UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

 

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

For the quarterly period ended September 30, 20172018

OR

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

 

OR

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

Commission file number: 001-35212

 

PIONEER POWER SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 27-1347616
(State of incorporation) (I.R.S. Employer Identification No.)

 

400 Kelby Street, 12th Floor

Fort Lee, New Jersey 07024

(Address of principal executive offices)

 

(212) 867-0700

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 of this chapter) 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 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”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of12b-2of the Exchange Act (Check one):Act.

 

Large accelerated filer☐Accelerated filer☐
Non-accelerated filer☐(Do not check if a smaller reporting company)
Smaller reporting company☒
Emerging growth company☐

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of November 13, 20179, 2018 was 8,726,045.

 

 

 

 

 

PIONEER POWER SOLUTIONS, INC.

Form 10-Q

For the QuarterQuarterly Period Ended September 30, 20172018

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
 
 Page
Item 1. Financial Statements1
Unaudited Consolidated Statements of (Loss) IncomeOperations for the Three and Nine Months Ended September 30, 20172018 and 201620171
Unaudited Consolidated Statements of Comprehensive Income (Loss) Income for the Three and Nine Months Ended September 30, 20172018 and 201620172
Consolidated Balance Sheets at September 30, 20172018 (unaudited) and December 31, 201620173
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20172018 and 201620174
Notes to Unaudited Consolidated Financial Statements5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations1621
Item 3. Quantitative and Qualitative Disclosures About Market Risk2630
Item 4. Controls and Procedures26
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings2731
Item 1A. Risk Factors2732
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds2732
Item 3. Defaults Upon Senior Securities2732
Item 4. Mine Safety Disclosures2732
Item 5. Other Information2732
Item 6. Exhibits28
Signatures2932

 

 

 

PART I –- FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of (Loss) IncomeOperations

(In thousands, except per share data)

(Unaudited)

 

 Three Months Ended Nine Months Ended  Three Months Ended Nine Months Ended
 September 30, September 30,  September 30, September 30,
 2017 2016 2017 2016  2018 2017 2018 2017
Revenues $29,794  $29,389  $87,953  $85,889  $25,956  $25,494  $74,024  $77,835 
Cost of goods sold                             
Cost of goods sold  23,475   22,872   69,547   67,248   20,815   19,609   59,253   60,559 
Restructuring and integration  873   —   873   —   —   873   —   873 
Total cost of goods sold  24,348   22,872   70,420   67,248   20,815   20,482   59,253   61,432 
Gross profit  5,446   6,517   17,533   18,641   5,141   5,012   14,771   16,403 
Operating expenses                                
Selling, general and administrative  5,041   5,338   14,455   14,894   4,081   4,151   12,426   12,676 
Restructuring and integration  —   19   160   199   —   —   —   156 
Foreign exchange gain  (194)  (52)  (465)  (142)  (889)  (194)  (617)  (465)
Total operating expenses  4 ,847   5,305   14,150   14,951   3,192   3,957   11,809   12,367 
Operating Income  599   1,212   3,383   3,690 
Income from continuing operations  1,949   1,055   2,962   4,036 
Interest expense  588   556   1,662   1,151   727   632   2,126   1,792 
Other expense  245   264   647   554   19   112   158   165 
(Loss) / income before taxes  (234)  392   1,074   1,985 
Income before taxes  1,203   311   678   2,079 
Income tax expense  530   70   396   900   415   530   550   396 
Net (loss) / income $(764) $322  $678  $1,085 
Net income (loss) from continuing operations  788   (219)  128   1,683 
Loss from discontinued operations, net of income taxes  (730)  (576)  (1,440)  (1,084)
Net income (loss) $58  $(795) $(1,312) $599 
                                
Net (loss) / income per common share:                
Basic $(0.09) $0.04  $0.08  $0.12 
Earnings (loss) per share:                
Basic and diluted                
Income (loss) from continuing operations $0.09  $(0.03) $0.01  $0.19 
Loss from discontinued operations  (0.08)  (0.06)  (0.17)  (0.11)
Net income (loss) $0.01  $(0.09) $(0.16) $0.08 
                
Diluted $(0.09) $0.04  $0.08  $0.12                 
Income (loss) from continuing operations $0.09  $(0.03) $0.01  $0.19 
Loss from discontinued operations  (0.08)  (0.06)  (0.17)  (0.11)
Net income (loss) $0.01  $(0.09) $(0.16) $0.08 
                                
Weighted average common shares outstanding:                                
Basic  8,725   8,700   8,713   8,700   8,726   8,725   8,726   8,713 
Diluted  8,725   8,708   8,727   8,708   8,734   8,725   8,726   8,727 

 

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


1  

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Comprehensive Income (Loss) Income

(In thousands)

(Unaudited)

 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
Net (loss) / income $(764) $322  $678  $1,085 
Other comprehensive (loss) / income                
Foreign currency translation adjustments  —   (147)  68   445 
Amortization of net prior service costs and net actuarial gains / (losses), net of tax  (42)  32   (15)  (109)
Other comprehensive (loss) / income  (42)  (115)  53   336 
Comprehensive (loss) / income $(806) $207  $731  $1,421 
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2018 2017 2018 2017
Net income (loss) $58  $(795) $(1,312) $599 
Other comprehensive income (loss)                
  Foreign currency translation adjustments  21   —   (146)  68 

  Amortization of net prior service costs and net actuarial losses,

net of tax

  (7)  (42)  (23)  (15)
Other comprehensive income (loss)  14   (42)  (169)  53 
  Comprehensive income (loss) $72  $(837) $(1,481) $652 

 

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


2  

PIONEER POWER SOLUTIONS, INC.

Consolidated Balance Sheets

(In thousands, except share data)

 

 September 30, December 31,  September 30, December 31,
 2017 2016  2018 2017
 (Unaudited)       (Unaudited)     
ASSETS                
Current assets                
Cash and cash equivalents $950  $246  $659  $218 
Accounts receivable, net  19,255   17,508   14,956   13,432 
Inventories, net  28,324   26,147   26,010   23,192 
Income taxes receivable  546   72   447   743 
Prepaid expenses and other current assets  2,765   2,215   2,688   2,803 
Current assets of discontinued operations  6,066   7,073 
Total current assets  51,840   46,188   50,826   47,461 
Property, plant and equipment, net  7,025   6,591   5,889   6,335 
Deferred income taxes  5,913   5,659   3,047   2,729 
Other assets  216   830   5,204   4,281 
Intangible assets, net  6,783   8,168   3,913   4,922 
Goodwill  9,972   9,972   8,527   8,527 
Total assets $81,749  $77,408  $77,406  $74,255 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities                
Bank overdrafts $1,386  $1,200  $2,600  $833 
Revolving credit facilities  20,197   17,689   19,580   17,814 
Short term borrowings  5,339   3,973   3,170   5,430 
Accounts payable and accrued liabilities  18,205   18,139   20,882   16,873 
Current maturities of long-term debt  4,926   1,379 
Current maturities of long-term debt and capital lease obligations  1,316   782 
Income taxes payable  1,619   1,360   900   1,164 
Current liabilities of discontinued operations  3,791   3,856 
Total current liabilities  51,672   43,740   52,239   46,752 
Long-term debt, net of current maturities  —   4,005   3,127   4,153 
Pension deficit  173   172   291   283 
Other long-term liabilities  582   892   3,946   3,853 
Noncurrent deferred income taxes  1,954   2,400 
Deferred income taxes  1,575   1,665 
Total liabilities  54,381   51,209   61,178   56,706 
Stockholders’ equity                
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued  —   —   —   — 
Common stock, $0.001 par value, 30,000,000 shares authorized; 8,726,045 shares issued and outstanding on September 30, 2017 and 8,699,712 shares issued and outstanding on December 31, 2016  9   9 
Common stock, $0.001 par value, 30,000,000 shares authorized;
8,726,045 shares issued and outstanding on September 30, 2018 and December 31, 2017		  9   9 
Additional paid-in capital  23,653   23,215   23,961   23,801 
Accumulated other comprehensive loss  (5,810)  (5,863)  (5,967)  (5,798)
Retained earnings  9,516   8,838 
Accumulated deficit  (1,775)  (463)
Total stockholders’ equity  27,368   26,199   16,228   17,549 
Total liabilities and stockholders’ equity $81,749  $77,408  $77,406  $74,255 

 

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


3  

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 Nine Months Ended  Nine Months Ended
 September 30,  September 30,
 2017 2016  2018 2017
Operating activities                
Net income $678  $1,085 
Net (loss) income $(1,312) $599 
Depreciation  956   1,006   898   956 
Amortization of intangible assets  1,390   1,309   1,102   1,390 
Amortization of right-of-use assets  403   396 
Amortization of debt issuance cost  185   153   67   185 
Deferred income taxes  (689)  206 
Deferred income tax benefit  (414)  (689)
Change in receivable reserves  53   250   (374)  53 
Change in inventory reserves  38   (435)  288   38 
Accrued pension  (24)  (68)  (6)  (24)
Stock-based compensation  319   34   160   319 
(Gain) / loss on disposition of fixed assets  (5)  77 
Foreign currency remeasurement (gain) / loss  (40)  2 
Other  14   (5)
Foreign currency remeasurement loss/ (gain)  85   (40)
Changes in current operating assets and liabilities:                
Accounts receivable  (1,434)  (4,188)  (455)  (1,434)
Inventories  (1,678)  (8,455)  (3,558)  (1,678)
Prepaid expenses and other assets  76   (378)  (509)  76 
Income taxes  (289)  890   42   (289)
Accounts payable and accrued liabilities  (9)  (348)  4,136   (17)
Net cash used in operating activities  (473)  (8,860)
Net cash provided by/ (used in) operating activities  567   (164)
                
Investing activities                
Additions to property, plant and equipment  (1,245)  (476)  (369)  (1,245)
Proceeds from sale of fixed assets  20   7   —   20 
Net cash used in investing activities  (1,225)  (469)  (369)  (1,225)
                
Financing activities                
Increase / (decrease) in bank overdrafts  162   (922)
Increase / (decrease) of short term borrowings  1,365   4,919 
Borrowings under debt agreement  31,919   30,413 
Bank overdrafts  1,593   162 
Short term borrowings  (2,260)  1,365 
Borrowing under debt agreement  31,696   31,919 
Repayment of debt  (30,465)  (24,564)  (30,462)  (30,465)
Payment of debt issuance costs  (157)  (226)
Proceeds from the exercise of options for common stock  120   — 
Payment of debt issuance cost  (24)  (157)
Net proceeds from the exercise of options for common stock  —   120 
Principal repayments of financing leases  (376)  (309)
Net cash provided by financing activities  2,944   9,620   167   2,635 
                
Increase in cash and cash equivalents  1,246   291   365   1,246 
Effect of foreign exchange on cash and cash equivalents  (542)  (102)  76   (542)
                
Cash and cash equivalents                
Beginning of period  246   648   218   246 
End of period $950  $837  $659  $950 

 

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


4  

PIONEER POWER SOLUTIONS, INC.

Notes to Consolidated Financial Statements

September 30, 20172018 (unaudited)

 

1. BASIS OF PRESENTATION

 

Overview

 

Pioneer Power Solutions, Inc. and its wholly-ownedwholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,” “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 thirteentwelve (12) additional locations in the U.S., Canada and Mexico for manufacturing, centralized distribution, engineering, sales and administration.

 

We have two reportable segments as defined in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, as filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2017:April 2, 2018: Transmission and Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).

 

Presentation

 

The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of September 30, 2017.2018. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim consolidated financial statements have been included. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP for a year-end balance sheet.

 

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

 

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

During the fourth quarter of 2017, as part of the Company’s review of strategic alternatives, the Board of Directors of the Company approved efforts to sell the Company’s switchgear business unit operated as Pioneer Custom Electric Products, Inc. (“PCEP”). On May 2, 2018, Pioneer Custom Electric Products Corp. (“PCEP”), a wholly owned subsidiary of Pioneer Power Solutions, Inc. (the “Company”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with CleanSpark, Inc. (“CleanSpark”), pursuant to which PCEP will sell certain assets (the “Asset Sale”) comprising the PCEP business to CleanSpark (the “Purchased Assets”). No debt or significant liabilities are being assumed by CleanSpark in the two paragraphs below, certain prior year amountsAsset Sale. The Company has agreed to extend the closing of the sale through December 31, 2018 to allow all parties additional time to satisfy all closing conditions.

