming fully amortized in our Critical Power segment.

 

Operating Income (Loss)Loss

 

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

 

 For the Year Ended
 For the Years Ended December 31, December 31,
 2016 2015 Variance % 2019 2018 Variance %
T&D Solutions $4,499  $(972) $5,471   562.9  $(3,143) $(4,093) $950   (23.2)
Critical Power Solutions  62   (847)  909   107.3   (3,581)  (1,326)  (2,255)  (170.1)
Unallocated Corporate Overhead Expenses  (3,206)  (3,481)  275   7.9   (5,029)  (3,706)  (1,323)  (35.7)
Total operating income (loss) $1,355  $(5,300) $6,655   125.6 
Total operating loss $(11,753) $(9,125) $(2,628)  28.8 

 

T&D SolutionsSolutions. .  Operating incomeloss from this segment increaseddecreased by $5.5 million, resulting from lower restructuring costs, lower operating expenses and increased sales volumes$950 in the year ended December 31, 20162019 compared to the year ended December 31, 2015.2018, due to a decrease in intangible impairment expense of $1.4 million, offset by an increase in legal expense in 2019.


 

Critical Power. The Critical Power segment operating incomeloss increased by $0.9$2.3 million during 20162019 from 2015. This increase resulted from2018 due primarily to a goodwill impairment of $3.0 million, offset by lower payroll costs and an increaseamortization of intangible assets in service revenue.2019.

 

General Corporate Expense. Our general corporate expense consistsexpenses consist primarily of executive management, corporate accounting and human resources personnel, office expenses, financing and corporate development activities, payroll and benefits administration, treasury, tax compliance, legal, stock-based compensation and public reporting costs, and costs not specifically allocated to reportable business segments. During the year ended December 31, 2016,2019, our unallocated corporate overhead expense decreasedincreased by $275.$1.3 million, primarily from increased payroll related expenses.

 

Non-Operating Expense

 

Interest Expense. For the year ended December 31, 2016,2019, our interest expense was $1.7 million,$396, as compared to approximately $0.7 million$916 for the year ended December 31, 2015.2018. The net increasedecrease in our interest expense was due to higher average borrowings underthe retirement of our credit facilities during 2016,bank indebtedness with the proceeds from the sale of the transformer business units in August 2019.

Other Expense. Other expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the year ended December 31, 2019, other non-operating expense was $2.8 million, as compared to 2015. The aggregate outstanding balance of our total debt increased by approximately $10.2 million$64 during the year ended December 31, 2016.

Other Expense (Income).2018. For the year ended December 31, 2016, our2019, included in other non-operating incomeexpense was a loss of $0.2$2.8 million consists primarily of abatement of penalties as they related to non-paymentthe mark to market adjustment on the fair value of payroll taxes of $1.1 million, offset by intangible impairment of $0.1 million. For the year ended December 31, 2015, our non-operating expense of $2.5 million consisted primarily of professional feescommon stock and costs incurredwarrants received in connection with acquisitionsthe Merger of $1.1 millionPCPI, CleanSpark and interest and penalties from the non-payment of payroll taxes of $1.5 million.Merger Sub.

 

Provision for Income Taxes. Our provision reflects an effective tax rate on loss before income taxes of 504%(11.9)% in 2016,2019, as compared to 31%7.9% in 2015,2018, as set forth below (dollars in thousands):below:  

 

 For the Year Ended
 For the Years Ended December 31, December 31,
 2016 2015 Variance 2019 2018 Variance
Loss before income taxes $176  $8,583  $(8,406) $(10,759) $(10,105) $(654)
Income tax expense (benefit)  887   (2,702)  3,589   1,278   (796)  2,074 
Effective income tax rate %  504   31   472   (11.9)  7.9   (19.8)

 

The increase in the Company’s effective tax rate during 2016 primarily reflects the correction of a prior year error in the current year, and the recognition of prior period adjustments resulting from an audit of our tax returns in Canada, as well as the permanent benefit resulting from the abatement of payroll tax penalties.  

Net Loss Perper Share from Continuing Operations

 

We generated a net loss from continuing operations of $1.1$12.0 million for the year ended December 31, 2016,2019, as compared to net loss from continuing operations of $5.9$9.3 million during the year ended December 31, 2015.2018. In 2016,2019, our net loss from continuing operations per basic and diluted share was $0.12,$1.38, as compared to a net loss from continuing operations per basic and diluted share of $0.76$1.07 during the year ended December 31, 2015.  2018.

 

LIQUIDITY AND CAPITAL RESOURCES

 

General. AtAs of December 31, 2016,2019, we had $8.2 million of cash and cash equivalents of approximately $0.2 million and total debt outstanding of $28.2 million, when including bank overdrafts.on hand. We have historically met our cash needs through a combination of cash flows from operating activities, bank borrowings under our revolving credit facilities and distributions between our U.S. and foreign subsidiaries. Our cash requirements arehave been generally for operating activities, debt repayment, capital improvements and acquisitions. We believe that working capital, borrowing capacity available under our credit facilities, funds generated from operations and cash available on hand should be sufficient to finance our cash requirements for anticipated operating activities, capital improvements and principal repayments of debt through at least the next twelve months.acquisitions.

 

Cash Provided/Used(Used in)/ Provided by Operating Activities. Cash used byin our operating activities was approximately $9.5$5.6 million during the year ended December 31, 2016,2019, as compared to cash used by our operating activitiesprovided of $4.0$2.2 million during the year ended December 31, 2015, primarily due to deferred taxes, restructuring and2018. The increase in cash used in operations during the year ended December 31, 2019 occurred as a result of an increase of cash used for working capital changes.when compared to the year ended December 31, 2018.

 

Cash Used inProvided by Investing Activities. Cash used inprovided by investing activities during the year ended December 31, 20162019 was approximately $0.6$39.8 million generated primarily from the completion of the Equity Transaction, as compared to $3.4cash provided by investing activities of $173 during the year ended December 31, 2018. During the year ended December 31, 2019, additions to our property, plant and equipment were $153.

Cash Used in Financing Activities. Cash used in our financing activities was $26.2 million during the year ended December 31, 2015.  During 2015, our2019, as compared to $3.4 million of cash used in investing activities included $2.1 million for business acquisitions. Additions to our property, plant and equipment in the ordinary course of business were approximately $0.7 million and $1.1 million, respectively, during the years ended December 31, 2016 and 2015.

Cash Provided by Financing Activities. Cash provided by our financing activities was $10.0 million during the year ended December 31, 2016, as compared to2018. The primary use of cash provided by ourin financing activities of approximately $4.5 million duringfor the year ended December 31, 2015.  During 2015, borrowings under our revolving credit facilities increased by $7.8 million.  2019 was for repayment of debt.


 

Working CapitalCapital/ (Deficit). As of December 31, 2016,2019, we had working capital of $2.4$10.1 million, including $0.2$8.2 million of cash and cash equivalents, compared to negativea working capital deficit of $3.1$5.5 million, including $0.6 million$211 of cash and cash equivalents at December 31, 2015. Our current assets were approximately 1.1 times our current liabilities at December 31, 2016, as compared to 0.9 times at December 31, 2015.2018. At December 31, 2016 and 2015,2019, 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. At December 31, 2018, we had $1.5 million and $2.6 million, respectively,$388 of available and unused borrowing capacity from our revolving credit facilities, without taking into account cash and equivalents on hand. However, the availability of this capacity under our revolving credit facilities is subject to restrictions on the use of proceeds and is dependent upon our ability to satisfy certain financial and operating covenants, including financial ratios.facilities.

 

Assessment of Liquidity.Liquidity. At December 31, 2016,2019, we had total debt of $28.2 million and $0.2$8.2 million of cash and cash equivalents on hand.hand generated primarily from the completion of the Equity Transaction. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings under our revolving credit facilities. Our cash requirements arehistorically were generally for operating activities, debt repayment, capital improvements and acquisitions. In addition, as further discussed below,As all outstanding amounts under our credit facilities maturity dates have been extended until July 2018.

The financial statements includedpaid in this annual report have been prepared assuming thatfull with the proceeds from the Equity Transaction during the year ended December 31, 2019, we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business.  Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments inexpect to meet our business, liquidity, capital requirements and that our credit facilitiescash needs with our lender will remain available to usworking capital and will not needcash flows from our operating activities. We expect our cash requirements to be replaced. generally for operating activities and capital improvements.

 

Credit Facilities and Long-Term Debt

 

Canadian Credit Facilities

 

Our Canadian subsidiaries have maintained credit facilities with BMO since October 2009. In June 2011, our wholly owned subsidiary Pioneer Electrogroup Canada Inc. entered into a letter loan agreement with BMO (the “Initial Canadian Facilities”) that replaced and superseded all of our businesses’ prior financing arrangements with the bank.

Our Initial Canadian Facilities originally provided for up to $22.0 million Canadian dollars (“CAD”) (approximately $15.9 million expressed in U.S. dollars) consisting of a $10.0 million CAD demand revolving credit facility (“Facility A”) to finance ongoing operations, a $2.0 million CAD term credit facility (“Facility B”) that financed a plant expansion, and a $10.0 million CAD term credit facility (“Facility C”) that financed a business acquisition and the purchase and expansion of its manufacturing facilities.

The Initial Canadian Facilities required us to comply on a consolidated Canadian basis with various financial covenants, including maintaining a minimum fixed charge coverage ratio, a maximum funded debt to EBITDA ratio and a limitation on funded debt as a percent of capitalization.

Facility A was originally subject to margin criteria and borrowings bear interest at BMO’s prime rate plus 0.50% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 0.50% per annum or LIBOR plus 2.00% per annum on amounts borrowed in U.S. dollars.

Borrowings under Facility B originally bore interest at BMO’s prime rate plus 1.00% per annum with principal repayments becoming due on a five year amortization schedule.

Borrowings under Facility C were repayable according to a five year principal amortization schedule and bore interest at the following rates: if the funded debt to EBITDA ratio is equal to or greater than 2.00, BMO’s prime rate plus 1.25% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 1.25% per annum or LIBOR plus 2.50% per annum on amounts borrowed in U.S. dollars; or, if the funded debt to EBITDA ratio is less than 2.00, BMO’s prime rate plus 1.00% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 1.00% per annum or LIBOR plus 2.25% per annum on amounts borrowed in U.S. dollars. In addition, Facility C was subject to a standby fee which is calculated monthly using the unused portion of the facility at either 0.625% per annum if the funded debt to EBITDA ratio is equal to or greater than 2.00 or 0.5625% per annum if the funded debt to EBITDA ratio is less than 2.00.

 In the third quarter of 2015, in connection with an amendment to our United States credit facilities, we elected to prepay $5.0 million Canadian dollars (approximately $4.0 million expressed in U.S. dollars) of Facility C with cash available on hand.

In April 2016, our wholly owned subsidiary, Pioneer Electrogroup Canada Inc. (“PECI”), entered into an Amended and Restated Credit Agreement (“CAD ARCA”) with BMOBank of Montreal (“BMO”) with respect to our existing Canadian credit facilities (as amended and restated, the “Canadian Facilities”) that replaced and superseded all of our businesses’ prior financing arrangements with the bank. This CAD ARCA extended the maturity date of our Canadian Facilities to July 31, 2017. Additionally, defaults relating to the breach of certain financial covenants under the prior financing arrangements with the bank existing as of December 31, 2015 were waived by BMO. On March 15, 2017, theThe CAD ARCA was further amended (the “2017 CAD ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 CAD ARCA Amendment”). The 2018 CAD ARCA Amendment extended the term of our Canadian Facilities to April 1, 2020. On August 8, 2019, BMO agreed to a temporary borrowing base increase until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities and the U.S. Facilities, and (ii) August 31, 2019.

 

Our Canadian Facilities provided for up to $8.1$8.2 million CADCanadian dollars (“CAD”) (approximately $6.3 million expressed in U.S. dollars) consisting of a revolving $7.0 million CAD revolving credit facility (“Facility AA”) to finance ongoing operations, a $0.5 million$471 CAD term credit facility (“Facility BB”) that financed a plant expansion, and a $0.7 million$712 USD Facility C(“Facility C”) that financed a business acquisition and the purchase and expansion of its manufacturing facilities. The 2017 CAD ARCA Amendment increased the Facility A to $8.0 million CAD, increasing the total amount of loans available under the Canadian Facilities to $9.1$9.2 million CAD.

Facility A, as amended and restated, is subject to margin criteria and borrowings bear interest at BMO’s prime rate plus 0.75% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 0.75% per annum or LIBOR plus 2.25% per annum on amounts borrowed in U.S. dollars. Pursuant to We made the 2017 CAD ARCA Amendment, Facility A will mature on July 31, 2018.

Borrowingsfinal principal payment under Facility B as amended and restated, bear interest at BMO’s prime rate plus 1.25% per annum with principal repayments becoming due on a five year amortization schedule. Pursuant to the CAD ARCA, quarterly principal repayments were reduced to $47 CAD, with a balloon payment of $141 CAD due on July 31, 2017. The 2017 CAD ARCA Amendment amended the payment schedules so that the quarterly principal payments of $47 CAD will continue after July 31, 2017 until our borrowings under the facility is fully paid on April 30, 2018.

Borrowings2018, and the outstanding principal balance under Facility C as amended and restated, bear interest at BMO’s prime rate plus 1.50% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 1.50% per annum or LIBOR plus 2.75% per annum on amounts borrowed in U.S. dollars. Pursuant towith proceeds received from the CAD ARCA, a principal repayment of $72 USD was due on June 30, 2016, and the reduced quarterly principal repayments of $36 USD was to be made beginning on October 31, 2016, with a balloon payment of $496 USD due on July 31, 2017. The 2017 CAD ARCA Amendment amended the payment schedules so that the quarterly payments of $36 USD will continue until July 31, 2018, with a balloon payment of $352 due on July 31, 2018. 

The CAD ARCA modified financial covenant testing so that testing will be performed on our consolidated financial statements. The financial covenants were changed pursuant to the CAD 2017 Amendment to require certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, which were further modified by the 2017 CAD ARCA Amendment. We are in compliance with mostsale of the financial covenant testing and, on March 6, 2017, we received a waiver from BMO on certain financial covenants existing as ofFarnham, Quebec, Canada, building in December 31, 2016.

As of December 31, 2016, we had approximately $5.2 million in U.S. dollar equivalents2018. All outstanding under our Canadian Credit Facilities. Our borrowings consisted of approximately $4.4 million outstandingamounts under Facility A $0.2 million outstanding under Facility Bwere paid in full on August 16, 2019, using proceeds from the Equity Transaction, and $0.6 million outstanding under Facility C.the underlying debt agreements were terminated.

 

As of December 31, 2015, we had approximately $1.7 million in U.S. dollar equivalents outstanding under our initial Canadian Facilities. Our borrowings consisted of approximately $0.5 million outstanding under Facility A, $0.4 million outstanding under Facility B and $0.8 million outstanding under Facility C.

United States Credit Facilities

On December 2, 2014, our existing U.S. credit facilities (the “U.S. Facilities) were amended in order to provide a $5.0 million term loan facility that was used for the acquisition of Titan. The term loan facility had principal repayments becoming due on a five year amortization schedule.

The U.S. Facilities initially required us to comply with a two-step test of financial covenants. First, as measured on a consolidated basis, we were required to comply with a maximum funded debt to adjusted EBITDA ratio of (a) 3.15x for the quarter ended December 31, 2014 and the quarter ending March 31, 2015, (b) 3.25x for the quarter ending June 30, 2015, (c) 3.65x for the quarter ending September 30, 2015, and (d) 2.75x for the quarter ending December 31, 2015 and all testing periods thereafter. Secondly, if the funded debt to adjusted EBITDA tests above are met, and our fixed charge coverage ratio is at or above 1.10x for the quarter ended December 31, 2014, and at or above 1.25x for all testing periods thereafter, then no further compliance tests were required.

Alternatively, we could comply with the financial covenant requirements of the U.S. Facilities if our U.S. operations maintained a maximum funded debt to capitalization ratio and various minimum fixed charge coverage ratios and maximum funded debt to adjusted EBITDA ratios which were set at different thresholds by time period.

Borrowings under the demand revolving credit facility (USD Facility A) bore interest, at our option, at the bank’s prime rate plus 1.00% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.25% per annum on Eurodollar loans. Borrowings under the term loan facility (USD Facility B) bore interest, at our option, at the bank’s prime rate plus 1.25% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.50% per annum on Eurodollar loans.

 

In April 2016, we entered into an Amended and Restated Credit Agreement (“US ARCA”) with BMO with respect to our existing U.S. Facilitiesfacilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank. Additionally, defaults relating to the breach of certain financial covenants under the prior financing arrangements with the bank existing as of December 31, 2015 were waived by BMO. On March 15, 2017, the(the “U.S. Facilities”).The US ARCA was further amended (the “2017 US ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 US ARCA Amendment”). The 2018 US ARCA Amendment extended the term of our US Facilities to April 1, 2020.

 

Our U.S. Facilities, as amended and restated, provided for up to $19.1 million USD consisting of a $14.0 million USD demand revolving credit facility (“USD Facility AA”) to finance ongoing operations, a $5.0 million USD term loan facility (“USD Facility BB”) that financed the acquisition of Titan, and a new $0.1 million$100 revolving credit facility provided pursuant to a MasterCard is to be used to pay for and temporarily finance our day-to-day business expenses and for no other purpose. The 2017 US ARCA Amendment increased the USD Facility A to $15.0 million, increasing the total amount of loans available under the U.S. Facilities to $20.1 million USD. A ll outstanding amounts under USD Facilities A and B were paid in full on August 16, 2019, using proceeds from the Equity Transaction, and the underlying debt agreements were terminated.

 

USD Facility A continues to bear interest, at our option, at the bank’s prime rate plus 1.00% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.25% per annum on Eurodollar loans. USD Facility A had a maturity date of July 31, 2017, which was extended to July 31, 2018 pursuant to the 2017 US ARCA Amendment.

Borrowings under USD Facility B bear interest, at our option, at U.S. base rate plus 1.25% per annum on U.S. prime loans, or an adjusted LIBOR rate plus 2.50% per annum on Eurodollar loans. Pursuant to the US ARCA, our quarterly principal payments were reduced to $31 USD for calendar year 2016, with the original amortization schedule continuing to apply to all quarterly principal payments made after December 31, 2016, and the final maturity date of December 2, 2019. The 2017 US ARCA Amendment reduced the scheduled quarterly principal payments to $31 USD, commencing March 31, 2017, to continue until July 31, 2018, with a balloon payment of $4,438 on July 31, 2018. 

The US ARCA modified financial covenant testing so that testing will be performed on our consolidated financial statements. The financial covenants were changed pursuant to the US ARCA to require certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, which were further modified by the 2017 US ARCA Amendment. We are in compliance with most of the financial covenant testing and on March 6, 2017, we received a waiver from BMO on certain financial covenants existing as of December 31, 2016.Capital Expenditures

 

Our obligations underadditions to property, plant and equipment were $153 during the U.S. Facilities are guaranteed by all our wholly-owned U.S. subsidiaries. In addition, we and our wholly-owned U.S. subsidiaries grantedyear ended December 31, 2019, as compared to $589 during the year ended December 31, 2018. We have no major future capital projects planned, or significant replacement spending anticipated during the rest of 2019. Additions were a security interest in substantially allresult of our assets, including 65%supporting the day to day needs of the shares of Pioneer Electrogroup Canada Inc. held by us, to secure our obligations for borrowed money under the U.S. Facilities. The U.S. Facilities also restrict our ability to incur indebtedness, create or incur liens, make investments, make distributions or dividends and enter into merger agreements for the sale of any or all our assets.

As of December 31, 2016, we had approximately $17.9 million outstanding under our U.S. Credit Facilities. Our borrowings consisted of approximately $13.3 million outstanding under USD Facility A, and $4.6 million outstanding under USD Facility B.

As of December 31, 2015, we had approximately $14.1 million outstanding under our U.S. Credit Facilities. Our borrowings consisted of approximately $9.4 million outstanding under USD Facility A, and $4.7 million outstanding under USD Facility B.Company.

 

Nexus Promissory Note

On July 25, 2012, Nexus Magneticos de Mexico, S. de R.L. de C.V., a subsidiary of Jefferson Electric, Inc., entered into a $1.7 million term loan agreement with GE CF Mexico, S.A. de C.V. The term loan from GE CF Mexico, S.A. de C.V. is payable in 60 consecutive monthly installments and bears interest, payable monthly, at a rate of 6.93% per annum. In December 2013, we elected to make a $250 advance payment against the Nexus Promissory Note. We provided a guaranty to GE CF Mexico, S.A. de C.V. of all of Nexus Magneticos de Mexico, S. de R.L. de C.V.’s obligations under the term loan agreement. During the fourth quarter of 2013, we prepaid $250 of the term loan and as of December 31, 2016 and 2015, there was approximately $0.2 million and $0.3 million outstanding, respectively.

Titan Notes Payable

In connection with the acquisition of Titan, we assumed obligations to repay the remaining holders of unsecured notes. As of December 31, 2015 these notes were fully repaid.

Capital Lease Obligations

 

As of December 31, 20162019 and 2015,December 31, 2018, we had an immaterial amount of capital lease obligations outstanding that were assumed in connection with the acquisition of Titan.


Capital Expenditures

Our additions to property, plant and equipment were $0.7 million during the year ended December 31, 2016, as compared to $1.1 million during the year ended December 31, 2015.

Factors That May Affect Future Operations

 

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

 

Off Balance Sheet Transactions and Related Matters

 

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

 

New Accounting Pronouncements

 

The information required by this Item is provided in “Note 2. Summary of Significant Accounting Policies” to our audited financial statements for the year ended December 31, 20152019 included in this Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

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

In May 2014, the Financial Accounting Standards Board (“FASB”) issued update 2014-09, Accounting Standards CodificationUpdate (“ASC”ASU”) 606, No. 2014-09, Revenue from Contracts with Customers. This guidance is a comprehensive new(Topic 606), or ASU 2014-09, which supersedes nearly all existing revenue recognition model that requires a companyguidance under U.S. GAAP. Since then, the FASB has also issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principals versus Agent Considerations, ASU 2016-04, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, and ASU 2017-13 Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Recession of Prior SEC Staff Announcements and Observer Comments, which further elaborate on the original ASU No. 2014-09.The core principle of these updates is to recognize revenue to depict the transfer ofrevenues when promised goods or services are transferred to a customer atcustomers in an amount that reflects the consideration itto which an entity expects to receive in exchangebe entitled for those goods or services. Accounting Standards Update (“ASU”)ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgmentjudgments and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. This standard is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Management is still assessing the impact of adoption on its consolidated financial statements. 

In July 2015, the FASB madeapproved a decision to deferone-year deferral of the effective date of the new standard for one year and permitto January 1, 2018, with early adoption to be permitted as of the original effective date.  The Company is currently reviewing itsdate of January 1, 2017. Once this standard becomes effective, companies may use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures) (the “modified retrospective approach”).  We completed a review of our various revenue streams from itswithin our two reportable segments: (i)segments, T&D Solutions and (ii) Critical Power. Concurrently, throughWe have gathered data to quantify the useamount of various data gathering methods, we are categorizingsales by type of revenue stream and categorized the types of sales for our business units for the purpose of comparing how we currently recognize revenue forto the purpose of quantifyingnew standard in order to quantify the impact if any,of this ASU. We have made policy elections within the amended standard that this new standard willare consistent with our current accounting. We adopted ASU 2014-09 in our first quarter of 2018 using the modified retrospective approach. We have on our consolidated financial statements and we have not yet determined the method by which we will adopt the standard in 2018.  

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This standard amends Topic 330, Inventory, which currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. When this standard is adopted, an entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  We do not expect material impactperformed a quantitative assessment of adopting ASU No. 2015-11 on2014-09 and concluded that there was no material impact to our consolidated financial statements.

In November 2015,statements other than enhanced disclosures and no changes to the FASB issued No. 2015-17, Income Taxes (Topic 740), which requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by ASU No. 2015-17. ASU No. 2015-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. A reporting entity may apply the provisions of ASU No. 2015-17 prospectively or retrospectively to all prior periods presented in the financial statements. The Company retrospectively adopted ASU No. 2015-17 in 2015 and has reflected the impact in the current and prior years in its statement of financial position.opening retained earnings.

