UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20182019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-35212
PIONEER POWER SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 27-1347616 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
400 Kelby Street, 12th Floor
Fort Lee, New Jersey 07024
(Address of principal executive offices)
(212) 867-0700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock | PPSI | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”filer”, “smaller reporting company,”company”, and “emerging growth company” in Rule 12b-2of12b-2 of the Exchange Act.Act:
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | Smaller reporting company | ☒ | |
Emerging | ☐ |
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 9, 2018August 14, 2019 was 8,726,045.
PIONEER POWER SOLUTIONS, INC.
Form 10-Q
For the Quarterly Period Ended SeptemberJune 30, 20182019
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PIONEER POWER SOLUTIONS, INC.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | $ | 25,956 | $ | 25,494 | $ | 74,024 | $ | 77,835 | ||||||||
Cost of goods sold | ||||||||||||||||
Cost of goods sold | 20,815 | 19,609 | 59,253 | 60,559 | ||||||||||||
Restructuring and integration | — | 873 | — | 873 | ||||||||||||
Total cost of goods sold | 20,815 | 20,482 | 59,253 | 61,432 | ||||||||||||
Gross profit | 5,141 | 5,012 | 14,771 | 16,403 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 4,081 | 4,151 | 12,426 | 12,676 | ||||||||||||
Restructuring and integration | — | — | — | 156 | ||||||||||||
Foreign exchange gain | (889 | ) | (194 | ) | (617 | ) | (465 | ) | ||||||||
Total operating expenses | 3,192 | 3,957 | 11,809 | 12,367 | ||||||||||||
Income from continuing operations | 1,949 | 1,055 | 2,962 | 4,036 | ||||||||||||
Interest expense | 727 | 632 | 2,126 | 1,792 | ||||||||||||
Other expense | 19 | 112 | 158 | 165 | ||||||||||||
Income before taxes | 1,203 | 311 | 678 | 2,079 | ||||||||||||
Income tax expense | 415 | 530 | 550 | 396 | ||||||||||||
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 | ||||||
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 | ||||||||||||||||
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 | 8,726 | 8,725 | 8,726 | 8,713 | ||||||||||||
Diluted | 8,734 | 8,725 | 8,726 | 8,727 |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | $ | 5,360 | $ | 3,877 | $ | 8,378 | $ | 10,122 | ||||||||
Cost of goods sold | 4,839 | 3,684 | 7,600 | 8,803 | ||||||||||||
Gross profit | 521 | 193 | 778 | 1,319 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 2,071 | 1,751 | 3,771 | 4,016 | ||||||||||||
Total operating expenses | 2,071 | 1,751 | 3,771 | 4,016 | ||||||||||||
Loss from continuing operations | (1,550 | ) | (1,558 | ) | (2,993 | ) | (2,697 | ) | ||||||||
Interest expense | 240 | 229 | 463 | 448 | ||||||||||||
Gain on sale of subsidiary | — | — | (4,207 | ) | — | |||||||||||
Other expense | 3,807 | 212 | 465 | 349 | ||||||||||||
(Loss) income before taxes | (5,597 | ) | (1,999 | ) | 286 | (3,494 | ) | |||||||||
Income tax (benefit) expense | (1,442 | ) | (341 | ) | 104 | (530 | ) | |||||||||
Net (loss) income from continuing operations | (4,155 | ) | (1,658 | ) | 182 | (2,964 | ) | |||||||||
Income from discontinued operations, net of income taxes | 132 | 862 | 1,443 | 1,594 | ||||||||||||
Net (loss) income | $ | (4,023 | ) | $ | (796 | ) | $ | 1,625 | $ | (1,370 | ) | |||||
(Loss) earnings per share: | ||||||||||||||||
Basic | ||||||||||||||||
(Loss) income from continuing operations | $ | (0.48 | ) | $ | (0.19 | ) | $ | 0.02 | $ | (0.34 | ) | |||||
Income from discontinued operations | 0.02 | 0.10 | 0.17 | 0.18 | ||||||||||||
Net (loss) income | $ | (0.46 | ) | $ | (0.09 | ) | $ | 0.19 | $ | (0.16 | ) | |||||
Diluted | ||||||||||||||||
(Loss) income from continuing operations | $ | (0.48 | ) | $ | (0.19 | ) | $ | 0.02 | $ | (0.34 | ) | |||||
Income from discontinued operations | 0.02 | 0.10 | 0.17 | 0.18 | ||||||||||||
Net (loss) income | $ | (0.46 | ) | $ | (0.09 | ) | $ | 0.19 | $ | (0.16 | ) | |||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 8,726 | 8,726 | 8,726 | 8,726 | ||||||||||||
Diluted | 8,726 | 8,726 | 8,730 | 8,726 |
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER POWER SOLUTIONS, INC.
Consolidated Statements of Comprehensive (Loss) Income
(In thousands)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net (loss) income | $ | (4,023 | ) | $ | (796 | ) | $ | 1,625 | $ | (1,370 | ) | |||||
Other comprehensive (loss) income | ||||||||||||||||
Foreign currency translation adjustments | 374 | (1 | ) | 62 | (167 | ) | ||||||||||
Amortization of net prior service costs and net actuarial losses, net of tax | 20 | (1 | ) | 110 | (16 | ) | ||||||||||
Other comprehensive income (loss) | 394 | (2 | ) | 172 | (183 | ) | ||||||||||
Comprehensive (loss) income | $ | (3,629 | ) | $ | (798 | ) | $ | 1,797 | $ | (1,553 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER POWER SOLUTIONS, INC.
(In thousands, except share data)
(Unaudited)
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 490 | $ | 200 | ||||
Short term investments | 3,882 | — | ||||||
Accounts receivable, net | 2,935 | 3,384 | ||||||
Insurance receivable | 2,400 | — | ||||||
Inventories, net | 5,020 | 3,678 | ||||||
Prepaid expenses and other current assets | 2,204 | 1,995 | ||||||
Current assets of discontinued operations | 51,378 | 37,667 | ||||||
Total current assets | 68,309 | 46,924 | ||||||
Property, plant and equipment, net | 761 | 878 | ||||||
Deferred income taxes | 4,041 | 2,837 | ||||||
Other assets | 2,826 | 3,098 | ||||||
Intangible assets, net | 103 | 124 | ||||||
Goodwill | 2,969 | 2,969 | ||||||
Assets of discontinued operations | — | 15,681 | ||||||
Total assets | $ | 79,009 | $ | 72,511 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Bank overdrafts | $ | 885 | $ | 78 | ||||
Revolving credit facilities | 20,982 | 20,755 | ||||||
Accounts payable and accrued liabilities | 12,074 | 8,951 | ||||||
Current maturities of long-term debt | 3,196 | 1,174 | ||||||
Income taxes payable | 102 | 95 | ||||||
Current liabilities of discontinued operations | 23,819 | 21,362 | ||||||
Total current liabilities | 61,058 | 52,415 | ||||||
Long-term debt, net of current maturities | — | 2,619 | ||||||
Other long-term liabilities | 1,275 | 1,599 | ||||||
Deferred income taxes | 2,920 | 1,592 | ||||||
Long-term liabilities of discontinued operations | — | 2,335 | ||||||
Total liabilities | 65,253 | 60,560 | ||||||
Stockholders’ equity | ||||||||
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued | — | — | ||||||
Common stock, $0.001 par value, 30,000,000 shares authorized; 8,726,045 shares issued and outstanding on June 30, 2019 and December 31, 2018 | 9 | 9 | ||||||
Additional paid-in capital | 23,974 | 23,966 | ||||||
Accumulated other comprehensive loss | (5,725 | ) | (5,897 | ) | ||||
Accumulated deficit | (4,502 | ) | (6,127 | ) | ||||
Total stockholders’ equity | 13,756 | 11,951 | ||||||
Total liabilities and stockholders’ equity | $ | 79,009 | $ | 72,511 |
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER POWER SOLUTIONS, INC.
Consolidated Statements of Comprehensive Income (Loss)Cash Flows
(In thousands)
(Unaudited)
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 |
Six Months Ended | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
Operating activities | ||||||||
Net income (loss) | $ | 1,625 | $ | (1,370 | ) | |||
Depreciation | 413 | 616 | ||||||
Amortization of intangible assets | 106 | 749 | ||||||
Amortization of right-of-use assets | 285 | 265 | ||||||
Amortization of debt issuance cost | 14 | 53 | ||||||
Deferred income tax expense (benefit) | 184 | (313 | ) | |||||
Change in receivable reserves | (55 | ) | (413 | ) | ||||
Change in inventory reserves | 143 | 182 | ||||||
Inventory write off from flood damage | 3,313 | — | ||||||
Gain on sale of subsidiary | (4,207 | ) | — | |||||
Unrealized gain on short term investments | 285 | — | ||||||
Accrued pension | — | (1 | ) | |||||
Stock-based compensation | 7 | 146 | ||||||
Other | — | 10 | ||||||
Foreign currency remeasurement loss | — | 50 | ||||||
Changes in current operating assets and liabilities: | ||||||||
Accounts receivable | (1,707 | ) | (1,135 | ) | ||||
Inventories | (974 | ) | (4,517 | ) | ||||
Insurance receivable | (2,400 | ) | — | |||||
Prepaid expenses and other assets | (284 | ) | (1,677 | ) | ||||
Income taxes | 433 | (120 | ) | |||||
Accounts payable and accrued liabilities | 4,226 | 5,860 | ||||||
Net cash provided by (used in) operating activities | 1,407 | (1,615 | ) | |||||
Investing activities | ||||||||
Additions to property, plant and equipment | (122 | ) | (188 | ) | ||||
Net cash used in investing activities | (122 | ) | (188 | ) | ||||
Financing activities | ||||||||
Bank overdrafts | (144 | ) | 1,301 | |||||
Short term borrowings | — | 6,507 | ||||||
Borrowing under debt agreement | 13,714 | 7,922 | ||||||
Repayment of debt | (14,098 | ) | (13,785 | ) | ||||
Payment of debt issuance cost | — | (28 | ) | |||||
Principal repayments of financing leases | (244 | ) | (248 | ) | ||||
Net cash (used)/provided by financing activities | (772 | ) | 1,669 | |||||
Increase in cash and cash equivalents | 513 | (134 | ) | |||||
Effect of foreign exchange on cash and cash equivalents | (223 | ) | 231 | |||||
Cash and cash equivalents | ||||||||
Beginning of period | 200 | 218 | ||||||
End of period | $ | 490 | $ | 315 |
For assets sold and consideration received in connection with the sale of Pioneer Critical Power, Inc. see Note 3.
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER POWER SOLUTIONS, INC.