Operating results for PCEP, which have been previously included in the T&D Solutions Segment, have now been reclassified as discontinued operations for all periods presented. See Note 5 – Discontinued Operations in Notes to conform to the current year presentation.

As the Company continues to implement the remediation plans discussed under the heading “PartConsolidated Financial Statements in Part I – Item 4. Controls and Procedures” of this Quarterly Report on Form 10-Q, the Company has determined that there were inconsistencies10-Q. Unless noted otherwise, discussions in classification of expenses between its business units in the reporting periods priorthese notes pertain to December 31, 2016. As a result, the company reclassified certain expenses from operating expenses to cost of goods sold for the year ended December 31, 2016, as previously disclosed in the Annual Report on Form 10-K filed with the SEC on March 29, 2017, and for the three and nine months ended September 30, 2016, resulting in a decrease to gross profit of $18, or negative 0.06% as a percentage of sales for the three months ended September 30, 2016 and, resulting in a decrease to gross profit of $262, or negative 0.30% as a percentage of sales for the nine months ended September 30, 2016, respectively.our continuous operations.

 

These unaudited consolidated financial statements should be read in conjunction with the risk factors and the audited consolidated financial statements and notes thereto of the Company and its subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company’s significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017. There have been no significant changes in the Company’s accounting policies during the third quarter of 2017.2018 except for the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, ASU No. 2016-02, Leases and ASU No. 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost as further described below. 

 

5  

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 CustomersCustomers. . In May 2014, the FASB issued Accounting Standards Update No. 2014-09, (“Revenue from Contracts with Customers (Topic 606), or ASU 2014-09”),2014-09, 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 2016-10, 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 ASU 2014-09these 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 judgmentjudgments and estimates may be required within the revenue recognition process than arewere required under previously existing U.S. GAAP.


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. Companies may use either of the following transition methods to adopt this standard: (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) 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 recognizerecognized revenue and quantifyingto the new standard in order to quantify the impact if any,of this ASU. We generally anticipate having substantially similar performance obligations under the new guidance when compared to previously existing U.S. GAAP. We have made policy elections within the amended standard that this new standard will have onare consistent with our consolidated financial statements. The Company plans to elect to applyexisting accounting. We adopted ASU 2014-09 in our first quarter of 2018 using the modified retrospective approach upon adoption. Additionally, the new guidance requiresand concluded that there was no material impact to our financial statements other than enhanced disclosures aboutand there are no changes to the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including revenue recognition policies to identify performance obligations, assets recognized from costs incurred to obtain and fulfill a contract, and significant judgments in measurement and recognition. The Company is determining the impact of adopting Topic 606 on its revenue recognition policies, procedures and control framework and the resulting impact on its consolidated financial position, results of operation and cash flows. The Company is in the process of reviewing revenue sources and evaluating the customer population to determine the appropriate distribution of customer accounts into populations with similar contract terms and performance obligations. We expect to complete this process before the filing of our Form 10-K for the year ended December 31, 2017.opening retained earnings balance.

 

Simplifying the Measurement of Inventory.Income Taxes. In July 2015,October 2016, the FASB issued ASU No. 2015-11, Inventory2016-16, Income Taxes (Topic 330)740): SimplifyingIntra-Entity Transfers of Assets Other Than Inventory. ASU No. 2016-16 requires the Measurementincome tax consequences of Inventory. This standard amends Topic 330, Inventory, which currently requiresintra-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 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 isoutside party. We adopted an entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling pricesASU 2016-16 in the ordinary coursefirst quarter of business, less reasonably predictable2018 using a modified retrospective approach. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.

Retirement Standard. In March 2017, the FASB issued ASU No. 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. We adopted Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the “New Retirement Standard”), effective January 1, 2018 using the full-retrospective method. The New Retirement Standard requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of completion, disposal,net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and transportation. The amendmentsactuarial gain/loss, and settlement and curtailment effects, are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.to be presented outside of any subtotal of operating income. The Company adopted ASU No. 2015-11elected to apply the practical expedient and use the amounts disclosed in Note 11 to the financial statements included in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2017 and has reflectedas the impact inestimation basis for applying the current year’s consolidated financial statements.retrospective presentation requirements of the standard.

 

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 is evaluatingWe adopted this standard in our first quarter of 2018 using the potential impact of adopting ASU 2016-02 on its consolidated financial statements. It is expected that upon adoption we will showmodified retrospective approach. As a significantresult, the opening retained earnings for January 1, 2017 was reduced by approximately $0.1 million. There was also an increase in assets and corresponding liabilities.liabilities of approximately $5.3 and $5.2 million, respectively, at January 1, 2017.

 

Share-Based Compensation. In April 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”. Under ASU No. 2016-09, companies will no longer record excess tax benefits 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 in 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 on 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 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 periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The Company adopted ASU No. 2016-09 in 2017. The adoption of the new guidance did not materially affect the Company’s financial position, results of operations or cash flows.

6  

 

Statement of Cash Flows. In August 2016, the FASB issued ASC UpdateASU No. 2016-15, Statement of Cash Flows (Topic(Topic 230): Classification of Certain Cash Receipts and Cash Payments. The purpose of Update No. 2016-15 is to reduce the diversity in practice in presentation and classification of the following items within the statement of cash flows: debt prepayments or debt extinguishment costs, settlement of zero coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, 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 securitization transactions. It also addresses classification of transactions that have characteristics of more than one class of cash flows. Update No. 2016-15 is effective for annual periods beginning after December 15, 2017, and a retrospective transition method is required. We doadopted ASU 2016-15 in our first quarter of 2018 using the retrospective approach. The adoption of ASU 2016-15 did not expect the adoption to have a material impact on our consolidated statements of cash flows for 2016 or 2017.flows.


Simplifying the Test for Goodwill Impairment.Stock Compensation. In January 2017,June 2018, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This standard was established2018-07, Compensation – Stock Compensation (Topic 718): Improvements 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 theNonemployee Share-Based Payment Accounting. The amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparingupdate expand the fair valuescope of a reporting unit with its carrying amount.Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. 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 eliminatedapply the requirements of Topic 718 to nonemployee awards except for any reporting unit with a zero or negative carrying amountspecific guidance on inputs to perform a qualitative assessmentan option pricing model and if it failsthe attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessmentperiod). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The updated standard is effective for the Company beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption of the new guidance is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company does not expect that the adoption of this standard will have a material effect on its consolidated financial statements.

Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements for fair value measurements. The ASU is effective for all annual and interim periods beginning January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

3. 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 units. An entityperiods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Nature of our products and services

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

Products

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

We provide customers with sophisticated power generation equipment and an advanced data collection and monitoring platform, the combination of which is requiredused to discloseensure smooth, uninterrupted power to operations during times of emergency.

Services

Power generation systems represent considerable investments that require proper maintenance and service in order to operate reliably during a time of emergency. Our power maintenance programs provide preventative maintenance, repair and support service for our customers’ power generation systems. 

7  

Our principal source of revenue is derived from sales of products and fees for services. We measure revenue based upon the amountconsideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The transaction price of goodwilla contract is allocated to each reporting unitdistinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of our products when the risk of loss or control for the product transfers to the customer and for services as they are performed. Under ASC 606, revenue is recognized when a customer obtains control of promised products or services in an amount that reflects the consideration we expect to receive in exchange for those products or services. To achieve this core principal, the Company applies the following five steps:

1)       Identify the contract with a zerocustomer

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products or negative carrying amountservices 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 net assets. An entity still hassubstantially all consideration for products or services that are transferred is probable based on the optioncustomer’s intent and ability to performpay the qualitative assessment forpromised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a reporting unitvariety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

2)       Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products or services, the Company must apply judgment to determine ifwhether promised products or services are capable of being distinct and distinct in the quantitative impairment test is necessary. The company will early adopt this standard duringcontext of the fourth quarter of 2017 in conjunction with our goodwill impairment assessment.contract. If these criteria are not met the promised products or services are accounted for as a combined performance obligation.

 

3.3)       Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. The customer payments are generally due in 30 days.

4)       Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis or cost of the product or service. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

5)       Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised product or service to a customer.

Substantially all of our revenue is recognized at a point of time, as the promised product passes to the customer. Service revenues include maintenance contracts that are recognized over time based on the contract term and repair services which are recognized as services are delivered.

8  

The following table presents our revenues disaggregated by revenue discipline:

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2018  2017  2018  2017 
Products $23,051  $22,808  $66,365  $70,688 
Services  2,905   2,686   7,659   7,147 
Total Revenue $25,956  $25,494  $74,024  $77,835 

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

Financial Statement Impact of Adopting ASC 606

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

4. OTHER EXPENSE

 

Other expense in the consolidated statements of income foroperations reports certain losses associated with activities not directly related to our core operations. For the three and nine months ended September 30, 2018, other non-operating expense was $19 and $158, respectively, as compared to $112 and $165, respectively, during the same periods of 2017.

5. DISCONTINUED OPERATIONS

A discontinued operation is a component of the Company’s business that represents a separate major line of business that had been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Consolidated Statement of Operations, Consolidated Statement of Cash Flows, and Consolidated Balance Sheets are presented as if the operation had been discontinued from the start of the comparative year.

During the fourth quarter of 2017, as part of the Company’s review of strategic alternatives, the Board of Directors of the Company approved efforts to sell the Company’s switchgear business. On May 2, 2018, Pioneer Custom Electric Products Corp. (“PCEP”), a wholly owned subsidiary of Pioneer Power Solutions, Inc. (the “Company”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with CleanSpark, Inc. (“CleanSpark”), pursuant to which PCEP will sell certain assets (the “Asset Sale”) comprising the PCEP business to CleanSpark (the “Purchased Assets”). No debt or significant liabilities are being assumed by CleanSpark in the Asset Sale.

As consideration for the Purchased Assets, CleanSpark has agreed to pay total consideration comprised of the following: (a) an 18-month promissory note at 9% interest, in principal amount equal to the net carrying value of the working capital of the business at closing; (b) a three-year equipment lease to be entered into at closing of the Asset Sale, providing for rent payments in the amount of $7,500 per month, which also includes two renewal terms of one-year each at CleanSpark’s option and 2016, respectively,a CleanSpark purchase option of $1,000,000; (c) 7,000,000 shares of CleanSpark common stock; (d) a five year warrant to purchase 1,000,000 shares of CleanSpark common stock at an exercise price of $1.60 per share; and (e) a five year warrant to purchase 1,000,000 shares of CleanSpark common stock at an exercise price of $2.00 per share.

On June 29, 2018, each of PCEP and CleanSpark signed a letter agreement (the “Letter Agreement”) which extended the date on which, under certain specified conditions, either PCEP or CleanSpark may terminate the Asset Purchase Agreement if the Asset Sale has not been completed (the “Termination Date”) from June 30, 2018 to October 15, 2018. On July 16, 2018 each of PCEP and CleanSpark signed a second letter agreement (the “Second Letter Agreement”) which further extended the Termination Date to December 31, 2018. No other provisions of the Asset Purchase Agreement were otherwise amended or waived, and the Asset Purchase Agreement remains in full force and effect.

Operating results for the switchgear business, which have been previously included in the T&D Solutions Segment, have now been reclassified as discontinued operations for all periods presented.