 

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


In AprilAugust 2016, the FASB issued ASU No. 2016-09, 2016-15, “Compensation-Stock Compensation (Topic 718)Statement of Cash Flows , Improvements(Topic 230): Classification of Certain Cash Receipts and Cash Payments”. The purpose of Update No. 2016-15 is to Employee Share-Based Payment Accounting”. Under ASU No. 2016-09, companies will no longer record excess tax benefitsreduce the diversity in practice in presentation and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit inclassification of the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity onfollowing items within the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employerflows: debt prepayments or debt extinguishment costs, settlement of zero coupon debt instruments or other debt instruments with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value upcoupon interest rates that are insignificant in relation to the amounteffective interest rate of taxes owed using the maximum statutory tax rateborrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investments and beneficial interests in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statementsecuritization transactions. It also addresses classification of transactions that have characteristics of more than one class of cash flows. Under current GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when itUpdate No. 2016-15 is likely to change, as is currently required. The amendments of this ASU are effective for reportingannual periods beginning after December 15, 2017, and a retrospective transition method is required. We adopted ASU 2016-15 in our first quarter of 2018 using the retrospective approach. The adoption of ASU 2016-15 did not have a material impact on our consolidated statements of cash flows.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740)”: Intra-Entity Transfers of Assets Other Than Inventory. ASU No. 2016-16 requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized when the intra-entity transfer occurs rather than deferring recognition of income tax consequences until the transfer was made with an outside party. We adopted ASU 2016-16 in the first quarter of 2018 using a modified retrospective approach. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment”. This standard was established to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company recorded an impairment charge of $3.0 million to the goodwill at the TESI business unit in 2019, partially as a result of the loss of the Verizon agreement, which is recorded in continuing operations within selling, general, and administrative expense.

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

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” that eliminates, amends, and adds certain disclosure requirements for fair value measurements. The ASU is effective for all annual and interim periods beginning January 1, 2020, with early adoption permitted but all ofpermitted. The Company is currently evaluating the guidance must be adopted in the same period. We do not expect material impact of adopting this ASU No. 2016-09 on ourits consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, 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.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

28  

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Page

Consolidated Financial Statements for the Years Ended December 31, 20162019 and 20152018

Report of Independent Registered Public Accounting Firm

35

30

Consolidated Statements of Operations

36

31

Consolidated Statements of Comprehensive LossIncome (Loss) 

37

32

Consolidated Balance Sheets

38

33

Consolidated Statements of Cash Flows

39

34

Consolidated Statements of Stockholders’ Equity

40

35

Notes to the Consolidated Financial Statements

41

36


Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Pioneer Power Solutions, Inc.

Fort Lee, New Jersey

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Pioneer Power Solutions, Inc., (the “Company”) and subsidiaries as of December 31, 20162019 and 2015 and2018, the related consolidated statements of operations and comprehensive loss,income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2016.  2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Power Solutions, Inc., at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

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

New York, NY New York

March 29, 2017 

30, 2020

35 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Operations

(In thousands, except per share data)

 

  For the Years Ended December 31,
  2016 2015
Revenues $114,402  $106,522 
Cost of goods sold  90,991   85,085 
  Gross profit  23,411   21,437 
Operating expenses        
  Selling, general and administrative  19,994   21,527 
  Restructuring, integration and impairment  2,426   5,577 
  Foreign exchange gain  (364)  (367)
    Total operating expenses  22,056   26,737 
Operating income (loss)  1,355   (5,300)
  Interest expense  1,736   748 
  Other (income) expense  (205)  2,535 
Income (loss) before taxes  (176)  (8,583)
Income tax expense (benefit)  887   (2,702)
Net loss $(1,063) $(5,881)
         
Net loss per common share:        
  Basic $(0.12) $(0.76)
  Diluted $(0.12) $(0.76)
         
Weighted average common shares outstanding:        
  Basic  8,700   7,746 
  Diluted  8,700   7,746 

  For the Year Ended
  December 31,
  2019 2018
Revenues $20,582  $20,127 
Cost of goods sold  19,417   18,233 
Gross profit  1,165   1,894 
Operating expenses        
Selling, general and administrative  12,918   11,019 
Total operating expenses  12,918   11,019 
Loss from continuing operations  (11,753)  (9,125)
Interest expense  396   916 
Gain on sale of subsidiaries  4,207   —   
Other expense  2,817   64 
Loss before taxes  (10,759)  (10,105)
  Income tax expense (benefit)  1,278   (796)
Net loss from continuing operations  (12,037)  (9,309)
Discontinued operations (Note 7)        
(Loss) income from operations of discontinued business units  (2,351)  4,744 
Gain on sale of discontinued subsidiaries  13,686   —   
Income tax expense  737   1,099 
Income from discontinued operations, net of income taxes  10,598   3,645 
Net loss $(1,439) $(5,664)
         
Earnings (loss) per share:        
Basic        
Loss from continuing operations $(1.38) $(1.07)
Income from discontinued operations  1.21   0.42 
Net loss $(0.17) $(0.65)
         
Diluted        
Loss from continuing operations $(1.38) $(1.07)
Income from discontinued operations  1.21   0.42 
Net loss $(0.17) $(0.65)
         
Weighted average common shares outstanding:        
  Basic  8,726   8,726 
  Diluted  8,726   8,726 

  

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

statements.

36



PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Comprehensive LossIncome (Loss)

(In thousands)

 

 For the Year Ended
 For the Years Ended December 31, December 31,
 2016 2015 2019 2018
Net loss $(1,063) $(5,881) $(1,439) $(5,664)
Other comprehensive income (loss)                
Foreign currency translation adjustments  (37)  (2,468)  4,766   (161)
Amortization of net prior service costs and net actuarial losses, net of tax  (157)  124   1,145   62 
Other comprehensive loss  (194)  (2,344)
Comprehensive loss $(1,257) $(8,225)
Other comprehensive income (loss)  5,911   (99)
Comprehensive income (loss) $4,472  $(5,763)

 

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

32  

 

37

PIONEER POWER SOLUTIONS, INC.

Consolidated Balance Sheets

(In thousands)

  December 31,
  2016 2015
ASSETS    
Current assets    
Cash and cash equivalents $246  $648 
Accounts receivable, net  17,508   14,223 
Inventories, net  26,147   17,663 
Income taxes receivable  72   576 
Prepaid expenses and other current assets  2,215   1,924 
Total current assets  46,188   35,034 
Property, plant and equipment, net  6,591   7,349 
Deferred income taxes  5,659   3,642 
Other assets  830   827 
Intangible assets, net  8,168   9,956 
Goodwill  9,972   10,068 
Total assets $77,408  $66,876 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities        
Bank overdrafts $1,200  $1,923 
Revolving credit facilities  17,689   9,874 
Short term borrowings  3,973   —   
Accounts payable and accrued liabilities  18,139   20,030 
Current maturities of long-term debt and capital lease obligations  1,379   6,037 
Income taxes payable  1,360   237 
Total current liabilities  43,740   38,101 
Long-term debt, net of current maturities  4,005   165 
Pension deficit  172   63 
Other long-term liability  892   372 
Deferred income taxes  2,400   781 
Total liabilities  51,209   39,482 
Stockholders’ equity        
Preferred stock, par value $0.001; 5,000,000 shares authorized; none issued  —     —   
Common stock, par value $0.001; 30,000,000 shares authorized; 8,699,712 shares issued and outstanding  9   9 
Additional paid-in capital  23,215   23,153 
Accumulated other comprehensive loss  (5,863)  (5,669)
Retained earnings  8,838   9,901 
Total stockholders’ equity  26,199   27,394 
Total liabilities and stockholders’ equity $77,408  $66,876 

 

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

38

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Cash Flows 

(In thousands) 

  Year Ended December 31,
  2016 2015
Operating activities    
Net loss $(1,063) $(5,881)
Depreciation  1,341   1,342 
Amortization of intangible assets  1,746   1,817 
Amortization of debt issuance cost  235   128 
Deferred income tax benefit  (405)  (3,121)
Gain on purchase of notes  —     (150)
Change in receivable reserves  352   170 
Change in inventory reserves  (86)  26 
Accrued pension  (53)  (127)
Stock-based compensation  62   231 
Impairments of fixed assets  —     2,581 
Loss on disposition of fixed assets  74   41 
Intangible asset impairment  110   428 
Imputed interest expenses  —     31 
Foreign currency remeasurement loss  (7)  (32)
Changes in current operating assets and liabilities:        
Accounts receivable  (3,560)  (2,377)
Inventories  (8,244)  (4,866)
Prepaid expenses and other assets  (153)  (175)
Income taxes  1,660   (285)
Accounts payable and accrued liabilities  (1,467)  6,256 
Net cash used in operating activities  (9,458)  (3,963)
         
Investing activities        
Additions to property, plant and equipment  (668)  (1,052)
Proceeds from sale of fixed assets  50   —   
Business acquisitions, net of cash acquired  —     (2,106)
Notes receivable  —     (243)
Net cash used in investing activities  (618)  (3,401)
         
Financing activities        
(Decrease)/increase in bank overdrafts  (716)  1,923 
Short term borrowings  3,973   —   
Borrowings under debt agreement  36,394   36,365 
Repayment of debt  (29,441)  (38,261)
Payment of debt issuance costs  (251)  (61)
Net proceeds from issuance of common stock  —     4,553 
Net cash provided by financing activities  9,959   4,519 
         
Decrease in cash and cash equivalents  (117)  (2,845)
Effect of foreign exchange on cash and cash equivalents  (285)  (339)
         
Cash and cash equivalents        
Beginning of year  648   3,832 
End of period $246  $648 
         
Supplemental cash flow information:        
Interest paid $1,258  $606 
Income taxes paid, net of refunds  (322)  435 
Non-cash investing activities:        
Forgiveness of indebtedness due to purchaser $—    $609 
  December 31, December 31,
  2019 2018
ASSETS    
Current assets        
Cash and cash equivalents $8,213  $211 
Short term investments  936   —   
Accounts receivable, net  3,716   3,384 
Insurance receivable  1,800   —   
Inventories, net  4,554   3,678 
Prepaid expenses and other current assets  795   1,996 
Current assets of discontinued operations  —     37,656 
Total current assets  20,014   46,925 
Property, plant and equipment, net  640   878 
Deferred income taxes  —     2,837 
Other assets  7,465   3,098 
Intangible assets, net  —     124 
Goodwill  —     2,969 
Assets of discontinued operations  —     15,681 
Total assets $28,119  $72,512 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities        
Bank overdrafts $374  $78 
Revolving credit facilities  —     20,755 
Accounts payable and accrued liabilities  7,533   7,257 
Deferred revenue  1,441   1,695 
Current maturities of long-term debt  —     1,174 
Income taxes payable  543   95 
Current liabilities of discontinued operations  —     21,362 
Total current liabilities  9,891   52,416 
Long-term debt, net of current maturities  —     2,619 
Other long-term liabilities  1,793   1,599 
Deferred income taxes  —     1,592 
Long-term liabilities of discontinued operations  —     2,335 
Total liabilities  11,684   60,561 
Stockholders’ equity        
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued  —     —   
Common stock, $0.001 par value, 30,000,000 shares authorized;
8,726,045 shares issued and outstanding on December 31, 2019 and 2018
  9   9 
Additional paid-in capital  23,978   23,966 
Accumulated other comprehensive income (loss)  14   (5,897)
Retained earnings (accumulated deficit)  (7,566)  (6,127)
Total stockholders’ equity  16,435   11,951 
Total liabilities and stockholders’ equity $28,119  $72,512 

 

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

statements.

39


 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Stockholders’ EquityCash Flows

(Dollars inIn thousands)

      Accumulated    
      Additional other   Total
  Common Stock paid-in comprehensive Retained stockholders'
  Shares Amount capital loss earnings equity
Balance - January 1, 2015  7,405,962  $7  $18,370  $(3,325) $15,782  $30,834 
Net Loss  —     —     —     —     (5,881)  (5,881)
Stock-based compensation  —     —     231   —     —     231 
Foreign currency translation adjustment  —     —     —     (2,468)  —     (2,468)
Pension adjustment, net of taxes  —     —     —     124   —     124 
Issuance of common stock in connection with a public offering at $4.00 per share, net of issuance cost  1,293,750   2   4,552   —     —     4,554 
Balance - December 31, 2015  8,699,712  $9  $23,153  $(5,669) $9,901  $27,394 
Net Loss  —     —     —     —     (1,063)  (1,063)
Stock-based compensation  —     —     62   —     —     62 
Foreign currency translation adjustment  —     —     —     (37)  —     (37)
Pension adjustment, net of taxes  —     —     —     (157)  —     (157)
Balance - December 31, 2016  8,699,712  $9  $23,215  $(5,863) $8,838  $26,199 
  For the Year Ended
  December 31,
  2019 2018
Operating activities    
Net loss $(1,439) $(5,664)
Depreciation  607   1,222 
Amortization of intangible assets  150   1,460 
Amortization of right-of-use assets  680   622 
Amortization of debt issuance cost  43   75 
Amortization of imputed interest  (166)  —   
Deferred income tax expense (benefit)  1,245   (329)
Change in receivable reserves  3,093   (350)
Change in inventory reserves  361   241 
Inventory write-off from flood damage  2,688   —   
Gain on sale of subsidiaries  (17,893)  —   
Insurance receivable  (1,800)  —   
Unrealized loss on short term investments  2,750   —   
Accrued pension  114   (55)
Stock-based compensation  12   165 
Other  —     21 
Intangible asset impairment  83   1,350 
Goodwill impairment  2,969   —   
Foreign currency remeasurement loss  (100)  42 
Changes in current operating assets and liabilities:        
Accounts receivable  1,855   (1,373)
Inventories  (1,145)  (2,118)
Prepaid expenses and other assets  (250)  (708)
Income taxes  827   (93)
Accounts payable and accrued liabilities  (3)  8,323 
Customer deposits and deferred revenue  (254)  (678)
Net cash (used in)/provided by operating activities  (5,573)  2,153 
         
Investing activities        
Additions to property, plant and equipment  (153)  (589)
Proceeds from sale of subsidiairies, net  39,923   —   
Proceeds from sale of fixed assets  —     762 
Net cash provided by investing activities  39,770   173 
         
Financing activities        
Bank overdrafts  (1,439)  699 
Short term borrowings  —     (5,430)
Borrowing under debt agreement  15,329   40,599 
Repayment of debt  (40,070)  (38,848)
Payment of debt issuance cost  (15)  (18)
Write-off of notes receivable  600   —   
Principal repayments of financing leases  (635)  (414)
Net cash used in financing activities  (26,230)  (3,412)
         
Increase (decrease) in cash and cash equivalents  7,966   (1,086)
Effect of foreign exchange on cash and cash equivalents  36   1,079 
Cash and cash equivalents        
Beginning of period  211   218 
End of period $8,213  $211 
         
Supplemental cash flow information:        
Interest paid  1,106   2,603 
Income taxes paid, net of refunds  477   587 
Non-cash investing and financing activities:        
Securities received for sale of subsidiary  4,207   —   
Notes receivable recognized upon Equity Transaction  4,929   —   

 

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

statements.

40


 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

        Accumulated   Accumulated  
      Additional other compre- Cash deficit/ Total
  Common Stock paid-in hensive Dividend Retained stockholders'
  Shares Amount capital income (loss) Declared Earnings equity
Balance - December 31, 2017  8,726,045  $9  $23,801  $(5,798) $—    $(463) $17,549 
Net loss  —     —     —     —     —     (5,664)  (5,664)
Stock-based compensation  —     —     165   —     —     —     165 
Foreign currency translation adjustment  —     —     —     (161)  —     —     (161)
Pension adjustment, net of taxes  —     —     —     62   —     —     62 
Balance - December 31, 2018  8,726,045  $9  $23,966  $(5,897) $—    $(6,127) $11,951 
                             
Balance - December 31, 2018  8,726,045   9   23,966   (5,897)  —     (6,127)  11,951 
Net loss  —     —     —     —     —     (1,439)  (1,439)
Stock-based compensation  —     —     12   —     —     —     12 
Foreign currency translation adjustment  —     —     —     4,766   —     —     4,766 
Pension adjustment, net of taxes  —     —     —     1,145   —     —     1,145 
Balance - December 31, 2019  8,726,045  $9  $23,978  $14  $—    $(7,566) $16,435 

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


PIONEER POWER SOLUTIONS, INC.

Notes to Consolidated Financial Statements

1. BASIS OF PRESENTATION

 

Pioneer Power Solutions, Inc. and its wholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,” “Pioneer Power,” “we,” “our” and “us”) manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. The Company is headquartered in Fort Lee, New Jersey and operates from twelve (12)five (5) additional locations in the U.S., Canada and Mexico for manufacturing, centralized distribution, engineering, sales and administration.

 

Acquisitions

On January 16, 2015, the Company acquired substantially all the assets of Harmonics Holdings Inc. (doing business as “Harmonics Limited” or “Harmonics”), a New Haven, Connecticut based specialty provider of equipment that incorporates a patented technology for the elimination of harmonic currents in power distribution systems. See Note 3 – Acquisitions.

On August 1, 2015, the Company acquired substantially all of the assets of Pacific Power Systems Integration, Inc., a Santa Fe Springs, California based manufacturer of custom electrical power distribution and control equipment, with a specific emphasis on low voltage draw-out, metal-enclosed and metal-clad switchgear. See Note 3 – Acquisitions.

NASDAQ Listing

 

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

 

In September 2015, the Company completed a public offering and issued 1,125,000 shares of its common stock at a gross sales price of $4.00 per share, resulting in $3.9 million in net proceeds after deducting the underwriting discount and costs directly attributable to the offering. Subsequent to the end of the third quarter, on October 5, 2015, the underwriters exercised their over-allotment option to purchase an additional 168,750 shares from the Company at the public offering price of $4.00 per share, resulting in an additional $0.6 million in net proceeds after deducting the underwriting discount.

Segments

 

In determining operating and reportable segments in accordance with ASC 280, Segment Reporting (“ASC 280”), the Company concluded that it has two reportable segments, which are also our operating segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions. As a result of the restructuring plans implemented during calendar year 2015, the activities of our Pioneer Critical Power switchgear operations have been transferred to the T&D Solutions segment as of January 1, 2016. For comparison purposes, prior periods presented have been adjusted to reflect this reclassification. Financial information about the Company’s segments is presented in Note 1617 – Business Segment, Geographic and Customer Information.

 

ClassificationSale of ExpensesTransformer Business Units

 

AsOn June 28, 2019, the Company implemented the remediation plans discussed under the heading “Item 9A. Controlsentered into a Stock Purchase Agreement (the “Stock Purchase Agreement”), by and Procedures” of this Annual Report on Form 10-K,among the Company, has determined that there were inconsistencies in classificationElectrogroup Canada, Inc., a wholly owned subsidiary of expenses between its business units. As a result, 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 reclassifiedrevalued the notes for an appropriate imputed interest rate, resulting in a reduction to the value of the notes at December 31, 2019 of $651, for a carrying value of $5.1 million, which is included within other long term assets as of December 31, 2019. After certain adjustments and expenses of sale, the Company received net consideration from costthe sale of goods$45.2 million. Subsequent to finalizing the working capital adjustment during the fourth quarter of 2019 the gain recognized on the Equity Transaction amounted to $13.7 million and is reflected within discontinued operations.

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

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

Presentation

The accompanying audited consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of December 31, 2019. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the audited consolidated financial statements have been included.


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

Liquidity

The accompanying financial statements have been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At December 31, 2019, we had $8.2 million of cash and cash equivalents on hand, generated primarily from the completion of the Equity Transaction, and working capital of $10.1 million. We have historically met our cash needs through a combination of cash flows from operating expensesactivities 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, 2016. The2019, 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.

During the quarter ended September 30, 2019 the Company has madedeclared a cash dividend of approximately $12 million in the same reclassificationaggregate which was subsequently enjoined by ruling of the courts in connection with the litigation with Myers Power Products, Inc. As a result of the court order, the cash dividend was cancelled by the Company during the fourth quarter of 2019. However, the timing and amount of future dividends could require the Company to seek capital funding to support its ongoing operations as the Company’s historical credit arrangements were terminated in connection with the Equity Transaction.

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 resultsuncertainties 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. See Note 13 for the year ended December 31, 2015, resulting in an increase to gross profit of $332, or 0.31% as a percentage of sales as presented for this period.further discussion.

 

Rounding

 

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

General

 

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

 

Principles of Consolidation

 

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

 

Reclassifications

 

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

 

41

Use of Estimates

 

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

 

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

 

Revenue Recognition

 

Revenue is recognized when (1) persuasive evidence of an arrangementa contract with a customer exists , (2) delivery occurs, (3) the sales price is fixed or determinable, (4) collectability is reasonably assured and (5) customer acceptance criteria, if any, has been successfully demonstrated. Revenue is recognizedperformance obligations promised in a contract are identified based on the sale of goods, when the significant risks and rewards of ownership have beenproducts or services that will be transferred to the buyer upon delivery, provided that customer , (3) the Company maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold. There are no further obligations on the part of the Company subsequent to revenue recognition, except when customers have the right of return or when the Company warrants the product. The Company records a provision for future returns, based on historical experience at the time of shipment of products to customers. The Company warrants some of its products against defects in design, materials and workmanship for periods ranging primarily from one to ten years depending on the model. The Company records a provision for estimated future warranty coststransaction price is determined based on the historical relationshipconsideration to which the Company will be entitled in exchange for transferring products or services to the customer , (4) the transaction price is allocated  to the performance obligations in the contract and (5)the Company satisfies performance obligations . Substantially all of warranty claims to salesour revenue is recognized at thea point of time, of shipment of products to customers. The Company periodically reviews the adequacy of its product warranties and adjusts, if necessary, the warranty percentage and accrued warranty reserve for actual experience.

Service revenue primarily consists of preventative maintenance and monitoring services, as well as the provision of after-market support relatedpromised product passes to equipment salesthe customer. Service revenues include maintenance contracts that are recognized over time based on the contract term and project commissioning service revenue. Revenues from theserepair services which are recognized as services are recognized when the service is performed and the customer has accepted the work.delivered.

37  

 

Cost of Goods Sold

 

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

 

Financial Instruments

 

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

The carrying amount reported in the consolidated balance sheet for shares held in CleanSpark, Inc., which are accounted for in accordance with the adoption of ASU 2016-01, of $936 included within short term investment approximates fair value as the asset has a readily determinable market value and as such it is considered a Level 1 asset. The estimated fair value of the warrants held in CleanSpark, Inc. of approximately $531 is considered a Level 3 asset due to unobservable inputs.

 

Cash and Cash Equivalents

 

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

Accounts Receivable

 

The Company accounts for trade receivables at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’scustomer's financial condition, credit history and current economic conditions. The Company writes off trade receivables when they are deemed uncollectible. The Company records recoveries of trade receivables previously written off when it receives them. Management considers the Company’s allowance for doubtful accounts, which was $0.6 million$77 and $123 as of December 31, 20162019 and 2015,2018, respectively, sufficient to cover any exposure to loss in its accounts receivable.

 

42

Long-Lived Assets

 

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

 

Finite life intangible assets consist primarily of customer relationships in multiple categories that are specific to the businesses acquired and for which estimated useful lives were determined based on actual historical customer attrition rates. The Company’s other finite life intangible assets consist of non-compete agreements, which have defined terms, certain trademarks which the Company has elected to gradually discontinue, and internally-developed software. These finite life intangible assets are amortized by the Company over periods ranging from onefour to twentyten years.

 

Long-lived assets and finite life intangible assets are reviewed for impairment whenever events or circumstances have occurred that indicate the remaining useful life of the asset may warrant revision or that the remaining balance of the asset may not be recoverable. Upon indications of impairment, or in the normal course of annual testing, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The measurement of possible impairment is generally estimated by the ability to recover the balance of an asset group from its expected future operating cash flows on an undiscounted basis. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value thereof. Determining asset groups and underlying cash flows requires the use of significant judgment. As described in Note 9, in 2015, due to relocation of Bemag, the Company recorded an impairment charge of $261 for customer relationships.

38  

 

Goodwill and Indefinite Life Intangible Assets

 

Goodwill was generated through the acquisitions made by the Company between 2010 and 2015. As the total consideration paid exceeded the value of the net assets acquired, the Company recorded goodwill for each of the completed acquisitions. At the date of acquisition, the Company performed a valuation to determine the value of the intangible assets, and the allocation of the purchase price to the assets and liabilities acquired. The goodwill is attributable to synergies and economies of scale provided to us by the acquired entity.