Consolidated Balance SheetsStatement of Stockholders’ Equity
(In thousands, except share data)thousands)
(Unaudited)
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 659 | $ | 218 | ||||
Accounts receivable, net | 14,956 | 13,432 | ||||||
Inventories, net | 26,010 | 23,192 | ||||||
Income taxes receivable | 447 | 743 | ||||||
Prepaid expenses and other current assets | 2,688 | 2,803 | ||||||
Current assets of discontinued operations | 6,066 | 7,073 | ||||||
Total current assets | 50,826 | 47,461 | ||||||
Property, plant and equipment, net | 5,889 | 6,335 | ||||||
Deferred income taxes | 3,047 | 2,729 | ||||||
Other assets | 5,204 | 4,281 | ||||||
Intangible assets, net | 3,913 | 4,922 | ||||||
Goodwill | 8,527 | 8,527 | ||||||
Total assets | $ | 77,406 | $ | 74,255 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Bank overdrafts | $ | 2,600 | $ | 833 | ||||
Revolving credit facilities | 19,580 | 17,814 | ||||||
Short term borrowings | 3,170 | 5,430 | ||||||
Accounts payable and accrued liabilities | 20,882 | 16,873 | ||||||
Current maturities of long-term debt and capital lease obligations | 1,316 | 782 | ||||||
Income taxes payable | 900 | 1,164 | ||||||
Current liabilities of discontinued operations | 3,791 | 3,856 | ||||||
Total current liabilities | 52,239 | 46,752 | ||||||
Long-term debt, net of current maturities | 3,127 | 4,153 | ||||||
Pension deficit | 291 | 283 | ||||||
Other long-term liabilities | 3,946 | 3,853 | ||||||
Deferred income taxes | 1,575 | 1,665 | ||||||
Total liabilities | 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, 2018 and December 31, 2017 | 9 | 9 | ||||||
Additional paid-in capital | 23,961 | 23,801 | ||||||
Accumulated other comprehensive loss | (5,967 | ) | (5,798 | ) | ||||
Accumulated deficit | (1,775 | ) | (463 | ) | ||||
Total stockholders’ equity | 16,228 | 17,549 | ||||||
Total liabilities and stockholders’ equity | $ | 77,406 | $ | 74,255 |
Accumulated | �� | |||||||||||||||||||||||
Additional | other | Total | ||||||||||||||||||||||
Common Stock | paid-in | comprehensive | Accumulated | stockholders’ | ||||||||||||||||||||
Shares | Amount | capital | income (loss) | deficit | equity | |||||||||||||||||||
Balance - December 31, 2017 | 8,726,045 | $ | 9 | $ | 23,801 | $ | (5,798 | ) | $ | (463 | ) | $ | 17,549 | |||||||||||
Net loss | — | — | — | — | (1,370 | ) | (1,370 | ) | ||||||||||||||||
Stock-based compensation | — | — | 146 | — | — | 146 | ||||||||||||||||||
Foreign currency translation adjustment | — | — | — | (167 | ) | — | (167 | ) | ||||||||||||||||
Pension adjustment, net of taxes | — | — | — | (16 | ) | — | (16 | ) | ||||||||||||||||
Balance - June 30, 2018 | 8,726,045 | $ | 9 | $ | 23,947 | $ | (5,981 | ) | $ | (1,833 | ) | $ | 16,142 | |||||||||||
Balance - December 31, 2018 | 8,726,045 | 9 | 23,966 | (5,897 | ) | (6,127 | ) | 11,951 | ||||||||||||||||
Net income | — | — | — | — | 1,625 | 1,625 | ||||||||||||||||||
Stock-based compensation | — | — | 7 | — | — | 7 | ||||||||||||||||||
Foreign currency translation adjustment | — | — | — | 62 | — | 62 | ||||||||||||||||||
Pension adjustment, net of taxes | — | — | — | 110 | — | 110 | ||||||||||||||||||
Balance - June 30, 2019 | 8,726,045 | $ | 9 | $ | 23,974 | $ | (5,725 | ) | $ | (4,502 | ) | $ | 13,756 |
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER POWER SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
Operating activities | ||||||||
Net (loss) income | $ | (1,312 | ) | $ | 599 | |||
Depreciation | 898 | 956 | ||||||
Amortization of intangible assets | 1,102 | 1,390 | ||||||
Amortization of right-of-use assets | 403 | 396 | ||||||
Amortization of debt issuance cost | 67 | 185 | ||||||
Deferred income tax benefit | (414 | ) | (689 | ) | ||||
Change in receivable reserves | (374 | ) | 53 | |||||
Change in inventory reserves | 288 | 38 | ||||||
Accrued pension | (6 | ) | (24 | ) | ||||
Stock-based compensation | 160 | 319 | ||||||
Other | 14 | (5 | ) | |||||
Foreign currency remeasurement loss/ (gain) | 85 | (40 | ) | |||||
Changes in current operating assets and liabilities: | ||||||||
Accounts receivable | (455 | ) | (1,434 | ) | ||||
Inventories | (3,558 | ) | (1,678 | ) | ||||
Prepaid expenses and other assets | (509 | ) | 76 | |||||
Income taxes | 42 | (289 | ) | |||||
Accounts payable and accrued liabilities | 4,136 | (17 | ) | |||||
Net cash provided by/ (used in) operating activities | 567 | (164 | ) | |||||
Investing activities | ||||||||
Additions to property, plant and equipment | (369 | ) | (1,245 | ) | ||||
Proceeds from sale of fixed assets | — | 20 | ||||||
Net cash used in investing activities | (369 | ) | (1,225 | ) | ||||
Financing activities | ||||||||
Bank overdrafts | 1,593 | 162 | ||||||
Short term borrowings | (2,260 | ) | 1,365 | |||||
Borrowing under debt agreement | 31,696 | 31,919 | ||||||
Repayment of debt | (30,462 | ) | (30,465 | ) | ||||
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 | 167 | 2,635 | ||||||
Increase in cash and cash equivalents | 365 | 1,246 | ||||||
Effect of foreign exchange on cash and cash equivalents | 76 | (542 | ) | |||||
Cash and cash equivalents | ||||||||
Beginning of period | 218 | 246 | ||||||
End of period | $ | 659 | $ | 950 |
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER POWER SOLUTIONS, INC.
Notes to Consolidated Financial Statements
SeptemberJune 30, 20182019 (unaudited)
1. BASIS OF PRESENTATION
Overview
Pioneer Power Solutions, Inc. and its wholly 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 twelve (12)five (5) 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, 2017,2018, as filed with the Securities and Exchange Commission (the “SEC”) on April 2, 2018:March 29, 2019: Transmission and Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).
Recent Developments
On June 28, 2019, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek, Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”). Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer (the “Equity Transaction”), for an aggregate base cash purchase price of $60.5 million, as well as the issuance by the Buyer of a subordinated promissory note to the Company in the aggregate principal amount of $7.5 million, in each case subject to certain adjustments.
If the Equity Transaction is completed, Pioneer Power would sell to the Buyer all of the assets and liabilities associated with its liquid-filled transformer and dry-type transformer manufacturing businesses within the Company’s Transmission & Distribution Solutions segment (the “T&D Segment”). However,Pioneer Power would retainits switchgear manufacturing business within the T&D segment, as well as all of the operations associated with its critical power solutions segment.
On June 28, 2019, certain stockholders of the Company holding an aggregate of 4,774,400 shares of the Company’s common stock, which, as of such date, constituted approximately 54.7% of the voting power of the outstanding shares of the Company’s common stock, executed a written consent approving the Stock Purchase Agreement and the transactions contemplated thereby, including the Equity Transaction.
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 SeptemberJune 30, 2018.2019. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the 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.
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 Asset 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, whichof liquid-filled and dry-type transformer manufacturing businesses have been previously included in the T&D Solutions Segment, which have now been reclassified as discontinued operations for all periods presented. See Note 56 – Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q. Unless noted otherwise, discussions in these notes pertain to our continuouscontinuing operations.
These unaudited consolidated financial statements should be read in conjunction with the risk factors under the heading “Part II – Item 1A. Risk Factors” and the risk factors and the audited consolidated financial statements and notes thereto of the Company and its subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Liquidity
The accompanying financial statements have been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements as of the six months ended June 30, 2019, the Company has an accumulated deficit of $4.8 million, and has working capital of $6.8 million. As of June 30, 2019, we had total debt of $25.1 million and $490 of cash and cash equivalents on hand. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings under our revolving credit facilities. Our cash requirements are generally for operating activities, debt repayment, capital improvements and acquisitions. As further discussed in Note 11 - Debt in Part I of this Form 10-Q our credit facilities’ maturity dates have been extended until April 1, 2020.
The financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lender will remain available to us and will not need to be replaced.
Management believes that its capital resources are adequate to fund operations through the first quarter of 2020, but the availability of the Company’s capital resources is dependent on the Company’s ability to meet the working capital obligations pursuant to the credit agreements with Bank of Montreal (“BMO”), its lender. The Company has certain credit arrangements with BMO that contain subjective acceleration clauses, and the Company has had several instances of non-compliance with certain of the covenants included in such credit agreements. Management has historically been able to obtain from BMO waivers of any non-compliance and management expects to be able to continue to obtain necessary waivers in the event of future non-compliance; however, there can be no assurance that the Company will be able to obtain such waivers, and should BMO refuse to provide a waiver in the future, the outstanding debt under the credit facilities could become due immediately. Additionally, the term of the Company’s agreement with BMO ends in April 2020. Concurrently with the closing of the Equity Transaction, all existing credit facilities granted by Bank of Montreal (BMO) under the Canadian Facilities (as defined below) and the U.S. Facilities (as defined below) will be repaid in full. The operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of commercial manufacturing at acceptable margins, marketing or sales acceptance, and dependence on key personnel.
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, 2017.2018. There have been no significant changes in the Company’s accounting policies during the thirdthis fiscal quarter of 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.2019.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements not yet adopted by the Company which would have a material impact on the Company’s financial statements.
Revenue from Contracts with Customers. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 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 these updates is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgments and estimates may be required within the revenue recognition process than were required under previously existing U.S. GAAP. In July 2015, the FASB approved a one-year deferral of the effective date to January 1, 2018, with early adoption to be permitted as of the original effective date of January 1, 2017. 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 within our two reportable segments: (i) T&D Solutions and (ii) Critical Power. We have gathered data to quantify the amount of sales by type of revenue stream and categorized the types of sales for our business units for the purpose of comparing how we recognized revenue to the new standard in order to quantify the impact 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 are consistent with our existing accounting. We adopted ASU 2014-09 in our first quarter of 2018 using the modified retrospective approach and concluded that there was no material impact to our financial statements other than enhanced disclosures and there are no changes to the opening retained earnings balance.
Income Taxes. In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU No. 2016-16 requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized when the intra-entity transfer occurs rather than deferring recognition of income tax consequences until the transfer was made with an outside party. We adopted ASU 2016-16 in the first quarter of 2018 using a modified retrospective approach. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.
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 net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. The Company elected 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 as the estimation basis for applying the 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. We adopted this standard in our first quarter of 2018 using the modified retrospective approach. As a result, 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 of approximately $5.3 and $5.2 million, respectively, at January 1, 2017.
Statement of Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (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 adopted ASU 2016-15 in our first quarter of 2018 using the retrospective approach. The adoption of ASU 2016-15 did not have a material impact on our consolidated statements of cash flows.
Stock Compensation. In June 2018, the FASB issued ASU No. 2018-07,Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The updated standard 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 theadopted this guidance on January 1, 2019. The adoption of this standard willASU did not have a material effectimpact on itsthe 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 Measurementthat 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 thedoes not anticipate material impact of adopting this ASU on its consolidated financial statements.