9

The components of assets and liabilities that are attributable to discontinued operations are as follows:

 

  Three Months Ended  Nine Months Ending 
  September 30,  September 30, 
  2017  2016  2017  2016 
Payroll tax interest and penalties accrued $40  $68  $28  $23 
Other non-operating expenses  205   196   619   531 
Other expense $245  $264  $647  $554 
  September 30,
2018		  December 31,
2017		 
  (Unaudited)    
Assets of discontinued operations:        
Accounts receivable - trade, net $739  $1,568 
Inventories, net  3,131   2,921 
Prepaid expenses  209   214 
Property, plant and equipment, net  354   524 
Right of use asset  —   129 
Intangible assets, net  1,382   1,477 
Other assets  251   240 
Assets of discontinued operations $6,066  $7,073 
         
Liabilities of discontinued operations:        
Bank overdrafts $150  $349 
Accounts payable and accrued liabilities  3,641   3,507 
Liabilities of discontinued operations $3,791  $3,856 

 

The Company continues to record interest on past due and unpaid payroll tax obligations. Duringfollowing table presents the nine months ended September 30, 2017 and 2016,discontinued operations of the Company received waiversswitchgear business in the Consolidated Statement of certain interest and penalties on these obligations totaling $0.1 million and $0.4 million, respectively.Operations:

 

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
  2018  2017  2018  2017 
Revenues $1,274  $4,299  $5,858  $10,118 
Costs and Expenses                
   Cost of goods sold  1,504   4,052   5,619   8,957 
   Operating Expenses  438   692   1,503   1,763 
   Interest income  (1)  (1)  (4)  (4)
   Other expense  257   132   563   486 
Total costs and expenses  2,198   4,875   7,681   11,202 
Loss before provision for income taxes  (924)  (576)  (1,823)  (1,084)
Income tax benefit  (194)  —   (383)  — 
Loss from discontinued operations, net of income taxes $(730) $(576) $(1,440) $(1,084)

4.

The following table presents the switchgear business in the Consolidated Statements of Cash Flows:

  Nine Months Ended
September 30,		 
  2018  2017 
Net cash used in operating activities $(299) $(3,300)
Net cash used in investing activities  —   (56)
Net cash provided by financing activities  299   3,356 
   Increase in cash and cash equivalents $—  $— 

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6. INVENTORIES

 

The components of inventories are summarized below:

 

 September 30,    September 30,
2018		 December 31,
2017		 
 2017
(Unaudited)		 December 31,
2016		  (Unaudited)    
Raw materials $10,116  $10,175  $13,114  $9,229 
Work in process  7,453   6,535   3,629   3,295 
Finished goods  11,152   9,826   9,737   10,919 
Provision for excess and obsolete inventory  (397)  (389)  (470)  (251)
Total inventories $28,324  $26,147  $26,010  $23,192 

 

Inventories are stated at the lower of cost or a net realizable basis determined on a FIFO method. Included in raw materials and finished goods at September 30, 20172018 and December 31, 20162017 are goods in transit of approximately $7.0 million and $3.1 million.million, respectively.

 

At September 30, 20172018 and December 31, 2016,2017, raw materials in the amount of $6.8 million and $3.0 million, respectively, not pledged to our secured creditor were used asfor collateral to secure short term borrowings under a product financing arrangement. This short term borrowing agreement amountingprovides the Company with the ability to $5.3acquire raw materials utilized in connection with its manufacturing process. The Company generally satisfies its obligations within 60 days of the initial borrowings, which yields an interest expense that is immaterial. The aggregate borrowings under this agreement amounted to $3.2 million and $4.0$5.4 million as of September 30, 2018 and December 31, 2017, respectively.


5.

7. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized below:

 

 September    September 30,
2018		 December 31,
2017		 
 

2017

(Unaudited)

 December 31,
2016		  (Unaudited)    
Land $50  $46  $48  $50 
Buildings  2,467   2,293   2,468   2,547 
Machinery and equipment  10,656   9,421   10,267   10,187 
Furniture and fixtures  476   466   427   430 
Computer hardware and software  1,364   1,289   1,093   1,097 
Leasehold improvements  715   534   526   528 
Construction in progress  18   18   164   18 
  15,746   14,067   14,993   14,857 
Less: Accumulated depreciation  (8,721)  (7,476)  (9,104)  (8,522)
Total property, plant and equipment, net $7,025  $6,591  $5,889  $6,335 

 

Depreciation expense was $1.0 million in$741 and $792 for the nine months ended September 30, 2018 and 2017, and 2016.respectively.

 

6.8. OTHER ASSETS

 

In December 2011 and January 2012, the Company made two secured loans, each in the amount of $0.3 million$300 to a developer of a renewable energy project in the U.S. 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 principal balance of the loan receivable is outstanding at September 30, 20172018 and December 31, 2016.2017. The Company expects to fully recover these amounts. At September 30, 2017,2018 the Company has classified the principal of $0.6 million to$600 as other current assets as the Company anticipatesdoes not anticipate the settlement of both notes in the next twelve months based upon ongoing negotiations with the debtor.

 

Included in Other Assets at September 30, 2017 and December 31, 2016 is a customer note receivable of $0.2 million.11


7.

9. GOODWILL AND OTHER INTANGIBLE ASSETS

 

There were no changes in the carrying values of goodwill for the nine months ended September 30, 2017.2018.

 

  T&D
Solutions
Segment		  Critical Power
Solutions
Segment		  Total
Goodwill		 
Gross Goodwill:         
Balance as of January 1, 2017 $7,978  $2,970  $10,948 
No activity  —   —   — 
Balance as of September 30, 2017 $7,978  $2,970  $10,948 
Accumulated impairment losses:            
Balance as of January 1, 2017 $(976) $—  $(976)
No activity  —   —   — 
Balance as of September 30, 2017 $(976) $—  $(976)
             
Net Goodwill as of September 30, 2017 $7,002  $2,970  $9,972 
  T&D
Solutions
Segment		  Critical Power
Solutions
Segment		  Total
Goodwill		 
Gross Goodwill:            
Balance as of January 1, 2018 $6,533  $2,970  $9,503 
No activity  —   —   — 
Balance as of September 30, 2018 $6,533  $2,970  $9,503 
Accumulated impairment losses:            
Balance as of January 1, 2018 $(976) $—  $(976)
No activity  —   —   — 
Balance as of September 30, 2018 $(976) $—  $(976)
             
Net Goodwill as of September 30, 2018 $5,557  $2,970  $8,527 

 

Changes in the carrying values of intangible assets for the nine months ended September 30, 2017,2018, were as follows:

 

 T&D
Solutions
Segment		 Critical Power
Solutions
Segment		 Total
Intangible
Assets		  T&D
Solutions
Segment		 Critical Power
Solutions
Segment		 Total
Intangible
Assets		 
Balance as of January 1, 2017  5,565   2,603   8,168 
Balance as of January 1, 2018, net $3,677  $1,245  $4,922 
Amortization  (312)  (1,078)  (1,390)  (166)  (841)  (1,007)
Foreign currency translation  5   —   5   (2)  —   (2)
Balance as of September 30, 2017 $5,258  $1,525  $6,783 
Balance as of September 30, 2018, net $3,509  $404  $3,913 

 

The components of intangible assets as of September 30, 20172018 are summarized below:

 

 Weighted Average Amortization Years Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Book Value  Weighted Average Amortization Years Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Book Value 
Customer relationships  7  $7,201  $(4,571) $—  $2,630  7  $6,689  $(5,742) $—  $947 
Non-compete agreements  6   705   (459)  —   246  4   155   (137)  —   18 
Trademarks  Indefinite   1,816   —   —   1,816  Indefinite   1,816   —   —   1,816 
Distributor territory license  4   474   (474)  —   — 
Internally developed software  7   289   (114)  —   175  7   289   (155)  —   134 
Developed technology  10   492   (135)  —   357  10   493   (183)  —   310 
Technology-related industry accreditations  Indefinite   1,575   —   (16)  1,559  Indefinite   706   —   (18)  688 
Total intangible assets     $12,552  $(5,753) $(16) $6,783     $10,148  $(6,217) $(18) $3,913 

 

The Company accelerated and fully amortizedamortization of intangible assets expense was $1,007 for the distributor territory license intangible asset upon the termination of its distribution agreement with a supplier during the quarternine months ended September 30, 2017.2018.


12

8.

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.

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 bore 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 bankBMO 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.

 

Our Canadian Facilities provided for up to $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 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 by the 2017 CAD ARCA Amendment and restated,the 2018 CAD ARCA Amendment, is subject to margin criteria and borrowings bearcriteria. Facility A, as amended by the 2017 CAD ARCA Amendment, bore interest at BMO’s prime rate plus 0.75% per annum on amounts borrowed in Canadian dollars, or itsBMO’s U.S. base rate plus 0.75% per annum or LIBOR plus 2.25% per annum on amounts borrowed in U.S. dollars. The 2018 CAD ARCA Amendment modified the interest rate on Facility A borrowings to BMO’s prime rate plus 0.50% per annum on amounts borrowed in Canadian dollars, or BMO’s U.S. base rate plus 0.50% per annum or LIBOR plus 2.0% per annum on amounts borrowed in U.S. dollars. Pursuant to the 2017 CAD ARCA Amendment, Facility A willwas to mature on July 31, 2018. The 2018 CAD ARCA Amendment extended the maturity of borrowings under Facility A to April 1, 2020. Consistent with the terms of the historical Facility A, including both a subjective acceleration clause and lockbox arrangement, will continue to be presented as a current liability. We believe based upon historical experience, that Facility A will remain in place to fund operations through maturity of this facility in April 2020.

 

Borrowings under Facility B, as amended and restated, bearby the 2017 CAD ARCA Amendment, bore 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 willwas to continue after July 31, 2017 until our borrowings under the facility is fully paid on April 30, 2018. The 2018 CAD ARCA Amendment did not modify the interest rate on Facility B borrowings, which remained at BMO’s prime rate plus 1.25% per annum. Pursuant to the 2018 CAD ARCA Amendment, we made the final principal payment of $47 under Facility B on April 30, 2018.


Borrowings under Facility C, as amended and restated, bearby the 2017 CAD ARCA, bore interest at BMO’s prime rate plus 1.50% per annum on amounts borrowed in Canadian dollars, or itsBMO’s U.S. base rate plus 1.50% per annum or LIBOR plus 2.75% per annum on amounts borrowed in U.S. dollars. Pursuant to the CAD ARCA, a principal repayment of $72 USD was due on June 30, 2016, and the reduced quarterly principal repayments of $36 USD waswere 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 willwere to continue until July 31, 2018, with a balloon payment of $352 due on July 31, 2018. Pursuant to the 2018 CAD ARCA Amendment, quarterly principal repayments of $36 will continue until January 31, 2020, with a balloon payment of $136 due on April 1, 2020. The 2018 CAD ARCA Amendment modified the interest rate on Facility C borrowings to BMO’s prime rate plus 1.25% per annum on amounts borrowed in Canadian dollars, or BMO’s U.S. base rate plus 1.25% per annum or LIBOR plus 2.50% per annum on amounts borrowed in U.S. dollars.

 

ThePursuant to the CAD ARCA, modifiedas amended by the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment, financial covenant testing so that testing will beis performed on our consolidated financial statements. The financial covenants were changed pursuantWe are required to the CAD 2017 Amendment to requiremeet certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, which were further modified byas set forth in the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment. On March 6, 2017, we received a waiver fromPursuant to the 2018 CAD ARCA Amendment, BMO waived defaults on a certainall financial covenantcovenants existing as of December 31, 2016.

We are currently2017, for which we were not in the process of renegotiating the terms of our credit facilities with BMO. BMO has agreed to suspend testing of the current ratio covenant as of September 30, 2017, due to such ongoing negotiation. We are in compliance with all financial covenants not suspended and required to be tested at September 30, 2017. We anticipate renegotiating our credit facilities on terms that will allow the Company to meet its covenants prospectively.compliance.

 

As of September 30, 2017,2018, we had approximately $6.8$6.0 million in U.S. dollar equivalents outstanding under our Canadian Credit Facilities. Our borrowings consisted of approximately $6.2$5.6 million outstanding under Facility A $0.1 millionand $352 outstanding under Facility B and $0.5 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 As 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 for2018, 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 furtherCompany was not in compliance tests were required.

Alternatively, we could comply with the financial covenant requirements of the U.S.Canadian Facilities if our U.S. operations maintainedand has received 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.waiver from BMO as of November 7, 2018 for the period ending September 30, 2018.