 

The Company tests its goodwill and indefinite-lived intangible asset for impairment at least annually (as of October 1) and whenever events or circumstances change that indicate impairment may have occurred. In 2015, the Company changed its annual testing date from December 31 to October 1. The Company believes this change in the timing of applying an accounting principle is preferable, as it allows for a more robust fair value assessment. This change in annual testing date does not delay, accelerate, or avoid an impairment charge. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant adverse change in legal factors or in the business climate of its segments; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill, the indefinite-lived intangible assets and the Company’s consolidated financial results. As described in Note 9,11, the companyCompany recorded an impairment chargecharges of $110$83 for intangible assets and $143$3.0 million against technology relatedgoodwill in 2019 and $870, $377 and $103 against technology-related industry accreditationsaccreditation, customer relationships and non-complete agreements, respectively, in 2016 and 2015, respectively. 

Reportable segments are defined in Note 1 Basis of Presentation.2018.

 

The Company tests its goodwill for impairment at the reporting unit level, which is an operating segment or a segment that is one level below its operating segments. An operating segment is defined by ASC 280-10-50 as a component of an enterprise that earns revenue and incurs expenses, of which discrete financial information is available. During the second quarter of 2015, the Company began evaluating improvement strategies to reorganize, simplify and cut costs from operations through closer business integration which reduced the number of reporting units to four in 2015. The goodwill has been assigned to the reporting unit to which the value relates. ThreeTwo of the Company’s four reporting units have goodwill. The Company tests goodwill by estimating the fair value of the reporting unit using a discounted cash flow model and other valuation techniques, but may elect to perform a qualitative analysis. A quantitative analysis is used to determine an estimated fair value representing the amount at which a reporting unit could be bought or sold in a current transaction between willing parties on an arms-length basis. The estimated fair value of each reporting unit is derived using a discounted cash flow method based on market and reporting unit-specific assumptions, including estimated future revenues and expenses, weighted average cost of capital, capital expenditures, the useful life over which cash flows will occur and other assumptions which are considered reasonable and inherent in discounted cash flow analysis. A qualitative analysis is performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative assessment.

 

43

Indefinite lifeAs of December 31, 2019, the Company has written the value of all of its goodwill and intangible assets consist primarily of trademarks. The fair value of these assets areto zero because the Company determined using a royalty relief methodology similar to that employed when the associated assetsthey were acquired, but using updated estimates of future sales, cash flows and profitability.impaired.

 

During the Company’s 2016 annual impairment tests of goodwill and indefinite life intangible assets, management identified an impairment of an indefinite-lived intangible asset in its T&D segment and recognized an impairment charge of $110 since the asset was no longer actively used by the Company. The Company’s 2015 quantitative impairment test identified no impairment of goodwill or indefinite life intangibles. See Note 9 ‒ Goodwill and Other Intangible Assets for further information on the impairment charge of $261 and $143 for customer relationship and technology related industry accreditations recorded in 2015 due to relocation of Bemag.

Foreign Currency Translation

The functional currency for the Companies foreign subsidiaries is the local currency in which the entity is located. The financial statements of all subsidiaries with a functional currency other than the U.S. dollar have been translated into U.S. dollars. All assets and liabilities of foreign operations are translated into U.S. dollars using year-end exchange rates, and all revenues and expenses are translated at weighted average rates during the respective period. The U.S. dollar results that arise from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the cumulative currency translation adjustments in accumulated other comprehensive income in stockholders’ equity. Gains and losses resulting from foreign currency transactions are included in earnings.

Income Taxes

 

The Company accounts for income taxes under the asset and liability method, based on the income tax laws and rates in the countries in which operations are conducted and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company believes that the deferred tax asset recorded as of December 31, 20162019 and 2015,2018 is realizable through future reversals of existing taxable temporary differences and future taxable income. If the Company was to subsequently determine that it would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made. The Company will continue to assess the adequacy of the valuation allowance on a quarterly basis. The Company’s judgments and tax filings are subject to audit by various taxing authorities.

 

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

 

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

39  

 

Unrecognized Tax Benefits

 

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

 

Additionally, ASC 740 requires the Company to accrue interest and related penalties, if applicable, on all tax positions for which reserves have been established consistent with jurisdictional tax laws. See Note 1416 ‒ Income Taxes.

 

44

Share-Based Payments

 

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

 

Employee Benefit Plan

The Company sponsors a defined benefit plan as described in Note 15 ‒ Pension Plan. The cost of pension benefits earned by employees is actuarially determined using the accumulated benefit method and a discount rate, used to measure interest cost on the accrued employee future benefit obligation, based on market interest rates on high-quality debt instruments with maturities that match the timing and benefits expected to be paid by the plan. Plan assets are valued using current market values and the expected return on plan assets is based on the net asset value of the plan assets. The costs that relate to employee current service are charged to income annually.

The transitional obligation created upon adoption of the FASB ASC 715 “Compensation – Retirement Benefits” is amortized over the average remaining service period of employees. For a given year, unrecognized actuarial gains or losses are recognized into income if the unamortized balance at the beginning of the year is more than 10% of the greater of the plan asset or liability balance. Any unrecognized actuarial gain or loss in excess of this threshold is recognized in income over the remaining service period of the employees. 

The Company reflects the funded status of its defined pension plans as a net asset or net liability in its balance sheet, with an offsetting amount in accumulated other comprehensive income, and recognizes changes in that funded status in the year in which the changes occur through comprehensive income.

Inventories

 

Inventories are stated at the lower of cost or marketnet realizable value using first-in, first-out (FIFO) or weighted-average methods and include the cost of materials, labor and manufacturing overhead. The Company uses estimates in determining the level of reserves required to state inventory at the lower of cost or market. The Company estimates are based on market activity levels, production requirements, the physical condition of products and technological innovation. Changes in any of these factors may result in adjustments to the carrying value of inventory. See Note 6.8 - Inventories.

 

Income (Loss) Per Share

 

Basic income (loss) per share is computed by dividing the income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing the income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. (see(See Note 1718 ‒ Basic and Diluted Net Income (Loss)Loss Per Share).

 

Fair Value Measurements

 

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

 

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

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

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

 

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

45

 

The fair value represents management’s best estimates based on a range of methodologies and assumptions. The carrying value of receivables and payables arising in the ordinary course of business approximate fair value because of the relatively short period of time between their origination and expected realization. These items have been classified as Level 1.

 

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

Reclassification of Long-Term Debt


 

The financial statements included in this annual report have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilitiescarrying amount reported in the normal courseconsolidated balance sheet for shares held in CleanSpark, Inc. of business.  Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments$936 included within short term investment approximates fair value as the asset has a readily determinable market value and as such it is considered a Level 1 asset. The estimated fair value of the warrants held in our business, liquidity, capital requirements and that our credit facilities with our lender will remain availableCleanSpark, Inc. of approximately $531 is considered a Level 3 asset due to us and will not need to be replaced. In addition, we did not duly pay and discharge our payroll tax obligations in a manner compliant with the covenant requirements of our U.S. Facilities during 2014 and 2015. (see Note 5 – Other (Income) / Expense).unobservable inputs.

 

Based on these determinations,  we began discussions with our lender and secured a waiver of defaults dated November 18, 2015 with respect to our U.S. credit agreement and our Canadian letter loan agreement, to suspend testing of the existing financial defaults until January 31, 2016 and to permit borrowings of up to $3.0 million by our Canadian subsidiary in order to provide financial support to our U.S. operations, subject to the satisfaction of new financial reporting requirements and other conditions. This waiver was subsequently extended to April 30, 2016, and the amount of borrowings increased up to $5.0 million by our Canadian subsidiary in order to provide financial assistance to our US operations. As a result of this noncompliance, all outstanding long-term debt with the lender was classified as a current liability at December 31, 2015.

On April 29, 2016 we executed an amended and restated credit agreement (“ARCA”) of our credit facilities from the Bank for Montreal. With the execution of the ARCA, portions of the credit facilities were classified as long term indebtedness. This ARCA contains revised covenants and funding amounts that finance our cash requirements for anticipated operating activities, restructuring and integration plans, capital improvements and scheduled principal repayments of long-term debt. The ARCA was to expire on July 31, 2017. On March 15, 2017, the ARCA was extended to July 31, 2018. Accordingly, long-term debt is classified as a non-current liability at December 31, 2016. 

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.

 

Revenue from Contracts with Customers. In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

In July 2015, the FASB made a decision to defer the effective date of the new standard for one year and permit early adoption as of the original effective date.  The Company is currently reviewing its various revenue streams from its two reportable segments: (i) T&D Solutions and (ii) Critical Power. Concurrently, through the use of various data gathering methods, we are categorizing the types of sales for our business units for the purpose of comparing how we currently recognize revenue for the purpose of quantifying the impact, if any, that this new standard will have on our consolidated financial statements and we have not yet determined the method by which we will adopt the standard in 2018. 

Simplifying the Measurement of Inventory.Income Taxes. In July 2015,December 2019, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This standard amends Topic 330, Inventory, which currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. When this standard is adopted, an entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company does not expect material impact of adopting ASU No. 2015-11 on its consolidated financial statements.

2019-12, Balance Sheet Classification of Deferred Taxes. In November 2015, the FASB issued No. 2015-17, Income Taxes (Topic 740), which requires that deferred tax liabilitiessimplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and assets be classified as non-current in a classified statement of financial position.also clarifies and amends existing guidance to improve consistent application. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by ASU No. 2015-17. ASU No. 2015-17 is effective for fiscal yearsall annual and interim periods beginning after December 15, 2016, including interim periods within those fiscal years,2020, with early adoption permitted. A reporting entity may apply the provisions of ASU No. 2015-17 prospectively or retrospectively to all prior periods presented in the financial statements. The Company retrospectively adopted ASU No. 2015-17 in 2015 and has reflectedis currently evaluating the potential impact inbut does not anticipate there will be an impact of the current and prior years inadoption of this standard on its statementresults of a material impact to the consolidated financial position.statements once implemented.

 

46

Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires, among other things, a lessee to recognize a liability representing future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, a lessee will be required to recognize at inception a right-of-use asset and a lease liability equal to the net present value of the lease payments, with lease expense recognized over the lease term on a straight-line basis. For leases with a term of twelve months or less, ASU 2016-02 allows a reporting entity to make an accounting policy election to not recognize a right-of-use asset and a lease liability, and to recognize lease expense on a straight-line basis. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Upon adoption, a reporting entity should apply the provisions of ASU 2016-02 at the beginning of the earliest period presented using a modified retrospective approach, which includes certain optional practical expedients that an entity may elect to apply. The Company does not expect material impact on its consolidated financial statementsWe adopted this standard in our first quarter of adopting ASU 2016-02.2018 using the modified retrospective approach.

 

Share-Based CompensationRevenue from Contracts with Customers. . In April 2016,May 2014, the FASB issued ASU No. 2016-09, 2014-09, Compensation-StockRevenue from Contracts with Customers(Topic 606), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. Since then, the FASB has also issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principals versus Agent Considerations, ASU 2016-04, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, and ASU 2017-13 Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Recession of Prior SEC Staff Announcements and Observer Comments, which further elaborate on the original ASU No. 2014-09.The core principle of these updates is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgments and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In July 2015, the FASB approved a one-year deferral of the effective date to January 1, 2018, with early adoption to be permitted as of the original effective date of January 1, 2017. Once this standard becomes effective, companies may use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures) (the “modified retrospective approach”).  We completed a review of our various revenue streams within our two reportable segments, T&D Solutions and Critical Power. We have gathered data to quantify the amount of sales by type of revenue stream and categorized the types of sales for our business units for the purpose of comparing how we currently recognize revenue to the new standard in order to quantify the impact of this ASU. We have made policy elections within the amended standard that are consistent with our current accounting. We adopted ASU 2014-09 in our first quarter of 2018 using the modified retrospective approach. We have performed a quantitative assessment of adopting ASU 2014-09 and concluded that there was no material impact to our financial statements other than enhanced disclosures and no changes to the opening retained earnings.

Stock Compensation. In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718),: Improvements to EmployeeNonemployee Share-Based Payment Accounting”. Under ASU No. 2016-09, companies will no longer record excess tax benefitsAccounting. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit inservices from nonemployees. An entity should apply the income statementrequirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the APIC pools willattribution 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 eliminated. In addition, ASU No. 2016-09 eliminatesused 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 requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companiesissuer or (2) awards granted in conjunction with selling goods or services to present excess tax benefitscustomers as an operating activity on the statementpart of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualifycontract accounted for under Topic 606, Revenue from Contracts with Customers. The updated standard is effective for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The Amendments of this ASU are effective for reporting periodsCompany beginning after December 15, 2016,2018, including interim periods within that fiscal year. Early adoption of the new guidance is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company adopted this guidance on January 1, 2019. The adoption of this ASU did not have a material impact on the consolidated financial statements.

41  

Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements for fair value measurements. The ASU is effective for all annual and interim periods beginning January 1, 2020, with early adoption permitted but all of the guidance must be adopted in the same period. permitted. The Company does not expectanticipate material impact of adopting this ASU No. 2016-09 on its consolidated financial statements.

 

3. ACQUISITIONSMeasurement of Credit Losses on Financial Instrument. In June 2016, the FASB issued amended guidance to ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. This amended guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. We do not expect that the amended guidance will have a material effect on our consolidated financial statements and related disclosures.

 

Since January 1, 2015, the Company has acquired two businesses in the U.S. These acquisitions have allowed the Company to expand its products and service capabilities and offer its customers a greater breadth of solutions for their electrical power distribution and backup power needs. A summary of the acquisitions is as follows:3. DIVESTITURES

 

Business AcquiredClosingNet Assets Acquired
(in 000s)
SegmentPrimary Form of Consideration
Harmonics Holdings

Pioneer Critical Power, Inc.

01/16/15      1,043T&D SolutionsSeller note/debt forgiveness 
Pacific Power Systems Integration, Inc.08/01/15      2,013T&D SolutionsCash 
      3,056

Each of the acquired businesses has been included in the Company’s results of operations since the date of its respective closing.

 

On January 16, 2015,22, 2019, Pioneer Critical Power, Inc., a Delaware corporation (“PCPI”), a wholly-owned subsidiary of the Company through its Jefferson Electric,within the T&D Solutions segment, CleanSpark and CleanSpark Acquisition, Inc. subsidiary, acquired substantially all the assets comprising the business of Harmonics Holdings Inc., a Delaware corporation (“Harmonics”Merger Sub”), consisting primarilyentered into an Agreement and Plan of intellectual property, accounts receivableMerger (the “Merger Agreement”), pursuant to which, among other things, Merger Sub merged with and machinery and equipment. Harmonics isinto PCPI, with PCPI becoming a Connecticut-based specialty providerwholly-owned subsidiary of equipment that incorporates a patented technology for the elimination of harmonic currents in power distribution systems. The transaction was accounted for under the acquisition method of accountingCleanSpark and the Company fundedsurviving company of the acquisition from available cash on hand, a seller note and forgiveness of debt.  merger (the “Merger”).

 

On August 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 Merger Agreement also contains representations, warranties and covenants of the parties customary for transactions similar to those entered into by the Merger Agreement. Such representations and warranties are made solely for purposes of the Merger Agreement and, in some cases, may be subject to qualifications and limitations agreed to by the parties in connection with the negotiated terms of the Merger Agreement and may have been qualified by disclosures that were made in connection with the parties’ entry into the Merger Agreement. The share quantities and exercise prices of warrants reflect the 10:1 2015,stock split completed by CleanSpark in December 2019.

In connection with the Merger Agreement, the Company, through itsCleanSpark 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. subsidiary, acquired, 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 all the assets comprising the business of Pacific Power Systems Integration, Inc. (“Pacific”). Located in Santa Fe Springs, California, Pacific is a manufacturer of low and medium voltage switchgear, primarily serving customerssimilar to that presented in the oil refining, mass transit and utility sectors.Myers Powers Case that are brought against CleanSpark or the surviving company of the Merger after the closing of the Merger. The transaction was accounted for underIndemnity Agreement expires five years from the acquisition methoddate of accounting andthe Indemnity Agreement.

In connection with entry into the Merger Agreement, the Company fundedand CleanSpark entered into a Contract Manufacturing Agreement (the “Contract Manufacturing Agreement”), dated as of January 22, 2019, pursuant to which the cash considerationCompany 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 acquisition with debt drawn under oneProducts 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 revolving credit facilities.cost. The Contract Manufacturing Agreement has a term of 18 months and may be extended by mutual agreement of the Company and CleanSpark.

 

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


47

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

 

The following table summarizes the consideration paid for the Harmonics and Pacific acquisitions and presents the allocation of the amount to the net tangible and identifiable intangible assets based on their estimated fair values as of January 16, 2015 and August 1, 2015, respectively:

  Harmonics Acquisition  Pacific Acquisition 
Purchase Price        
Cash consideration $93  $2,013 
Forgiveness of trade payables and indebtedness due to purchaser  609    
Deferred payments due to seller  341    
  $1,043  $2,013 
         
Initial Purchase Price Allocation        
Current assets $21  $18 
Property, plant and equipment  4   182 
Identifiable intangible assets  995   1,562 
Goodwill  23   251 
Net assets acquired 1,043  2,013 

The acquisitionsMerger resulted in the recognitiondeconsolidation of goodwillPCPI and a gain of $4.2 million in the first quarter of 2019. The fair value of the investment in the common stock of CleanSpark was determined using quoted market prices and warrants were established using a Black Scholes model.

From the date of sale through December 31, 2019, the estimated fair value of the warrants and CleanSpark common stock decreased to $1.4 million and an unrealized mark to market loss of $2.8 million was recognized within other expense for the period ended December 31, 2019. 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. See Note 1 for details related to the sale of the Transformer business.

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 December 31, 2019, the Company’s consolidatedfinancial 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 because the purchase prices exceeded the net tangible asset values, and reflects the future net incomefor cash and cash flow potentialequivalents, receivables, inventories, accounts payable and accrued expenses and other current liabilities approximate their respective fair values because of the acquired businesses.short-term nature of these accounts. The share quantities and exercise prices of warrants reflect the 10:1 stock split completed by CleanSpark in December 2019.

 

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

  December 31, 2019
Fair Value Measurements Using
  Quoted prices
in active markets for identical assets
(Level 1)
 Significant
other observable
inputs
(Level 2)
 Significant
unobservable
inputs
(Level 3)
 Assets             
 Common shares  $936  $—    $—   
 Warrants   —     —     531 

Level 3 Valuation

The warrant asset (which relates to warrants to purchase shares of intangible assets arising fromcommon stock) is marked-to-market each reporting period with the acquisitionchange in fair value recorded to other income (expense) in the accompanying statements of Harmonicsoperations 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 December 31, 2019, include (i) volatility of 282%, (ii) risk free interest rate of 1.66%, (iii) strike price ($16.00 and Pacific, their respective amortization periods,$20.00), (iv) fair value of common stock ($5.40), and (v) expected life of 4.07 years.

The table presented below is a summary of changes in the amountfair value of amortization expense recognizedthe Company’s Level 3 valuation for the CleanSpark warrants for the year ended December 31, 2019:

  CleanSpark
Warrants
Balance at December 31, 2018 $—   
Issuance of warrants  1,479 
Change in fair value  (948)
Balance at December 31, 2019 $531 

No other changes in valuation techniques or inputs occurred during the year ended December 31, 2016:

  Weighted Average
Amortization Years
  Harmonics Acquisition 
Acquired Intangible Assets        
Customer relationships  10  $319 
Non-compete agreements  5   75 
Developed technology  10   492 
Trademark  Indefinite   26 
   Technology-related industry accreditations  Indefinite   83 
      $995 
         
Amortization expense recorded during the year ended December 31, 2016     $93 

  Weighted Average
Amortization Years
  Pacific Acquisition 
Acquired Intangible Assets (a)        
Customer relationships  13  $512 
Non-compete agreements  7   180 
   Technology-related industry accreditations  Indefinite   870 
      $1,562 
         
Amortization expense recorded during the year ended December 31, 2016     $62 

(a) In connection with completing its purchase price allocation, certain2019. No transfers of assets were identifiedbetween Level 1 and reclassed in 2016.

48

The Company incurred approximately $13Level 2 of transaction costs related to the Harmonics acquisition, and $43 related to the Pacific acquisition,fair value measurement hierarchy occurred during the year ended December 31, 2015 that2019.

5. REVENUES

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are reflected inpresented under Topic 606. There was no adjustment to opening retained earnings due to the Company’s statementimpact of operations as a period expense.adopting Topic 606.

 

The Company reported Harmonicsadopted ASC 606 using the modified retrospective method.

Nature of our products and Pacific resultsservices

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 operationsemergency. 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 T&D Solutions segmentcustomer 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 year ended December 31, 2016product transfers to the customer and 2015.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: 

 

There were no acquisitions in 2016.1)            Identify the contract with a customer

 

4. RESTRUCTURING AND IMPAIRMENTA 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.

 

During2)          Identify the second quarterperformance 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 2015,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, began evaluating improvement strategies intendedand 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 reorganize, simplifydetermine whether promised products or services are capable of being distinct and reduce costs from operationsdistinct 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 closer business integration, pursuantpast 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 restructuring and integration plan to be carried out in stages with an original completion date by mid-2016.customer.

 

In August 2015, management finalizedSubstantially all of our revenue from the sale of switchgear and commenced executionpower generation equipment is recognized at a point of its plan, which included a consolidationtime. Revenues are recognized at the point in time that the customer obtains control of the Company’s six manufacturing facilities into three locations, workforce reductions, staff relocationsgood which is when it has taken title to the products and measures to more closely align product lineshas assumed the risks and supply chains across business units, among other actions that have resultedrewards of ownership specified in the recognition of certain restructuring, integrationpurchase order or sales agreement. Service revenues include maintenance contracts that are recognized over time based on the contract term and impairment expenses.

During 2016, in the T&D Segment, the relocation of our Medium Voltage Transformer line was begunrepair services which are recognized as of the end of 2016, and will be completed in the first half of 2017. In the Critical Power segment, the relocation of the facility begun in 2015 and completed in 2016 resulted in additional costs incurred in 2016.services are delivered.

 

The following is a summary of the components of restructuring, integration and impairment expenses, before taxes, during the years ended December 31, 2016 and 2015:table presents our revenues disaggregated by revenue discipline:

  T&D  Critical Power    
Year Ended December 31, 2016 Segment  Segment  Total 
Lease termination and other facility costs $1,220  $  $1,220 
Business integration expenses  900      900 
Other costs  274   32   306 
Pre-tax restructuring, integration and impairment expense $2,394  $32  $2,426 

 

 

 

 

 

 

 

 

 

For the Year Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Products

 

$

10,401

 

 

$

10,327

 

Services

 

 

10,181

 

 

 

9,800

 

Total Revenue

 

$

20,582

 

 

$

20,127

 

 

For the year ended December 31, 2016, the lease termination and other facility costs include contract exit and excess production costs due to deferring relocation of Bemag. Business integration expenses include inventory obsolescence as a result of product line integration and relocation costs of Bemag’s low voltage production facility. Other costs consist primarily of cost over runs on the 2015 restructuring accruals.

  T&D  Critical Power    
Year Ended December 31, 2015 Segment  Segment  Total 
Employee severance and related costs $564  $  $564 
Lease termination and other facility costs  168   80   248 
Business integration expenses (a)  1,570      1,570 
Asset impairments  2,792      2,792 
Other costs  403      403 
Pre-tax restructuring, integration and impairment expense $5,497  $80  $5,577 

(a) Due to the reorganization, certain operations were transferred from Critical Power to T&D Segment.

For the year ended December 31, 2015, employee severance and related costs consists of retention pay and severance benefits. Lease termination and other facility costs include contract termination and exit costs. Business integration expenses include inventory obsolescence as a result of product line integration, travel, and third-party information technology costs. Asset impairments includes the write-downs of the Company’s Canadian dry-type transformer facility, excess machinery and equipment held for sale in preparation for the plant consolidations and certain intangible assets associated with products the Company no longer expects to continue to produce and sell. Other costs consist primarily of legal expenses incurred in connection with implementing the restructuring plan.

Charges associated with each action were included in restructuring, integration and impairment expenses in our consolidated statement of operations, and reflected in our table of Operating Income (Loss) by segment group in See Note 1617 – Business Segment, Geographic and Geographic Information.Customer Information.

 

49

The components and changes in the Company’s restructuring liability were as follows:

        Facility       
  Severance and  Product Line  Closure and  Asset    
  Related  Harmonization  Exit Costs  Write-downs  Total 
Restructuring liability as of January 1, 2015 $  $  $  $  $ 
Restructuring, integration and impairment expense  565   64   1,395   3,553   5,577 
Cash paid  (120)  (21)  (1,327)     (1,468)
Other           (3,553)  (3,553)
Foreign currency translation        23      23 
Restructuring liability as of December 31, 2015 $445  $43  $91     $579 
Restructuring and integration expense        2,426      2,426 
Cash paid  (332)     (1,335)     (1,667)
Other        (590)     (590)
Foreign currency translation     3         3 
Restructuring liability as of December 31, 2016 $113  $46  $592  $  $751 

5.6. OTHER (INCOME)/EXPENSE

 

Other (income) expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the year ended December 31, 2019, other expense was $2.8 million, as compared to $64 during the year ended December 31, 20162018. For the year ended December 31, 2019, included in other expense was a loss of $2.8 million related to the mark to market adjustment on the fair value of common stock and 2015 are as follows:warrants received in connection with the Merger of PCPI, CleanSpark and the Merger Sub.