3. REVENUESDisclosure Requirements for Defined Benefit Plans. In August 2018, the FASB issued amended guidance under Subtopic 715-20 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The amended guidance removes the requirements to disclose: amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; the amount and timing of plan assets expected to be returned to the entity; and the effects of a one-percentage point change in assumed health care cost trend rates. The amended guidance requires disclosure of an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This guidance is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The amended guidance is required to be applied on a retrospective basis to all periods presented. We are currently evaluating this guidance to determine the impact on our disclosures.
AdoptionMeasurement of ASC Topic 606, “RevenueCredit Losses on Financial Instrument. In June 2016, the FASB issued amended guidance to ASU No. 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. This amended guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. We do not expect that the amended guidance will have a material effect on our consolidated financial statements and related disclosures.
3. DIVESTITURES
On January 22, 2019, Pioneer Critical Power, Inc., a Delaware corporation (“PCPI”), a wholly-owned subsidiary of the Company within Transmission and Distribution segment, CleanSpark and CleanSpark Acquisition, Inc., a Delaware corporation (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, among other things, Merger Sub merged with and into PCPI, with PCPI becoming a wholly-owned subsidiary of the CleanSpark and the surviving company of the merger (the “Merger”).
At the effective date of the Merger, all of the issued and outstanding shares of common stock of PCPI, par value $0.01 per share, were converted into the right to receive (i) 1,750,000 shares of common stock, par value $0.001 per share (“Common Stock”), of CleanSpark, (ii) a five-year warrant to purchase 500,000 shares of Common Stock at an exercise price of $1.60 per share, and (iii) a five-year warrant to purchase 500,000 shares of Common Stock at an exercise price of $2.00 per share.
The Merger Agreement also contains representations, warranties and covenants of the parties customary for transactions similar to those contemplated by the Merger Agreement. Such representations and warranties are made solely for purposes of the Merger Agreement and, in some cases, may be subject to qualifications and limitations agreed to by the parties in connection with the negotiated terms of the Merger Agreement and may have been qualified by disclosures that were made in connection with the parties’ entry into the Merger Agreement.
In connection with the Merger Agreement, the Company, CleanSpark and PCPI entered into an Indemnity Agreement (the “Indemnity Agreement”), dated January 22, 2019, pursuant to which the Company agreed to assume the liabilities and obligations related to the claims made by Myers Powers Products, Inc. in the case titledMyers Power Products, Inc. v. Pioneer Power Solutions, Inc., Pioneer Custom Electrical Products, Corp., et al., Los Angeles County Superior Court Case No. BC606546 (the “Myers Power Case”) as they may relate to PCPI or CleanSpark after the closing of the Merger. In addition, the Company agreed to indemnify and hold harmless CleanSpark and the surviving company of the Merger and their respective officers, directors, agents, members and employees, and the heirs successors and assigns of the foregoing from Contractsand against all losses incurred by reason of claims made by Myers Power Products, Inc. as presented or substantially similar to that presented in the Myers Powers Case that are brought against CleanSpark or the surviving company of the Merger after the closing of the Merger. The Indemnify Agreement expires five years from the date of the Indemnity Agreement.
In connection with Customers”entry into the Merger Agreement, the Company and CleanSpark entered into a Contract Manufacturing Agreement (the “Contract Manufacturing Agreement”), dated as of January 22, 2019, pursuant to which the Company will manufacture paralleling switchgear, automatic transfer switches and related control and circuit protective equipment (collectively, “Products”) exclusively for purchase by CleanSpark. CleanSpark will purchase the Products via purchase orders issued to the Company at any time and from time to time. The price for the Products payable by CleanSpark to the Company will be negotiated on a case by case basis, but all purchases of Products will have a target price of 91% of the CleanSpark customer’s purchase order price and will not be more than 109% of the Company’s cost. The Contract Manufacturing Agreement has a term of 18 months and may be extended by mutual agreement of the Company and CleanSpark.
In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Non-Competition and Non-Solicitation Agreement (the “Non-Compete Agreement”), dated January 22, 2019, pursuant to which the Company agreed not to, among other things, own, manage, operate, finance, control, advise, render services to or guarantee the obligations of any person or entity that engages in or plans to engage in the design, manufacture, distribution and service of paralleling switchgear, automatic transfer switches, and related products (the “Restricted Business”). The Company agreed not to engage in the Restricted Business within any state or county within the United States in which CleanSpark or the surviving company of the Merger conducts such Restricted Business for a period of four (4) years from the date of the Non-Compete Agreement.
In addition, the Company also agreed, for a period of four (4) years from the date of the Non-Compete Agreement, not to, among other things, directly or indirectly (i) solicit, induce, or attempt to induce customers, suppliers, licensees, licensors, franchisees, consultants of the Restricted Business as conducted by the Company, CleanSpark or the surviving company to cease doing business with the surviving company or CleanSpark or (ii) solicit, recruit, or encourage any of the surviving company’s or CleanSpark’s employees, or independent contractors to discontinue their employment or engagement with the surviving company or CleanSpark.
The Merger resulted in the deconsolidation of PCPI and a gain of $4.2 million in the first quarter of 2019. The fair value of the investment in the common stock of CleanSpark was determined using quoted market prices and warrants were established using a Black Scholes model.
From the date of sale through June 30, 2019, the estimated fair value of the warrants and common stock decreased to $3.9 million and an unrealized mark to market loss of $325 was recognized within other expense for the six months ended June 30, 2019. For the three months ended June 30, 2019, the unrealized mark to market loss recognized within other expense was $3.7 million.
4. REVENUES
On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606.
Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 while prior period amounts are not adjusted and continueusing the modified retrospective method. There was no adjustment to be reported in accordance with our historic accounting underopening retained earnings due to the impact of adopting Topic 605.606.
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 transformersswitchgear 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 offor power generation equipment which is used to ensure 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.
Our principal source of revenue is derived from sales of products and fees for services. We measure revenue based upon the consideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Customers typically receive the benefit of our products when the risk of loss or control for the product transfers to the customer and for services as they are performed. Under ASC 606, revenue is recognized when a customer obtains control of promised products or services in an amount that reflects the consideration we expect to receive in exchange for those products or services. To achieve this core principal, the Company applies the following five steps:
1) Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products or services to be transferred and identifies the payment terms related to these products or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for products or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products or services, the Company must apply judgment to determine whether promised products or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised products or services are accounted for as a combined performance obligation.
3) Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer. The customer payments are generally due in 30 days.
4) Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis or cost of the product or service. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
5) Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised product or service to a customer.
Substantially all of our revenue 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.
The following table presents our revenues disaggregated by revenue discipline:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Products | $ | 23,051 | $ | 22,808 | $ | 66,365 | $ | 70,688 | $ | 3,004 | $ | 1,285 | $ | 4,249 | $ | 5,362 | ||||||||||||||||
Services | 2,905 | 2,686 | 7,659 | 7,147 | 2,356 | 2,592 | 4,129 | 4,760 | ||||||||||||||||||||||||
Total Revenue | $ | 25,956 | $ | 25,494 | $ | 74,024 | $ | 77,835 | $ | 5,360 | $ | 3,877 | $ | 8,378 | $ | 10,122 |
See Note 1415 - 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.
4.5. OTHER EXPENSE
Other expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the three and nine months ended SeptemberJune 30, 2018,2019, other non-operating expense was $19 and $158, respectively,$3.8 million, as compared to $112 and $165, respectively,$212 during the same periodsthree months ended June 30, 2018. For the three months ended June 30, 2019, included in other non-operating expense was a loss of 2017.$3.7 million related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the Merger of PCPI, CleanSpark and the Merger Sub. See Note 3 - Divestitures.
5.For the six months ended June 30, 2019, other non-operating expense was $465, as compared to $349 during the six months ended June 30, 2018. For the six months ended June 30, 2019, included in other non-operating expense was a loss of $325 related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the Merger of PCPI, CleanSpark and the Merger Sub. See Note 3 - Divestitures.
6. DISCONTINUED OPERATIONS
A discontinued operation is a component of the Company’s business that represents a separate major line of business that had been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Consolidated Statement of Operations, Consolidated Statement of Cash Flows, and Consolidated Balance Sheets are presented as if the operation had been discontinued from the start of the comparative year. Based upon the authoritative guidance, the Company concluded that the operations of the liquid-filled and dry-type transformer business should be presented as discontinued operations as of June 30, 2019.
DuringOverview
OnJune 28, 2019, the fourth quarter of 2017, as partCompany entered into the Stock Purchase Agreement, by and among the Company, the Disposed Companies, Nathan Mazurek, and the Buyer. Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer.
If the Equity Transaction is completed, Pioneer Power would sell to the Buyer all of the assets and liabilities associated with its liquid-filled transformer and dry-type transformer manufacturing businesses within the Company’s reviewT&D Segment. However,Pioneer Power would retainits switchgear manufacturing business within the T&D segment, as well as all of strategic alternatives,the operations associated with its critical power solutions segment.
Consideration
The consideration payable by the Buyer in the Equity Transaction is a base cash purchase price of $60.5 million, as well as the issuance by the Buyer of a subordinated promissory note to Pioneer Power in the aggregate principal amount of $7.5 million (the “Seller Note”), in each case subject to adjustment pursuant to the terms of the Stock Purchase Agreement. Pursuant to the terms of the Stock Purchase Agreement, the Seller Note will bear interest at an annualized rate of 4.0%, to be paid-in-kind annually, and will have a maturity date of December 31, 2022. In addition, pursuant to the terms of the Stock Purchase Agreement, the Buyer will have the right to set-off amounts owed to Pioneer Power under the Seller Note on a dollar-for-dollar basis by the amount of any indemnifiable losses Buyer suffers as a result of certain actions or omissions by Pioneer Power or the Disposed Companies.
Covenants
The Company has agreed, subject to the terms of the Stock Purchase Agreement, to various covenants and agreements, including, among others, to conduct the business of the Disposed Companies in the ordinary course during the period between the execution of the Stock Purchase Agreement and the closing of the Equity Transaction in a manner consistent with past practice. The parties have also agreed to use their respective best efforts to take, or cause to be taken, all things necessary, proper or advisable to consummate the transactions contemplated by the Stock Purchase Agreement.
In addition, pursuant to the Stock Purchase Agreement, each of Pioneer Power, its affiliates and Nathan Mazurek, Pioneer Power’s President, Chief Executive Officer and Chairman of the Board of Directors, have agreed to a non-solicitation provision that generally prohibits such persons, for a three-year period, from, among other things, soliciting or attempting to hire employees of the Disposed Companies or the Buyer or engaging in the business operated by the Disposed Companies within certain geographic areas, subject to certain limitations and exceptions.
Closing Conditions
Each party’s obligation to consummate the Stock Purchase Agreement is subject to certain conditions, including, among others: (i) approval of the Stock Purchase Agreement by the holders of a majority of Pioneer Power’s outstanding common stock, which such approval was obtained by the written consent of certain Pioneer Power stockholders onJune 28, 2019 (as discussed in more detail below),(ii) 20 days having elapsed since the mailing to the stockholders of the Company approved effortsof the definitive information statement with respect to sell the Company’s switchgear business. On May 2, 2018,approval and adoption of the Stock Purchase Agreement and (iii) the absence of any order or legal requirement issued or enacted by any court or other governmental authority preventing consummation of the Equity Transaction.