 

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.13

United States Credit Facilities

 

In April 2016, we entered into an Amended and Restated Credit Agreement (“US ARCA”) with BMO with respect to our U.S. Facilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank.bank (as amended and restated, the “U.S. Facilities”). Additionally, defaults relating to the breach of certain financial covenants under the prior financing arrangements with the bankBMO existing as of December 31, 2015 were waived by BMO. On March 15, 2017, theThe 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.

 

USD Facility A, continues to bearas amended and restated per 2017 US ARCA, bore interest, at our option, at the bank’sBMO’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. Pursuant to the 2018 US ARCA Amendment, borrowings under Facility A bears interest, at our option, at the BMO’s prime rate plus 0.75% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.00% 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. The 2018 US ARCA Amendment extended the maturity of borrowings under USD Facility A to April 1, 2020. Consistent with the terms of the historical USD Facility A, including both a subjective acceleration clause and lockbox arrangement, will continue to be presented as a current liability. We believe based upon historical experience, that the USD Facility A will remain in place to fund operations through maturity in April 2020.


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. Pursuant to the 2018 US ARCA Amendment, monthly principal repayments beginning on July 31, 2018 are increased to $100 and will continue until March 31, 2020, with a balloon payment of $2,338 due on April 1, 2020. The 2018 US ARCA Amendment did not change the USD Facility B interest rate.

 

ThePursuant to the US ARCA, modifiedas amended by the 2017 US ARCA Amendment and the 2018 US ARCA Amendment, financial covenant testing so that testing will beis performed on our consolidated financial statements. The financial covenants were changed pursuantWe are required to the US ARCA to requiremeet certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, which were further modified byas set forth in the 2017 US ARCA Amendment and the 2018 US ARCA Amendment. On March 6, 2017, we received a waiver from BMO on a certain financial covenantcovenants existing as of December 31, 2016.

We are currently in On March 28, 2018, pursuant to the process of renegotiating the terms of our credit facilities with BMO.2018 US ARCA Amendment, BMO has agreed to suspend testing of the current ratio covenant as of September 30, 2017 due to such ongoing negotiation. We are in compliance withwaived defaults on all financial covenants existing as of December 31, 2017 for which we were not suspended and required to be tested at September 30, 2017. We anticipate renegotiating our credit facilities on terms that will allow the Company to meet its covenants prospectively.in compliance.

 

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 September 30, 2017,2018, we had approximately $18.5$18.1 million outstanding under our U.S. Credit Facilities. Our borrowings consisted of approximately $14.0 million outstanding under USD Facility A, and $4.5$4.1 million outstanding under USD Facility B.

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 $1.7 million term loan agreement with GE CF Mexico, S.A. de C.V. (“GE Capital Mexico”). The term loan was payable in 60 consecutive monthly installments and bore interest, payable monthly, at a rate of 6.93% per annum. The obligations of Nexus under the term loan were secured by certain machinery and equipment located in Mexico and by a corporate guaranty by the Company. As of September 30, 20172018, the balanceCompany was not in compliance with the financial covenant requirements of the noteU.S. Facilities and has been fully repaid, while at December 31, 2016 there was approximately $185 outstanding underreceived a waiver from BMO as of November 7, 2018 for the Nexus Promissory Note.period ending September 30, 2018.

 

Long-term14

The Company’s debt consists of the following:

 

 September 30,    September 30,
2018		 December 31,
2017		 
 2017
(Unaudited)		 December 31,
2016		  (Unaudited)   
Term credit facilities, net (a) $4,923  $5,194  $4,442  $4,933 
Nexus promissory note  —   185 
Capital lease obligations  3   5   1   2 
Total debt  4,926   5,384   4,443   4,935 
Less current portion  (4,926)  (1,379)  (1,316)  (782)
Total long-term debt $—  $4,005  $3,127  $4,153 

 

 (a) The balances as of September 30, 20172018 and December 31, 20162017 are net of debt issuance costs of $218$47 and $245,$102, respectively.

 

9.11. PENSION PLAN

 

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


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

 

 Three Months Ended Nine Months Ended      
 September 30, September 30,  Three Months Ended
September 30,		 Nine Months Ended
September 30,		  Affected Line Item
in the Statements of
 2017 2016 2017 2016  2018 2017 2018 2017  Consolidated Operations
Current service cost, net of employee contributions $10  $10  $35  $33  $14  $10  $45  $35  Selling, general and administrative
Interest cost on accrued benefit obligation  27   26   79   76   24   27   74   79  Other expense
Expected return on plan assets  (44)  (41)  (128)  (121)  (42)  (44)  (127)  (128) Other expense
Amortization of transitional obligation  3   3   9   8   3   3   6   9  Other expense
Amortization of past service costs  2   3   6   8   2   2   4   6  Other expense
Amortization of net actuarial gain  12   10   36   28   14   12   42   36  Other expense
Total cost of benefit $10  $11  $37  $32  $15  $10  $44  $37   

 

The Company’s policy is to fund the pension plan at or above the minimum level required by law. The Company made $56$58 and $86$56 of contributions to its defined benefit pension plan during the nine months ended September 30, 20172018 and 2016,2017, respectively. Changes in the discount rate and actual investment returns that are lower than the long-term expected return on plan assets could result in the Company making additional contributions. There were no changes during the current period.

15

12. STOCKHOLDERS’ EQUITY

 

10.  STOCKHOLDERS’ EQUITY

Common Stock

 

The Company had 8,726,045 and 8,699,712 shares of common stock, $0.001 par value per share, outstanding as of September 30, 20172018 and December 31, 2016, respectively.2017.

 

Warrants

 

As of September 30, 2017 and December 31, 2016,2017, the Company had warrants outstanding to purchase 50,600 shares of common stock with a weighted average exercise price of $7.00 per share. TheAll of the warrants expireexpired on September 18, 2018. No warrants were exercised duringthrough the nine months endedexpiration date of September 18, 2018. The Company has no warrants outstanding as of September 30, 2017.2018.

 

Stock-Based Compensation

 

A summary of stock option activity under the 2011 Long-Term Incentive Plan as of September 30, 2017,2018, and changes during the nine months ended September 30, 2017,2018, are 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, 2017   247,400  $8.75      $  
Outstanding as of January 1, 2018   435,800  $8.35   7.5  $216 
Granted   262,000   7.30            7,000   5.60         
Exercised   (26,333)  4.55            —   —         
Forfeited   (47,267)  6.74            (16,500)  7.98         
Outstanding as of September 30, 2017   435,800  $8.35   7.7  $238,140 
Exercisable as of September 30, 2017   173,800   9.94   5.0   138,580 
Outstanding as of September 30, 2018   426,300  $8.32   6.70  $16 
Exercisable as of September 30, 2018   412,633  $8.38   6.60  $16 

 

As of September 30, 20172018, there were 237,867247,367 shares available for future grants under the Company’s 2011 Long-Term Incentive Plan.

 

Stock-based compensation expense recorded for the three and nine months ended September 30, 20172018 was approximately $148$14 and $319,$160, respectively, as compared to the expense of $28$148 and $34,$319, during the three and nine months ended September 30, 2016,2017, respectively. At September 30, 2017,2018, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of incomeoperations of approximately $339.$19.


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 aunrealized income of $21 for the three months ended September 30, 2018 and nominal unrealized loss for the three months ended September 30, 2017 and $147 for the three months ended September 30, 2016.2017. For the nine months ended September 30, 20172018 and 2016,2017, the Company had foreign currency translation adjustments resulting in unrealized loss of $146 and unrealized income of $68, and $445, respectively.

 

11.16

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

 

Basic and diluted income (loss) per common share isare 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. In periods where the company reported a net loss, diluted net loss per common share is the same as basic net loss per common share for those periods. The following table sets forth the computation of basic and diluted income (loss) income per share (in thousands, except per share data):

 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
Numerator:            
Net (loss) income $(764) $322  $678  $1,085 
                 
Denominator:                
Weighted average basic shares outstanding  8,725   8,700   8,713   8,700 
Effect of dilutive securities - equity based compensation plans  —   8   14   8 
Net dilutive effect of warrants outstanding  —   —   —   — 
Denominator for diluted net (loss) income per common share  8,725   8,708   8,727   8,708 
                 
Net (loss) income per common share:                
Basic $(0.09) $0.04  $0.08  $0.12 
Diluted $(0.09) $0.04  $0.08  $0.12 
                 
Anti-dilutive securities (excluded from per share calculation):                
Equity based compensation plans  397   173   383   173 
Warrants  51   51   51   51 
  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
  2018  2017  2018  2017 
Numerator:            
Income (loss) from continuing operations $788  $(219) $128  $1,683 
Loss from discontinued operations, net of income taxes  (730)  (576)  (1,440)  (1,084)
Net income (loss) $58  $(795) $(1,312) $599 
                 
Denominator:                
Weighted average basic shares outstanding $8,726  $8,725  $8,726  $8,713 
Effect of dilutive securities - equity based compensation plans  8   —   —   14 
Denominator for diluted net income per common share $8,734  $8,725  $8,726  $8,727 
                 
Earnings (loss) per share:                
Basic                
Income (loss) from continuing operations $0.09  $(0.03) $0.01  $0.19 
Loss from discontinued operations  (0.08)  (0.06)  (0.17)  (0.11)
    Net income (loss) $0.01  $(0.09) $(0.16) $0.08 
                 
Diluted                
Income (loss) from continuing operations $0.09  $(0.03) $0.01  $0.19 
Loss from discontinued operations  (0.08)  (0.06)  (0.17)  (0.11)
    Net income (loss) $0.01  $(0.09) $(0.16) $0.08 

 

12.14. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

 

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

 

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 segment provides power generation equipment, and aftermarket field-services primarily to help customers ensure smooth, uninterrupted power to operations during times of emergency.


17

The following tables present information about segment income and loss:

 

 Three Months Ended Nine Months Ended 
 September 30, September 30,  Three Months Ended
September 30,		 Nine Months Ended
September 30,		 
 2017 2016 2017 2016  2018 2017 2018 2017 
Revenues                  
T&D Solutions                                
Transformers $21,548  $21,110  $66,198  $61,605  $22,663  $21,547  $65,194  $66,198 
Switchgear  4,299   4,268   10,118   10,876 
  25,847   25,378   76,316   72,481   22,663   21,547   65,194   66,198 
Critical Power                
Critical Power Solutions                
Equipment  1,261   1,741   4,490   7,598   388   1,261   1,171   4,490 
Service  2,686   2,270   7,147   5,810   2,905   2,686   7,659   7,147 
  3,947   4,011   11,637   13,408   3,293   3,947   8,830   11,637 
Consolidated $29,794  $29,389  $87,953  $85,889  $25,956  $25,494  $74,024  $77,835 

 

 Three Months Ended Nine Months Ended 
 September 30, September 30,  Three Months Ended
September 30,		 Nine Months Ended
September 30,		 
 2017 2016 2017 2016  2018 2017 2018 2017 
Depreciation and Amortization                                
T&D Solutions $366  $450  $1,082  $1,203  $314  $348  $981  $1,028 
Critical Power  507   355   1,210   1,063 
Critical Power Solutions  369   577   1,122   1,399 
Unallocated Corporate Overhead Expenses  17   17   52   51   16   18   49   55 
Consolidated $890  $822  $2,344  $2,317  $699  $943  $2,152  $2,482 

 

 Three Months Ended Nine Months Ended  Three Months Ended
September 30,		 Nine Months Ended
September 30,		 
 September 30, September 30,  2018 2017 2018 2017 
 2017 2016 2017 2016 
Operating Income (Loss)                
Operating Income                
T&D Solutions $1,442  $2,002  $6,207  $6,083  $2,449  $1,777  $5,594  $6,715 
Critical Power  72   (10)  (277)  (100)
Critical Power Solutions  141   83   (533)  (252)
Unallocated Corporate Overhead Expenses  (915)  (780)  (2,547)  (2,293)  (641)  (805)  (2,099)  (2,427)
Consolidated $599  $1,212  $3,383  $3,690  $1,949  $1,055  $2,962  $4,036 

 

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

 

 Three Months Ended Nine Months Ended  Three Months Ended
September 30,		 Nine Months Ended
September 30,		 
 September 30 September 30,  2018 2017 2018 2017 
 2017 2016 2017 2016 
Revenues         
United States $20,804  $20,594  $59,790  $59,067  $17,163  $16,504  $49,291  $49,672 
Canada  8,990   8,795   28,163   26,758   8,793   8,990   24,733   28,163 
Others  —   —   —   64 
Total $29,794  $29,389  $87,953  $85,889  $25,956  $25,494  $74,024  $77,835 


18

15. LEASES

The company leases certain offices, facilities and equipment under operating and financing leases. Our leases have remaining terms of 1 year to 8 years some of which contain options to extend up to 10 years. As of September 30, 2018 and 2017, assets recorded under finance leases were $3,565 and $3,359 respectively, and accumulated amortization associated with finance leases was $917 and $397, respectively.