44  

7. DISCONTINUED OPERATIONS

 

  Year Ended December 31, 
  2016  2015 
Payroll tax interest and penalties (abated 2016) accrued 2015  (1,050)  1,546 
Acquisition transaction and other expenses  735   1,139 
Impairment of intangible assets  110    
(Gain) on cancellation of Titan notes payable     (150)
Other (income)/expense $(205) $2,535 

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 December 31, 2019.

 

During 2015,Overview

On August 16, 2019, the Company recognized a charge of approximately $1.5 million representing estimated accrued interestcompleted the Equity Transaction pursuant to the Stock Purchase Agreement, by and potential penalties for failureamong the Company, the Disposed Companies, Nathan Mazurek, and the Buyer. Pursuant to timely file employer’s federal payroll tax returns and make the required payments thereon for all payroll periods beginning on and after January 1, 2014. Immediately upon discoveryterms of the delinquency in October 2015,Stock Purchase Agreement, the Company contactedsold (i) all of the Internal Revenue Service (“IRS”) which confirmed that no delinquency notices had been sent, nor were there any collection proceedings underway. In November 2015,issued and outstanding equity interests of Electrogroup to the Company filedCanadian Buyer and (ii) all past due payroll tax returnsof 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 IRS and became timelyCompany’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 remittanceEquity Transaction is a base cash purchase price of its current period payroll tax obligations.$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 December 31, 2019.

 

During the fourth quarter of 2016,2019, 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 reduction to the value of the notes at December 31, 2019 of $651, for a carrying value of $5.1 million, which is included within other long term assets as of December 31, 2019. After certain adjustments and expenses of sale, the Company received noticenet consideration from the Internal Revenue Servicesale of $45.2 million. Subsequent to finalizing the working capital adjustment during the fourth quarter of 2019 the gain recognized on the Equity Transaction amounted to $13.7 million and is reflected within discontinued operations.

Covenants

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

Indemnification

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


In addition, Pioneer Power has agreed to indemnify the Buyer and its affiliated parties for Losses resulting from, among other things, certain pre-closing tax matters, debt held by the Disposed Companies, transaction expenses, breaches of representations and warranties that are not covered by the Buyer’s representation and warranty insurance because the Buyer had knowledge of such breach (only to the extent such Losses would have been covered by the representation and warranty insurance had the Buyer not known of such breach) (“Interim Breaches”), certain matters related to Electrogroup’s operations, certain legal proceedings, certain matters related to Nexus Custom Magnetics, L.L.C., a wholly owned subsidiary of Jefferson, and certain matters concerning end-user software utilized by the Disposed Companies.

The indemnification obligations of Pioneer Power with respect to Losses of the Buyer resulting from inaccuracies or breaches of the Company’s representations and warranties, except for breaches of certain fundamental warranties, claims of fraud and breaches of representations, warranties or covenants relating to taxes, and claims for certain specific indemnities, are subject to (i) a true deductible equal to $330,000, (ii) a cap equal to $330,000, and (iii) a per-claim threshold amount of $50,000, and any such Losses shall be satisfied solely through a set-off to the first Seller Note with the principal amount of $3.3 million.  In addition, the indemnification rights of the Buyer with respect to Interim Breaches are subject to a cap equal to $5.0 million, and the indemnification rights of the Buyer with respect to Losses resulting from certain legal matters are subject to a true deductible equal to $150,000 and a cap equal to $3.3 million.

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

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

Other Provisions

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

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. 

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

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets of discontinued operations:

 

 

 

 

 

 

 

 

Accounts receivable - trade, net

 

$

 

 

$

12,944

 

Inventories, net

 

 

 

 

 

23,632

 

Income taxes receivable

 

 

 

 

 

566

 

Prepaid expenses

 

 

 

 

 

514

 

Property, plant and equipment, net

 

 

 

 

 

4,406

 

Right of use asset

 

 

 

 

 

2,124

 

Deferred income taxes

 

 

 

 

 

134

 

Intangible assets, net

 

 

 

 

 

3,460

 

Goodwill

 

 

 

 

 

5,557

 

Assets of discontinued operations

 

$

 

 

$

53,337

 

 

 

 

 

 

 

 

 

 

Liabilities of discontinued operations:

 

 

 

 

 

 

 

 

Bank overdrafts

 

$

 

 

$

1,690

 

Accounts payable and accrued liabilities

 

 

 

 

 

18,894

 

Income taxes payable

 

 

 

 

 

778

 

Pension deficit

 

 

 

 

 

148

 

Other long-term liabilities

 

 

 

 

 

2,187

 

Liabilities of discontinued operations

 

$

 

 

$

23,697

 

During the quarter ended June 30, 2019 the Company’s Reynosa Facility was damaged by a flood resulting in damages to inventory. This loss has been partially offset by $2.4 million of insurance proceeds that the penalties for failureCompany expects to timely file employer’s federal payroll tax returns and make the required payments thereon had been abated for Pioneer Power Solutions, Inc., Jefferson Electric Inc. and Pioneer Custom Electrical Products Corp.receive. The abatementCompany received $600 of these penalties amountsinsurance proceeds during the year ended December 31, 2019, and $1.4 million of these insurance proceeds were received subsequent to year-end. While the net loss on inventory damaged amounting to approximately $1.1$782 has been reflected within the Cost of goods sold in discontinued operations, the corresponding insurance receivable of $1.8 million and has been recognized as an asset from continuing operations as of December 31, 2019. 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.


During the year ended December 31, 2019, the Company determined that there was substantial doubt over our ability to collect $2.3 million due from our former Asian manufacturing partner as the Company no longer retains a relationship with this entity subsequent to the sale of the Transformer business. While the Company will continue to pursue collection of the amount, based upon discussions with the supplier during the year ended December 31, 2019, the recognition of a reserve was deemed appropriate.

The following table presents the discontinued operations of the liquid-filled and dry-type transformer manufacturing businesses in the Company’s other expense in its consolidated statementsConsolidated Statement of operations.Operations (in thousands):

 

50

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

Revenues

 

$

46,631

 

 

$

86,263

 

Costs and Expenses

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

39,915

 

 

 

68,906

 

Selling, general and administrative

 

 

9,207

 

 

 

10,445

 

Foreign exchange gain

 

 

(834

)

 

 

(337

)

Interest expense

 

 

653

 

 

 

1,745

 

Other expense

 

 

41

 

 

 

760

 

Total costs and expenses

 

 

48,982

 

 

 

81,519

 

Gain on sale of discontinued subsidiaries

 

 

13,686

 

 

 

 

Income before provision for income taxes

 

 

11,335

 

 

 

4,744

 

Income tax expense

 

 

737

 

 

 

1,099

 

Income from discontinued operations, net of income taxes

 

$

10,598

 

 

$

3,645

 

 

6.

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

     
  Year Ended December 31,
  2019 2018
Depreciation and amortization $756 $1,207 
Capital expenditures  117  432 
Write-off of receivables  2,876   —   

8. INVENTORIES

 

The components of inventories are summarized below:

 

 December 31,

 

December 31,

 

 2016 2015

 

2019

 

 

2018

 

Raw materials $10,175  $7,115 

 

$

2,309

 

 

$

2,049

 

Work in process  6,535   3,918 

 

 

2,628

 

 

 

1,949

 

Finished goods  9,826   7,134 

 

 

46

 

 

 

46

 

Provision for excess and obsolete inventory  (389)  (504)

 

 

(429

)

 

 

(366

)

Total inventories $26,147  $17,663 

 

$

4,554

 

 

$

3,678

 

 

Inventories are stated at the lower of cost or a net realizable value determined on a FIFO method. Included in raw materialswork in process at December 31, 2019 and finished goodsDecember 31, 2018 are goods in transit of approximately $3.1 million$0 and $120, respectively. Also included in 2016work in process at December 31, 2019 and $2.1 million in 2015. Additionally, $0.6 millionDecember 31, 2018 is a net realizable value reserve of inventory in 2016approximately $418 and $0.8$0, respectively. The net realizable value adjustment of inventory in 2015$418 was written off due to restructuring.recognized through cost of goods sold of the T&D Solutions segment during the year ended December 31, 2019.


 

At December 31, 2016, $4.0 million of raw materials not pledged to our secured creditor were used as collateral to secure short term borrowings under a product financing arrangement, while none of the raw materials was pledged as of December 31, 2015.

7.9. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized below:

 

 December 31, 

 

 

 

 

 

 

 2016 2015 

 

December 31,

 

Land $46  $45 
Buildings  2,293   2,224 

 

2019

 

 

2018

 

Machinery and equipment  9,421   9,143 

 

$

1,225

 

 

$

1,219

 

Furniture and fixtures  466   416 

 

 

205

 

 

 

205

 

Computer hardware and software  1,289   1,334 

 

 

682

 

 

 

682

 

Leasehold improvements  534   271 

 

 

337

 

 

 

312

 

Construction in progress  18   375 
  14,067   13,808 

 

 

2,449

 

 

 

2,418

 

Less: Accumulated depreciation  (7,476)  (6,459)

 

 

(1,809

)

 

 

(1,540

)

Total property, plant and equipment, net $6,591  $7,349 

 

$

640

 

 

$

878

 

 

Depreciation expense was $1.3 million in 2016$269 and 2015.$352 for the period ended December 31, 2019 and 2018, respectively.

 

Additionally, in 2015, $2.4 million of property, plant and equipment was written off due to restructuring.10. OTHER ASSETS

 

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

 

In December 2011 and January 2012, the Company made two secured loans, each in the amount of $300 to a developer of a renewable energy project in the U.S.U.S, secured by assets of the developer. The promissory notes accrue interest at a rate of 4.5% per annum with a final payment of all unpaid principal and interest becoming fully due and payable upon the earlier to occur of (i) the four year anniversary of the issuance date of the promissory notes, or (ii) an event of default. As defined in the promissory notes, an event of default includes, but is not limited to, the following: any bankruptcy, reorganization or similar proceeding involving the borrower, a sale or transfer of substantially all the assets of the borrower, a default by the borrower relating to any indebtedness due to third parties, the incurrence of additional indebtedness by the borrower without the Company’s written consent and failure of the borrower to perform its obligations pursuant to its other agreements with the Company, including its purchase order for pad mount transformers. The full loan receivableCompany has determined that the probability of recovering the secured loans is outstandingunlikely, and has written-off the balance of $600 during the year ended December 31, 2019.

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, 2016 and 2015.2022. The Company is actively evaluating its alternatives to either foreclosedetermined the fair value of the notes based on its security interests underlyingmarket conditions and prevailing interest rates. During the loans, or otherwise renegotiate and extend them. Asfourth quarter of 2019, the Company does not currently expect repaymentand 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 loans receivable within$5.0 million Seller Note to $3.3 million. The Company has revalued the next twelve months, they have been classified as long-termnotes for an appropriate imputed interest rate, resulting in a reduction to the Company’s Consolidated Balance Sheets.

Also included in Other Assetsvalue of the notes at December 31, 2016 and 2015 is2019 of $651, for a customer note receivablecarrying value of $0.2$5.1 million.

 

51Other assets are summarized below:

 

 

December 31,

 

 

 

2019

 

 

2018

 

Right of use assets

 

$

1,806

 

 

$

2,207

 

Notes receivable, net

 

 

5,096

 

 

 

865

 

CleanSpark warrants

 

 

531

 

 

 

 

Deposits

 

 

32

 

 

 

26

 

Other assets

 

$

7,465

 

 

$

3,098

 

 

9.11. GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill is tested at the reporting unit level annually and if necessary, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

In 2015,2018, the Company changeddetermined certain definite lived intangible assets within the switchgear reporting unit had carrying values that exceeded its annual testing date from December 31 to October 1. Thefair value. As a result, the Company believes this changerecorded impairment charges of $870, $377 and $103 against technology-related industry accreditation, customer relationships and non-complete agreements, respectively. During 2019, the Company recorded impairment charges of $83 against internally developed software during 2019 in the method of applying an accounting principle is preferable, as it will alleviate the resource constraints that historically existed during the fourth quarter. This change in annual testing date does not delay, accelerate, or avoid an impairment charge.its Critical Power segment.

 

We testPrior to 2017, the Company tested goodwill for impairment using a quantitative analysis consisting of a two-step approach. The first step of our quantitative analysis consistsconsisted of a comparison of the carrying value of our reporting units, including goodwill, to the estimated fair value of our reporting units using a discounted cash flow methodology. If step one results in the carrying value of the reporting unit exceeding the fair value of such reporting unit, we would then proceed to step two which would require us to calculate the amount of impairment loss, if any, that we would record for such reporting unit. In the fourth quarter of 2017 the Company adopted ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” and eliminated Step 2 from the goodwill impairment test.


 

In 2016, Jefferson recorded anThe goodwill impairment test was performed as of $110 for its technology-related industry accreditation that was no longer in use during the year.

In 2015, due to relocation of Bemag, the companyOctober 1, 2019 and involves significant estimates. The Company recorded an impairment charge of $404, consisting of $261 and $143 for customer relationship and technology-related industry accreditations, respectively. During$3.0 million to the planningremaining goodwill at the TESI business unit in 2019, based in part by the loss of the relocation ofVerizon agreement, which is recorded in continuing operations within selling, general, and administrative expense. The Company recorded no impairment to goodwill during the Bemag production to Reynosa, the following was determined: 1- the product offering would be built to the specifications of the Jefferson technology-related industry accreditations, rendering Bemag’s accreditations impaired; and 2 – the move to Reynosa would have an adverse impact on the customers being serviced by Bemag, due to the increase in shipping time from Reynosa versus the shipping time from Farnham, QC. This increase in shipping time would cause customers to order from competitors. Thus, the customer relationships were viewed as impaired and written off.year ended December 31, 2018.

 

Changes in the carrying amount of goodwill by reportable segment during the years ended December 31, 20162019 and 20152018 are as follows:

 

  T&D  Critical Power    
  Solutions  Solutions  Total 
  Segment  Segment  Goodwill 
Gross Goodwill:            
Balance as of January 1, 2015 $7,703  $2,879  $10,582 
Additions due to acquisitions  371      371 
Adjustments     91   91 
Balance as of December 31, 2015 $8,074  $2,970  $11,044 
Accumulated impairment losses:            
Balance as of January 1, 2015 $(976) $  $(976)
No activity         
Balance as of December 31, 2015 $(976) $  $(976)
             
Net Goodwill $7,098  $2,970  $10,068 
             
Gross Goodwill:            
Balance as of January 1, 2016 $8,074  $2,970  $11,044 
Adjustments  (96)     (96)
Balance as of December 31, 2016 $7,978  $2,970  $10,948 
Accumulated impairment losses:            
Balance as of January 1, 2016 $(976) $  $(976)
No activity         
Balance as of December 31, 2016 $(976) $  $(976)
             
Net Goodwill $7,002  $2,970  $9,972 

52

As mentioned in Note 1, goodwill of $0.7 million was transferred from Critical Power to T&D Solutions segment due to restructuring.

  Critical
Power
Segment
  Total
Goodwill
 
Gross Goodwill:      
Balance as of January 1, 2018 $2,969  $2,969 
No activity      
Balance as of December 31, 2018 $2,969  $2,969 
Accumulated impairment losses:        
Balance as of January 1, 2018 $  $ 
Impairment charges      
Balance as of December 31, 2018 $  $ 
         
Net Goodwill $2,969  $2,969 
         
Gross Goodwill:        
Balance as of January 1, 2019 $2,969  $2,969 
No activity      
Balance as of December 31, 2019 $2,969  $2,969 
Accumulated impairment losses:        
Balance as of January 1, 2019 $  $ 
Impairment charges  (2,969)  (2,969)
Balance as of December 31, 2019 $(2,969) $(2,969)
         
Net Goodwill $  $ 

 

Changes in intangible asset balances for the years ended December 31, 20162019 and 20152018 consisted of the following:

 

 T&D Critical Power Total 

 

Critical Power

 

 

Total

 

 Solutions Solutions Intangible 

 

Solutions

 

 

Intangible

 

 Segment Segment Assets 

 

Segment

 

 

Assets

 

Balance as of January 1, 2015 $4,644  $5,147  $9,791 
Additions due to acquisition  2,386      2,386 

Balance as of January 1, 2018

 

$

1,245

 

 

$

1,245

 

Amortization

 

 

(1,121

)

 

 

(1,121

)

Foreign currency translation

 

 

 

 

 

 

Balance as of December 31, 2018

 

$

124

 

 

$

124

 

Amortization  (515)  (1,304)  (1,819)

 

 

(41

)

 

 

(41

)

Impairment charges  (404)     (404)

 

 

(83

)

 

 

(83

)

Foreign currency translation  2      2 

 

 

 

 

 

 

Balance as of December 31, 2015 $6,113  $3,843  $9,956 
Adjustments  62      62 
Amortization  (506)  (1,240)  (1,746)
Impairment charges  (110)     (110)
Foreign currency translation  6      6 
Balance as of December 31, 2016 $5,565  $2,603  $8,168 

Balance as of December 31, 2019

 

$

 

 

$

 


The components of intangible assets at December 31, 2019 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Amortization Years

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Impairment Charges

 

 

Foreign Currency Translation

 

 

Net Book Value

 

Internally developed software

 

7

 

 

 

289

 

 

 

(206

)

 

 

(83

)

 

 

 

 

 

 

Total intangible assets

 

 

 

 

 

$

289

 

 

$

(206

)

 

$

(83

)

 

$

 

 

$

 

(a)

During 2019, the Company recorded impairment charges to internally developed software intangible asset of the Critical Power business upon determining that the carrying value of these assets was not recoverable.

 

The components of intangible assets at December 31, 20162018 are summarized below:

 

 Weighted Average Amortization Years Gross Carrying Amount Accumulated Amortization Impairment Charges Foreign Currency Translation Net Book Value 

 

Weighted Average Amortization Years

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Impairment Charges

 

 

Foreign Currency Translation

 

 

Net Book Value

 

Customer relationships  7  $7,203  $(3,564) $  $  $3,639 

 

 

7 (b)

 

 

$

7,202

 

 

$

(6,175

)

 

$

(377

)

 

$

 

 

$

650

 

Non-compete agreements  6   720   (392)     (6)  322 

 

 

4 (b)

 

 

 

705

 

 

 

(587

)

 

 

(103

)

 

 

 

 

 

15

 

Trademarks  (a)   2,139   (251)     (73)  1,815 

 

 

Indefinite

 

 

 

1,816

 

 

 

 

 

 

 

 

 

 

 

 

1,816

 

Distributor territory license  4   474   (237)        237 
Internally developed software  7   289   (83)        206 

 

 

7

 

 

 

289

 

 

 

(165

)

 

 

 

 

 

 

 

 

124

 

Developed technology  10   493   (99)        394 

 

 

10

 

 

 

492

 

 

 

(197

)

 

 

 

 

 

 

 

 

295

 

Technology-related industry accreditations  Indefinite   1,686      (110)  (21)  1,555 

 

 

Indefinite (b)

 

 

 

1,576

 

 

 

 

 

 

(870

)

 

 

(22

)

 

 

684

 

Total intangible assets     $13,004  $(4,626) $(110) $(100) $8,168 

 

 

 

 

 

$

12,080

 

 

$

(7,124

)

 

$

(1,350

)

 

$

(22

)

 

$

3,584

 

(b)

During 2018, the Company recorded impairment charges to customer relationships, non-compete agreements and technology-related industry accreditations intangible assets of the switchgear business upon determining that the carrying value of these assets was not recoverable.

 

(a) Includes $1.8 million of trademarks with an indefinite useful life.12. DEBT

Future scheduled annual straight-line amortization expense over the useful lives of finite life intangible assets is as follows:

Years Ending December 31,  Total 
2017  $1,655 
2018   1,578 
2019   291 
2020   266 
2021   265 
Thereafter   743 
   $4,798 

10. DEBT

 

Canadian Credit Facilities

Our Canadian subsidiaries have maintained credit facilities with BMO since October 2009. In June 2011, our wholly owned subsidiary Pioneer Electrogroup Canada Inc. entered into a letter loan agreement with BMO (the “Initial Canadian Facilities”) that replaced and superseded all of our businesses’ prior financing arrangements with the bank. 

Our Initial Canadian Facilities originally provided for up to $22.0 million Canadian dollars (“CAD”) (approximately $15.9 million expressed in U.S. dollars) consisting of a $10.0 million CAD demand revolving credit facility (“Facility A”) to finance ongoing operations, a $2.0 million CAD term credit facility (“Facility B”) that financed a plant expansion, and a $10.0 million CAD term credit facility (“Facility C”) that financed a business acquisition and the purchase and expansion of its manufacturing facilities.

53

The Initial Canadian Facilities required us to comply on a consolidated Canadian basis with various financial covenants, including maintaining a minimum fixed charge coverage ratio, a maximum funded debt to EBITDA ratio and a limitation on funded debt as a percent of capitalization.

Facility A was originally subject to margin criteria and borrowings bear interest at BMO’s prime rate plus 0.50% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 0.50% per annum or LIBOR plus 2.00% per annum on amounts borrowed in U.S. dollars.

Borrowings under Facility B originally bore interest at BMO’s prime rate plus 1.00% per annum with principal repayments becoming due on a five year amortization schedule.

Borrowings under Facility C were repayable according to a five year principal amortization schedule and bore interest at the following rates: if the funded debt to EBITDA ratio is equal to or greater than 2.00, BMO’s prime rate plus 1.25% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 1.25% per annum or LIBOR plus 2.50% per annum on amounts borrowed in U.S. dollars; or, if the funded debt to EBITDA ratio is less than 2.00, BMO ’s prime rate plus 1.00% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 1.00% per annum or LIBOR plus 2.25% per annum on amounts borrowed in U.S. dollars. In addition, Facility C was subject to a standby fee which is calculated monthly using the unused portion of the facility at either 0.625% per annum if the funded debt to EBITDA ratio is equal to or greater than 2.00 or 0.5625% per annum if the funded debt to EBITDA ratio is less than 2.00. 

In the third quarter of 2015, in connection with an amendment to our United States credit facilities, we elected to prepay $5.0 million Canadian dollars (approximately $4.0 million expressed in U.S. dollars) of Facility C with cash available on hand.

 

In April 2016, our wholly owned subsidiary, Pioneer Electrogroup Canada Inc. (“PECI”), entered into an Amended and Restated Credit Agreement (“CAD ARCA”) with BMOBank of Montreal (“BMO”) with respect to our existing Canadian credit facilities (as amended and restated, the “Canadian Facilities”) that replaced and superseded all of our businesses’ prior financing arrangements with the bank. This CAD ARCA extended the maturity date of our Canadian Facilities to July 31, 2017. Additionally, defaults relating to the breach of certain financial covenants under the prior financing arrangements with the bank existing as of December 31, 2015 were waived by BMO. On March 15, 2017, theThe CAD ARCA was further amended (the “2017 CAD ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 CAD ARCA Amendment”). The 2018 CAD ARCA Amendment extended the term of our Canadian Facilities to April 1, 2020. On August 8, 2019, BMO agreed to a temporary borrowing base increase until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities and the U.S. Facilities, and (ii) August 31, 2019.

 

Our Canadian Facilities provided for up to $8.1$8.2 million CADCanadian dollars (“CAD”) (approximately $6.3 million expressed in U.S. dollars) consisting of a revolving $7.0 million CAD revolving credit facility (“Facility AA”) to finance ongoing operations, a $0.5 million$471 CAD term credit facility (“Facility BB”) that financed a plant expansion, and a $0.7 million$712 USD Facility (“Facility C”) that financed a business acquisition and the purchase and expansion of its manufacturing facilities. The 2017 CAD ARCA Amendment increased the Facility A to $8.0 million CAD, increasing the total amount of loans available under the Canadian Facilities to $9.1$9.2 million CAD.

Facility A, as amended and restated, is subject to margin criteria and borrowings bear interest at BMO’s prime rate plus 0.75% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 0.75% per annum or LIBOR plus 2.25% per annum on amounts borrowed in U.S. dollars. Pursuant to We made the 2017 CAD ARCA Amendment, Facility A will mature on July 31, 2018.