In addition, the consummation of the Equity Transaction is subject to a financing condition. Certain lenders have entered into a debt financing commitment letter with the Buyer, and Mill Point Capital LLC entered into an equity commitment letter with the Buyer, in each case committing to provide the Buyer with funding to pay the aggregate consideration to be paid by the Buyer in connection with the Equity Transaction. The Buyer is not obligated to consummate the Equity Transaction unless it receives debt financing on substantially the terms provided for in the debt financing commitment letter or the Buyer is able to obtain alternative financing in amount sufficient to consummate the Equity Transaction.
If the Stock Purchase Agreement is terminated by the Buyer after all mutual conditions to closing have been satisfied, except that the Buyer has not obtained sufficient financing to consummate the Equity Transaction, the Buyer would be required to pay a $4.0 million reverse termination fee to Pioneer Power, subject to certain limitations set forth in the Stock Purchase Agreement. The reverse termination fee would also be payable by the Buyer in certain other limited circumstances described in the Stock Purchase Agreement
Termination Fee
Under the terms of the Stock Purchase Agreement, Pioneer Power is not permitted to, and may not authorize or permit its representatives to, directly or indirectly, solicit, initiate or knowingly take any action to encourage or facilitate the submission of an Acquisition Proposal (as defined in the Stock Purchase Agreement), or any inquiries relating to a potential Acquisition Proposal.
Notwithstanding this restriction, Pioneer Power may, prior to the closing of the Equity Transaction, respond to, and engage in discussions and negotiations concerning, a written unsolicited bona fide Acquisition Proposal submitted, and not withdrawn, by a party other than the Buyer that Pioneer Power’s board of directors believes, in good faith and after consultation with its outside legal counsel and its financial advisor, constitutes, or could reasonably be expected to result in, a Superior Proposal (as defined in the Stock Purchase Agreement).
If the Stock Purchase Agreement were to be terminated in connection with or as a result of Pioneer Power’s adoption of a Superior Proposal or entry into an Alternative Acquisition Agreement (as defined in the Stock Purchase Agreement), Pioneer Power would be required to pay a $4.0 million termination fee to the Buyer, subject to certain limitations set forth in the Stock Purchase Agreement. The termination fee would also be payable by Pioneer Power in certain other limited circumstances described in the Stock Purchase Agreement.
Indemnification
Pursuant to the Stock Purchase Agreement, Pioneer Power and the Buyer have each agreed toindemnify one another for any and all liabilities, losses, damages, claims, demands, suits, actions, judgments, fines, penalties, deficiencies, awards, taxes, assessments, costs or expenses (including reasonable attorney’s or other professional fees and expenses) (“Losses”) resulting from any inaccuracy or breach of the respective party’s representations and warranties or any breach or nonperformance of the respective party’s covenants and agreements in the Stock Purchase Agreement or its related ancillary agreements.
In addition, Pioneer Power has agreed to indemnify the Buyer and its affiliated parties for Losses resulting from, among other things, certain pre-closing tax matters, debt held by the Disposed Companies, transaction expenses, breaches of representations and warranties that are not covered by the Buyer’s representation and warranty insurance because the Buyer had knowledge of such breach (only to the extent such Losses would have been covered by the representation and warranty insurance had the Buyer not known of such breach) (“Interim Breaches”), certain matters related to Electrogroup’s operations, certain legal proceedings, certain matters related to Nexus Custom Electric Products Corp. (“PCEP”)Magnetics, L.L.C., 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 sellJefferson, and certain assets (the “Asset Sale”) comprisingmatters concerning end-user software utilized by the PCEP business to CleanSpark (the “Purchased Assets”). No debt or significant liabilities are being assumed by CleanSpark in the Asset Sale.Disposed Companies.
As consideration for the Purchased Assets, CleanSpark has agreedThe indemnification obligations of Pioneer Power with respect to pay total consideration comprisedLosses of the following: (a) an 18-month promissory note at 9% interest, in principalBuyer resulting from inaccuracies or breaches of the Company’s representations and warranties, except for breaches of certain fundamental warranties, claims of fraud and breaches of representations, warranties or covenants relating to taxes, and claims for certain specific indemnities, are subject to (i) a true deductible equal to $330,000, (ii) a cap equal to 0.5% of the purchase price, and (iii) a per-claim threshold amount of $50,000. In addition, the indemnification rights of the Buyer with respect to Interim Breaches are subject to a cap equal to $5.0 million, and the indemnification rights of the Buyer with respect to Losses resulting from certain matters related to Electrogroup’s operations are subject to a true deductible equal to $500,000 and a cap equal to $5.0 million.
The indemnification obligations of the Buyer, except with respect to breaches of certain fundamental representations and warranties and claims of fraud, are subject to a true deductible equal to $330,000 and a cap equal to $3.3 million. In addition, each party’s total indemnification obligation is subject to a cap equal to the net carrying valuepurchase price, except for claims of fraud.
The Buyer has obtained a customary representation and warranty insurance policy insuring the working capitalBuyer against losses resulting from a breach of representations and warranties by Pioneer Power and the business at closing; (b)Disposed Companies, and the Buyer is required to use commercially reasonable efforts to utilize the representation and warranty insurance to cover any Losses resulting from such a three-year equipment leasebreach. In addition, in rather than seeking recovery from Pioneer Power, the Buyer is required to be entered into at closing ofsetoff amounts owed to Pioneer Power under the Asset Sale, providing for rent payments inSeller Note on a dollar-for-dollar basis by the amount of $7,500 per month, which also includes two renewal termsany indemnifiable losses Buyer suffers as a result of one-year each at CleanSpark’s option and 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.certain actions or omissions by Pioneer Power or the Disposed Companies.
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 AssetOther Provisions
The Stock 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 eachalso contains customary representations and warranties, certain termination rights 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 provisionsboth parties, including termination by mutual written consent of the Assetparties, and provisions governing certain other matters between the parties.
The foregoing description of the Stock Purchase Agreement were otherwise amended or waived,does not purport to be complete and is qualified in its entirety by reference to the Assetfull text of the Stock Purchase Agreement, remains in full forcea copy of which is filed as Exhibit 2.1 on Form 8-K filed with the Security and effect.Exchange Commission on July 1, 2019 and is incorporated by reference herein.
Operating results for the switchgear business, which have beenof liquid-filled and dry-type transformer manufacturing businesses previously included in the T&D Solutions Segment, have now been reclassified as discontinued operations for all periods presented.
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The components of assets and liabilities that are attributable to discontinued operations are as follows:follows (in thousands):
September 30, 2018 | December 31, 2017 | June 30, | December 31, | |||||||||||||
(Unaudited) | 2019 | 2018 | ||||||||||||||
Assets of discontinued operations: | ||||||||||||||||
Cash and cash equivalents | $ | 6 | $ | 11 | ||||||||||||
Accounts receivable - trade, net | $ | 739 | $ | 1,568 | 15,397 | 12,944 | ||||||||||
Inventories, net | 3,131 | 2,921 | 20,131 | 23,632 | ||||||||||||
Income taxes receivable | — | 566 | ||||||||||||||
Prepaid expenses | 209 | 214 | 604 | 514 | ||||||||||||
Property, plant and equipment, net | 354 | 524 | 4,300 | 4,406 | ||||||||||||
Right of use asset | — | 129 | 1,928 | 2,124 | ||||||||||||
Deferred income taxes | 78 | 134 | ||||||||||||||
Intangible assets, net | 1,382 | 1,477 | 3,377 | 3,460 | ||||||||||||
Other assets | 251 | 240 | ||||||||||||||
Goodwill | 5,557 | 5,557 | ||||||||||||||
Assets of discontinued operations | $ | 6,066 | $ | 7,073 | $ | 51,378 | $ | 53,348 | ||||||||
Liabilities of discontinued operations: | ||||||||||||||||
Bank overdrafts | $ | 150 | $ | 349 | $ | 793 | $ | 1,690 | ||||||||
Accounts payable and accrued liabilities | 3,641 | 3,507 | 20,278 | 18,894 | ||||||||||||
Income taxes payable | 655 | 778 | ||||||||||||||
Pension deficit | 3 | 148 | ||||||||||||||
Other long-term liabilities | 2,090 | 2,187 | ||||||||||||||
Liabilities of discontinued operations | $ | 3,791 | $ | 3,856 | $ | 23,819 | $ | 23,697 |
During the quarter ended June 30, 2019 the Company’s Reynosa Facility was damaged by a flood resulting in damages to inventory. While management continues to evaluate the extent of the damaged inventory, as of June 30, 2019 the Company has recognized a loss of $3.3 million based upon an estimate of inventory damaged and unsalable as a result of the flood. This loss has been partially offset by $2.4 million of insurance proceeds that the Company expects to receive. While the net loss on inventory damaged amounting to approximately $913 has been reflected within the Cost of goods sold in discontinued operations, the corresponding insurance receivable of $2.4 million has been recognized as an asset from continuing operations. The amount of damaged inventory and insurance proceeds are based upon the management’s best estimate, and the actual amount of damaged inventory and insurance proceeds may differ from such estimates.
The following table presents the discontinued operations of the switchgear businessliquid-filled and dry-type transformer manufacturing businesses in the Consolidated Statement of Operations:Operations (in thousands):
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 | ) |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | $ | 19,003 | $ | 21,599 | $ | 40,684 | $ | 42,530 | ||||||||
Costs and Expenses | ||||||||||||||||
Cost of goods sold | 16,047 | 16,874 | 33,886 | 33,749 | ||||||||||||
Selling, general and administrative | 2,275 | 2,832 | 4,715 | 5,395 | ||||||||||||
Foreign exchange loss (gain) | 143 | 197 | (491 | ) | 272 | |||||||||||
Interest expense | 275 | 520 | 550 | 948 | ||||||||||||
Other expense (income) | — | (1 | ) | 48 | 96 | |||||||||||
Total costs and expenses | 18,740 | 20,422 | 38,708 | 40,460 | ||||||||||||
Income before provision for income taxes | 263 | 1,177 | 1,976 | 2,070 | ||||||||||||
Income tax expense | 131 | 315 | 533 | 476 | ||||||||||||
Income from discontinued operations, net of income taxes | $ | 132 | $ | 862 | $ | 1,443 | $ | 1,594 |
The following table presents the switchgear businessdiscontinued operations of theliquid-filled and dry-type transformer manufacturing businesses in the Consolidated Statements of Cash Flows:Flows (in thousands):
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 | $ | — | $ | — |
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Net cash provided by operating activities | $ | 2,793 | $ | 1,580 | ||||
Net cash used in investing activities | (97 | ) | (57 | ) | ||||
Net cash used in financing activities | (2,607 | ) | (1,685 | ) | ||||
Effect of foreign exchange on cash and cash equivalents | (94 | ) | 152 | |||||
Increase in cash and cash equivalents | $ | (5 | ) | $ | (10 | ) |
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6.7. INVENTORIES
The components of inventories are summarized below:
September 30, 2018 | December 31, 2017 | June 30, | December 31, | |||||||||||||
(Unaudited) | 2019 | 2018 | ||||||||||||||
Raw materials | $ | 13,114 | $ | 9,229 | $ | 2,138 | $ | 2,049 | ||||||||
Work in process | 3,629 | 3,295 | 3,377 | 1,949 | ||||||||||||
Finished goods | 9,737 | 10,919 | (88 | ) | 46 | |||||||||||
Provision for excess and obsolete inventory | (470 | ) | (251 | ) | (407 | ) | (366 | ) | ||||||||
Total inventories | $ | 26,010 | $ | 23,192 | $ | 5,020 | $ | 3,678 |
Inventories are stated at the lower of cost or a net realizable basisvalue determined on a FIFO method. Included in raw materials and finished goods at SeptemberJune 30, 20182019 and December 31, 20172018 are goods in transit of approximately $7.0 million$36 and $3.1 million,$120, respectively.