The components of the lease expense were as follows:

  Three Months Ended  Nine Months Ended 
  September 30,
2018		  September 30,
2017		  September 30,
2018		  September 30,
2017		 
Operating lease cost $185  $170  $548  $509 
                 
Finance lease cost                
   Amortization of right-of-use asset $137  $140  $403  $396 
   Interest on lease liabilities  38   42   117   126 
Total finance lease cost $175  $182  $520  $522 

Other information related to leases was as follows:

Supplemental Cash Flows Information

  September 30,
2018		  September 30,
2017		 
Cash paid for amounts included in the mesurement of lease liabilities   
   Operating cash flows from operating leases $557  $517 
   Operating cash flows from finance leases  117   126 
   Financing cash flows from finance leases  376   309 
Right-of-use assets obtained in exchange for lease obligations:        
   Operating leases  484   435 
   Finance leases  409   396 

Weighted Average Remaining Lease Term

September 30,
2018		September 30,
2017
Operating leases3 years4 years
Finance leases7 years7 years

Weighted Average Discount Rate

  September 30, September 30,
  2018 2017
Operating leases 5.5% 5.5%
Finance leases 5.5% 5.5%

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Future minimum lease payments under non-cancellable leases as of September 30, 2018 were as follows:

  Operating
Leases		  Finance
Leases		 
2018 (excluding the nine months ended September 30, 2018) $212  $168 
2019  793   635 
2020  763   533 
2021  410   489 
2022  91   356 
Thereafter  —   1,157 
   Total future minmum lease payments  2,269   3,338 
Less imputed interest  (176)  (548)
   Total future minmum lease payments $2,093  $2,790 

Reported as of September 30, 2018:

  Operating
Leases		  Finance
Leases		 
Accounts payable and accrued liabilities $709  $490 
Other long-term liabilities  1,371   2,187 
Total $2,080  $2,677 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated interim financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2016,2017, which was filed with the Securities and Exchange Commission on March 29, 2017.April 2, 2018.

 

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

 

Special Note Regarding Forward-Looking Statements

 

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

 

●General economic conditions and their effect on demand for electrical equipment, particularly in the commercial construction market, but also in the power generation, industrial production, data center, oil and gas, marine and infrastructure industries.
●The effects of fluctuations in sales on our business, revenues, expenses, net income, income (loss) per share, margins and profitability.
●Many of our competitors are better established and have significantly greater resources, and may subsidize their competitive offerings with other products and services, which may make it difficult for us to attract and retain customers.
●We depend on Siemens Industry, Inc. (“Siemens”) and Hydro-Quebec for a large portion of our business, and any change in the level of orders from Siemens and Hydro-Quebec could have a significant impact on our results of operations.
●The potential loss or departure of key personnel, including Nathan J. Mazurek, our chairman, president and chief executive officer.
●Our ability to 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,stock, 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.


21  

The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Moreover, new risks regularly emerge and it is not possible for us to predict or articulate all risks we face, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should review carefully the risks and uncertainties described under the heading “Part II - Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 20162017 for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.

 

Business Overview

 

We manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. Our principal products and services include 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 1312 additional locations in the U.S., Canada and Mexico for manufacturing, service, centralized distribution, engineering, sales and administration.

 

Description of Business Segments

 

We have two reportable segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).

 

●Our T&D Solutions business provides equipment solutions that help customers effectively and efficiently manage their electrical power distribution systems to desired specifications. The reporting segment is comprised of two primary product categories: electrical transformers and switchgear.transformers. These solutions are marketed principally through our Pioneer Transformers Ltd. (“PTL”), Jefferson Electric, Inc. (“Jefferson”), and Bemag Transformers, Inc. (“Bemag”), Pioneer Critical Power, Inc. (“PCPI”) and Pioneer Custom Electric Products, Inc. (“PCEP”) brand names.

●Our Critical Power business provides customers with 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. These solutions are marketed by our operations headquartered in Minnesota, currently doing business under the Titan Energy Systems Inc. (“Titan”), as well as the Pioneer Critical Power brand names.

Discontinued Operations

During the fourth quarter of 2017, as part of our review of strategic alternatives, we made approved efforts to sell our switchgear business. Operating results for PCEP, through which we did our switchgear business and have been previously included in the T&D Solutions Segment, have now been reclassified as discontinued operations for all periods presented. On May 2, 2018, Pioneer Custom Electric Products Corp. (“PCEP”), a wholly owned subsidiary of Pioneer Power Solutions, Inc. (the “Company”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with CleanSpark, Inc. (“CleanSpark”), pursuant to which PCEP will sell certain assets (the “Asset Sale”) comprising the PCEP business to CleanSpark (the “Purchased Assets”). No debt or significant liabilities are being assumed by CleanSpark in the Asset Sale. Our switchgear business has incurred losses in the years 2016 and 2017, and we believe that disposition of our switchgear business will improve our liquidity and will not significantly affect our capital resources. See Note 5 – Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.

 

Foreign Currency Exchange Rates

 

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

 

22  

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

 

   2017  2016 
      Statements of Operations and     Statements of Operations and 
   Balance Sheet  Comprehensive Income  Balance Sheet  Comprehensive Income 
    End of   Period   Cumulative   End of   Period   Cumulative 
Quarter Ended   Period   Average   Average   Period   Average   Average 
March 31  $0.7519  $0.7559  $0.7559  $0.7700  $0.7274  $0.7274 
June 30  $0.7706  $0.7436  $0.7497  $0.7742  $0.7760  $0.7509 
September 30  $0.8013  $0.7983  $0.7652  $0.7624  $0.7662  $0.7560 

Reclassifications

As the Company continues to implement the remediation plans discussed under the heading “Part I – Item 4. Controls and Procedures” of this Quarterly Report on Form 10-Q, the Company has determined that there were inconsistencies in classification of expenses between its business units in the reporting periods prior to December 31, 2016. As a result, the Company reclassified certain expenses from operating expenses to cost of goods sold for the year ended December 31, 2016, as previously disclosed in the Annual Report on Form 10-K filed with the SEC on March 29, 2017, and for the three and nine months ended September 30, 2016, resulting in a decrease to gross profit of $18, or negative 0.06% as a percentage of sales for the three months ended September 30, 2016 and, resulting in a decrease to gross profit of $262, or negative 0.30% as a percentage of sales for the nine months ended September 30, 2016, respectively.

   2018  2017 
      Statements of Operations and     Statements of Operations and 
    Balance Sheet   Comprehensive Income   Balance Sheet   Comprehensive Income 
        Period    Cumulative       Period   Cumulative 
Quarter Ended   End of Period   Average   Average   End of Period   Average   Average 
March 31  $0.7756  $0.7906  $0.7906  $0.7519  $0.7559  $0.7559 
June 30  $0.7594  $0.7745  $0.7825  $0.7706  $0.7436  $0.7497 
September 30  $0.7725  $0.7652  $0.7766  $0.8013  $0.7983  $0.7652 

 

Critical Accounting Policies

 

The Company’s significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2017 except for the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, ASU No. 2016-02, Leases, ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other than Inventory and ASU No. 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

 

RESULTS OF OPERATIONS

 

Overview of the Three and Nine Month Results

 

Selected financial and operating data for our reportable business segments for the most recent reporting period is summarized below. This information, as well as the selected financial data provided in Note 1214 – Business Segment and Geographic Information and in our unaudited Consolidated Financial Statements and related notes included in this Quarterly Report on Form 10-Q, should be referred to when reading our discussion and analysis of results of operations below.

 

Our summary of operating results during the three and nine months ended September 30, 20172018 and 20162017 are as follows:

 

 Three Months Ended September 30, Nine Months Ended September 30,  Three Months Ended
September 30,		 Nine Months Ended
September 30,		 
 2017 2016 2017 2016  2018 2017 2018 2017 
Revenues                   
T&D Solutions $25,847  $25,378  $76,316  $72,481  $22,663  $21,547  $65,194  $66,198 
Critical Power  3,947   4,011   11,637   13,408 
Critical Power Solutions  3,293   3,947   8,830   11,637 
Consolidated  29,794   29,389   87,953   85,889   25,956   25,494   74,024   77,835 
Cost of sales                
Cost of goods sold                
T&D Solutions  21,425   19,682   61,327   55,909   18,348   17,569   52,068   52,363 
Critical Power  2,923   3,190   9,093   11,339 
Critical Power Solutions  2,467   2,913   7,185   9,069 
Consolidated  24,348   22,872   70,420   67,248   20,815   20,482   59,253   61,432 
Gross profit  5,446   6,517   17,533   18,641   5,141   5,012   14,771   16,403 
Selling, general and administrative expenses  4,359   4,794   12,724   13,269   3,703   3,533   11,236   11,134 
Depreciation and amortization expense  682   544   1,731   1,625   378   618   1,190   1,542 
Restructuring and integration  —   19   160   199   —   —   —   156 
Foreign exchange gain  (194)  (52)  (465)  (142)  (889)  (194)  (617)  (465)
Total operating expenses  4,847   5,305   14,150   14,951   3,192   3,957   11,809   12,367 
Operating income  599   1,212   3,383   3,690 
Operating income from continuing operations  1,949   1,055   2,962   4,036 
Interest expense  588   556   1,662   1,151   727   632   2,126   1,792 
Other expense  245   264   647   554   19   112   158   165 
(Loss) income before taxes  (234)  392   1,074   1,985 
Income before taxes  1,203   311   678   2,079 
Income tax expense  530   70   396   900   415   530   550   396 
Net (loss) / income $(764) $322  $678  $1,085 
Net income (loss) from continuing operations  788   (219)  128   1,683 
Loss from discontinued operations, net of income taxes  (730)  (576)  (1,440)  (1,084)
Net income (loss) $58  $(795) $(1,312) $599 

23  

During the fourth quarter of 2017, as part of our review of strategic alternatives, our Board of Directors approved efforts to sell our switchgear business unit operated as PCEP. Operating results for PCEP, which have been previously included in the T&D Solutions Segment, have now been reclassified as discontinued operations for all periods presented. See Note 5 – Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q. The excluded revenue for the switchgear business previously reported in T&D Solutions was $1.3 million and $4.3 million for the three months ended September 30, 2018 and 2017, respectively, and $5.9 million and $10.1 million for the nine months ended September 30, 2018 and 2017, respectively. The excluded loss from the switchgear business was $730 and $576 for the three months ended September 30, 2018 and 2017, respectively, and $1,440 and $1,084 for the nine months ended September 30, 2018 and 2017, respectively.

  

Backlog

 

Our backlog is based on firm orders from our customers expected to be delivered in the future, most of which is expected to occur during the next twelve months. Backlog may vary significantly from reporting period to reporting period due to the timing of customer commitments. The time between receipt of an order and actual delivery, or completion, of our products and services varies from one or more days, in the case of inventoried standard products, to three to nine months, in the case of certain custom engineered equipment solutions, and up to one year or more under our service contracts.