Borrowingsfinal principal payment under Facility B as amended and restated, bear interest at BMO’s prime rate plus 1.25% per annum with principal repayments becoming due on a five year amortization schedule. Pursuant to the CAD ARCA, quarterly principal repayments were reduced to $47 CAD, with a balloon payment of $141 CAD due on July 31, 2017. The 2017 CAD ARCA Amendment amended the payment schedules so that the quarterly principal payments of $47 CAD will continue after July 31, 2017 until our borrowings under the facility is fully paid on April 30, 2018.

Borrowings2018, and the outstanding principal balance under Facility C as amended and restated, bear interest at BMO’s prime rate plus 1.50% per annum on amounts borrowed in Canadian dollars, or its U.S. base rate plus 1.50% per annum or LIBOR plus 2.75% per annum on amounts borrowed in U.S. dollars. Pursuant towith proceeds received from the CAD ARCA, a principal repayment of $72 USD was due on June 30, 2016, and the reduced quarterly principal repayments of $36 USD was to be made beginning on October 31, 2016, with a balloon payment of $496 USD due on July 31, 2017. The 2017 CAD ARCA Amendment amended the payment schedules so that the quarterly payments of $36 USD will continue until July 31, 2018, with a balloon payment of $352 due on July 31, 2018.

The CAD ARCA modified financial covenant testing so that testing will be performed on our consolidated financial statements. The financial covenants were changed pursuant to the CAD 2017 Amendment to require certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, which were further modified by the 2017 CAD ARCA Amendment. We are in compliance with mostsale of the financial covenant testing and, on March 6, 2017, we received a waiver from BMO on certain financial covenants existing as ofFarnham, Quebec, Canada, building in December 31, 2016.

As of December 31, 2016, we had approximately $5.2 million in U.S. dollar equivalents2018. A ll outstanding under our Canadian Credit Facilities. Our borrowings consisted of approximately $4.4 million outstandingamounts under Facility A $0.2 million outstanding under Facility Bwere paid in full on August 16, 2019, using proceeds from the Equity Transaction, and $0.6 million outstanding under Facility C.the underlying debt agreements were terminated.

As of December 31, 2015, we had approximately $1.7 million in U.S. dollar equivalents outstanding under our Initial Canadian Facilities. Our borrowings consisted of approximately $0.5 million outstanding under Facility A, $0.4 million outstanding under Facility B and $0.8 million outstanding under Facility C. 

54

 

United States Credit Facilities

On December 2, 2014, our existing U.S. credit facilities (the “U.S. Facilities”) were amended in order to provide a $5.0 million term loan facility that was used for the acquisition of Titan. The term loan facility had principal repayments becoming due on a five year amortization schedule.

The U.S. Facilities initially required us to comply with a two-step test of financial covenants. First, as measured on a consolidated basis, we were required to comply with a maximum funded debt to adjusted EBITDA ratio of (a) 3.15x for the quarter ended December 31, 2014 and the quarter ending March 31, 2015, (b) 3.25x for the quarter ending June 30, 2015, (c) 3.65x for the quarter ending September 30, 2015, and (d) 2.75x for the quarter ending December 31, 2015 and all testing periods thereafter. Secondly, if the funded debt to adjusted EBITDA tests above are met, and our fixed charge coverage ratio is at or above 1.10x for the quarter ended December 31, 2014, and at or above 1.25x for all testing periods thereafter, then no further compliance tests were required.

Alternatively, we could comply with the financial covenant requirements of the U.S. Facilities if our U.S. operations maintained a maximum funded debt to capitalization ratio and various minimum fixed charge coverage ratios and maximum funded debt to adjusted EBITDA ratios which were set at different thresholds by time period.

Borrowings under the demand revolving credit facility (USD Facility A) bore interest, at our option, at the bank’s prime rate plus 1.00% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.25% per annum on Eurodollar loans. Borrowings under the term loan facility (USD Facility B) bore interest, at our option, at the bank’s prime rate plus 1.25% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.50% per annum on Eurodollar loans.

 

In April 2016, we entered into an Amended and Restated Credit Agreement (“US ARCA”) with BMO with respect to our existing U.S. Facilitiesfacilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank. Additionally, defaults relating to the breach of certain financial covenants under the prior financing arrangements with the bank existing as of December 31, 2015 were waived by BMO. On March 15, 2017, the(the “U.S. Facilities”).The US ARCA was further amended (the “2017 US ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 US ARCA Amendment”). The 2018 US ARCA Amendment extended the term of our US Facilities to April 1, 2020.

 

Our U.S. Facilities, as amended and restated, provided for up to $19.1 million USD consisting of a $14.0 million USD demand revolving credit facility (“USD Facility AA”) to finance ongoing operations, a $5.0 million USD term loan facility (“USD Facility BB”) that financed the acquisition of Titan, and a new $0.1 million$100 revolving credit facility provided pursuant to a MasterCard is to be used to pay for and temporarily finance our day-to-day business expenses and for no other purpose. The 2017 US ARCA Amendment increased the USD Facility A to $15.0 million, increasing the total amount of loans available under the U.S. Facilities to $20.1 million USD. A ll outstanding amounts under USD Facilities A and B were paid in full on August 16, 2019, using proceeds from the Equity Transaction, and the underlying debt agreements were terminated.


13. COMMITMENTS AND CONTINGENCIES

 

USD Facility A continues to bear interest, at our option, at the bank’s prime rate plus 1.00% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.25% per annum on Eurodollar loans. USD Facility A had a maturity date of July 31, 2017, which was extended to July 31, 2018 pursuant to the 2017 US ARCA Amendment

Borrowings under USD Facility B bear interest, at our option, at U.S. base rate plus 1.25% per annum on U.S. prime loans, or an adjusted LIBOR rate plus 2.50% per annum on Eurodollar loans. Pursuant to the US ARCA, our quarterly principal payments were reduced to $31 USD for calendar year 2016, with the original amortization schedule continuing to apply to all quarterly principal payments made after December 31, 2016, and the final maturity date of December 2, 2019. The 2017 US ARCA Amendment reduced the scheduled quarterly principal payments to $31 USD, commencing March 31, 2017, to continue until July 31, 2018, with a balloon payment of $4,438 on July 31, 2018.Leases

 

The US ARCA modified financial covenant testing so that testing will be performed on our consolidated financial statements. The financial covenants were changed pursuant to the US ARCA to require certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, which were further modified by the 2017 US ARCA Amendment. We are in compliance with most of the financial covenant testing and on March 6, 2017, we received a waiver from BMO on certain financial covenants existing as of December 31, 2016.

Our obligations under the U.S. Facilities are guaranteed by all our wholly-owned U.S. subsidiaries. In addition, we and our wholly-owned U.S. subsidiaries granted a security interest in substantially all of our assets, including 65% of the shares of Pioneer Electrogroup Canada Inc. held by us, to secure our obligations for borrowed money under the U.S. Facilities. The U.S. Facilities also restrict our ability to incur indebtedness, create or incur liens, make investments, make distributions or dividends and enter into merger agreements or agreements for the sale of any or all our assets.

As of December 31, 2016, we had approximately $17.9 million outstanding under our U.S. Credit Facilities. Our borrowings consisted of approximately $13.3 million outstanding under USD Facility A, and $4.6 million outstanding under USD Facility B.

As of December 31, 2015, we had approximately $14.1 million outstanding under our U.S. Credit Facilities. Our borrowings consisted of approximately $9.4 million outstanding under USD Facility A, and $4.7 million outstanding under USD Facility B.

55

Nexus Promissory Note

On July 25, 2012, the Company’s Mexican subsidiary, Nexus Magneticos de Mexico, S. de R.L. de C.V. (“Nexus”), entered into a $1.65 million term loan agreement with GE CF Mexico, S.A. de C.V. (“GE Capital Mexico”). The term loan is payable in 60 consecutive monthly installments and bears interest, payable monthly, at a rate of 6.93% per annum. The obligations of Nexus under the term loan are secured by certain machinery and equipment located in Mexico and by a corporate guaranty by the Company. As of December 31, 2016 and 2015, there was approximately $0.2 million and $0.3 million outstanding, respectively, under the Nexus Promissory Note. 

Long-term debt consists of the following:

       
  December 31, 
  2016  2015 
Term credit facilities, net (a) $5,194  $5,714 
Nexus promissory note  185   481 
Capital lease obligations  5   7 
Total debt  5,384   6,202 
Less current portion  (1,379)  (6,037)
Total long-term debt $4,005  $165 

(a) The balances as of December 31, 2016 and 2015 are net of debt issuance costs of $245 and $229, respectively.

Excluding debt issuance costs of $245, the annual maturities of long-term debt at December 31, 2016, were as follows:

     
   Long-term 
Years Ending December 31,  debt maturities 
2017  $1,504 
2018   600 
2019   3,525 
2020    
Thereafter    
Total long-term debt maturities  $5,629 
       

11. COMMITMENTS AND CONTINGENCIES

Leases

The Companycompany leases certain offices, facilities and equipment under operating and financing leases. Our leases expiring at various dates through 2026.  Athave remaining terms of 1 year to 7 years some of which contain options to extend up to 10 years. As of December 31, 2016,2019 and 2018, assets recorded under finance leases were $1,253 and $864, respectively, and accumulated amortization associated with finance leases was $571 and $343, respectively.

The components of the minimum annual lease commitments under the leases having terms in excess of one yearexpense were as follows:

 

   Operating 
Years Ending December 31,  Leases 
2017  $1,015 
2018   957 
2019   718 
2020   662 
2021   397 
Thereafter   1,508 
Total lease commitments  $5,257 
       

 

 

For the Year Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Operating lease cost

 

 

$

677

 

 

$

592

 

 

 

 

 

 

 

 

 

 

 

Finance lease cost

 

 

 

 

 

 

 

 

 

Amortization of right-of-use asset

 

 

$

284

 

 

$

187

 

Interest on lease liabilities

 

 

 

53

 

 

 

40

 

Total finance lease cost

 

 

$

337

 

 

$

227

 

Rent and

Other information related to leases was as follows:

Supplemental Cash Flows Information

 

 

December 31,

 

 

 

2019

 

 

2018

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

$

664

 

 

$

598

 

Operating cash flows from finance leases

 

 

 

53

 

 

 

40

 

Financing cash flows from finance leases

 

 

 

281

 

 

 

170

 

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

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

599

 

 

 

515

 

Finance leases

 

 

 

62

 

 

 

54

 

Weighted Average Remaining Lease Term

 

December 31,

 

2019

 

2018

Operating leases

2 years

 

3 years

Finance leases

2 years

 

2 years

Weighted Average Discount Rate

 

 

December 31,

 

 

 

2019

 

 

2018

 

Operating leases

 

 

5.50

%

 

 

5.50

%

Finance leases

 

 

6.90

%

 

 

6.50

%


Future minimum lease expense was approximately $1.5 million for 2016 and 2015.payments under non-cancellable leases as of December 31, 2019 were as follows:

 

 

Operating

 

 

Finance

 

 

 

Leases

 

 

Leases

 

2020

 

 

 

677

 

 

 

281

 

2021

 

 

 

401

 

 

 

330

 

2022

 

 

 

91

 

 

 

140

 

2023

 

 

 

 

 

 

124

 

Total future minmum lease payments

 

 

 

1,169

 

 

 

875

 

Less imputed interest

 

 

 

(62

)

 

 

(93

)

Total future minmum lease payments

 

 

$

1,107

 

 

$

782

 

Reported as of December 31, 2019:

 

 

Operating

 

 

Finance

 

 

 

Leases

 

 

Leases

 

Accounts payable and accrued liabilities

 

 

$

632

 

 

$

236

 

Other long-term liabilities

 

 

 

475

 

 

 

546

 

Total

 

 

$

1,107

 

 

$

782

 

Litigation and Claims

 

The Company is from time to time party to various lawsuits, claims and other proceedings that arise in the ordinary course of our business.

 

On January 11, 2016, Myers Power Products, Inc., a specialty electrical products manufacturer, filed suit with the Superior Court of the State of California, County of Los Angeles, against us, PCEP and two PCEP’sPCEP 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) amount.; however, the Company has recognized approximately $1.2 million for expected costs related to this litigation. On March 18, 2016, we filed an answer to the complaint, denying generally each and every allegation and relief sought by Myers Power Products, Inc. and seeking dismissal based on, among other things, failure to state facts sufficient to constitute a cause of action. We intend to contest the matter vigorously. Due to the uncertainties of litigation, however, we can give no assurance that we, PCEP and our employees will prevail on any claims made against us, PCEP and our employees in any such lawsuit. As of the filing of this report, this action is scheduled for trial in the second quarter of 2020. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results. We cannot execute the sale of PCEP until the lawsuit has been resolved.

On October 4, 2019, the dividend that was payable by the Company was enjoined by court order of the Superior Court of California related to the foregoing case. The Company continues to contest the order. As of the date of this filing, this court order remains in place. On October 16, 2019, Myers Power Products, Inc. filed an ex parte application arguing the Company had violated, or intended to violate the modified preliminary injunction and sought order from the court for the Company to post a bond in an amount of $20,000 or more. The court has not taken any action on this request and the Company intends to vigorously defend its rights in the event the order is granted.

There are also two appeals pending in the California Court of Appeals for the Second Appellate District, which includes an appeal of an order modifying a previously issued preliminary injunction and an order enjoining us to obtain and post a $12 million bond in connection with the modified preliminary injunction. Due to the uncertainties of litigation, the Company can give no assurance that it will prevail on the appeals. These appeals are currently scheduled to be heard later in calendar year 2021, after the underlying case is likely to be heard and decided.

 

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

 

12.14. STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company had 8,699,7128,726,045 shares of common stock, $0.001 par value per share, outstanding as of December 31, 20162019 and 2015.

In September 2015, the Company completed a public offering and issued 1,125,000 shares of its common stock at a gross sales price of $4.00 per share, resulting in $3.9 million in net proceeds after deducting the underwriting discount and costs directly attributable to the offering. Subsequent to the end of the third quarter, on October 5, 2015, the underwriters exercised their over-allotment option to purchase an additional 168,750 shares from the Company at the public offering price of $4.00 per share, resulting in an additional $0.6 million in net proceeds after deducting the underwriting discount.

Warrants

The Company had warrants outstanding to purchase 50,600 shares of common stock, with a weighted average exercise price of $7.00 per share, as of December 31, 2016 and 2015. The warrants expire on September 18, 2018.  No warrants were exercised during the years ended December 31, 2016 and 2015.


Preferred Stock

 

The board of directors is authorized, subject to any limitations prescribed by law, without further vote or action by the shareholders, to issue from time to time up to 5,000,000 shares of preferred stock, $0.001 par value, in one or more series. Each such series of preferred stock shall have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as shall be determined by the board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.

 

Foreign Currency Translation

Foreign assets and liabilities are translated using the exchange rate in effect at the balance sheet date, and results of operations are translated using an average rate for the period. Translation adjustments are accumulated and reported as a component of accumulated other comprehensive income (loss). The Company had foreign currency translation adjustments resulting in an unrealized loss of $37 for the year ended December 31, 2016, as compared to an unrealized loss of $2.5 million for the year ended December 31, 2015.

13.15. STOCK-BASED COMPENSATION

 

On December 2, 2009, the Company adopted the 2009 Equity Incentive Plan (the “2009 Plan”) for the purpose of issuing incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, restricted stock, stock appreciation rights, performance unit awards and stock bonus awards to employees, directors, consultants and other service providers. A total of 320,000 shares of common stock are reserved for issuance under the 2009 Plan. Options may be granted under the 2009 Plan on terms and at prices as determined by the board of directors or by the plan administrators appointed by the board of directors.

 

On May 11, 2011, the board of directors of the Company adopted the Pioneer Power Solutions, Inc. 2011 Long-Term Incentive Plan (the “2011 Plan”) which was subsequently approved by stockholders of the Company on May 31, 2011. The 2011 Plan replaces and supersedes the 2009 Plan. The Company’s outside directors and employees, including the Company’s principal executive officer, principal financial officer and other named executive officers, and certain contractors are all eligible to participate in the 2011 Plan. The 2011 Plan allows for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards, which may be granted singly, in combination, or in tandem, and upon such terms as are determined by the Board or a committee of the Board that is designated to administer the Plan. Subject to certain adjustments, the maximum number of shares of the Company’s common stock that may be delivered pursuant to awards under the 2011 Plan is 700,000 shares. As of December 31, 2016, 247,4002019, 379,800 stock options had been granted and are considered outstanding, consisting of 79,60021,000 incentive stock options and 167,800358,800 non-qualified stock options.

 

Expense for stock-based compensation recorded for the years ended December 31, 20162019 and 20152018 was approximately $0.1$12 and $0.2 million,$165, respectively. All of the stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. As of December 31, 2016,2019, the Company had total stock-based compensation expense remaining to be recognized of approximately $44.$2.

 

The fair value of the stock options granted was measured using the Black-Scholes valuation model with the following assumptions:

 

  Year Ended December 31, 
  2016  2015 
Expected volatility  34 - 35%  34 - 37%
Expected life in years  5.5 - 6.0   5.5 - 6.0 
Risk-free interest rate  1.57 - 1.66%  1.52 - 1.62%
Dividend yield  0%  0%

 

 

Year Ended December 31,

 

 

 

2019

 

2018

 

Expected volatility

 

 

 

 

29

%

Expected life in years

 

 

 

 

5.5

 

Risk-free interest rate

 

 

 

 

3

%

Dividend yield

 

 

 

 

0

%


A summary of stock option activity for the years ended December 31, 20162019 and 2015,2018, and changes during the years then ended is presented below:

 

  Stock
Options
 Weighted average
exercise price
 Weighted
average remaining
contractual term
 Aggregate
intrinsic value
 

 

Stock
Options

 

 

Weighted average
exercise price

 

 

Weighted
average remaining
contractual term

 

 

Aggregate
intrinsic value

 

Outstanding as of January 1, 2015   366,400  $9.92   6.9  $62,160 

Outstanding as of January 1, 2018

 

 

435,800

 

 

$

8.35

 

 

 

7.50

 

 

$

216

 

GrantedGranted   13,000   8.98   9.3    

 

 

7,000

 

 

 

5.60

 

 

 

 

 

 

 

ExercisedExercised             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ForfeitedForfeited   (34,667)  15.21   7.9    

 

 

(18,000

)

 

 

8.54

 

 

 

 

 

 

 

 

Outstanding as of December 31, 2015   344,733  $9.35   6.5  $62,160 

Outstanding as of January 1, 2019

 

 

424,800

 

 

$

8.30

 

 

 

6.50

 

 

$

22

 

GrantedGranted   27,000   3.68   9.2   61,290 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ExercisedExercised             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ForfeitedForfeited   (124,333)  9.31   5.9    

 

 

(45,000

)

 

 

14.75

 

 

 

 

 

 

 

 

 

Outstanding as of December 31, 2016   247,400  $8.75   5.9  $123,450 
                 
Exercisable as of December 31, 2016   197,733  $9.3   5.3  $62,160 
                  

Outstanding as of December 31, 2019

 

 

379,800

 

 

$

7.54

 

 

 

6.10

 

 

$

 

Exercisable as of December 31, 2019

 

 

376,467

 

 

$

7.54

 

 

 

6.10

 

 

$

 

 

The total number of shares reserved for the plan is 700,000 leaving a balance of 452,600293,867 available for future grants.

Intrinsic value is the difference between the market value of the stock at December 31, 20162019 and the exercise price which is aggregated for all options outstanding and exercisable. A summary of the weighted-average grant-date fair value of options, total intrinsic value of options exercised, and cash receipts from options exercised is shown below:

 

 Year Ended December 31, 

 

Year Ended December 31,

 

 2016 2015 

 

2019

 

 

2018

 

Weighted-average fair value of options granted (per share) $1.33  $3.20 

 

$

 

 

$

1.81

 

Intrinsic value gain of options exercised      

 

 

 

 

 

 

Cash receipts from exercise of options      

 

 

 

 

 

 

 

14.16. INCOME TAXES

 

The components of loss before income (loss) before taxes are summarized below:

 

 Year Ended Decmber 31,
 2016 2015
Earnings before income taxes     
U.S. operations$           (2,574) $           (7,563)
Foreign operations              2,398             (1,020)
Income (loss) before income taxes$              (176) $           (8,583)
  Year Ended December 31,
  2019 2018
Loss before income taxes    
U.S. operations $(10,759) $(10,105)
Loss before income taxes $(10,759) $(10,105)

  

The components of the income tax provision (benefit) were as follows:follows:

 

 Year Ended December 31, Year Ended December 31,
 2016 2015 2019 2018
Current        
Federal $—    $—    $  $— 
State  119   6   31   58 
Foreign  1,184   —   
Deferred  (416)  (2,708)  1,247   (854)
Total income tax provision $887  $(2,702) $1,278  $(796)

 


A reconciliation from the statutory U.S. income tax rate and the Company’sCompany's effective income tax rate, as computed on income (loss)loss before taxes, is as follows:

 

  Year Ended Decmber 31,
  2016 2015
Federal income tax at statutory rate $(61) $(3,004)
State and local income tax, net  12   (343)
Foreign rate differential  199   645 
Other permanent items  (319)  —   
Foreign tax credit  38   —   
True-up and other  1,018   —   
Total $887  $(2,702)

  Year Ended Decmber 31,
  2019 2018
Federal Income tax at statutory rate $(2,259) $(2,123)
State and local income tax, net  (452)  (424)
Other permanent items  54   (110)
Valuation allowance  3,859   1,568 
True-up and other  76   293 
Total $1,278  $(796)

  

The Company’s provision for income taxes reflects an effective tax rate on income (loss)loss before income taxes of 504%(11.9) % in 2016,2019, as compared to 31%7.9% in 2015.2018. The increase in the Company’s effective tax rate during 20162019 primarily reflects the correctionimpact of a prior year error in the current year, andsale of its transformers business, the recognition of prior period adjustments resulting from an audita valuation allowance and the utilization of our tax returns in Canada, as well as the permanent benefit resulting from the abatement of payroll tax penalties.

Provision has not been made for U.S. or additional foreign taxes on undistributed income of the Canadian foreign subsidiary, which have been, and will continue to be reinvested with the exception of certain deemed dividends.  This income could become subject to additional tax if they were remitted as dividends, if foreign income were loaned to us or a U.S. affiliate, or if we should sell, transfer or dispose of our stock in the foreign subsidiaries.  However, due to the availability of foreign tax credits, we do not believe there would be any material deferred tax liability as a result of the company’s un-repatriated foreign earnings.  As of December 31, 2016, the cumulative amount of undistributed income was approximately $17.9 million.its net operating losses.

 

The net deferred income tax asset (liability) was comprised of the following:

 

 December 31, December 31,
 2016 2015 2019 2018
Noncurrent deferred income taxes        
Total assets $5,659  $3,642  $844  $2,837 
Total liabilities  (2,400)  (781)  (844)  (1,592)
Net noncurrent deferred income tax asset (liability)  3,259   2,861 
Net deferred income tax asset (liability) $3,259  $2,861 
Net noncurrent deferred income tax asset  —     1,245 
Net deferred income tax asset $—    $1,245 

 

55  

The tax effect of temporary differences between GAAP accounting and federal income tax accounting creating deferred income tax assets and liabilities were as follows:

 

 December 31, December 31,
 2016 2015 2019 2018
Deferred tax assets        
Canada net operating loss carryforward $—    $37 
U.S. net operating loss carryforward  —     1,361 
U.S. net operating loss carry forward $—    $662 
Non-deductible reserves  1,122   711   1,785   1,628 
Pension plan  47   —   
Foreign tax credits  3,463   1,111 
Fixed assets  116   —   
Tax credits  4,631   4,631 
Intangibles  920   737   2,189   1,634 
Other  (9)  368   —     442 
Valuation allowance  —     (431)  (7,761)  (6,160)
Net deferred tax assets  5,659   3,894   844   2,837 
Deferred tax        
Deferred tax liabilities        
Fixed assets  (1,065)  (1,033)  (64)  (313)
Intangibles  (1,335)  —     —     (723)
Other  (780)  (556)
Net deferred tax liabilities  (2,400)  (1,033)  (844)  (1,592)
Deferred asset (liability), net $3,259  $2,861 
Deferred asset, net $—    $1,245 

  

The assessment of the amount of value assigned to our deferred tax assets under the applicable accounting rules is judgmental. We are required to consider all available positive and negative evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets in the future.  Such evidence includes scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and the results of recent operations. Since this evaluation requires consideration of events that may occur some years into the future, there is an element of judgment involved. Realization of our deferred tax assets is dependent on generating sufficient taxable income in future periods. We do not believe that it is more likely than not that future taxable income will be sufficient to allow us to recover substantially allany of the value assigned to our deferred tax assets. However, if future events cause us to conclude that it is not more likely than not thatAccordingly, we will be able to recover allhave provided for a valuation allowance of the value assigned to ourCompany's foreign tax credits as we do not anticipate generating sufficient foreign source income. In addition, we have provided for a full valuation allowance on the domestic deferred tax assets weas the combined effect of future domestic source income and the future reversals of future tax assets and liabilities will likely be requiredinsufficient to adjust our valuation allowance accordingly.realize the full benefits of the assets.