At September 30, 2018 and December 31, 2017, raw materials in the amount of $6.8 million and $3.0 million, respectively, not pledged to our secured creditor were used for collateral to secure short term borrowings under a product financing arrangement. This short term borrowing agreement provides the Company with the ability to acquire 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 $5.4 million as of September 30, 2018 and December 31, 2017, respectively.
7.8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized below:
September 30, 2018 | December 31, 2017 | June 30, | December 31, | |||||||||||||
(Unaudited) | 2019 | 2018 | ||||||||||||||
Land | $ | 48 | $ | 50 | ||||||||||||
Buildings | 2,468 | 2,547 | ||||||||||||||
Machinery and equipment | 10,267 | 10,187 | $ | 1,219 | $ | 1,219 | ||||||||||
Furniture and fixtures | 427 | 430 | 205 | 205 | ||||||||||||
Computer hardware and software | 1,093 | 1,097 | 682 | 682 | ||||||||||||
Leasehold improvements | 526 | 528 | 337 | 312 | ||||||||||||
Construction in progress | 164 | 18 | ||||||||||||||
14,993 | 14,857 | 2,443 | 2,418 | |||||||||||||
Less: Accumulated depreciation | (9,104 | ) | (8,522 | ) | (1,682 | ) | (1,540 | ) | ||||||||
Total property, plant and equipment, net | $ | 5,889 | $ | 6,335 | $ | 761 | $ | 878 |
Depreciation expense was $741$142 and $792$106 for the nine monthsperiod ended SeptemberJune 30, 20182019 and 2017,2018, respectively.
8.9. OTHER ASSETS
Included in other assets at June 30, 2019 and December 31, 2018 are right-of-use asset, net, of $1.9 million and $2.2 million, respectively, related to our lease obligations.
In December 2011 and January 2012, the Company made two secured loans, each in the amount of $300 to a developer of a renewable energy project in the U.S.U.S, secured by assets of the developer. The promissory notes accrue interest at a rate of 4.5% per annum with a final payment of all unpaid principal and interest becoming fully due and payable upon the earlier to occur of (i) the four year anniversary of the issuance date of the promissory notes, or (ii) an event of default. As defined in the promissory notes, an event of default includes, but is not limited to, the following: any bankruptcy, reorganization or similar proceeding involving the borrower, a sale or transfer of substantially all the assets of the borrower, a default by the borrower relating to any indebtedness due to third parties, the incurrence of additional indebtedness by the borrower without the Company’s written consent and failure of the borrower to perform its obligations pursuant to its other agreements with the Company, including its purchase order for pad mount transformers. The principal balance of the loan receivable is outstanding at SeptemberJune 30, 20182019 and December 31, 2017.2018. The Company expects to fully recover these amounts. At SeptemberAs of June 30, 20182019 the Company has classified the principal of $600 as other assets as the Company does not anticipate the settlement of both notes in the next twelve months based upon ongoing negotiations with the debtor.
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9.10. GOODWILL AND OTHER INTANGIBLE ASSETS
There were no changes in the carrying values of goodwill for the ninesix months ended SeptemberJune 30, 2018.2019.
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 |
T&D | Critical Power | |||||||||||
Solutions | Solutions | Total | ||||||||||
Segment | Segment | Goodwill | ||||||||||
Gross Goodwill: | ||||||||||||
Balance as of January 1, 2019 | $ | — | $ | 2,969 | $ | 2,969 | ||||||
No activity | — | — | — | |||||||||
Balance as of June 30, 2019 | $ | — | $ | 2,969 | $ | 2,969 |
Changes in the carrying values of intangible assets for the ninesix months ended SeptemberJune 30, 2018,2019, were as follows:
T&D Solutions Segment | Critical Power Solutions Segment | Total Intangible Assets | ||||||||||
Balance as of January 1, 2018, net | $ | 3,677 | $ | 1,245 | $ | 4,922 | ||||||
Amortization | (166 | ) | (841 | ) | (1,007 | ) | ||||||
Foreign currency translation | (2 | ) | — | (2 | ) | |||||||
Balance as of September 30, 2018, net | $ | 3,509 | $ | 404 | $ | 3,913 |
T&D | Critical Power | Total | ||||||||||
Solutions | Solutions | Intangible | ||||||||||
Segment | Segment | Assets | ||||||||||
Balance as of January 1, 2019, net | $ | — | $ | 124 | $ | 124 | ||||||
Amortization | — | (21 | ) | (21 | ) | |||||||
Balance as of June 30, 2019, net | $ | — | $ | 103 | $ | 103 |
The components of intangible assets as of SeptemberJune 30, 20182019 are summarized below:
Weighted Average Amortization Years | Gross Carrying Amount | Accumulated Amortization | Foreign Currency Translation | Net Book Value | |||||||||||||||
Customer relationships | 7 | $ | 6,689 | $ | (5,742 | ) | $ | — | $ | 947 | |||||||||
Non-compete agreements | 4 | 155 | (137 | ) | — | 18 | |||||||||||||
Trademarks | Indefinite | 1,816 | — | — | 1,816 | ||||||||||||||
Internally developed software | 7 | 289 | (155 | ) | — | 134 | |||||||||||||
Developed technology | 10 | 493 | (183 | ) | — | 310 | |||||||||||||
Technology-related industry accreditations | Indefinite | 706 | — | (18 | ) | 688 | |||||||||||||
Total intangible assets | $ | 10,148 | $ | (6,217 | ) | $ | (18 | ) | $ | 3,913 |
Weighted Average Amortization Years | Gross Carrying Amount | Accumulated Amortization | Net Book Value | |||||||||||||
Internally developed software | 7 | $ | 289 | $ | (186 | ) | $ | 103 | ||||||||
Total intangible assets | $ | 289 | $ | (186 | ) | $ | 103 |
The amortization of intangible assets expense was $1,007$21 for the ninesix months ended SeptemberJune 30, 2018.2019.
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10.11. DEBT
Canadian Credit Facilities
In April 2016, our wholly owned subsidiary, Pioneer Electrogroup Canada Inc. (“PECI”), entered into an Amended and Restated Credit Agreement (“CAD ARCA”) with Bank 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 BMO existing as of December 31, 2015 were waived by BMO. The CAD ARCA was further amended (the “2017 CAD ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 CAD ARCA Amendment”). The 2018 CAD ARCA Amendment extended the term of our Canadian Facilities to April 1, 2020. On August 8, 2019, BMO agreed to a Temporary Borrowing Base Increase (defined in Note 17 - Subsequent Events), until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities and the U.S. Facilities, and (ii) August 31, 2019.
Our Canadian Facilities provided for up to $8.2 million Canadian dollars (“CAD”) (approximately $6.3 million expressed in U.S. dollars) consisting of a revolving $7.0 million CAD revolving credit facility (“Facility A”) to finance ongoing operations, a $471 CAD term credit facility (“Facility B”) that financed a plant expansion, and a $712 USD Facility 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 $9.2 million CAD.
Facility A, as amended by the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment, is subject to margin criteria. 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 BMO’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 was 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 by 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 was 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 by the 2017 CAD ARCA, bore interest at BMO’s prime rate plus 1.50% per annum on amounts borrowed in Canadian dollars, or BMO’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 were 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 were 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 willwere to 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. In December 2018 we repaid the outstanding principal balance under Facility C of $316 CAD with proceeds received from the sale of the Farnham, Quebec, Canada building.
Pursuant to the CAD ARCA, as amended by the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment, financial covenant testing is performed on our consolidated financial statements. We are required to meet certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, as set forth in the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment. Pursuant to the 2018 CAD ARCA Amendment, BMO waived defaults on all financial covenants existing as of December 31, 2017, for which we were not in compliance.
As of SeptemberJune 30, 2018,2019, we had approximately $6.0 million in U.S. dollar equivalents outstanding under our Canadian Facilities. Our borrowings consisted of approximately $5.6$6.0 million outstanding under Facility AA. As of June 30, 2019, the Company was not in compliance with a financial covenant and $352on August 8, 2019, the Company received a waiver from BMO on the financial covenant breach existing as of June 30, 2019.
Concurrently with the closing of the Equity Transaction, all existing credit facilities granted by BMO under the Canadian Facilities and the U.S. Facilities will be repaid in full.
As of December 31, 2018, we had approximately $5.8 million in U.S. dollar equivalents outstanding under our Canadian Facilities. Our borrowings consisted of approximately $5.8 million outstanding under Facility C.A. As of September 30,December 31, 2018, the Company was not in compliance with its financial covenants and on March 25, 2019, the financial covenant requirements of the Canadian Facilities and hasCompany received a waiver from BMO on all financial covenant breaches existing as of November 7, 2018 for the period ending September 30,December 31, 2018.
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United States Credit Facilities
In April 2016, we entered into an Amended and Restated Credit Agreement (“US ARCA”) with BMO with respect to our existing U.S. Facilitiesfacilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank (as amended and restated, the(the “U.S. Facilities”). Additionally, defaults relating to the breach of certain financial covenants under the prior financing arrangements with BMO existing as of December 31, 2015 were waived by BMO. The.The US ARCA was further amended (the “2017 US ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 US ARCA Amendment”). The 2018 US ARCA Amendment extended the term of our US Facilities to April 1, 2020.
Our U.S. Facilities, as amended and restated, provided for up to $19.1 million USD consisting of a $14.0 million USD demand revolving credit facility (“USD Facility A”) to finance ongoing operations, a $5.0 million USD term loan facility (“USD Facility B”) that financed the acquisition of Titan, and a new $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, as amended and restated per 2017 US ARCA, bore interest, at our option, at BMO’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$4.4 million 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$2.3 million due on April 1, 2020. The 2018 US ARCA Amendment did not change the USD Facility B interest rate.
Pursuant to the US ARCA, as amended by the 2017 US ARCA Amendment and the 2018 US ARCA Amendment, financial covenant testing is performed on our consolidated financial statements. We are required to meet certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, as 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 certain financial covenants existing as of December 31, 2016. On March 28, 2018, pursuant to the 2018 US ARCA Amendment, BMO waived defaults on all financial covenants existing as of December 31, 2017 for which we were not 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 SeptemberJune 30, 2018,2019, we had approximately $18.1$18.2 million outstanding under our U.S. Facilities. Our borrowings consisted of approximately $14.0$15.0 million outstanding under USD Facility A, and $4.1$3.2 million outstanding under USD Facility B. As of SeptemberJune 30, 2019, the Company was not in compliance with a financial covenant and on August 8, 2019, the Company received a waiver from BMO on the financial covenant breach existing as of June 30, 2019.