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

 

 September 30, June 30, March 31, December 31, September 30,  September 30, June 30, March 31, December 31, September 30, 
 2017 2017 2017 2016 2016  2018 2018 2018 2017 2017 
T&D Solutions $28,059  $29,182  $31,705  $34,588  $36,699  $29,449   25,419  $21,503  $20,170  $20,016 
Critical Power  10,626   10,466   5,039   3,970   4,831 
Critical Power Solutions  11,522   10,850   8,623   8,710   10,626 
Order backlog  40,971   36,269   30,126   28,880   30,642 
Discontinued Operation  9,626   8,344   5,621   6,316   8,043 
Total order backlog $38,685  $39,648  $36,744  $38,558  $41,530  $50,597   44,613  $35,747  $35,196  $38,685 

 

Revenue

 

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

                 
 Three Months Ended September 30, Nine Months Ended September 30,  Three Months Ended
September 30,		 Nine Months Ended
September 30,		 
 2017 2016 Variance % 2017 2016 Variance %  2018 2017 Variance % 2018 2017 Variance % 
T&D Solutions                                                                
Transformers $21,548  $21,110  $438   2.1  $66,198  $61,605  $4,593   7.5  $22,663  $21,547  $1,116   5.2  $65,194  $66,198  $(1,004)  (1.5)
Switchgear  4,299   4,268   31   0.7   10,118   10,876   (758)  (7.0)
  25,847   25,378   469   1.8   76,316   72,481   3,835   5.3   22,663   21,547   1,116   5.2   65,194   66,198   (1,004)  (1.5)
Critical Power                                
Critical Power Solutions                                
Equipment  1,261   1,741   (480)  (27.6)  4,490   7,598   (3,108)  (40.9)  388   1,261   (873)  (69.2)  1,171   4,490   (3,319)  (73.9)
Service  2,686   2,270   416   18.3   7,147   5,810   1,337   23.0   2,905   2,686   219   8.2   7,659   7,147   512   7.2 
  3,947   4,011   (64)  (1.6)  11,637   13,408   (1,771)  (13.2)  3,293   3,947   (654)  (16.6)  8,830   11,637   (2,807)  (24.1)
Total revenue $29,794  $29,389  $405   1.4  $87,953  $85,889  $2,064   2.4  $25,956  $25,494  $462   1.8  $74,024  $77,835  $(3,811)  (4.9)

 

For the three months ended September 30, 2017,2018, our consolidated revenue increased by $405,$0.5 million, or 1.4%1.8%, to $29.8$26.0 million, up from $29.4$25.5 million during the three months ended September 30, 2016.2017. For the nine months ended September 30, 2017,2018, our consolidated revenue increaseddecreased by $2,064,$3.8 million, or 2.4%4.9%, to $88.0$74.0 million, updown from $85.9$77.8 million during the nine months ended September 30, 2016.2017.

 

T&D Solutions. During the three and nine months ended September 30, 2017,2018, revenue from our transformer product lines increased by $438,$1.1 million or 2.1%, and $4,593, or 7.5%,5.2% as compared to the three and nine months ended September 30, 2016. The increase was driven by our “dry-type” transformer product lines in the United States, which increased by $1,147, or 10.0%, during the three months ended September 30, 2017 and $3,650, or 10.9%, duringdue to higher sales of liquid filled transformers. During the nine months ended September 30, 20172018, revenue from our transformer product lines decreased by $1.0 million or 1.5% as compared to the three and nine months ended September 30, 2016.

Our sales of T&D switchgear increased by 0.7% to $4.3 million, during the three months ended September 30, 2017, as compared to the same period of the prior year due to an increase in sales of automatic transfer switches. For the nine months ended September 30, 2017, our switchgear sales decreased2017. The decrease was mostly driven by 7.0% to $10.1 million when compared to the same period last year as a result of lower sales of our low voltage switchgear“dry type” transformer products.

 

Critical Power. Titan is the only business unit in the Critical Power segment. For the three months ended September 30, 2017,2018, equipment sales decreased by $480,$0.9 million, or 27.6%69.2%, as compared to the same period in the prior year, resulting from a reduced focus on thisequipment sales included in the Titan revenue stream. For the nine months ended September 30, 2017,2018, equipment sales were down by $3,108,$3.3 million, or 40.9%,73.9% compared to the same period in 2016.2017.

 

For the three andmonths ended September 30, 2018, service revenue increased by $219 or 8.2%, as compared to the same period in the prior year. For the nine months ended September 30, 2017,2018, service revenue increased by $416,$511 or 18.3% and $1,337, or 23.0%, respectively, as7.2% compared to the same periodsperiod in 2017. The Company increased the prior year due to increase isfocus on the service revenue in our service business with our multi-location customers.its Critical Power segment.


24  

Gross Profit and Gross Margin

 

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

 

 Three Months Ended September 30, Nine Months Ended September 30,  Three Months Ended
September 30,		 Nine Months Ended
September 30,		 
 2017 2016 Variance % 2017 2016 Variance %  2018 2017 Variance % 2018 2017 Variance % 
T&D Solutions                                                                
Gross profit $4,422  $5,696  $(1,274)  (22.4) $14,989  $16,572  $(1,583)  (9.6) $4,315  $3,978  $337   8.5  $13,126  $13,835  $(709)  (5.1)
Gross margin %  17.1   22.4   (5.3)      19.6   22.9   (3.3)      19.0   18.5   0.5       20.1   20.9   (0.8)    
                                                                
Critical Power                                
Critical Power Solutions                                
Gross profit  1,024   821   203   24.7   2,544   2,069   475   23.0   826   1,034   (208)  (20.1)  1,645   2,568   (923)  (35.9)
Gross margin %  25.9   20.5   5.4       21.9   15.4   6.5       25.1   26.2   (1.1)      18.6   22.1   (3.5)    
                                                                
Consolidated gross profit $5,446  $6,517  $(1,071)  (16.4) $17,533  $18,641  $(1,108)  (5.9) $5,141  $5,012  $129   2.6  $14,771  $16,403  $(1,632)  (9.9)
Consolidated gross margin %  18.3   22.2   (3.9)      19.9   21.7   (1.8)      19.8   19.7   0.1       20.0   21.1   (1.1)    

 

For the three months ended September 30, 2017,2018, our consolidated gross margin was 18.3%19.8% of revenues, compared to 22.2%19.7% during the three months ended September 30, 2016.2017. For the nine months ended September 30, 2017,2018, our gross margin was 19.9%20.0% of revenues, compared to 21.7% for21.1% during the nine months ended September 30, 2016.2017. The decrease in our consolidated gross margin percentage for the three and nine months ended September 30, 2017 is due to the decreased gross margin in our T&D Solutions segment asfurther explained below.

 

T&D Solutions. During the three and ninemonths ended September 30, 2018 the gross margin increased by 0.5% as compared to the same period in 2017. Included in the three months ended September 30, 2017 the decrease in our T&D Solutions gross margin of 5.3% and 3.3%, respectively, as compared to the same periods in 2016 resulted primarily from lower margins in our dry-type transformer due tois the write off of raw material inventory not relocated from Canada. The raw material inventory was not relocated dueDuring the nine months ended September 30, 2018 the gross margin decreased by 0.8% as compared to the review of allowable sourcing and suppliers of components for finished goods.same period in 2017 primarily from an unfavorable product mix in our “dry type” transformers.

 

Critical Power. During the three and nine months ended September 30, 2017,2018, the gross margin increased 5.4%decreased by 1.1% and 6.5%3.5%, respectively, when compared to the same periods in 2016. This increase is2017, primarily due to lower sales while the result of revenue mix with a shift towards service sales, which provide a greater gross margin than equipment sales.fixed costs remained comparable.


25  

Operating Expenses

 

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

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  Variance  %  2017  2016  Variance  % 
T&D Solutions                                
Selling, general and administrative expense $3,016  $3,573  $(557)  (15.6) $8,618  $9,976  $(1,358)  (13.6)
Depreciation and amortization expense  158   172   (14)  (8.1)  469   511   (42)  (8.2)
Restructuring and integration  —   —   —   —   160   143   17   11.9 
Foreign exchange gain  (194)  (52)  (142)  273.1   (465)  (142)  (323)  227.5 
Segment operating expense $2,980  $3,693  $(713)   (19.3)  $8,782  $10,488  $(1,706)  (16.3)
                                 
Critical Power                                
Selling, general and administrative expense $445  $477  $(32)  (6.7) $1,611  $1,107  $504   45.5 
Depreciation and amortization expense  507   355   152   42.8   1,210   1,063   147   13.8 
Restructuring and integration  —   —   —   —   —   (1)  1   (100.0)
Segment operating expense $952  $832  $120   14.4  $2,821  $2,169  $652   30.1 
                                 
Unallocated Corporate Overhead Expenses                                
Selling, general and administrative expense $898  $744  $154   20.7  $2,495  $2,186  $309   14.1 
Depreciation expense  17   17   —   —   52   51   1   2.0 
Restructuring and integration  —   19   (19)  (100.0)  —   57   (57)  (100.0)
Segment operating expense $915  $780  $135   17.3  $2,547  $2,294  $253   11.0 
                                 
Consolidated                                
Selling, general and administrative expense $4,359  $4,794  $(435)  (9.1) $12,724  $13,269  $(545)  (4.1)
Depreciation and amortization expense  682   544   138   25.4   1,731   1,625   106   6.5 
Restructuring and integration  —   19   (19)  (100.0)   160   199   (39)   (19.6)
Foreign exchange gain  (194)  (52)  (142)  273.1   (465)  (142)  (323)  227.5 
Consolidated operating expense $5,720  $5,305  $(458)  (8.6) $14,150  $14,951  $(801)  (5.4) 

  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
  2018  2017  Variance  %  2018  2017  Variance  % 
T&D Solutions                                
Selling, general and administrative expense $2,695  $2,302  $393   17.1  $7,928  $7,152  $776   10.9 
Depreciation and amortization expense  60   93   (33)  (35.5)  221   277   (56)  (20.2)
Restructuring and integration  —   —   —   —   —   156   (156)  (100.0)
Foreign exchange gain  (889)  (194)  (695)  358.2   (617)  (465)  (152)  32.7 
Segment operating expense $1,866  $2,201  $(335)  (15.2) $7,532  $7,120  $412   5.8 
                                 
Critical Power Solutions                                
Selling, general and administrative expense $383  $444  $(61)  (13.7) $1,257  $1,610  $(353)  (21.9)
Depreciation and amortization expense  302   507   (205)  (40.4)  921   1,210   (289)  (23.9)
Segment operating expense $685  $951  $(266)  (28.0) $2,178  $2,820  $(642)  (22.8)
                                 
Unallocated Corporate Overhead Expenses                                
Selling, general and administrative expense $625  $787  $(162)  (20.6) $2,051  $2,372  $(321)  (13.5)
Depreciation expense  16   18   (2)  (11.1)  48   55   (7)  (12.7)
Segment operating expense $641  $805  $(164)  (20.4) $2,099  $2,427  $(328)  (13.5)
                                 
Consolidated                                
Selling, general and administrative expense $3,703  $3,533  $170   4.8  $11,236  $11,134  $102   0.9 
Depreciation and amortization expense  378   618   (240)  (38.8)  1,190   1,542   (352)  (22.8)
Restructuring and integration  —   —   —   —   —   156   (156)  (100.0)
Foreign exchange gain  (889)  (194)  (695)  358.2   (617)  (465)  (152)  32.7 
Consolidated operating expense $3,192  $3,957  $(765)  (19.3) $11,809  $12,367  $(558)  (4.5)

 

Selling, General and Administrative Expense. For the three months ended September 30, 2017,2018, consolidated selling, general and administrative expense, before depreciation and amortization, decreasedincreased by $435,$170, or 9.1%4.8%, to $4.4 million,$3,703, as compared to $4.8 million$3,533 during the three months ended September 30, 2016 primarily due to lower salary and benefits expenses.2017. As a percentage of our consolidated revenue, selling, general and administrative expense before depreciation and amortization decreasedincreased to 14.5%14.3% in the 20172018 period, as compared to 16.3%13.9% in 2016.2017.

 

During the nine months ended September 30, 2017,2018, consolidated selling, general and administrative expense, before depreciation and amortization, decreasedincreased by $545$102 or 4.1%0.9%, to $12.7$11.2 million, as compared to $13.3$11.1 million during the nine months ended September 30, 2016 primarily due to lower salary and benefits expenses.2017. As a percentage of our consolidated revenue, selling, general and administrative expense before depreciation and amortization decreasedincreased to 14.5%15.2% in the 20172018 period, as compared to 15.5%14.3% in 2016.2017.