 

As of December 31, 2016,2019, the Company does not havehas no net operating loss carry-forwards available in the United States or Canada.carryforward. The Companycompany has approximately $3.5$4.6 million of foreign tax credits for which expire in 2018it has provided a full valuation allowance and $39 of research and development credits which expire in 2032.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, exclusive of interest and penalties, is as follows:

 

  Uncertain Tax Position
Balance as of January 1, 2015 $317 
No activity  —   
Balance as of December 31, 2015 $317 
Decreases related to tax return becoming statuted barred during the year  (113)
Balance as of December 31, 2016 $204 
 Uncertain Tax Position
Balance as of January 1, 2018 $218 
Increases due to changes in foreign exchange  224 
Balance as of December 31, 2018 $442 
Decreases related to tax returns becoming statuted barred during the year  —   
Balance as of December 31, 2019 $442 

 

The Company’s policy is to recognize interest and penalties related to income tax matters as interest expense. Interest and penalties as they relate to the payroll tax issue are recorded as Other Expense.other expense.

 

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is highly uncertain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next twelve months.

 

The tax years subject to examination by major tax jurisdiction include the years 20112013 and forward by the U.S. Internal Revenue Service and most state jurisdictions, and the years 2010 and, generally, 20122014 and forward for the Canadian jurisdiction.

 

15. PENSION PLAN56  

 

A Canadian subsidiary of the Company sponsors a defined benefit pension plan in which a majority of its employees are members. The employer contributes 100% to the plan. The benefits, or the rate per year of credit service, are established by the Company’s subsidiary and updated at its discretion.

Cost of Benefits

The components of the expense the Company incurred under the pension plan are as follows:

    
  Year Ended December 31, 
  2016  2015 
Current service cost, net of employee contributions $46  $50 
Interest cost on accrued benefit obligation  102   103 
Expected return on plan assets  (163)  (160)
Amortization of transitional obligation  10   10 
Amortization of past service costs  7   7 
Amortization of net actuarial gain  37   44 
Total cost of benefit $39  $54 

Benefit Obligation

The Company’s obligation for the pension plan is valued annually as of the beginning of each fiscal year. The projected benefit obligation represents the present value of benefits ultimately payable to plan participants for both past and future services expected to be provided by the plan participants.

The Company’s obligations pursuant to the pension plan are as follows: 

       
  December 31, 
  2016  2015 
Projected benefit obligation, at beginning of year $2,578  $3,057 
Current service cost, net of employee contributions  46   50 
Employee contributions  30   30 
Interest cost  102   103 
Actuarial loss (gain)  15   (66)
Impact of change in discount rate  39   (37)
Benefits paid  (167)  (160)
Foreign exchange adjustment  (15)  (399)
Projected benefit obligation, at end of year $2,628  $2,578 

A summary of expected benefit payments related to the pension plan is as follows:

     
Years Ending December 31,  Pension Plan 
2017  $159 
2018   158 
2019   154 
2020   151 
2021   147 
2022-2026   689 
       

 Other changes in plan assets and benefit obligations recognized in other comprehensive income / (loss) are as follows:

  Year Ended December 31, 
  2016  2015 
Net (loss) / gain $(220) $108 
Amortization of prior service cost  7   7 
Amortization of gain  37   44 
Amortization of transitional asset  10   11 
   (166)  170 
Taxes  (9)  46 
Total recognized in other comprehensive (loss) / income, net of taxes $(157) $124 

The estimated net loss amortized from accumulated other comprehensive income / (loss) into net periodic benefit cost over the next year amounts to approximately $37. The estimated prior service cost amortized from accumulated other comprehensive income into net periodic benefit cost over the next year amounts to approximately $7. The estimated transitional asset amortized from accumulated other comprehensive income into net periodic benefit cost over the next year amounts to approximately $10.

The accumulated other comprehensive income / (loss) consists of the following amounts that have not yet been recognized as components of net benefit cost:

  December 31, 
  2016  2015 
Unrecognized prior service cost $96  $96 
Unrecognized net actuarial loss  1,348   48 
Unrecognized transitional obligation  58   1,191 
Deferred income taxes  (404)  (394)
Total $1,098  $941 

Plan Assets

Assets held by the pension plan are invested in accordance with the provisions of the Company’s approved investment policy. The pension plan’s strategic asset allocation was structured to reduce volatility through diversification and enhance return to approximate the amounts and timing of the expected benefit payments. The asset allocation for the pension plan at the end of 2016 and 2015 and the target allocation for 2017, by asset category, is as follows:

          
  December 31,  2017 Target 
  2016  2015  Allocation 
Equity securities  37%  43%  37%
Fixed income securities  53   47   53 
Real estate  8   8   8 
Other  2   2   2 
Total  100%  100%  100%

The fair market values, by asset category are as follows:

  Fair Value Measurements 
  at December 31, 
  2016  2015 
Equity securities $909  $1,082 
Fixed income securities  1,302   1,182 
Real estate  196   201 
Other  49   50 
Total $2,456  $2,515 

Changes in the assets held by the pension plan in the years 2016 and 2015 are as follows: 

       
  December 31, 
  2016  2015 
Fair value of plan assets, at beginning of year $2,515  $2,706 
Actual return on plan assets  (3)  164 
Employer contributions  96   135 
Employee contributions  30   30 
Benefits paid  (167)  (160)
Foreign exchange adjustment  (15)  (360)
Fair value of plan assets, at end of year $2,456  $2,515 

Contributions

The Company’s policy is to fund the pension plan at or above the minimum required by law. The Company made $0.1 million of contributions to its defined benefit pension plan in each of the 2016 and 2015 years. The Company expects to make contributions of less than $0.1 million to the defined benefit pension plan in 2017. Changes in the discount rate and actual investment returns which continue to remain lower than the long-term expected return on plan assets could result in the Company making additional contributions.

Funded Status

The funded status of the pension plan is as follows:

  December 31, 
  2016  2015 
Projected benefit obligation $2,628  $2,578 
Fair value of plan assets  2,456   2,515 
Accrued obligation (long term) $172  $63 

Assumptions

Assumptions used in accounting for the pension plan are as follows:

  December 31, 
  2016  2015 
Weighted average discount rate used to determine the accrued benefit obligations  3.80%  3.90%
Discount rate used to determine the net pension expense  3.90%  3.80%
Expected long-term rate on plan assets  6.50%  6.50%

To determine the expected long-term rate of return on pension plan assets, the Company considers the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. The Company applies the expected rate of return to a market related value of the assets which reduces the underlying variability in assets to which the Company applies that expected return. The Company amortizes gains and losses as well as the effects of changes in actuarial assumptions and plan provisions over a period no longer than the average future service of employees.

Primary actuarial assumptions are determined as follows:

The expected long-term rate of return on plan assets is based on the Company’s estimate of long-term returns for equities and fixed income securities weighted by the allocation of assets in the plans. The rate is impacted by changes in general market conditions, but because it represents a long-term rate, it is not significantly impacted by short-term market swings. Changes in the allocation of plan assets would also impact this rate.

The assumed discount rate is used to discount future benefit obligations back to today’s dollars. The discount rate is reflective of yield rates on U.S. long-term investment grade corporate bonds on and around the December 31 valuation date. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase the Company’s obligation and expense.

16.17. BUSINESS SEGMENT, GEOGRAPHIC AND CUSTOMER 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 Solutions.Power. The Critical Power Solutions reportable segment is the Company’s Titan Energy Systems Inc. subsidiary.business unit. The T&D Solutions reportable segment is an aggregation of all other Company subsidiaries, together with sales and expenses attributable to the strategic sales group for its T&D Solutions marketing activities.

 

The T&D Solutions segment is involved in the design, manufacture and distribution of electrical transformers and switchgear used primarily by utilities, large industrial and commercial operations to manage their electrical power distribution needs. The Critical Power Solutions segment provides power generation equipment, and 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:

 

 

For the Year Ended

 

 Year Ended December 31,

 

December 31,

 

 2016 2015

 

2019

 

 

2018

 

Revenues    

 

 

 

 

 

 

 

 

T&D Solutions    

 

 

 

 

 

 

 

 

Transformers $81,111  $75,598 
Switchgear  14,759   9,273 

 

$

8,985

 

 

$

8,747

 

  95,870   84,871 

 

$

8,985

 

 

$

8,747

 

Critical Power Solutions        

 

 

 

 

 

 

 

 

Equipment  10,166   14,929 

 

 

1,416

 

 

 

1,580

 

Service  8,366   6,722 

 

 

10,181

 

 

 

9,800

 

  18,532   21,651 

 

 

11,597

 

 

 

11,380

 

Consolidated $114,402  $106,522 

 

$

20,582

 

 

$

20,127

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended

 

 Year Ended December 31,

 

December 31,

 

 2016 2015

 

2019

 

 

2018

 

Depreciation and Amortization    

 

 

 

 

 

 

 

 

T&D Solutions $1,617  $1,643 

 

$

144

 

 

$

318

 

Critical Power Solutions  1,405   1,449 

 

 

162

 

 

 

1,718

 

Unallocated Corporate Overhead Expenses  67   73 

 

 

48

 

 

 

62

 

Consolidated $3,089  $3,165 

 

$

354

 

 

$

2,098

 

 

 

 

 

 

 

 

 

 

 Year Ended December 31,

 

For the Year Ended

 

 2016 2015

 

December 31,

 

Operating Income (Loss)    

 

2019

 

2018

 

Operating Loss

 

 

 

 

 

 

T&D Solutions $4,499  $(972)

 

$

(3,143

)

 

$

(4,093

)

Critical Power Solutions  62   (847)

 

 

(3,581

)

 

(1,326

)

Unallocated Corporate Overhead Expenses  (3,206)  (3,481)

 

 

(5,029

)

 

(3,706

)

Consolidated $1,355  $(5,300)

 

$

(11,753

)

 

$

(9,125

)

 

57  

The following table presents information which reconciles segment assets to consolidated total assets:

 

 December 31,

 

December 31,

 

 2016 2015

 

2019

 

 

2018

 

Assets    

 

 

 

 

 

 

 

 

T&D Solutions $59,779  $50,890 

 

$

6,075

 

 

$

6,024

 

Critical Power Solutions  10,620   12,173 

 

 

4,849

 

 

 

7,745

 

Corporate  7,009   3,813 

 

 

17,147

 

 

 

5,335

 

Consolidated $77,408  $66,876 

 

$

28,071

 

 

$

19,104

 

 

Corporate assets consist primarily of cash and deferred tax assets.short term investment.

 

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

 

 

For the Year Ended

 

 Year Ended December 31, 

 

December 31,

 

 2016  2015 

 

2019

 

 

2018

 

Revenues     

 

 

 

 

 

 

 

 

United States $83,083  $68,752 

 

$

20,582

 

 

$

20,127

 

Canada  31,210   36,740 
Others  109   1,030 
Total $114,402  $106,522 

 

$

20,582

 

 

$

20,127

 

 

Sales to SiemensCleanSpark, Verizon and Fluid Technologies accounted for approximately 15%18%, 13% and 12%, respectively, of the Company’s total sales in 2016, as compared to 10% in 2015.2019.

The distribution of the Company’s property, plant, and equipment by geographic location is approximately as follows:

 

 December 31, 

 

December 31,

 

 2016 2015 

 

2019

 

 

2018

 

Property, plant and equipment        

 

 

 

 

 

 

 

 

Canada $3,793  $4,181 
United States  1,334   1,582 

 

$

640

 

 

$

878

 

Mexico  1,464   1,586 
Total $6,591  $7,349 

 

$

640

 

 

$

878

 

 

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

 

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

 

58  

 

  Year Ended December 31, 
  2016  2015 
Numerator:      
Net loss $(1.063) $(5,881)
         
Denominator:        
Weighted average basic shares outstanding  8,700   7,746 
Effect of dilutive securities - equity based compensation plans      
Net dilutive effect of warrants outstanding      
Denominator for diluted earnings per common share  8,700   7,746 
         
Net loss per common share:        
Basic $(0.12) $(0.76)
Diluted $(0.12) $(0.76)
         
Anti-dilutive securities (excluded from per share calculation):        
Equity based compensation plans  173   345 
Warrants  51   51 

 

 

For the Year Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(12,037

)

 

$

(9,309

)

Income from discontinued operations, net of income taxes

 

 

10,598

 

 

 

3,645

 

Net loss

 

$

(1,439

)

 

$

(5,664

)

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average basic shares outstanding

 

 

8,726

 

 

 

8,726

 

Denominator for diluted net income per common share

 

 

8,726

 

 

 

8,726

 

 

 

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(1.38

)

 

$

(1.07

)

Income from discontinued operations

 

 

1.21

 

 

 

0.42

 

Net loss

 

$

(0.17

)

 

$

(0.65

)

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(1.38

)

 

$

(1.07

)

Income from discontinued operations

 

 

1.21

 

 

 

0.42

 

Net loss

 

$

(0.17

)

 

$

(0.65

)

 

18.19. SUBSEQUENT EVENTS

During the quarter ending March 31, 2020, the Company was notified by Verizon that it will not be renewing its contract with the Company for the period of April 1, 2020 through March 31, 2021.

During the quarter ending March 31, 2020, the Company received $1.4 million of the insurance proceeds due from the June 2019 flood at the Company’s facility in Reynosa, Mexico.

 

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 15, 2017,2020, the maturityWHO 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 the revolving loans under the Canadian facilities was extended to July 31, 2018. Additionally, the amendmentthis report. As such, it is uncertain as to the CAD ARCA includedfull magnitude that the following changes: Facility A was increased to a maximumpandemic will have on the Company’s financial condition, liquidity, and future results of $8.0 million CAD;operations. Management is actively monitoring the reduced Facility B quarterly paymentglobal situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of $47 CAD will continue after July 31, 2017 until our borrowings under the facility is fully paid on April 30, 2018;COVID-19 outbreak and the reduced Facility C quarterly payment of $36 USD will continue until July 31, 2018, with a balloon payment of $352 due on July 31, 2018.

On March 15, 2017,global responses to curb its spread, the expiration dateCompany is not able to estimate the effects of the revolving loans underCOVID-19 outbreak at this time, however if the U.S facilities was extended to July 31, 2018. Additionally, this extension includedpandemic continues it may have an adverse effect on the following changes: USD Facility A was increased to a maximumCompany’s results of $15.0 million USD and USD Facility B quarterly payments of $31 USD will continue until July 31, 2018, with a balloon payment of $4,438 on July 31, 2018.operations, financial condition, or liquidity for fiscal year 2020.

On March 17, 2017, the option holder N. Mazurek, CEO, exercised 13,000 options which had an exercise price of $4.53 per share. The option holder remitted $59 in cash, resulting in a net issuance of 13,000 shares of Common Stock. 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

Not applicable.

 

ITEM 9A. 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 Exchange Act, as of December 31, 2016,2019, the end of the period covered by this Annual Report on Form 10-K. The Disclosure Controls evaluation was done in conjunction with an independent consulting firm and under the supervision and with the participation of management, including our chief executive officer and chief financial officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. As of December 31, 2016,2019, based on the evaluation of these disclosure controls and procedures and in light of the material weaknesses found in our internal controls over financial reporting, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were not effective.effective at the reasonable assurance level.

 

59  

Management’s Report on Internal Control Overover Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate over time.

 

Management, including our chief executive officer and our chief financial officer, assessedPrior to the effectiveness of our internal control over financial reporting as ofyear ended December 31, 2016. In making this assessment,2019, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013).  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of December 31, 2016, we determined that controls are not effective because control deficiencies existed that constituted a material weakness, as described below:

1)       Material weakness in financial close and reporting process – We did not maintain a sufficient complement of adequately trained personnel with an appropriate level of knowledge, experience, and training in the application of GAAP commensurate with our financial reporting requirements to identify and address risks critical to financial reporting. There is also a deficiency in our ability to gather, analyze and thoroughly review information related to financial reporting in a timely manner, and resulted in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness described above could result in further misstatements of the aforementioned accounts and disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting, as permitted by the rules of the SEC.

Remediation Plan

As of December 31, 2016, there werehad identified control deficiencies which constituted a material weakness in our internal control over financial reporting. Management has taken and is taking steps to strengthen our internal control over financial reporting. Specifically, we have implemented the following remediation items:

 

We have executed a plan that provided for the recruitment of new senior personnel at our reporting unit locations, as well as additional training for existing accounting staff as it relates to our financial reporting requirements.

Members of management and the accounting staff have received additional training related to policies, procedures and internal controls, including Pioneer’s policies regarding monthly reconciliations and supervisory review procedures for all significant accounts.

Our corporate accounting group, assisted by an independent consulting firm that has been engaged, has reviewed and assessed progress on the remediation plan noted above.

 

In addition, we have implemented a component part ofManagement, including our restructuringchief executive officer and integration plan, designed to reduceour chief financial officer, assessed the number of our production facilities from six locations to three. As a result, the controls and procedures which were previously identified as ineffective at our Bemag and PCPI reporting units have become inapplicable, as performance of their relevant business activities has been transferred to other Pioneer locations having suitable entity-level controls and financial closing and reporting processes. While we have taken certain actions to address the material weaknesses identified, additional measures may be necessary as we work to improve the overall effectiveness of our internal controlscontrol over financial reporting. 

As previously disclosed in Item 9Areporting as of our Annual Report on Form 10-K for the year ended December 31, 2015,2019. In making this assessment, management used the control deficiencies which constituted a "material weakness" identified was a material weakness in our payroll tax payment process due to a lackcriteria set forth by the Committee of payroll preventative controls to ensure payroll taxes were filed and paid timely, as well as management review controls which resulted in the non-compliance with payroll tax requirements. As oneSponsoring Organizations of the remediation measures taken to address such control deficiencies, we contracted with a third party to process our payroll, prepare all payroll reports and timely remit these taxes to the appropriate tax authorities.Treadway Commission in Internal Control — Integrated Framework (2013). In our assessment of the effectiveness of internal control over financial reporting as of December 31, 2016, management has concluded2019, we determined that this has been fully remediated atour internal control over financial reporting of the December 31, 2016.

2019, is effective.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting, as permitted by the rules of the SEC.

Changes in Internal Control over Financial Reporting

 

Other than the changes discussed above in the Remediation Plan,remediation items, there has been no change in our internal control over financial reporting during the fourth quarter ended December 31, 20162019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

60  

PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers and Directors

 

The information requiredfollowing table sets forth the name, age and positions of our executive officers and the members of our board of directors:

Name

Age

Position with the Company

Nathan J. Mazurek

58

President, Chief Executive Officer and Chairman of the Board of Directors

Thomas Klink

57

Chief Financial Officer, Secretary, Treasurer and Director

Yossi Cohn

41

Director

Ian Ross

76

Director

David Tesler

46

Director

Jonathan Tulkoff

58

Director

The board of directors currently consists of six members. Following the death of our former director, David J. Landes, in September 2019, in an effort to reduce costs, we have determined not to fill his position and instead reduced the size of the board to six directors.

Our directors hold office until the earlier of their death, resignation or removal by this item willstockholders or until their successors have been qualified. Our directors serve a term of office to expire at the annual meeting of stockholders in 2020. At each annual meeting of stockholders, directors elected to succeed those directors whose terms expire shall be included underelected for a term of office to expire at the caption “Directors, Executive Officersnext annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and Corporate Governance”qualified.

Our officers hold office until the earlier of their death, resignation or removal by our board of directors or until their successors have been selected. They serve at the pleasure of our board of directors.

Nathan J. Mazurek.Mr. Mazurek has served as our chief executive officer, president and chairman of the board of directors since December 2, 2009. From December 2, 2009 through August 12, 2010, Mr. Mazurek also served as our chief financial officer, secretary and treasurer. Mr. Mazurek has over 25 years of experience in the electrical equipment and components industry. Mr. Mazurek has served as the chief executive officer, president, vice president, sales and marketing and chairman of the board of directors of Pioneer Transformers Ltd. since 1995. Mr. Mazurek has served as the president of American Circuit Breaker Corp., a former manufacturer and distributor of circuit breakers, since 1988. From 1999 through 2017, Mr. Mazurek served as director of Empire Resources, Inc., a distributor of semi-finished aluminum and steel products. From 2002 through 2007, Mr. Mazurek served as president of Aerovox, Inc., a manufacturer of AC film capacitors. Mr. Mazurek received his BA from Yeshiva College in 1983 and his JD from Georgetown University Law Center in 1986. Mr. Mazurek brings to the board extensive experience with our company and in our Proxy Statementindustry. Since he is responsible for, and familiar with, our day-to-day operations and implementation of our strategy, his insights into our performance and into the electrical equipment and components industry are critical to board discussions and to our success.

Thomas Klink. Mr. Klink has served as a director since April 30, 2010 and as our chief financial officer, secretary and treasurer since January 7, 2016. Since 1996, he has served in various positions at Jefferson Electric, Inc., including as its chief executive officer, chief financial officer, vice president, treasurer, secretary and chairman of the board of directors. Previously, from 1994 to 1996, Mr. Klink served as a division controller at MagneTek, Inc., a company listed on NASDAQ, reporting to the corporate controller. Mr. Klink also previously served as a controller for U.S. Music Corporation, a manufacturer of musical instruments from 1990 through 1994. Mr. Klink received his BBA in Accounting from the University of Wisconsin – Milwaukee in 1984. Mr. Klink brings extensive industry and leadership experience to our board, including over 15 years of experience in the electrical equipment industry Mr. Klink continues to be the president of Jefferson Electric, which was sold as part of the Equity Transaction during 2019. Additionally, Mr. Klink is also employed by Pioneer Transformers L.P. as their president and CFO.

Yossi Cohn. Mr. Cohn has served as a director since December 2, 2009. Mr. Cohn founded L3C Capital Partners, LLC, an investor in multi-family residential properties, in June 2009, and serves as a partner in the firm. Mr. Cohn served as a director of investor relations at IDT Corporation, a NYSE-listed telecommunications company, from September 2005 through May 2007. Prior to joining IDT Corporation, Mr. Cohn was a director of research at SAGEN Asset Management, an asset manager of funds of hedge funds, from January 2005 through May 2005. Mr. Cohn began his career as an analyst in the funds-of-funds investment group of Millburn Ridgefield Corporation, where he worked from 2001 through January 2005. Our board believes Mr. Cohn’s background at these and other companies, particularly in areas of capital markets, financial, strategic and investment management experience, makes him an effective member of our board.

Ian Ross. Mr. Ross has served as a director since March 24, 2011. In 2000, Mr. Ross co-founded and has since served as president of Omniverter Inc., a company specializing in electrical power quality solutions for industrial producers and electrical utilities in the U.S. and Canada. He has also served as the president of KIR Resources Inc. and KIR Technologies Inc. since 1999, companies engaged in management consulting and import/export activities in the electrical equipment industry, respectively. Mr. Ross previously held positions in Canada as vice president technology with Schneider Canada, a specialist in energy management, and vice president of the distribution products business at Federal Pioneer Ltd., now part of Schneider Canada. Previously, Mr. Ross held a number of successive board level positions in UK engineering companies, culminating in five years as managing director, Federal Electric, Ltd., before moving to Canada in 1986 at the request of Federal Pioneer Ltd. He received an MA in mechanical sciences (electrical and mechanical engineering) from Cambridge University and subsequently qualified as an accountant ACMA. Our board believes that Mr. Ross’ relationships and broad experience in the electrical transmission and distribution equipment industry will assist us in continuing to grow our business and realizing our strategic goals.

61  

David Tesler. Mr. Tesler has served as a director since December 2, 2009. Mr. Tesler is President of LeaseProbe, LLC, a provider of lease abstracting services, since he founded the company in 2004. In 2008, LeaseProbe, LLC acquired Real Diligence, LLC, a provider of financial due diligence services. The combined company does business as Real Diligence and operates as an integrated outsourced provider of legal and commercial due diligence services for the 2017 Annual Meetingcommercial real estate industry. Prior to 2004, Mr. Tesler practiced law at Skadden Arps Slate Meager & Flom LLP and at Jenkens & Gilchrist, Parker Chapin LLP. Mr. Tesler received his BA from Yeshiva College, an MA in medieval history from Bernard Revel Graduate School and a JD from Benjamin A. Cardozo School of StockholdersLaw. Mr. Tesler brings extensive legal, strategic and executive leadership experience to be filedour board.