Concurrently with the closing of the Equity Transaction, all existing credit facilities granted by BMO under the Canadian and the U.S. Facilities will be repaid in full. In the event that the Stock Purchase Agreement is terminated prior to closing of the Equity Transaction and if we receive the reverse termination fee as set forth therein, we are required to remit to BMO 50% of such reverse termination fee, which will be applied to permanently reduce the amounts outstanding under our USD Facility B.
As of December 31, 2018, we had approximately $18.8 million outstanding under our U.S. Facilities. Our borrowings consisted of approximately $15.0 million outstanding under USD Facility A, and $3.8 million outstanding under USD Facility B. As of December 31, 2018, the Company was not in compliance with its financial covenants and on March 25, 2019, the financial covenant requirements of the U.S. Facilities and hasCompany received a waiver from BMO on all financial covenant breaches existing as of November 7, 2018 for the period ending September 30,December 31, 2018.
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The Company’s debt consists of the following:
September 30, 2018 | December 31, 2017 | |||||||
(Unaudited) | ||||||||
Term credit facilities, net (a) | $ | 4,442 | $ | 4,933 | ||||
Capital lease obligations | 1 | 2 | ||||||
Total debt | 4,443 | 4,935 | ||||||
Less current portion | (1,316 | ) | (782 | ) | ||||
Total long-term debt | $ | 3,127 | $ | 4,153 |
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Term credit facilities | $ | 3,196 | $ | 3,793 | ||||
Less current portion | (3,196 | ) | (1,174 | ) | ||||
Total long-term debt | $ | — | $ | 2,619 |
(a) | The balances as of June 30, 2019 and December 31, 2018 are net of debt issuance costs of $42 and $45, respectively. |
(a) The balances as of September 30, 2018 and December 31, 2017 are net of debt issuance costs of $47 and $102, respectively.
11.12. 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 included in Income from discontinued operations, net of income taxes, in the Consolidated Statements of operations.
The components of the expense the Company incurred under the pension plan are as follows:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Affected Line Item in the Statements of | June 30, | June 30, | ||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | Consolidated Operations | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||
Current service cost, net of employee contributions | $ | 14 | $ | 10 | $ | 45 | $ | 35 | Selling, general and administrative | $ | 14 | $ | 14 | $ | 29 | $ | 31 | |||||||||||||||||
Interest cost on accrued benefit obligation | 24 | 27 | 74 | 79 | Other expense | 26 | 25 | 52 | 50 | |||||||||||||||||||||||||
Expected return on plan assets | (42 | ) | (44 | ) | (127 | ) | (128 | ) | Other expense | (42 | ) | (42 | ) | (82 | ) | (85 | ) | |||||||||||||||||
Amortization of transitional obligation | 3 | 3 | 6 | 9 | Other expense | 3 | 1 | 6 | 3 | |||||||||||||||||||||||||
Amortization of past service costs | 2 | 2 | 4 | 6 | Other expense | 2 | — | 4 | 2 | |||||||||||||||||||||||||
Amortization of net actuarial gain | 14 | 12 | 42 | 36 | Other expense | 11 | 14 | 24 | 28 | |||||||||||||||||||||||||
Total cost of benefit | $ | 15 | $ | 10 | $ | 44 | $ | 37 | $ | 14 | $ | 12 | $ | 33 | $ | 29 |
The Company’s policy is to fund the pension plan at or above the minimum level required by law. The Company made $58$30 and $56$36 of contributions to its defined benefit pension plan during the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, 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.
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12.13. STOCKHOLDERS’ EQUITY
Common Stock
The Company had 8,726,045 shares of common stock, $0.001 par value per share, outstanding as of SeptemberJune 30, 20182019 and December 31, 2017.
Warrants
As of December 31, 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. All of the warrants expired on September 18, 2018. No warrants were exercised through the expiration date of September 18, 2018. The Company has no warrants outstanding as of September 30, 2018.
Stock-Based Compensation
A summary of stock option activity under the 2011 Long-Term Incentive Plan as of SeptemberJune 30, 2018,2019, and changes during the ninesix months ended SeptemberJune 30, 2018,2019, 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, 2018 | 435,800 | $ | 8.35 | 7.5 | $ | 216 | |||||||||||||||||||||||||||
Outstanding as of January 1, 2019 | 424,800 | $ | 8.30 | 6.5 | $ | 22 | |||||||||||||||||||||||||||
Granted | 7,000 | 5.60 | — | — | |||||||||||||||||||||||||||||
Exercised | — | — | — | — | |||||||||||||||||||||||||||||
Forfeited | (16,500 | ) | 7.98 | — | — | ||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||
Outstanding as of June 30, 2019 | 424,800 | $ | 8.30 | 6.00 | $ | 14 | |||||||||||||||||||||||||||
Exercisable as of June 30, 2019 | 421,467 | $ | 8.31 | 6.00 | $ | 14 |
As of SeptemberJune 30, 2018,2019, there were 247,367248,867 shares available for future grants under the Company’s 2011 Long-Term Incentive Plan.
Stock-based compensation expense recorded for the three and ninesix months ended SeptemberJune 30, 20182019 was approximately $14$2 and $160,$7, respectively, as compared to $148the expense of approximately ($2) and $319,$146, during the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively. At SeptemberFor the three and six months ended June 30, 2018, the expense reversal was primarily the result of forfeitures of previously expensed awards to a former employee. As of June 30, 2019, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of operations of approximately $19.$6.
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 unrealized incomegain of $21$374 for the three months ended SeptemberJune 30, 20182019 and nominal unrealized loss of $1 for the three months ended SeptemberJune 30, 2017.2018. For the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, the Company had foreign currency translation adjustments resulting in unrealized gain of $62 and unrealized loss of $146 and unrealized income of $68,$167, respectively.
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13.14. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Basic and diluted income (loss) per common share areis calculated based on the weighted average number of shares outstanding during the period. The Company’s employee and director stock option awards, as well as incremental shares issuable upon exercise of warrants, are not considered in the calculations if the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):
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 |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Numerator: | ||||||||||||||||
Net (loss) income | $ | (4,155 | ) | $ | (1,658 | ) | $ | 182 | $ | (2,964 | ) | |||||
Income from discontinued operations, net of income taxes | 132 | 862 | 1,443 | 1,594 | ||||||||||||
Net (loss) income | $ | (4,023 | ) | $ | (796 | ) | $ | 1,625 | $ | (1,370 | ) | |||||
Denominator: | ||||||||||||||||
Weighted average basic shares outstanding | 8,726 | 8,726 | 8,726 | 8,726 | ||||||||||||
Effect of dilutive securities - equity based compensation plans | — | — | 4 | — | ||||||||||||
Denominator for diluted net income per common share | 8,726 | 8,726 | 8,730 | 8,726 | ||||||||||||
(Loss) earnings per share: | ||||||||||||||||
Basic | ||||||||||||||||
(Loss) income from continuing operations | $ | (0.48 | ) | $ | (0.19 | ) | $ | 0.02 | $ | (0.34 | ) | |||||
Income from discontinued operations | 0.02 | 0.10 | 0.17 | 0.18 | ||||||||||||
Net (loss) income | $ | (0.46 | ) | $ | (0.09 | ) | $ | 0.19 | $ | (0.16 | ) | |||||
Diluted | ||||||||||||||||
(Loss) income from continuing operations | $ | (0.48 | ) | $ | (0.19 | ) | $ | 0.02 | $ | (0.34 | ) | |||||
Income from discontinued operations | 0.02 | 0.10 | 0.17 | 0.18 | ||||||||||||
Net (loss) income | $ | (0.46 | ) | $ | (0.09 | ) | $ | 0.19 | $ | (0.16 | ) |
14.15. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company follows ASC 280 - Segment Reporting in determining its reportable segments. The Company considered the way its management team, most notably its chief operating decision maker, makes operating decisions and assesses performance and considered which components of the Company’s enterprise have discrete financial information available. As the Company makes decisions using a manufactured products vs. distributed products and services group focus, its analysis resulted in two reportable segments: T&D Solutions and Critical Power. The T&D Solutions reportable segment is our switchgear business unit. The Critical Power reportable segment is the Company’s Titan Energy Systems Inc. business unit. The T&D Solutions reportable segment is an aggregation of our transformer business units.
The T&D Solutions segmentSegment is involved in the design, manufacture and distribution of electrical transformersswitchgear 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.
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The following tables present information about segment income and loss:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | ||||||||||||||||
T&D Solutions | ||||||||||||||||
Transformers | $ | 22,663 | $ | 21,547 | $ | 65,194 | $ | 66,198 | ||||||||
22,663 | 21,547 | 65,194 | 66,198 | |||||||||||||
Critical Power Solutions | ||||||||||||||||
Equipment | 388 | 1,261 | 1,171 | 4,490 | ||||||||||||
Service | 2,905 | 2,686 | 7,659 | 7,147 | ||||||||||||
3,293 | 3,947 | 8,830 | 11,637 | |||||||||||||
Consolidated | $ | 25,956 | $ | 25,494 | $ | 74,024 | $ | 77,835 |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | ||||||||||||||||
T&D Solutions | ||||||||||||||||
Switchgear | $ | 2,737 | $ | 883 | $ | 3,810 | $ | 4,585 | ||||||||
2,737 | 883 | 3,810 | 4,585 | |||||||||||||
Critical Power Solutions | ||||||||||||||||
Equipment | 267 | 402 | 441 | 784 | ||||||||||||
Service | 2,356 | 2,592 | 4,127 | 4,753 | ||||||||||||
2,623 | 2,994 | 4,568 | 5,537 | |||||||||||||
Consolidated | $ | 5,360 | $ | 3,877 | $ | 8,378 | $ | 10,122 |
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Depreciation and Amortization | ||||||||||||||||||||||||||||||||
T&D Solutions | $ | 314 | $ | 348 | $ | 981 | $ | 1,028 | $ | 37 | $ | 90 | $ | 71 | $ | 181 | ||||||||||||||||
Critical Power Solutions | 369 | 577 | 1,122 | 1,399 | 37 | 374 | 73 | 753 | ||||||||||||||||||||||||
Unallocated Corporate Overhead Expenses | 16 | 18 | 49 | 55 | 14 | 16 | 28 | 32 | ||||||||||||||||||||||||
Consolidated | $ | 699 | $ | 943 | $ | 2,152 | $ | 2,482 | $ | 88 | $ | 480 | $ | 172 | $ | 966 |
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | June 30, | June 30, | |||||||||||||||||||||||||||
Operating Income | ||||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||
Operating Income (Loss) | ||||||||||||||||||||||||||||||||
T&D Solutions | $ | 2,449 | $ | 1,777 | $ | 5,594 | $ | 6,715 | $ | (542 | ) | $ | (719 | ) | $ | (775 | ) | $ | (565 | ) | ||||||||||||
Critical Power Solutions | 141 | 83 | (533 | ) | (252 | ) | 252 | (234 | ) | (148 | ) | (673 | ) | |||||||||||||||||||
Unallocated Corporate Overhead Expenses | (641 | ) | (805 | ) | (2,099 | ) | (2,427 | ) | (1,260 | ) | (605 | ) | (2,070 | ) | (1,459 | ) | ||||||||||||||||
Consolidated | $ | 1,949 | $ | 1,055 | $ | 2,962 | $ | 4,036 | $ | (1,550 | ) | $ | (1,558 | ) | $ | (2,993 | ) | $ | (2,697 | ) |
Revenues are attributable to countries based on the location of the Company’s customers:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | ||||||||||||||||
United States | $ | 17,163 | $ | 16,504 | $ | 49,291 | $ | 49,672 | ||||||||
Canada | 8,793 | 8,990 | 24,733 | 28,163 | ||||||||||||
Total | $ | 25,956 | $ | 25,494 | $ | 74,024 | $ | 77,835 |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | ||||||||||||||||
United States | $ | 5,360 | $ | 3,877 | $ | 8,378 | $ | 10,122 |
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15.16. LEASES
The companyCompany 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 104 years. As of SeptemberJune 30, 20182019 and 2017,2018, assets recorded under finance leases were $3,565$1.0 million and $3,359$1.1 million, respectively, and accumulated amortization associated with finance leases was $917were $475 and $397, respectively. As of June 30, 2019 and 2018, assets recorded under operating leases were $2.1 million and $1.5 million, respectively and accumulated amortization associated with operating leases were $748 and $531, respectively. Such amounts are included within other assets.