 

Depreciation and Amortization Expenses.Depreciation and amortization expense consists primarily of depreciation of fixed assets and amortization of definite-lived intangible assets and depreciation of fixedright-of-use assets related to our finance leases and excludes amounts included in cost of sales. For the three months ended September 30, 2017,2018, depreciation and amortization expense increaseddecreased by $138$240 or 25.4%38.8% when compared to the same period in 2016.2017. For the nine months ended September 30, 2017,2018, depreciation and amortization expense increaseddecreased by $106$352 or 6.5%22.8% when compared to the same period in 2016. These increases are the result of the write-off of the distributor territory license upon termination of a distribution agreement in the Critical Power segment for the three months ended September 31, 2017.

 

Restructuring and Integration Expenses.For There was no restructuring and integration expense for the three months ended September 30, 2017 and 2018 and nine months ended September 30, 2018. For the nine months ended September 30, 2017, restructuring and integration expense decreased by approximately $19 and $39, respectively, comparedwas $156 related to the same periods in 2016, primarily due to completionrelocation of the relocation of our dry-type transformersmedium voltage transformer production facility from Canada in second quarter of 2017.to a lower cost facility.


Foreign Exchange Loss/Gain. During the three months ended September 30, 2017 and 2016, approximately 29% and 27% of our consolidated operating revenues were denominated in Canadian dollars. During the nine months ended September 30, 20172018, approximately 46% and 2016, approximately 31% and 29%45%, respectively, of our consolidated operating revenues were denominated in Canadian dollars.dollars, as compared to 42% and 44%, respectively, for the same periods in 2017. Most of our expenses were denominated and disbursed in U.S. dollars during the three and nine months ended September 30, 20172018 and 2016.2017. 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 the three months ended September 30, 20172018 and 2016,2017, we recorded a gain of $194$889 and $52$194, respectively, due to currency fluctuations. For the nine months ended September 30, 20172018 and 2016,2017, we recorded a gain of $465$617 and $142,$465, respectively, due to currency fluctuations.

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Operating Income (Loss)

 

The following table represents our operating income, or lossexcluding discontinued operations, by reportable segment for the periods indicated:

 

 Three Months Ended September 30, Nine Months Ended September 30,  Three Months Ended
September 30,		 Nine Months Ended
September 30,		 
 2017 2016 Variance % 2017 2016 Variance %  2018 2017 Variance % 2018 2017 Variance % 
T&D Solutions $1,442  $2,002  $(560)  (28.0) $6,207  $6,083  $124   2.0  $2,449  $1,777  $672   37.8  $5,594  $6,715  $(1,121)  (16.7)
Critical Power  72   (10)  82   (820.0)  (277)  (100)  (177)  177.0 
Critical Power Solutions  141   83   58   (69.9)  (533)  (252)  (281)  (111.5)
Unallocated Corporate Overhead Expenses  (915)  (780)  (135)  17.3   (2,547)  (2,293)  (254)  11.1   (641)  (805)  164   20.4   (2,099)  (2,427)  328   13.5 
Total operating income $599  $1,212  $(613)  (50.6) $3,383  $3,690  $(307)  (8.3) $1,949  $1,055  $894   84.7  $2,962  $4,036  $(1,074)  (26.6)

 

T&D Solutions. During the three and nine months ended September 30, 2017,2018, T&D segment operating income was $1,442 and $6,208 respectively,$2,449 as compared to $2,003 and $6,083 during$1,777 for the same periods of 2016. The decreaseperiod in operating income for2017. Included in the three months ended September 30, 2016 as compared to the same period in the prior year2017 is primarily due to the write off-ofoff of raw material inventory that was not relocated to Mexico during relocation of our dry-type reporting unit. The increase in operating income forfrom Canada. During the nine months ended September 30, 20172018, T&D segment operating income was $5,594 as compared to $6,715 during the same period of 2017. The decrease in 2016the operating income is primarily due to higher revenues and lower selling, general and administrative expenses.an unfavorable product mix in our “dry type” transformers.

 

Critical Power. During the three and nine months ended September 30, 2017,2018, our Critical Power segment generated an operating income of $72 and$141 as compared to $83 during the same period of 2017. During the nine months ended September 30, 2018, our Critical Power segment generated an operating loss of $277, respectively,$533 as compared to an operating$252 loss of $11 and $100 during the same periods of 2016.2017.

 

Unallocated Corporate Overhead Expenses.Our corporate expenses consistsconsist primarily of executive management, corporate accounting and human resources personnel, office expenses, financing and corporate development activities, payroll and benefits administration, treasury, tax compliance, legal, stock-based compensation and public reporting costs, and costs not specifically allocated to reportable business segments. During the three and nine months period ended September 30, 2017,2018, our Unallocated Corporate Overhead Expenses increased $135decreased by $164 or 17.3%20.4% and $254$328 or 11.1%13.5%, respectively, as compared to the same periods in 2016,2017 primarily due to an increase in stock based compensation expense.adjustment of prior year insurance premiums.

 

Non-Operating Expense

 

Interest Expense. For the three and nine months ended September 30, 2017,2018, interest expense was approximately $588$727 and $1,662,$2,126, respectively, as compared to $556$632 and $1,151$1,792, respectively, during the three and nine months ended September 30, 2016, respectively.2017. The increase in our interest expense was due to higher average borrowings outstanding under our credit facilities and the increased utilization of short term borrowings with increased rates during the 20172018 period as compared to 2016.2017.

 

Other Expense. For the three and nine months ended September 30, 2017,2018, other non-operating expense was $245$19 and $647,$158, respectively, as compared to $264$112 and $554,$165, during the same periods of 2016. The Company continues to record interest on past due and unpaid payroll tax obligations. Included in the nine months ended September 30, 2017 and 2016 are waivers of certain interest and penalties on payroll tax obligations totaling $70 and $362, respectively.2017.

 

Income Tax Expense (Benefit). Our effective income tax expense rate was 226.5%34.5% for the three months ended September 30, 2017,2018, compared to 17.9%170.4% during the same period in 2016.2017. For the nine months ended September 30, 2017,2018, our effective income tax expense rate was 36.9%81.1%, as compared to 45.3%19.0% during the same period in 2016,2017, as set forth below (dollars in thousands):

 Three Months Ended September 30, Nine Months Ended September 30,              
 2017 2016 Variance 2017 2016 Variance  Three Months Ended
September 30,		 Nine Months Ended
September 30,		 
(Loss) income before income taxes $(234) $392  $(626) $1,074  $1,985  $(911)
 2018 2017 Variance 2018 2017 Variance 
Income from continuing operations before income taxes $1,203  $311  $892  $678  $2,079  $(1,401)
Income tax expense  530   70   460   396   900   (504)  415   530   (115)  550   396   154 
Effective income tax rate %  226.5   17.9   208.6   36.9   45.3   (8.5)  34.5   170.4   (135.9)  81.1   19.0   62.1 

 

Our effective income tax rate decreased by 135.9% and increased by 208.6% for three months ended September 30, 2017, as compared to the same period in 2016 primarily due to additional expense for assessment by tax authorities in Canada, dividend income recorded offset by foreign tax credit, and provision to tax return true-ups. For the nine months ended September 30, 2017, our effective income tax rate decreased 8.5% as compared to the same period in 2016 primarily due to realized foreign exchange loss in Canada during the nine months ended September 30, 2017.

Net (Loss) Income

We generated net loss of $764 and net income of $67862.1% during the three and nine months ended September 30, 20172018, respectively, as compared to the same period of the prior year, primarily due to changes made to taxation of foreign earned income pursuant to the U.S. tax code changes enabled in December 2017.

Net Income/ (Loss)

We generated a net income of $322$58 and $1,085net loss of $1,312 during the three and nine months ended September 30, 2018, respectively, as compared to net loss of $795 and net income of $599 for the three and nine months ended September 30, 2016, respectively.2017. Our net income per basic and diluted share for the three months ended September 30, 2018 was $0.01. Our net loss per basic and diluted share for the nine months ended September 30, 2018 was $0.16. Our net loss per basic and diluted share for the three months ended September 30, 2017 was $0.09 and our$0.09. Our net income per basic and diluted share for the nine months ended September 30, 2017 was $0.08, as compared to net$0.08.

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Our income per share from continuing operations basic and diluted share of $0.04 and $0.12 for the three and nine months ended September 30, 2016, respectively. The decrease in our net2018 was $0.09 and $0.01, respectively, as compared to loss of $0.03 and income of $0.19 for the three and nine months ended September 30, 2017, respectively.

Our loss per share from discontinued operations basic and diluted for the three and nine months ended September 30, 2018 was $0.08 and $0.17, respectively. Our loss per share from discontinued operations basic and diluted for the three and nine months ended September 30, 2017 was driven by an increase in our restructuring$0.06 and income tax expenses when compared to the same period in 2016 was driven primarily by lower gross profit due to the write off of inventory that had not relocated from Canada and higher income tax expense. The decrease in our net income for the nine months ended September 30, 2017 as compared to the same period in 2016 was driven primarily by lower gross profit due to the write off of inventory that had not relocated from Canada, partially offset by lower income tax expense.$0.11, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

General. At September 30, 2017,2018, we had total debt of $31,848 and $950$659 of cash and cash equivalents on hand.hand and total debt outstanding of $33.6 million, when including bank overdrafts and liabilities of discontinued operations. We have historically met our cash needs through a combination of cash flows from operating activities, and bank borrowings under our revolving credit facilities.facilities and distributions between our U.S. and foreign subsidiaries. Our cash requirements are generally for operating activities, debt repayment, capital improvements and acquisitions. We believe that working capital, the borrowing capacity available under our credit facilities, and funds generated from operations shouldand cash available on hand will 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.months from the date of filing.

 

Cash Provided by/ Used in Operating Activities. Cash usedprovided by our operating activities was $473 and $8,860$567 during the nine months ended September 30, 2017 and 2016, respectively, primarily due2018 as compared to $164 of cash used in operating activities during the decrease in working capital as we reported the term credit facilities within our current liabilities in the ninnine months ended September 30, 2017. The principal elements of cash provided by operating activities during the nine months ended September 30, 2018 were $3,003 of non-cash expenses consisting of depreciation, amortization of intangibles and deferred issuance costs, changes in inventory reserves, stock-based compensation and foreign currency premeasurement loss. These sources of cash were partially offset by the net loss of $1,312, deferred income tax benefit of $414, changes in receivable reserves of $374 and $344 of cash used for working capital purposes.

 

Cash Used in Investing Activities. Cash used in investing activities during the nine months ended September 30, 20172018 was $1,225$369, as compared to $469$1,225 during the nine months ended September 30, 2016. Additions2017. During the nine months ended September 30, 2018, additions to our property, plant and equipment were $1,245 as compared to $476 in the prior year comparable period.$369.

 

Cash Provided by Financing Activities. Cash provided by our financing activities was $2,944 and $9,620$167 during nine months ended September 30, 2018, as compared to $2,635 during the nine months ended September 30, 2017 and 2016, respectively. During the nine months ended September 30, 2017, our net cash provided by financing activities included $31,919 of increased borrowings under our credit facilities, an increase in short term borrowings of $1,365 as a result of a product financing arrangement and a $162 increase in bank overdrafts, offset by debt payments of $30,465 under our credit facilities.2017.

 

Working Capital. As of September 30, 2017,2018, we had negative working capital of $168,$1.4 million, including $950$659 of cash and cash equivalents, compared to working capital of $2,448,$709, including $246$218 of cash and cash equivalents at December 31, 2016. The decrease in working capital as of September 30, 2017, as compared to September 30, 2016, is primarily due to our reporting of the term credit facilities within our current liabilities. We are currently in the process of renegotiating the terms of our credit facilities with BMO.2017. Our current assets were approximately 1.0 and 1.11.00 times our current liabilities at September 30, 20172018 and at December 31, 2017. At September 30, 2018 and December 31, 2016, respectively. At September 30, 2017, and December 31, 2016, we had $1,214$0.9 million and $1,535,$3.3 million, respectively, of available and unused borrowing capacity from our revolving credit facilities.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. Management believes that the existing credit facility is available as of the filing date to support operations as needed. As previously noted our total order backlog has increased approximately $6 million during the three months ended September 30, 2018 which has required us to increase our inventory levels and related commitments to meet this future demand. We expect that as we work off this backlog and when we complete the sale of PCEP that our working capital position will improve including a reduction in our overall debt levels.