Jonathan Tulkoff. Mr. Tulkoff has served as director since December 2, 2009. Mr. Tulkoff began his career as a currency trader at Marc Rich & Co, he then joined Forest City enterprises, a publicly traded real estate development company, and was a VP in the acquisition and development division. In 2016, Mr. Tulkoff founded Commodity Asset Management, an industrial materials investment fund. For the last twenty years, Mr. Tulkoff has been involved in trading, marketing and financing of physical commodities, with distinct expertise in ferrous metals. Mr. Tulkoff is Series 3 licensed. Our board believes Mr. Tulkoff’s extensive strategic, international and executive leadership experience, particularly in commodity markets for metal products which represent one of the largest components of our company’s cost of manufacture, make him an effective member of our board. The board of directors regards all of the individuals above as competent professionals with many years of experience in the business community. The board of directors believes that the overall experience and knowledge of the members of the board of directors will contribute to the overall success of our business.

Family Relationships

There are no family relationships among any of our directors and executive officers. Messrs. Mazurek and Klink are parties to certain agreements related to their service as executive officers and directors described in the “Agreements with Executive Officers” section of Item 11.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and officers, and persons who own more than ten percent of our common stock, to file with the SEC within 120 daysinitial reports of ownership and reports of changes in ownership of our common stock. Directors, officers and persons who own more than ten percent of our common stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based solely on a review of the copies of such reports furnished to us, during the fiscal year ended December 31, 2016 (the “2017 Proxy Statement”)2019, each of our directors, officers and greater than ten percent stockholders complied with all Section 16(a) filing requirements applicable to our directors, officers and greater than ten percent stockholders.

Board Committees

Our board of directors established an audit committee on March 24, 2011, which has the composition and responsibilities described below. We do not have a standing nominating and corporate governance committee or a compensation committee.

Audit Committee. The audit committee consists of Messrs. Cohn, Ross and Tulkoff, each of whom our board has determined to be financially literate and qualify as an independent director under Section 5605(a)(2) of the rules of the Nasdaq Stock Market. In addition, Mr. Ross is incorporated herein by reference. The information required by this item regarding delinquent filers pursuant tothe chairman of the audit committee and qualifies as a financial expert as defined in Item 405407(d)(5)(ii) of Regulation S-KS-K. The audit committee’s duties are to recommend to our board of directors the engagement of independent auditors to audit our financial statements and to review our accounting and auditing principles. The audit committee will review the scope, timing and fees for the annual audit and the results of audit examinations performed by internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee held a total of four meetings during the fiscal year ended December 31, 2019. The audit committee operates under a formal charter adopted by the board of directors that governs its duties and conduct. Copies of the charter can be included underobtained free of charge from the caption “Section 16(a) Beneficial Ownership Reporting Compliance” inCompany’s web site, www.pioneerpowersolutions.com, by contacting the 2016 Proxy StatementCompany by mail at the address appearing on the first page of this Annual Report on Form 10-K to the attention of Investor Relations, or by telephone at (212) 867-0700.   

62  

Code of Business Conduct and Ethics

We have adopted a code of business conduct and ethics that applies to our directors, officers, and employees, including our principal executive officer, principal financial officer and principal accounting officer, which is incorporated herein by reference.posted on our website at www.pioneerpowersolutions.com. We intend to disclose future amendments to certain provisions of the code of ethics, or waivers of such provisions granted to executive officers and directors, on this website within four business days following the date of such amendment or waiver. 

 

ITEM 11.  EXECUTIVE COMPENSATION

Compensation Philosophy and Process

The responsibility for establishing, administering and interpreting our policies governing the compensation and benefits for our executive officers lies with our senior management, subject to the review and approval of our board of directors. Our board of directors has not retained the services of any compensation consultants.

The goals of our executive compensation program are to attract, motivate and retain individuals with the skills and qualities necessary to support and develop our business within the framework of our size and available resources. In 2018, we designed our executive compensation program to achieve the following objectives:

attract and retain executives experienced in developing and delivering products such as our own;

motivate and reward executives whose experience and skills are critical to our success;

reward performance; and

align the interests of our executive officers and other key employees with those of our stockholders by motivating our executive officers and other key employees to increase stockholder value.

As a “controlled company” under the corporate governance rules of the Nasdaq stock market, we are not required to have a compensation committee, nor have we engaged any compensation consultants to determine or recommend the amount and form of executive and director compensation during and for 2019. At this time, our board of directors has determined that the financial and administrative burden of engaging compensation consultants is not justified in light of our Company’s size, its resources and our relatively small number of executive officers and directors. Rather, the recommended level, components and rationale for our compensation program are developed and presented each year by our principal executive officers to the board of directors for its consideration and approval. Our board of directors has specific authority to limit cash bonus awards to our named executive officers, as provided for in their employment agreements, which authority may not be delegated to other persons at this time.

63  

2019 and 2018 Summary Compensation Table

 

The informationfollowing table summarizes, for each of the last two fiscal years ended December 31, 2019 and 2018, the compensation paid to (i) Nathan J. Mazurek, our chief executive officer, president and chairman of the board of directors, and (ii) Thomas Klink, who has served as our chief financial officer, secretary and treasurer since January 7, 2016 and prior to that served as the president of Pioneer Transformer LP and a director, whom we refer to collectively herein as the “named executive officers”.

 

Name and Principal Position

 

 

Year

 

 

Salary
($)

 

 

Bonus
(4)
($)

 

 

Option
Awards (1)
($)

 

 

All Other
Compensation
($)

 

 

Total
($)

 

Nathan J. Mazurek

 

 

2019

 

 

 

490,000

 

 

 

900,000

 

 

 

0

 

 

 

27,000

 

(2

)

 

 

1,417,000

 

President, Chief Executive Officer, Chairman of the Board of Directors

 

 

2018

 

 

 

465,000

 

 

 

 

 

 

1,814

 

 

 

15,000

 

(2

)

 

 

481,814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas Klink

 

 

2019

 

 

 

282,292

 

 

 

500,000

 

 

 

0

 

 

 

31,000

 

(3

)

 

 

813,292

 

Chief Financial Officer, Secretary, Treasurer, and Director

 

 

2018

 

 

 

356,667

 

 

 

 

 

 

 

1,814

 

 

 

20,000

 

(3

)

 

 

378,480

 

(1)

Amounts represent the aggregate grant date fair value, as determined in accordance with FASB ASC Topic 718, with the exception that the amounts shown assume no forfeitures. The assumptions used to calculate the value of share based awards are set forth in “Item 8. Financial Statements and Supplementary Data – Note 15. Stock-Based Compensation” contained in this Annual Report. These amounts do not represent the actual value that may be realized by our named executive officers, as that is dependent on the long-term appreciation in our common stock.

(2)

Comprised of board of directors meeting fees.

(3)

Comprised of board of directors and audit committee meeting fees.

(4)

The dollar value of bonus (cash) earned by the named executive officers during the year ended December 31, 2019.

Agreements with Executive Officers

Nathan J. Mazurek

We entered into an employment agreement with Mr. Mazurek, dated as of December 2, 2009, pursuant to which Mr. Mazurek was to serve as our chief executive officer for a term of three years. Pursuant to this employment agreement, Mr. Mazurek was entitled to receive an annual base salary of $250,000 from December 2, 2009 through December 2, 2010, which was increased to $275,000 on December 2, 2010 and to $300,000 on December 2, 2011. Mr. Mazurek was entitled to receive an annual cash bonus at the discretion of our board of directors, or a committee thereof, of up to 50% of his annual base salary, which percentage was permitted to be increased in the discretion of the board.

This agreement prohibited Mr. Mazurek from competing with us for a period of four years following the date of termination, unless he was terminated without cause or due to disability or he voluntarily resigned following a breach by us of this agreement, in which case he was prohibited from competing with us for a period of only two years.

We entered into a new employment agreement with Mr. Mazurek, dated as of March 30, 2012, pursuant to which Mr. Mazurek will serve as our chief executive officer for a three year term ending on March 31, 2015. Pursuant to this new employment agreement, Mr. Mazurek was entitled to receive an annual base salary of $350,000 during the remainder of the 2012 calendar year, which increased to $365,000 during the 2013 calendar year and then to $380,000 for the remainder of his employment term. The other material terms of the new employment agreement are substantially similar to those under his previous agreement, except that Mr. Mazurek has agreed not to compete with us for a period of one year following the termination of his employment for any reason.

On November 11, 2014, we entered into a first amendment to our employment agreement with Mr. Mazurek, pursuant to which the term of the employment agreement was extended by a period of three years ending on March 31, 2018. In addition, pursuant to this employment agreement, as amended, Mr. Mazurek became entitled to receive an annual base salary of $410,000 beginning on the amendment effective date and ending on December 31, 2015, which increased to $425,000 during the 2016 calendar year.

On June 30, 2016, we entered into a second amendment to our employment agreement with Mr. Mauzurek, pursuant to which the term of the employment agreement was extended by a period of five years ending on March 31, 2021. In addition, pursuant to this employment agreement, as amended, Mr. Mazurek became entitled to receive an annual base salary of $425,000 for the period beginning on January 1, 2016 and ending on December 31, 2016, $440,000, for the period beginning on January 1, 2017 and ending on December 31, 2017, $465,000, for the period beginning on January 1, 2018 and ending on December 31, 2018, $490,000, for the period beginning on January 1, 2019 and ending on December 31, 2019, and $515,000 per annum, for the period beginning on January 1, 2020 and ending on March 31, 2021.

64  

If Mr. Mazurek is terminated without cause, he is entitled to receive (i) any unpaid base salary accrued through the date of his termination, (ii) any unreimbursed expenses properly incurred prior to the date of his termination, and (iii) severance pay equal to the base salary that would have been payable to Mr. Mazurek for the remainder of the term of his executive employment agreement, which expires on March 31, 2021, less applicable withholdings and taxes. As a precondition to receiving severance pay, Mr. Mazurek is required to execute and deliver within sixty (60) days following his termination a general release of claims against the us and our subsidiaries and affiliates that may have arisen on or before the date of the release.

For purposes of Mr. Mazurek’s executive employment agreement, “cause” generally means termination because of: (i) an act or acts of willful or material misrepresentation, fraud or willful dishonesty by Mr. Mazurek; (ii) any willful misconduct by Mr. Mazurek with regard to the Company; (iii) any violation by Mr. Mazurek of any fiduciary duties owed by him to the Company; (iv) Mr. Mazurek’s conviction of, or pleading nolo contendere or guilty to, a felony (other than a traffic infraction) or (v) any other material breach by Mr. Mazurek of the executive employment agreement that is not cured by him within twenty (20) days after his receipt of a written notice from the Company of such breach specifying the details thereof.

As stated earlier, on June 28, 2019, we entered into the Stock Purchase Agreement by and among the Company, Electrogroup, Jefferson, JE Mexico, Nathan Mazurek, and the Buyer, which was subsequently amended as of August 13, 2019. Pursuant to the Stock Purchase Agreement, as amended by the Amendment, the Equity Transaction was completed on August 16, 2019. Pursuant to the Stock Purchase Agreement, Mr. Mazurek agreed to a non-solicitation provision that generally prohibits him, for a three-year period, from, among other things, soliciting or attempting to hire employees of the Disposed Companies or the Buyer or engaging in the business operated by the Disposed Companies within certain geographic areas, subject to certain limitations and exceptions. See the “Certain Related Transactions and Relationships” section of this itemProxy Statement.

Thomas Klink

On April 30, 2010, in connection with our acquisition of Jefferson Electric, Inc., Jefferson Electric, Inc. entered into an employment agreement with Thomas Klink pursuant to which Mr. Klink is serving as Jefferson Electric, Inc.’s president, subject to the authority of our chief executive officer, Mr. Mazurek, for an original term of three years. Mr. Klink was initially entitled to receive an annual base salary of $312,000. Mr. Klink’s employment may be terminated upon his death or disability, upon the occurrence of certain events that constitute “cause,” and without cause. If terminated without cause, Mr. Klink will be includedentitled to receive as severance an amount equal to his base salary for the remainder of the employment period under the captions “Director Compensation,” “Executive Compensation”agreement, conditioned upon his execution of a release in form reasonably acceptable to counsel of Jefferson Electric, Inc. On April 30, 2013, Jefferson Electric, Inc. and “Directors,Mr. Klink entered into an amendment to this employment agreement, pursuant to which the term was extended to April 30, 2016, unless terminated earlier in accordance with its terms, and Mr. Klink’s annual base salary was reduced to $250,000.

On January 7, 2016, Mr. Klink was appointed as our chief financial officer, secretary and treasurer.

On June 30, 2016, we entered into a second amendment to our employment agreement with Mr. Klink, pursuant to which the term was extended to April 30, 2019. In addition, Mr. Klink became entitled to an annual base salary of $315,000 for the period beginning on May 1, 2016 and ending on April 30, 2017, $340,000 for the period beginning on May 1, 2017 and ending on April 30, 2018, and $365,000 for the period beginning on May 1, 2018 and ending on April 30, 2019.

On February 15, 2019, we entered into a third amendment to our employment agreement with Mr. Klink, pursuant to which the term was extended to April 30, 2020, and Mr. Klink’s annual based salary was adjusted to $390,000 for the period beginning on May 1, 2019 and ending on April 30, 2020.

Effective with the Equity Transaction, Mr. Klink’s compensation was reduced to $125,000 annually.

65  

Outstanding Equity Awards at Fiscal Year End

The following table provides information on stock options previously awarded to each of the named executive officers and which remained outstanding as of December 31, 2019. This table includes unexercised and unvested options awards. Each outstanding award is shown separately for each named officer.

 

 

 

 

 

 

Option Awards

 

 

 

 

 

 

Name

 

Date

of Grant

 

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable

 

Number of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

 

 

Option

Exercise

Price

($)

 

Option

Expiration

Date

 

Nathan J. Mazurek

 

3/23/2010

 

400  (2)

 

-

 

$

16.25

 

3/23/2020

 

 

 

3/24/2011

 

400  (2)

 

-

 

 

12.00

 

3/24/2021

 

 

 

3/23/2012

 

1,000  (2)

 

-

 

 

4.11

 

3/23/2022

 

 

 

3/20/2013

 

25,000  (3)

 

-

 

 

5.60

 

3/20/2023

 

 

 

3/20/2013

 

1,000  (2)

 

-

 

 

5.60

 

3/20/2023

 

 

 

3/06/2014

 

50,000  (3)

 

-

 

 

10.21

 

3/06/2024

 

 

 

3/06/2014

 

1,000  (2)

 

-

 

 

10.21

 

3/06/2024

 

 

 

3/30/2015

 

1,000  (2)

 

-

 

 

8.98

 

3/30/2025

 

 

 

3/10/2016

 

1,000  (2)

 

-

 

 

3.68

 

3/10/2026

 

 

 

3/30/2017

 

1,000  (2)

 

-

 

 

7.30

 

3/30/2027

 

 

 

3/30/2017

 

130,000  (4)

 

-

 

 

7.30

 

3/30/2027

 

 

 

4/03/2018

 

1,000  (2)

 

-

 

 

5.60

 

4/03/2028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thomas Klink

 

3/24/2011

 

1,000  (1)

 

-

 

$

12.00

 

3/24/2021

 

 

 

3/24/2011

 

400  (2)

 

-

 

 

12.00

 

3/24/2021

 

 

 

3/23/2012

 

3,000  (1)

 

-

 

 

4.11

 

3/23/2022

 

 

 

3/23/2012

 

1,000  (2)

 

-

 

 

4.11

 

3/23/2022

 

 

 

3/20/2013

 

3,000  (1)

 

-

 

 

5.60

 

3/20/2023

 

 

 

3/20/2013

 

1,000  (2)

 

-

 

 

5.60

 

3/20/2023

 

 

 

3/06/2014

 

1,000  (2)

 

-

 

 

10.21

 

3/06/2024

 

 

 

3/30/2015

 

1,000  (2)

 

-

 

 

8.98

 

3/30/2025

 

 

 

3/10/2016

 

1,000  (2)

 

-

 

 

3.68

 

3/10/2026

 

 

 

3/30/2017

 

1,000  (2)

 

-

 

 

7.30

 

3/30/2027

 

 

 

3/30/2017

 

100,000  (4)

 

-

 

 

7.30

 

3/30/2027

 

 

 

4/03/2018

 

1,000  (2)

 

-

 

 

5.60

 

4/03/2028

 

(1)

Incentive stock options granted for service as an executive officer. Vests in equal annual installments upon each of the first three anniversaries of the grant date.

(2)

Non-qualified stock options granted for service as a director. Vests on the first anniversary of the grant date.

(3)

Non-qualified stock options granted for service as an executive officer. Vests in equal annual installments upon each of the first three anniversaries of the grant date.

(4)

Non-qualified stock options granted for service as an executive officer. Vests on the first anniversary of the grant date.

Change of Control Agreements

We do not currently have plans providing for the payment of retirement benefits to our officers or directors, other than as described under “Agreements with Executive OfficersOfficers” above.

We do not currently have any change-of-control or severance agreements with any of our executive officers or directors, other than as described under “Agreements with Executive Officers” above. In the event of the termination of employment of the named executive officers, any and Corporate Governance – Corporate Governanceall unexercised stock options shall expire and Board Matters – Compensation Committee Interlocksno longer be exercisable after a specified time following the date of the termination, other than as described under “Agreements with Executive Officers” above.

66  

2009 Equity Incentive Plan

On December 2, 2009, our board of directors and Insider Participation”stockholders adopted the 2009 Equity Incentive Plan, pursuant to which 320,000 shares of our common stock were reserved for issuance as awards to employees, directors, consultants and other service providers. The purpose of the 2009 Equity Incentive Plan was to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services were considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in our development and financial success. Under the 2009 Equity Incentive Plan, we were authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, restricted stock, stock appreciation rights, performance unit awards and stock bonus awards. The 2009 Equity Incentive Plan is currently administered by our board of directors but may be subsequently administered by a compensation committee designated by our board of directors. The 2011 Long-Term Incentive Plan that we adopted in May 2011 replaced and superseded the 2009 Equity Incentive Plan in its entirety but any awards granted prior to May 21, 2011 that are still outstanding are subject to the 2009 Equity Incentive Plan.

2011 Long-Term Incentive Plan

On May 11, 2011, our board of directors adopted the 2011 Long-Term Incentive Plan, subject to stockholder approval, which was obtained on May 31, 2011. The 2011 Long-Term Incentive Plan replaces and supersedes the 2009 Equity Incentive Plan. Our outside directors and our employees, including the principal executive officer, principal financial officer and other named executive officers, and certain contractors are all eligible to participate in the 2017 Proxy Statement2011 Long-Term Incentive Plan. The 2011 Long-Term Incentive Plan allows for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards, which may be granted singly, in combination, or in tandem, and upon such terms as are determined by the board or a committee of the board that is incorporated hereindesignated to administer the 2011 Long-Term Incentive Plan. Subject to certain adjustments, the maximum number of shares of our common stock that may be delivered pursuant to awards under the 2011 Long-Term Incentive Plan is 700,000 shares, of which 293,867 were available for future issuances as of December 31, 2019. The 2011 Long-Term Incentive Plan is currently administered by reference.our board of directors but may be subsequently administered by a compensation committee designated by our board of directors. 

Equity Compensation Plan Information

The following table provides certain information as of December 31, 2019 with respect to our equity compensation plans under which our equity securities are authorized for issuance:

 

 

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

 

 

Weighted average
exercise price of
outstanding options,
warrants and rights

 

 

Number of securities
remaining available for
future issuance under
equity compensation plans

 

Equity compensation plans approved by security holders

 

 

379,800

 

 

 

$

7.54

 

 

 

 

Equity compensation plans not approved by security holders

 

 

 

 

 

 

 

 

 

 

Total

 

 

379,800

 

 

 

$

7.54

 

 

 

 

67  

Director Compensation

The following table provides compensation information for the one year period ended December 31, 2019 for each non-employee member of our board of directors:

Name

Fees Earned or
Paid in Cash
($)

Total
($)

Yossi Cohn

31,000  (1

)

31,000

David J. Landes (3)

15,000  (2

)

15,000

Ian Ross

31,000  (1

)

31,000

David Tesler

24,000  (2

)

24,000

Jonathan Tulkoff

31,000  (1

)

31,000

(1)

Comprised of board of directors and audit committee meeting fees.

(2)

Comprised of board of directors meeting fees.

(3)

Mr. Landes died on September 13, 2019.

All of our directors, including our employee directors, are paid cash compensation in connection with their attendance at the meetings of the board of directors. Our directors are also reimbursed for reasonable out-of-pocket expenses incurred in connection with their attendance at such meetings.For the year ended December 31, 2019, our directors were paid cash compensation of $3,000 per meeting for attendance. In addition, the members of our audit committee and our chief financial officer received a fee of $1,000 per meeting for attendance at a meeting of our audit committee for the year ended December 31, 2019.

68  

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth information required by this item willwith respect to the beneficial ownership of our common stock as of March 30, 2020 by:

each person known by us to beneficially own more than 5.0% of our common stock;

each of our directors;

each of the named executive officers; and

all of our directors and executive officers as a group.

The percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be included undera beneficial owner of a security if that person has or shares voting power, which includes the captions “Common Stock Ownershippower to vote or to direct the voting of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information”the security, or investment power, which includes the power to dispose of or to direct the disposition of the security. Except as indicated in the 2017 Proxy Statementfootnotes to this table, each beneficial owner named in the table below has sole voting and sole investment power with respect to all shares beneficially owned and each person’s address, unless otherwise specified in the notes below, is incorporated herein by reference.c/o Pioneer Power Solutions, Inc., 400 Kelby Street, 12th Floor, Fort Lee, New Jersey 07024. As of March 30, 2020, we had 8,726,045 shares outstanding.

 

 

Number of Shares

 

 

Percentage

 

Name of Beneficial Owner

 

Beneficially

 

 

Beneficially

 

 

 

Owned (1)

 

 

Owned (1)

 

5% Owners

 

 

 

 

 

 

 

 

 

Estate of David J. Landes

 

 

4,567,800

(2

)

 

 

52.3

%

Provident Pioneer Partners, L.P.

 

 

4,560,000

(3

)

 

 

52.3

%

North Star Investment Management Corporation

 

 

2,515,820

(4

)

 

 

28.8

%

A. Lawrence Carroll Trust

 

 

975,000

(5

)

 

 

11.2

%

Kennedy Capital Management, Inc.

 

 

441,455

(6

)

 

 

5.1

%

 

 

 

 

 

 

 

 

 

 

Officers and Directors

 

 

 

 

 

 

 

 

 

Nathan J. Mazurek

 

 

4,785,800

(7

)

 

 

53.5

%

Thomas Klink

 

 

214,400

(8

)

 

 

2.4

%

Yossi Cohn

 

 

7,800

(9

)

 

 

 

*

Ian Ross

 

 

7,400

(9

)

 

 

 

*

David Tesler

 

 

11,550

(10

)

 

 

 

*

Jonathan Tulkoff

 

 

17,800

(11

)

 

 

 

*

All directors and executive officers as a group (6 persons)

 

 

5,044,750

 

 

 

 

56.5

%

* represents ownership of less than 1%.

(1)

Shares of common stock beneficially owned and the respective percentages of beneficial ownership of common stock assumes the exercise of all options, warrants and other securities convertible into common stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of March 30, 2020. Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days are deemed outstanding and held by the holder of such options or warrants for computing the percentage of outstanding common stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person.

(2)David J. Landes was our former director who died on September 13, 2019. Estate of David J. Landes is the minority stockholder and a control person of Provident Canada Corp., the general partner of Provident Pioneer Partners, L.P., and, as such, has beneficial ownership of the 4,560,000 shares of common stock held by Provident Pioneer Partners, L.P. In addition, includes 7,800 shares subject to stock options which are exercisable within 60 days of March 30, 2020. 

(3)

Includes 4,560,000 shares of common stock held by Provident Pioneer Partners, L.P. Nathan J. Mazurek is the majority stockholder and a control person of Provident Canada Corp., the general partner of Provident Pioneer Partners, L.P., and, as such, has sole voting and investment power over these shares.

(4)

Beneficial ownership is based on information contained in Amendment No. 2 to Schedule 13G filed on January 8, 2020. The beneficial owner’s address is 20 N. Wacker Drive, Suite 1416, Chicago, Illinois 60606.