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 |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Operating lease cost | $ | 165 | $ | 135 | $ | 330 | $ | 269 | ||||||||
Finance lease cost | ||||||||||||||||
Amortization of right-of-use asset | $ | 61 | $ | 45 | $ | 135 | $ | 84 | ||||||||
Interest on lease liabilities | 13 | 10 | 27 | 18 | ||||||||||||
Total finance lease cost | $ | 74 | $ | 55 | $ | 162 | $ | 102 |
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 |
June 30, | ||||||||
2019 | 2018 | |||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash flows from operating leases | $ | 334 | $ | 292 | ||||
Operating cash flows from finance leases | 27 | 18 | ||||||
Financing cash flows from finance leases | 127 | 77 | ||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||
Operating leases | 296 | 249 | ||||||
Finance leases | 61 | 45 |
Weighted Average Remaining Lease Term
June 30, | |||||||
2019 | 2018 | ||||||
Operating leases | 2 years | 3 years | |||||
Finance leases | 2 years | 2 years |
Weighted Average Discount Rate
June 30, | ||||||||
2019 | 2018 | |||||||
Operating leases | 5.50 | % | 5.50 | % | ||||
Finance leases | 6.72 | % | 6.50 | % |
September 30, | September 30, | |||
2018 | 2017 | |||
Operating leases | 5.5% | 5.5% | ||
Finance leases | 5.5% | 5.5% |
19
Future minimum lease payments under non-cancellable leases as of SeptemberJune 30, 20182019 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 |
Operating | Finance | |||||||
Leases | Leases | |||||||
2019 | $ | 330 | $ | 168 | ||||
2020 | 676 | 232 | ||||||
2021 | 401 | 280 | ||||||
2022 | 91 | 90 | ||||||
2023 | — | 37 | ||||||
Thereafter | — | — | ||||||
Total future minmum lease payments | 1,498 | 807 | ||||||
Less imputed interest | (97 | ) | (78 | ) | ||||
Total future minmum lease payments | $ | 1,401 | $ | 729 |
Reported as of SeptemberJune 30, 2018:2019:
Operating Leases | Finance Leases | |||||||
Accounts payable and accrued liabilities | $ | 709 | $ | 490 | ||||
Other long-term liabilities | 1,371 | 2,187 | ||||||
Total | $ | 2,080 | $ | 2,677 |
Operating | Finance | |||||||
Leases | Leases | |||||||
Accounts payable and accrued liabilities | $ | 609 | $ | 246 | ||||
Other long-term liabilities | 792 | 483 | ||||||
Total | $ | 1,401 | $ | 729 |
2017. SUBSEQUENT EVENTS
On August 8, 2019, BMO agreed to a temporary amendment to the borrowing base under the Canadian Facilities, to increase the percentage of the outstanding unpaid amount of eligible receivables from 80% to 90%, up to a maximum of $1 million CAD of additional borrowing base (the “Temporary Borrowing Base Increase”), until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities (as defined above) and the U.S. Facilities (as defined above), and (ii) August 31, 2019. In addition, in the event that the Stock Purchase Agreement is terminated prior to closing of the Equity Transaction and if we receive the reverse termination fee as set forth therein, we are required to remit to BMO 50% of such reverse termination fee, which will be applied to permanently reduce the amounts outstanding under our USD Facility B (as defined above).
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, 2017,2018, which was filed with the Securities and Exchange Commission on April 2, 2018.March 29, 2019.
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. |
● | The potential loss or departure of key personnel, including Nathan J. Mazurek, our chairman, president and chief executive officer. |
● | Our ability to generate internal growth, maintain market acceptance of our existing products and gain acceptance for our new products. |
● | Unanticipated increases in raw material prices or disruptions in supply could increase production costs and adversely affect our profitability. |
● | Our common stock may be delisted from NASDAQ following the consummation of the Equity Transaction. |
● | 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 |
● | 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 |
● | 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, 20172018 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 transformersswitchgear 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 125 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 | |
name. |
● | Our Critical Power business provides customers with |
Recent Events
On June 28, 2019, the Company entered into the Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek, Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”). Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer (the “Equity Transaction”), for an aggregate base cash purchase price of $60.5 million, as well as the issuance by the Buyer of a subordinated promissory note to the Company in the aggregate principal amount of $7.5 million, in each case subject to certain adjustments.
On June 28, 2019, certain stockholders of the Company holding an aggregate of 4,774,400 shares of the Company’s common stock, which, as of such date, constituted approximately 54.7% of the voting power of the outstanding shares of the Company’s common stock, executed a written consent approving the Stock Purchase Agreement and the transactions contemplated thereby, including the Equity Transaction.
If the Equity Transaction is completed, Pioneer Power would sell to the Buyer all of the assets and liabilities associated with its liquid-filled transformer and dry-type transformer manufacturing businesses within the Company’s Transmission & Distribution Solutions segment (the “T&D Segment”). However, Pioneer Power would retain its switchgear manufacturing business within the T&D segment, as well as all of the operations associated with its critical power solutions segment.
In addition, concurrently with the closing of the Equity Transaction, all existing credit facilities granted by Bank of Montreal (BMO) under the Canadian Facilities (as defined below) and the U.S. Facilities (as defined below) will be repaid in full.
On August 8, 2019, BMO agreed to a temporary amendment to the borrowing base under the Canadian Facilities, to increase the percentage of the outstanding unpaid amount of eligible receivables from 80% to 90%, up to a maximum of $1 million CAD of additional borrowing base (the “Temporary Borrowing Base Increase”), until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities (as defined below) and the U.S. Facilities (as defined below), and (ii) August 31, 2019. In addition, in the event that the Stock Purchase Agreement is terminated prior to closing of the Equity Transaction and if we receive the reverse termination fee as set forth therein, we are required to remit to BMO 50% of such reverse termination fee, which will be applied to permanently reduce the amounts outstanding under our USD Facility B (as defined below).
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, throughliquid-filled transformer and dry-type transformer manufacturing businesses, 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 56 – Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.
During the quarter ended June 30, 2019 the Company’s Reynosa Facility was damaged by a flood resulting in damages to inventory. While management continues to evaluate the extent of the damaged inventory, as of June 30, 2019 the Company has recognized a loss of $3.3 million based upon an estimate of inventory damaged and unsalable as a result of the flood. This loss has been partially offset by $2.4 million of insurance proceeds that the Company expects to receive. While the net loss on inventory damaged amounting to approximately $913 has been reflected within the Cost of goods sold in discontinued operations, the corresponding insurance receivable of $2.4 million has been recognized as an asset from continuing operations. The amount of damaged inventory and insurance proceeds are based upon the management’s best estimate, and the actual amount of damaged inventory and insurance proceeds may differ from such estimates.
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.
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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):
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 |
2019 | 2018 | ||||||||||||||||||||||||
Statements of Operations and | Statements of Operations and | ||||||||||||||||||||||||
Balance Sheet | Comprehensive Income | Balance Sheet | Comprehensive Income | ||||||||||||||||||||||
Cumulative | Cumulative | ||||||||||||||||||||||||
Quarter Ended | End of Period | Period Average | Average | End of Period | Period Average | Average | |||||||||||||||||||
March 31 | $ | 0.7483 | $ | 0.7523 | $ | 0.7523 | $ | 0.7756 | $ | 0.7906 | $ | 0.7906 | |||||||||||||
June 30 | $ | 0.7641 | $ | 0.7477 | $ | 0.7500 | $ | 0.7594 | $ | 0.7745 | $ | 0.7825 |
Critical Accounting Policies
There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 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.2018.