 

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 bore 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 bankBMO 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.

 

Our Canadian Facilities provided for up to $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 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.

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Facility A, as amended by the 2017 CAD ARCA Amendment and restated,the 2018 CAD ARCA Amendment, is subject to margin criteria and borrowings bearcriteria. Facility A, as amended by the 2017 CAD ARCA Amendment, bore interest at BMO’s prime rate plus 0.75% per annum on amounts borrowed in Canadian dollars, or itsBMO’s U.S. base rate plus 0.75% per annum or LIBOR plus 2.25% per annum on amounts borrowed in U.S. dollars. The 2018 CAD ARCA Amendment modified the interest rate on Facility A borrowings to BMO’s prime rate plus 0.50% per annum on amounts borrowed in Canadian dollars, or BMO’s U.S. base rate plus 0.50% per annum or LIBOR plus 2.0% per annum on amounts borrowed in U.S. dollars. Pursuant to the 2017 CAD ARCA Amendment, Facility A willwas to mature on July 31, 2018. The 2018 CAD ARCA Amendment extended the maturity of borrowings under Facility A to April 1, 2020. Consistent with the terms of the historical Facility A, including both a subjective acceleration clause and lockbox arrangement, will continue to be presented as a current liability. We believe based upon historical experience, that Facility A will remain in place to fund operations through maturity of this facility in April 2020.

 

Borrowings under Facility B, as amended and restated, bearby the 2017 CAD ARCA Amendment, bore 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 willwas to continue after July 31, 2017 until our borrowings under the facility is fully paid on April 30, 2018. The 2018 CAD ARCA Amendment did not modify the interest rate on Facility B borrowings, which remained at BMO’s prime rate plus 1.25% per annum. Pursuant to the 2018 CAD ARCA Amendment, we made the final principal payment of $47 under Facility B on April 30, 2018.

 

Borrowings under Facility C, as amended and restated, bearby the 2017 CAD ARCA, bore interest at BMO’s prime rate plus 1.50% per annum on amounts borrowed in Canadian dollars, or itsBMO’s U.S. base rate plus 1.50% per annum or LIBOR plus 2.75% per annum on amounts borrowed in U.S. dollars. Pursuant to the CAD ARCA, a principal repayment of $72 USD was due on June 30, 2016, and the reduced quarterly principal repayments of $36 USD waswere 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 willwere to continue until July 31, 2018, with a balloon payment of $352 due on July 31, 2018. Pursuant to the 2018 CAD ARCA Amendment, quarterly principal repayments of $36 will continue until January 31, 2020, with a balloon payment of $136 due on April 1, 2020. The 2018 CAD ARCA Amendment modified the interest rate on Facility C borrowings to BMO’s prime rate plus 1.25% per annum on amounts borrowed in Canadian dollars, or BMO’s U.S. base rate plus 1.25% per annum or LIBOR plus 2.50% per annum on amounts borrowed in U.S. dollars.

 

ThePursuant to the CAD ARCA, modifiedas amended by the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment, financial covenant testing so that testing will beis performed on our consolidated financial statements. The financial covenants were changed pursuantWe are required to the CAD 2017 Amendment to requiremeet certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, which were further modified byas set forth in the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment. On March 6, 2017, we received a waiver fromPursuant to the 2018 CAD ARCA Amendment, BMO waived defaults on a certainall financial covenantcovenants existing as of December 31, 2016.2017, for which we were not in compliance.

 

We are currently in the process of renegotiating the terms of our credit facilities with BMO. BMO has agreed to suspend testing of the current ratio covenant as of September 30, 2017 due to such ongoing negotiation. We are in compliance with all financial covenants not suspended and required to be tested at September 30, 2017. We anticipate renegotiating our credit facilities on terms that will allow the Company to meet its covenants prospectively.


As of September 30, 2017,2018, we had approximately $6.8$6.0 million in U.S. dollar equivalents outstanding under our Canadian Credit Facilities. Our borrowings consisted of approximately $6.2$5.6 million outstanding under Facility A $0.1 millionand $352 outstanding under Facility BC. As of September 30, 2018, the Company was not in compliance with the financial covenant requirements of the Canadian Facilities and $0.5 million outstanding under Facility C.has received a waiver from BMO as of November 7, 2018 for the period ending September 30, 2018.

 

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 U.S. Facilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank.bank (as amended and restated, the “U.S. Facilities”). Additionally, defaults relating to the breach of certain financial covenants under the prior financing arrangements with the bankBMO existing as of December 31, 2015 were waived by BMO. On March 15, 2017, theThe 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.

 

USD Facility A, continues to bearas amended and restated per 2017 US ARCA, bore interest, at our option, at the bank’sBMO’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. Pursuant to the 2018 US ARCA Amendment, borrowings under Facility A bears interest, at our option, at the BMO’s prime rate plus 0.75% per annum on U.S. prime rate loans, or an adjusted LIBOR rate plus 2.00% 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. The 2018 US ARCA Amendment extended the maturity of borrowings under USD Facility A to April 1, 2020. Consistent with the terms of the historical USD Facility A, including both a subjective acceleration clause and lockbox arrangement, will continue to be presented as a current liability. We believe based upon historical experience, that the USD Facility A will remain in place to fund operations through maturity in April 2020.

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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. Pursuant to the 2018 US ARCA Amendment, monthly principal repayments beginning on July 31, 2018 are increased to $100 and will continue until March 31, 2020, with a balloon payment of $2,338 due on April 1, 2020. The 2018 US ARCA Amendment did not change the USD Facility B interest rate.

 

ThePursuant to the US ARCA, modifiedas amended by the 2017 US ARCA Amendment and the 2018 US ARCA Amendment, financial covenant testing so that testing will beis performed on our consolidated financial statements. The financial covenants were changed pursuantWe are required to the US ARCA to requiremeet certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, which were further modified byas set forth in the 2017 US ARCA Amendment and the 2018 US ARCA Amendment. On March 6, 2017, we received a waiver from BMO on a certain financial covenantcovenants existing as of December 31, 2016.

We are currently in On March 28, 2018, pursuant to the process of renegotiating the terms of our credit facilities with BMO.2018 US ARCA Amendment, BMO has agreed to suspend testing of the current ratio covenant as of September 30, 2017 due to such ongoing negotiation. We are in compliance withwaived defaults on all financial covenants existing as of December 31, 2017 for which we were not suspended and required to be tested at September 30, 2017. We anticipate renegotiating our credit facilities on terms that will allow the Company to meet its covenants prospectively.in compliance.

 

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 September 30, 2017,2018, we had approximately $18.5$18.1 million outstanding under our U.S. Credit Facilities. Our borrowings consisted of approximately $14.0 million outstanding under USD Facility A, and $4.5$4.1 million outstanding under USD Facility B. As of September 30, 2018, the Company was not in compliance with the financial covenant requirements of the U.S. Facilities and has received a waiver from BMO as of November 7, 2018 for the period ending September 30, 2018.

 

Nexus Promissory NoteCapital Lease Obligations

 

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. was payable in 60 consecutive monthly installments and bore 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. As of September 30, 2017 the balance of the note has been fully repaid, while at2018 and December 31, 2016 there was approximately $1852017, we had an immaterial amount of capital lease obligations outstanding underthat were assumed in connection with the Nexus Promissory Note.acquisition of Titan.

 

Capital Expenditures

 

Our additions to property, plant and equipment were $369 during the nine months ended September 30, 2018, as compared to $1,245 during the nine months ended September 30, 2017, as compared to $476 during the nine months ended September 30, 2016.2017. We have no major future capital projects planned, or significant replacement spending anticipated during 2017. We anticipate approximately $1,000 of additions to property, plant and equipment in the next twelve months. We expect to finance our capital expenditures with available cash and cash provided under our credit facilities.2018.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not Applicable

 

ITEM 4. CONTROLS AND PROCEDURES

 

Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

 

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. The matters that management identified in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, filed with the SEC on March 29, 2017,April 2, 2018, continued to exist and were still considered material weaknesses in our internal control over financial reporting at September 30, 2017.2018.

 

We conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2016,September 30, 2018, the end of the period covered by this AnnualQuarterly 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.10-Q. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. As of September 30, 2017,2018, 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.

 

30  

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

Remediation Plan

 

As of September 30, 2017,2018, there were 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 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 of our restructuring and integration plan, designed to reduce 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 controls over financial reporting.  Until the remediation plan is fully implemented and operating for a sufficient period of time, we will not be able to conclude that the material weaknesses have been remediated. We will continue to monitor and assess our remediation activities to address the material weaknesses discussed above through remediation as soon as practicable.


Changes in Internal Control over Financial Reporting

 

Other than the changes discussed above in the Remediation Plan, there has been no change in our internal control over financial reporting during the third quarter ended September 30, 20172018 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in lawsuits, investigations and claims that arise in the ordinary course of business.

 

On January 11, 2016, Myers Power Products, Inc., a specialty electrical products manufacturer, filed suit with the Superior Court of the State of California, County of Los Angeles, against us, PCEP and two PCEP’s employees who are former employees of Myers Power Products, Inc., Geo Murickan, the president of PCEP (“Murickan”), and Brett DeChellis (“DeChellis”), alleging, among other things, that Murickan wrongly used and retained confidential business information of Myers Power Products, Inc. for the benefit of us and PCEP, in breach of their confidentiality agreement and/or employment agreement entered into with Myers Power Products, Inc., and that we and PCEP knowingly received and used such confidential business information. Myers Power Products, Inc. is seeking injunctive relief enjoining us, PCEP and our employees from using its confidential business information and compensatory damages of an unspecified unlimited (exceeding $25,000) amount. On March 18, 2016, we filed an answer to the complaint, denying generally each and every allegation and relief sought by Myers Power Products, Inc. and seeking dismissal based on, among other things, failure to state facts sufficient to constitute a cause of action. We intend to contest the matter vigorously. Due to the uncertainties of litigation, however, we can give no assurance that we, 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.

 

As of the date of this filing,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 11 – Commitments and Contingencies included in the notes to our consolidated financial statements included in the 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.

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ITEM 1A. RISK FACTORS

 

During the fiscal quarter ended September 30, 20172018 there were no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.


ITEM 6. EXHIBITS

 

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

 

  2832  

 

 

SIGNATURESEXHIBIT INDEX

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

 

  PIONEER POWER SOLUTIONS, INC.
Date: November 13, 2017By:/s/ Nathan J. Mazurek
Name: Nathan J. Mazurek
Title: Chief Executive Officer
Date: November 13, 2017/s/ Thomas Klink
Name: Thomas Klink

Title: Chief Financial Officer

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


EXHIBIT INDEX

Exhibit

No.

 Description
3.1 Composite Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Registration Statement on Form S-1 of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on June 21, 2011).
   

3.2

 Bylaws (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 2, 2009).
10.1Letter Agreement, dated June 29, 2018, by and between Cleanspark, Inc and Pioneer Custom Electric Products Corp. (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, 2018)
10.2Letter Agreement, dated July 16, 2018, by and between Cleanspark, Inc and Pioneer Custom Electric Products Corp. (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 19, 2018)
10.3*Waiver Letter, dated November 7, 2018, from Bank of Montreal, Chicago Branch, as lender.
   
31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101* The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2018, formatted in XBRL (eXtensible Business Reporting Language), (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Financial Statements.

 

 

* Filed herewith.

 

 

SIGNATURES

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

PIONEER POWER SOLUTIONS, INC.
Date: November 9, 2018By:/s/ Nathan J. Mazurek
Name: Nathan J. Mazurek
Title: Chief Executive Officer

Date: November 9, 2018/s/ Thomas Klink
Name: Thomas Klink

Title: Chief Financial Officer

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