(5)

Beneficial ownership is based on information contained in Amendment No. 5 to Schedule 13G filed on January 31, 2020. A. Lawrence Carroll is the trustee of the A. Lawrence Carroll Trust and, in such capacity, has voting and dispositive power over the securities held for the account of this stockholder. The beneficial owner’s address is 415 L’Ambiance Drive, #804, Longboat Key, FL 34228.

(6)

Beneficial ownership is based on information contained in Amendment No. 1 to Schedule 13G filed on February 14, 2020. The beneficial owner’s address is 10829 Olive Blvd St Louis, Missouri 63141.

69  

(7)

Nathan J. Mazurek is the majority stockholder and a control person of Provident Canada Corp., the general partner of Provident Pioneer Partners, L.P., and, as such, has sole voting and investment power over the 4,560,000 shares of common stock held by Provident Pioneer Partners, L.P. In addition, includes 212,800 shares subject to stock options which are exercisable within 60 days of March 30, 2020.

(8)

Includes 100,000 shares of common stock and 114,400 shares subject to stock options which are exercisable within 60 days of March 30, 2020.

(9)

Comprised of shares subject to stock options which are exercisable within 60 days of March 30, 2020.

(10)

David J. Landes was the minority stockholder and a control person of Provident Canada Corp., the general partner of Provident Pioneer Partners, L.P., and, as such, has beneficial ownership of the 4,560,000 shares of common stock held by Provident Pioneer Partners, L.P. In addition, includes 7,800 shares subject to stock options which are exercisable within 60 days of March 30, 2020. Mr. Landes died on September 13, 2019.

(11)

Includes 3,750 shares of common stock and 7,800 shares subject to stock options which are exercisable within 60 days of March 30, 2020.

(12)

Includes 10,000 shares of common stock and 7,800 shares subject to stock options which are exercisable within 60 days of March 30, 2020.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

AdditionalCertain Related Transactions and Relationships

Generally, we do not enter into related party transactions unless the members of the board who do not have an interest in the potential transaction have reviewed the transaction and determined that (i) we would not be able to obtain better terms by engaging in a transaction with a non-related party and (ii) the transaction is in our best interest. This policy applies generally to any transaction in which we are to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the previous two completed fiscal years, and in which any related person had or will have a direct or indirect material interest.  This policy is not currently in writing. In addition, our audit committee, which was established on March 24, 2011, is required to pre-approve any related party transactions pursuant to its charter.

On June 28, 2019, we entered into a Stock Purchase Agreement, dated as of June 28, 2019 (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek, Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”), which was subsequently amended by Amendment No. 1 to the Stock Purchase Agreement, dated as of August 13, 2019 (the “Amendment”). Pursuant to the Stock Purchase Agreement, as amended by the Amendment, the Company agreed to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer (collectively, the “Equity Transaction”).

On August 16, 2019, the Company completed the Equity Transaction pursuant to the terms and conditions of the Stock Purchase Agreement, as amended by the Amendment. As consideration for the Disposed Companies, Buyer paid the Company a base aggregate purchase price of $68.0 million, consisting of (i) $60.5 million of cash, (ii) the issuance by the Buyer of a subordinated promissory note to the Company in the aggregate principal amount of $5.0 million and (iii) the issuance by the Buyer of a subordinated promissory note to the Company in the aggregate principal amount of $2.5 million. The purchase price was subject to a customary working capital adjustment. 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 note not to $3.3 million. After these adjustments, the Company’ net consideration for this sale received was $45.2 million in net consideration for this sale. Nathan Mazurek, who is considered a related person due to his position as chairman, chief executive officer and president of the Company and is a holder of approximately 53.5% of the outstanding shares of our common stock, is a party to the Stock Purchase Agreement with respect to the non-solicitation, confidentiality and non-competition provisions.

In connection with the Stock Purchase Agreement, for a period of three years commencing on the closing date, except on behalf of the Buyer, the Disposed Companies or any of their respective affiliates in the ordinary scope of their respective duties, Nathan Mazurek has agreed not to (i) directly or indirectly engage, solicit, induce, hire or attempt to engage, solicit, induce or hire, whether or not for consideration, any employee or independent contractor of the Disposed Companies, certain direct or indirect subsidiaries of the Company, or the Buyer, who is (or was within seven (7) months prior to the date of the Stock Purchase Agreement) employed by any of the Disposed Companies, such subsidiaries of the Company or the Buyer, subject to certain limitations, (ii) disclose or use confidential information required by this item will be includedrelated to the Disposed Companies or certain subsidiaries of the Company, subject to certain limitations and exceptions, or (iii) engage in the design, manufacture and distribution of electric transformers from 5kva – 30mva in size and 110v-72kv in voltage in certain geographic areas or have any ownership of any business within those geographic areas conducting such business or solicit business away from the Buyer, the Disposed Companies or certain subsidiaries of the Company, in each case subject to certain limitations and exceptions.

70  

Director Independence

Our board of directors has determined that each of Yossi Cohn, Ian Ross, David Tesler and Jonathan Tulkoff satisfy the requirements for independence set out in Section 5605(a)(2) of the Nasdaq Stock Market Rules and that each of these directors has no material relationship with us (other than being a director and/or a stockholder). In making its independence determinations, the board of directors sought to identify and analyze all of the facts and circumstances relating to any relationship between a director, his immediate family or affiliates and our company and our affiliates and did not rely on categorical standards other than those contained in the Nasdaq Stock Market rule referenced above.

Because Nathan Mazurek, our president, chief executive officer and chairman of the board of directors, controls a majority of our outstanding voting power, we are a “controlled company” under the captions “Certain Relationshipscorporate governance rules of the Nasdaq Stock market. Therefore, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, our small size and Related Transactions”our desire to efficiently manage our financial and “Directors, Executive Officersadministrative resources, our board of directors has determined not to have an independent nominating or compensation committee and Corporate Governance  – Corporate Governanceto have the full board of directors be directly responsible for compensation matters and Board Matters  – Director Independence” infor nominating members of our board. However, only Messrs. Cohn, Ross, Tesler and Tulkoff satisfy the 2017 Proxy Statement and is incorporated herein by reference.independence requirement that would apply to the members of such committees under the Nasdaq Stock Market Rules.   

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

BDO USA, LLP served as our independent registered public accounting firm for the fiscal years ended December 31, 2019 and 2018.

 

The information requiredfollowing table presents aggregate fees for professional services rendered by this item will be included underBDO USA, LLP during the caption “Independentfiscal years ended December 31, 2019 and 2018:

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

Audit fees (1)

 

$

600

 

 

$

490

 

Audit-related fees (2)

 

 

36

 

 

 

12

 

Tax fees (3)

 

 

 

 

 

5

 

Total fees

 

$

636

 

 

$

507

 

(1)

Audit fees consisted primarily of fees for the annual audit of our consolidated financial statements, the interim reviews of the quarterly consolidated financial statements, review of a registration statement and normal, recurring accounting consultations.

(2)

Audit-related fees consisted of fees related to an agreed upon procedures project related to the Equity Transaction during the year ended December 31, 2019 and the audit of an employee benefit plan during the year ended December 31, 2018.

(3)

Tax fees consisted primarily of fees related for tax compliance.

Pre-Approval of Independent Registered Public Accounting Firm”Firm Fees and Services Policy

Our audit committee pre-approves all auditing and permitted non-audit services to be performed for us by our independent auditor against estimates submitted by the auditor, except for de minimis non-audit services that are approved by the audit committee prior to the completion of the audit. The audit committee has pre-established limits that require audit committee approval in advance of any additional funds that may be required in excess of the auditor’s estimate. The audit committee may form and delegate authority to subcommittees consisting of one or more members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services. The audit committee pre-approved all of the fees set forth in the 2017 Proxy Statement and is incorporated herein by reference.table above.


PART IV

 

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

a.

We have filed the following documents as part of this Annual Report on Form 10-K:

1.

Consolidated Financial Statements

The following financial statements are included in Item 8 herein:

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Operations for the Years Ended December 31, 20162019 and 20152018

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 20162019 and 20152018

Consolidated Balance Sheets as of December 31, 20162019 and 20152018

Consolidated Statements of Cash Flows for the Years Ended December 31, 20162019 and 20152018

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 20162019 and 20152018

Notes to Consolidated Financial Statements

2.

Financial Statement Schedules

None

3.

Exhibits

See the Index to Exhibits immediately following the signature page of this Annual Report on Form 10-K.

 

ITEM 16. FORM 10-K SUMMARY.

 

None

 

69 

72  

 

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.INDEX TO EXHIBITS

 

Exhibit No.

PIONEER POWER SOLUTIONS, INC.

Description

2.1

Agreement and Plan of Merger Agreement, dated January 22, 2019, between Pioneer Critical Power Inc. and CleanSpark. (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on January 28, 2019).

  

Date: March 29, 2017  2.2

By:/s/

Stock Purchase Agreement, dated as of June 28, 2019, by and among Pioneer Power Solutions, Inc., Electrogroup Canada, Inc., Jefferson Electric, Inc., JE Mexican Holdings, Inc., Nathan J. Mazurek,

Name: Nathan J. Mazurek
Title: Chief Executive Officer Pioneer Transformers L.P. and Pioneer Acquireco ULC (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on July 1, 2019).

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

2.3

Amendment No. 1 to the Stock Purchase Agreement, dated as of August 13, 2019, by and among Pioneer Power Solutions, Inc., Electrogroup Canada, Inc., Jefferson Electric, Inc., JE Mexican Holdings, Inc., Pioneer Transformers L.P. and Pioneer Acquireco ULC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on August 14, 2019).

 

SignatureTitleDate
/s/ Nathan J. Mazurek

March 29, 2017

Nathan J. Mazurek

President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)

/s/ Thomas KlinkMarch 29, 2017
Thomas KlinkChief Financial Officer, Secretary, Treasurer and Director (Principal Financial Officer and Principal Accounting Officer)
/s/ Yossi CohnMarch 29, 2017
Yossi CohnDirector
/s/ David J. LandesMarch 29, 2017
David J. LandesDirector
/s/ Ian RossMarch 29, 2017
Ian RossDirector
/s/ David TeslerMarch 29, 2017
David TeslerDirector
/s/ Jonathan TulkoffMarch 29, 2017
Jonathan TulkoffDirector

INDEX TO EXHIBITS

Exhibit No.Description
3.1Composite 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).

3.2Bylaws (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).

4.1*
4.1Form

Description of Securities Purchase Agreement (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 7, 2009).

4.2Warrant to Purchase Common Stock, dated April 30, 2010, issued to Thomas Klink (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on May 4, 2010).
4.3Warrant to Purchase Common Stock, dated April 26, 2010 (Incorporated by reference to Exhibit 4.6 to Post-Effective Amendment No. 1 to Registration Statement on Form S-1 of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on June 1, 2010).
4.4Form of Warrant to Purchase Common Stock, dated September 24, 2013, issued to Roth Capital Partners, LLC and to Monarch Capital Group, LLC (Incorporated by reference to Exhibit 4.8 to Amendment No. 1 to Registration Statement on Form S-1 of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on September 10, 2013).
10.1+Form of Director and Officer Indemnification Agreement (Incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission for the year ended December 31, 2010).

10.2+Pioneer Power Solutions, Inc. 2009 Equity Incentive Plan (Incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 7, 2009).

10.3+Form of 2009 Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 7, 2009).

10.4+Form of 2009 Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 7, 2009).

10.5+Pioneer Power Solutions, Inc. 2011 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on May 31, 2011).

10.6+Employment Agreement, dated December 2, 2009, by and between Pioneer Power Solutions, Inc. and Nathan J. Mazurek (Incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 7, 2009).
10.7+Employment Agreement, dated March 30, 2012, by and between Pioneer Power Solutions, Inc. and Nathan J. Mazurek (Incorporated by reference to Exhibit 10.42 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on March 30, 2012).

10.8+10.7+First Amendment to Employment Agreement, dated November 11th,11th, 2014, by and between Pioneer Power Solutions, Inc. and Nathan J. Mazurek (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on November 12, 2014).
10.9+Employment and Non-Competition Agreement, dated August 12, 2010, by and between Pioneer Power Solutions, Inc. and Andrew Minkow (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on August 18, 2010).
10.10+Employment Agreement, dated March 30, 2012, by and between Pioneer Power Solutions, Inc. and Andrew Minkow (Incorporated by reference to Exhibit 10.43 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on March 30, 2012).
10.11+First Amendment to Employment Agreement, dated November 11th, 2014, by and between Pioneer Power Solutions, Inc. and Andrew Minkow (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on November 12, 2014).

 

10.12+10.8+Employment Agreement, dated April 30, 2010, by and between Jefferson Electric, Inc. and Thomas Klink (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on May 4, 2010).

10.13+10.9+First Amendment to Employment Agreement, dated April 30, 2013, by and between Jefferson Electric, Inc. and Thomas Klink (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on April 30, 2013).

10.14*Collective Labor Agreement, dated January 28, 2016, by and between Pioneer Transformers Ltd. and United Steelworkers, Local Section 9414  (Incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission for the year ended December 31, 2010).
10.15Collective Bargaining Agreement Nexus Magneticos S. de R.L. de C.V., dated January 1, 2011 (Incorporated by reference to Exhibit 10.35 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission for the year ended December 31, 2010).
10.16Collective Labor Agreement, dated March 27, 2014, by and between Bemag Transformer Inc. and Syndicat Québécois des Employées et Employés de Service, Section Locale 298 (FTQ) (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q/A of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on October 31, 2014).
10.17^Agreement dated February, 13, 2015, by and between Pioneer Transformers Ltd. and Hydro-Quebec Utility Company. (Incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on April 2, 2015).
10.18Agreement dated February 13, 2015, by and between Titan Energy Systems and Generac Power Systems, Inc. (Incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on April 2, 2015).
10.19Term Loan Agreement, dated July 25, 2012, by and between Nexus Magneticos S. de R.L. de C.V. and GE CF Mexico, S.A. de C.V. (Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Quarterly Report on Form 10-Q/A of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on November 16, 2012).
10.20Irrevocable Transfer of Title and Guaranty Trust Agreement, dated July 25, 2012, by and among, Nexus Magneticos S. de R.L. de C.V. and GE CF Mexico, S.A. de C.V., Jefferson Electric, Inc., GE CF Mexico, S.A. de C.V. and Banco Invex, S.A. (Incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the Quarterly Report on Form 10-Q/A of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on November 16, 2012).
10.21Corporate Guaranty, dated July 25, 2011, by and between Pioneer Power Solutions, Inc. and GE CF Mexico, S.A. de C.V. (Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Quarterly Report on Form 10-Q/A of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on November 16, 2012).
10.22Industrial Lease between Comercializadora Reynosa Para La Industria Maquiladora S.A. DE C.V. and Nexus Magneticos e Mexico S. de R.L. de C.V (Incorporated by reference to Exhibit 10.41 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on April 1, 2013).
10.23Share Purchase Agreement, dated May 13, 2011, by and among Fiducie Familiale Mazoyer, Bon-Ange Inc., Gilles Mazoyer and 7834080 Canada Inc. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on May 19, 2011).
10.24Amendment Agreement, dated June 30, 2011, by and among Fiducie Familiale Mazoyer, Bon-Ange Inc., Gilles Mazoyer and 7834080 Canada Inc. (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on July 5, 2011).
10.25Equipment Purchase Agreement, dated July 1, 2011, by and among Vermont Transformer, Inc., GCEFF Inc., Gilles Mazoyer and 7834080 Canada Inc. (Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on July 5, 2011).
10.26Credit Agreement, dated as of June 28, 2013, by and among Pioneer Power Solutions, Inc., as borrower, Pioneer Critical Power Inc. and Jefferson Electric, Inc., as guarantors, and Bank of Montreal, Chicago Branch, as lender (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on July 3, 2013).
10.2710.10Security Agreement, dated as of June 28, 2013, by and among Pioneer Power Solutions, Inc., Pioneer Critical Power Inc. and Jefferson Electric, Inc. and Bank of Montreal, Chicago Branch (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on July 3, 2013).

 

10.28Amended and Restated Letter Loan Agreement, dated as of June 28, 2013, by and among Pioneer Electrogroup Canada Inc., Pioneer Transformers Ltd. and Bemag Transformer Inc., as borrowers, and Bank of Montreal, as lender (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on July 3, 2013).
10.29First Amendment to Amended and Restated Letter Loan Agreement, dated as of March 10, 2014, by and among Pioneer Electrogroup Canada Inc., Pioneer Transformers Ltd. and Bemag Transformer Inc., as borrowers, and Bank of Montreal, as lender (Incorporated by reference to Exhibit 10.30 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on March 14, 2014).
10.3010.11Guaranty Agreement, dated as of June 28, 2013, by Pioneer Power Solutions, Inc. in favor of Bank of Montreal (Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on July 3, 2013).
10.31First Amendment to Credit Agreement, dated as of August 7, 2013, by and among Pioneer Power Solutions, Inc., Jefferson Electric, Inc., Pioneer Critical Power Inc. and Bank of Montreal (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on August 14, 2013).
10.32Second Amendment to Credit Agreement, by and among Pioneer Power Solutions, Inc. and Bank of Montreal, Chicago Branch (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on November 12, 2013).
10.33Third Amendment to Credit Agreement, by and among Pioneer Power Solutions, Inc. and Bank of Montreal, Chicago Branch (Incorporated by reference to Exhibit 10.34 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on March 14, 2014).
10.34Fourth Amendment to Credit Agreement, by and among Pioneer Power Solutions, Inc. and Bank of Montreal, Chicago Branch (Incorporated by reference to Exhibit 10.35 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on March 14, 2014).
10.35Fifth Amendment to Credit Agreement, dated as of December 2, 2014, by and among Pioneer Power Solutions, Inc. and Bank of Montreal, Chicago Branch (Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 3, 2014).
10.36Sixth Amendment to Credit Agreement, dated as of March 27, 2015, by and among Pioneer Power Solutions, Inc. and Bank of Montreal, Chicago Branch. (Incorporated by reference to Exhibit 10.36 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on April 2, 2015).
10.37Seventh Amendment to Credit Agreement, dated as of May 15, 10`5, by and among Pioneer Power Solutions, Inc. and Bank of Montreal, Chicago Branch (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on May 15, 2015).
10.38Waiver and Eighth Amendment to Credit Agreement, dated as of August 12, 2015, by and among Pioneer Power Solutions, Inc. and Bank of Montreal, Chicago Branch (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on August 12, 2015).
10.39Amendment to Amended and Restated Loan Agreement, dated as of July 30, 2015, by and among Pioneer Electrogroup Canada Inc., as borrower, Pioneer Power Solutions, Inc., as guarantor, and Bank of Montreal, as lender (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on August 12, 2015).
10.40Limited Duration Waiver and Consent Letter, dated as of November 18, 2015, by and among Pioneer Power Solutions, Inc., Pioneer Electrogroup Canada Inc. and Bank of Montreal, Chicago Branch (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on November 23, 2015).
10.41Form of Series D Convertible Preferred Stock Purchase Agreement (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 3, 2014).
10.42Series A-1 Convertible Preferred Stock Purchase Agreement, dated as of December 2, 2014, by and between Titan Energy Worldwide, Inc. and PTES Acquisition Corp. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 3, 2014).
10.43Loan and Security Agreement, dated as of December 2, 2014, by and between Titan Energy Worldwide, Inc. and PTES Acquisition Corp. (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 3, 2014).

 

10.44Form of Note Purchase Agreement by and between PTES Acquisition Corp. and certain note holders (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 19, 2014).
10.45+General Release and Severance Agreement, dated January 7, 2016, by and between Pioneer Power Solutions, Inc. and Andrew Minkow (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on January 11, 2016).
10.50Limited Duration Waiver and Consent Letter, dated as of March 21, 2016, by and among Pioneer Power Solutions, Inc, Pioneer Electrogroup Canada Inc. and Bank of Montreal, Chicago Branch (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on March 25, 2016).
10.5110.12Amended and Restated Credit Agreement, dated as of April 29, 2016, by and among Pioneer Power Solutions, Inc., as borrower, each of the domestic subsidiary guarantors signatory thereto and Bank of Montreal, Chicago Branch, as lender (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on May 4, 2016).

10.5210.13Amended and Restated Credit Agreement, dated as of April 29, 2016, by and among Pioneer Electrogroup Canada Inc., as borrower, each of the Canadian subsidiary guarantors signatory thereto and Bank of Montreal, as lender (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on May 4, 2016).

10.53+10.14+Second Amendment to Employment Agreement, dated June 30, 2016, by and between Pioneer Power Solutions, Inc. and Nathan J. Mazurek (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on July 1, 2016).

10.54+10.15+Second Amendment to Employment Agreement, dated June 30, 2016, by and between Jefferson Electric, Inc. and Thomas Klink. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on July 1, 2016).

10.16+Third Amendment to Employment Agreement, dated February 15, 2019, by and between Jefferson Electric, Inc. and Thomas Klink. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on February 20, 2019).

10.17
10.55*Waiver Letter, dated March 6, 2017, from Bank of Montreal, Chicago Branch, as lender.
10.56*

First Amending Agreement, dated as of March 15, 2017, by and among Pioneer Power Solutions, Inc., as borrower, each of the domestic subsidiary guarantors signatory thereto and Bank of Montreal, Chicago Branch, as lender.

10.18
10.57*

First Amending Agreement, dated as of March 15, 2017, by and among Pioneer Electrogroup Canada Inc., as borrower, each of the Canadian subsidiary guarantors signatory thereto and Bank of Montreal, as lender.

10.19
21.1ListSecond Amending Agreement, dated as of subsidiaries.March 28, 2018, by and among Pioneer Electrogroup Canada Inc., as borrower, each of the Canadian subsidiary guarantors signatory thereto and Bank of Montreal, as lender (Incorporated by reference to Exhibit 21.110.24 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on April 2, 2015)2018).

10.20Second Amending Agreement, dated as of March 28, 2018, by and among Pioneer Power Solutions, Inc., as borrower, each of the domestic subsidiary guarantors signatory thereto and Bank of Montreal, Chicago Branch, as lender (Incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on April 2, 2018).

10.21Indemnity Agreement, dated January 22, 2019, between the Company, CleanSpark and PCPI. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on January 28, 2019).

23.1*10.22Contract Manufacturing Agreement, dated January 22, 2019, between the Company and CleanSpark. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on January 28, 2019).

10.23Non-Competition and Non-Solicitation Agreement, dated January 22, 2019, between the Company and CleanSpark. (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on January 28, 2019).

74  

10.24

Waiver Letter, dated March 25, 2019, from Bank of Montreal, Montreal Branch, as lender (Incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on March 29, 2019).

10.25

Waiver Letter dated May 6, 2019, from Bank of Montreal, Montreal Branch, as lender (Incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on May 15, 2019).

10.26

Temporary Amendment to Borrowing Base in the PPSI Credit Agreement, dated August 8, 2019, by and between Bank of Montreal, Pioneer Power Solutions, Inc., Pioneer Electrogroup Canada Inc., Jefferson Electric, Inc., Pioneer Critical Power Inc., Pioneer Custom Electrical Products Corp. and Titan Energy Systems, Inc. (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on August 14, 2019).

10.27

Waiver Letter dated August 8, 2019, from Bank of Montreal, Montreal Branch, as lender (Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on August 14, 2019).

21.1*

List of subsidiaries.

23.1*

Consent of BDO USA, LLPLLP.

31.1*

31.1*

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

31.2*

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

32.1*

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

32.2*

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*

101*

The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2019, formatted in XBRL (eXtensible Business Reporting Language), (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Comprehensive Income,(Income) Loss, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Financial Statements.

 

 

^  Certain portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission under a confidential treatment request pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

+ Management contract or compensatory plan or arrangement.

* Filed herewith.

 

75  

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: March 30, 2020 

By:

/s/ Nathan J. Mazurek

Name: Nathan J. Mazurek

Title: Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ Nathan J. Mazurek

March 30, 2020 

Nathan J. Mazurek

 President, Chief Executive Officer and

Chairman of the Board of Directors

(Principal Executive Officer)

/s/ Thomas Klink

March 30, 2020 

Thomas Klink

Chief Financial Officer, Secretary, Treasurer and Director (Principal Financial Officer and Principal Accounting Officer)

/s/ Yossi Cohn

March 30, 2020 

Yossi Cohn

Director

/s/ Ian Ross

March 30, 2020 

Ian Ross

Director

/s/ David Tesler

March 30, 2020 

David Tesler

Director

/s/ Jonathan Tulkoff

March 30, 2020 

Jonathan Tulkoff

Director

76