RESULTS OF OPERATIONS
Overview of the Three and NineSix 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 1415 – 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 ninesix months ended SeptemberJune 30, 20182019 and 20172018 are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | ||||||||||||||||
T&D Solutions | $ | 22,663 | $ | 21,547 | $ | 65,194 | $ | 66,198 | ||||||||
Critical Power Solutions | 3,293 | 3,947 | 8,830 | 11,637 | ||||||||||||
Consolidated | 25,956 | 25,494 | 74,024 | 77,835 | ||||||||||||
Cost of goods sold | ||||||||||||||||
T&D Solutions | 18,348 | 17,569 | 52,068 | 52,363 | ||||||||||||
Critical Power Solutions | 2,467 | 2,913 | 7,185 | 9,069 | ||||||||||||
Consolidated | 20,815 | 20,482 | 59,253 | 61,432 | ||||||||||||
Gross profit | 5,141 | 5,012 | 14,771 | 16,403 | ||||||||||||
Selling, general and administrative expenses | 3,703 | 3,533 | 11,236 | 11,134 | ||||||||||||
Depreciation and amortization expense | 378 | 618 | 1,190 | 1,542 | ||||||||||||
Restructuring and integration | — | — | — | 156 | ||||||||||||
Foreign exchange gain | (889 | ) | (194 | ) | (617 | ) | (465 | ) | ||||||||
Total operating expenses | 3,192 | 3,957 | 11,809 | 12,367 | ||||||||||||
Operating income from continuing operations | 1,949 | 1,055 | 2,962 | 4,036 | ||||||||||||
Interest expense | 727 | 632 | 2,126 | 1,792 | ||||||||||||
Other expense | 19 | 112 | 158 | 165 | ||||||||||||
Income before taxes | 1,203 | 311 | 678 | 2,079 | ||||||||||||
Income tax expense | 415 | 530 | 550 | 396 | ||||||||||||
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 |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | ||||||||||||||||
T&D Solutions | $ | 2,737 | $ | 883 | $ | 3,810 | $ | 4,585 | ||||||||
Critical Power Solutions | 2,623 | 2,994 | 4,568 | 5,537 | ||||||||||||
Consolidated | 5,360 | 3,877 | 8,378 | 10,122 | ||||||||||||
Cost of goods sold | ||||||||||||||||
T&D Solutions | 2,914 | 1,167 | 3,825 | 4,085 | ||||||||||||
Critical Power Solutions | 1,925 | 2,517 | 3,775 | 4,718 | ||||||||||||
Consolidated | 4,839 | 3,684 | 7,600 | 8,803 | ||||||||||||
Gross profit | 521 | 193 | 778 | 1,319 | ||||||||||||
Selling, general and administrative expenses | 2,021 | 1,355 | 3,645 | 3,222 | ||||||||||||
Depreciation and amortization expense | 50 | 396 | 126 | 794 | ||||||||||||
Total operating expenses | 2,071 | 1,751 | 3,771 | 4,016 | ||||||||||||
Operating loss from continuing operations | (1,550 | ) | (1,558 | ) | (2,993 | ) | (2,697 | ) | ||||||||
Interest expense | 240 | 229 | 463 | 448 | ||||||||||||
Gain on sale of subsidiary | — | — | (4,207 | ) | — | |||||||||||
Other expense | 3,807 | 212 | 465 | 349 | ||||||||||||
Loss (income) before taxes | (5,597 | ) | (1,999 | ) | 286 | (3,494 | ) | |||||||||
Income tax (benefit) expense | (1,442 | ) | (341 | ) | 104 | (530 | ) | |||||||||
Net (loss) income from continuing operations | (4,155 | ) | (1,658 | ) | 182 | (2,964 | ) | |||||||||
Income from discontinued operations, net of income taxes | 132 | 862 | 1,443 | 1,594 | ||||||||||||
Net (loss) income | $ | (4,023 | ) | $ | (796 | ) | $ | 1,625 | $ | (1,370 | ) |
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During
As discussed above under “Discontinued Operations,” 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 businessliquid-filled transformer and dry-type transformer manufacturing businesses previously reported in T&D Solutions was $1.3$19.0 million and $4.3$21.6 million for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and $5.9$40.7 million and $10.1$42.5 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively. The excluded lossincome, net of income taxes from the switchgear businessliquid-filled transformer and dry-type transformer manufacturing businesses was $730$132 and $576$862 for the three months ended SeptemberJune 30, 2019 and 2018, respectively. The excluded income, net of income taxes from the liquid-filled transformer and 2017, respectively,dry-type transformer manufacturing businesses was $1.4 million and $1,440 and $1,084$1.6 million for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, 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, | ||||||||||||||||
2018 | 2018 | 2018 | 2017 | 2017 | ||||||||||||||||
T&D Solutions | $ | 29,449 | 25,419 | $ | 21,503 | $ | 20,170 | $ | 20,016 | |||||||||||
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 | $ | 50,597 | 44,613 | $ | 35,747 | $ | 35,196 | $ | 38,685 |
June 30, | March 31, | December 31, | September 30, | June 30, | ||||||||||||||||
2019 | 2019 | 2018 | 2018 | 2018 | ||||||||||||||||
T&D Solutions | $ | 10,120 | $ | 9,876 | $ | 9,486 | $ | 9,626 | $ | 8,344 | ||||||||||
Critical Power Solutions | 4,844 | 4,274 | 6,171 | 11,522 | 10,850 | |||||||||||||||
Order backlog | $ | 14,964 | $ | 14,150 | $ | 15,657 | $ | 21,148 | $ | 19,194 | ||||||||||
Discountinued Operation | 35,672 | 34,466 | 31,834 | 29,449 | 25,419 | |||||||||||||||
Total order back log | $ | 50,635 | $ | 48,616 | $ | 47,491 | $ | 50,597 | $ | 44,613 |
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, | |||||||||||||||||||||||||||||||
2018 | 2017 | Variance | % | 2018 | 2017 | Variance | % | |||||||||||||||||||||||||
T&D Solutions | ||||||||||||||||||||||||||||||||
Transformers | $ | 22,663 | $ | 21,547 | $ | 1,116 | 5.2 | $ | 65,194 | $ | 66,198 | $ | (1,004 | ) | (1.5 | ) | ||||||||||||||||
22,663 | 21,547 | 1,116 | 5.2 | 65,194 | 66,198 | (1,004 | ) | (1.5 | ) | |||||||||||||||||||||||
Critical Power Solutions | ||||||||||||||||||||||||||||||||
Equipment | 388 | 1,261 | (873 | ) | (69.2 | ) | 1,171 | 4,490 | (3,319 | ) | (73.9 | ) | ||||||||||||||||||||
Service | 2,905 | 2,686 | 219 | 8.2 | 7,659 | 7,147 | 512 | 7.2 | ||||||||||||||||||||||||
3,293 | 3,947 | (654 | ) | (16.6 | ) | 8,830 | 11,637 | (2,807 | ) | (24.1 | ) | |||||||||||||||||||||
Total revenue | $ | 25,956 | $ | 25,494 | $ | 462 | 1.8 | $ | 74,024 | $ | 77,835 | $ | (3,811 | ) | (4.9 | ) |
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||
2019 | 2018 | Variance | % | 2019 | 2018 | Variance | % | |||||||||||||||||||||||||
T&D Solutions | ||||||||||||||||||||||||||||||||
Switchgear | 2,737 | 883 | 1,854 | 210.0 | 3,810 | 4,585 | (775 | ) | (16.9 | ) | ||||||||||||||||||||||
2,737 | 883 | 1,854 | 210.0 | 3,810 | 4,585 | (775 | ) | (16.9 | ) | |||||||||||||||||||||||
Critical Power Solutions | ||||||||||||||||||||||||||||||||
Equipment | 267 | 402 | (135 | ) | (33.5 | ) | 441 | 784 | (343 | ) | (43.7 | ) | ||||||||||||||||||||
Service | 2,356 | 2,592 | (236 | ) | (9.1 | ) | 4,127 | 4,753 | (626 | ) | (13.2 | ) | ||||||||||||||||||||
2,623 | 2,994 | (371 | ) | (12.4 | ) | 4,568 | 5,537 | (969 | ) | (17.5 | ) | |||||||||||||||||||||
Total revenue | $ | 5,360 | $ | 3,877 | $ | 1,483 | 38.3 | $ | 8,378 | $ | 10,122 | $ | (1,744 | ) | (17.2 | ) |
For the three months ended SeptemberJune 30, 2018,2019, our consolidated revenue increased by $0.5$1.5 million, or 1.8%38.3%, to $26.0$5.4 million, up from $25.5$3.9 million during the three months ended SeptemberJune 30, 2017.2018. For the ninesix months ended SeptemberJune 30, 2018,2019, our consolidated revenue decreased by $3.8$1.7 million, or 4.9%17.2%, to $74.0$8.4 million, down from $77.8$10.1 million during the ninesix months ended SeptemberJune 30, 2017.2018.
T&D Solutions. During the three months ended SeptemberJune 30, 2018,2019, revenue from our transformer product linesswitchgear increased by $1.1$1.9 million, or 5.2%209.9%, as compared to the three months ended SeptemberJune 30, 20172018 due to higher salestiming of liquid filled transformers. shipments.
During the ninesix months ended SeptemberJune 30, 2018,2019, revenue from our transformer product linesswitchgear decreased by $1.0 million$775, or 1.5%16.9% as compared to the ninesix months ended SeptemberJune 30, 2017. The decrease was mostly driven by2018 due to lower salesvolume of our “dry type” transformer products.sales.
Critical Power.Titan is the only business unit in the Critical Power segment. For the three months ended SeptemberJune 30, 2018,2019, equipment sales decreased by $0.9 million,$135, or 69.2%33.5%, as compared to the same period in the prior year,year. For the six months ended June 30, 2019, equipment sales were down by $343, or 43.7%, as compared to the same period in 2018 resulting from a reduced focus on equipment sales included in the Titan revenue stream. For the nine months ended September 30, 2018, equipment sales were down by $3.3 million, or 73.9% compared to the same period in 2017.
For the three and six months ended SeptemberJune 30, 2018,2019, service revenue increaseddecreased by $219$236, or 8.2%9.1%, and $626, or 13.2%, respectively, as compared to the same periodperiods in the prior year. For the nine months ended September 30, 2018, service revenue increased by $511 or 7.2% compared to the same period in 2017. The Company increased the focus on the service revenue in its Critical Power segment.
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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, | |||||||||||||||||||||||||||||||
2018 | 2017 | Variance | % | 2018 | 2017 | Variance | % | |||||||||||||||||||||||||
T&D Solutions | ||||||||||||||||||||||||||||||||
Gross profit | $ | 4,315 | $ | 3,978 | $ | 337 | 8.5 | $ | 13,126 | $ | 13,835 | $ | (709 | ) | (5.1 | ) | ||||||||||||||||
Gross margin % | 19.0 | 18.5 | 0.5 | 20.1 | 20.9 | (0.8 | ) | |||||||||||||||||||||||||
Critical Power Solutions | ||||||||||||||||||||||||||||||||
Gross profit | 826 | 1,034 | (208 | ) | (20.1 | ) | 1,645 | 2,568 | (923 | ) | (35.9 | ) | ||||||||||||||||||||
Gross margin % | 25.1 | 26.2 | (1.1 | ) | 18.6 | 22.1 | (3.5 | ) | ||||||||||||||||||||||||
Consolidated gross profit | $ | 5,141 | $ | 5,012 | $ | 129 | 2.6 | $ | 14,771 | $ | 16,403 | $ | (1,632 | ) | (9.9 | ) | ||||||||||||||||
Consolidated gross margin % | 19.8 | 19.7 | 0.1 | 20.0 | 21.1 | (1.1 | ) |
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||
2019 | 2018 | Variance | % | 2019 | 2018 | Variance | % | |||||||||||||||||||||||||
T&D Solutions | ||||||||||||||||||||||||||||||||
Gross profit | $ | (177 | ) | $ | (284 | ) | $ | 107 | (37.7 | ) | $ | (15 | ) | $ | 500 | $ | (515 | ) | (103.0 | ) | ||||||||||||
Gross margin % | (6.5 | ) | (32.2 | ) | 25.7 | (0.4 | ) | 10.9 | (11.3 | ) | ||||||||||||||||||||||
Critical Power Solutions | ||||||||||||||||||||||||||||||||
Gross profit | 698 | 477 | 221 | 46.3 | 793 | 819 | (26 | ) | (3.2 | ) | ||||||||||||||||||||||
Gross margin % | 26.6 | 15.9 | 10.7 | 17.4 | 14.8 | 2.6 | ||||||||||||||||||||||||||
Consolidated gross profit | $ | 521 | $ | 193 | $ | 328 | 169.9 | $ | 778 | $ | 1,319 | $ | (541 | ) | (41.0 | ) | ||||||||||||||||
Consolidated gross margin % | 9.7 | 5.0 | 4.7 | 9.3 | 13.0 | (3.7 | ) |
For the three months ended SeptemberJune 30, 2018,2019, our consolidated gross margin was 19.8%9.7% of revenues, compared to 19.7%5.0% during the three months ended SeptemberJune 30, 2017.2018. For the ninesix months ended SeptemberJune 30, 2018,2019, our gross margin was 20.0%9.3% of revenues, compared to 21.1% during13.0% for the ninesix months ended SeptemberJune 30, 2017.2018. The decrease in our consolidated gross margin percentage is further explained below.
T&D Solutions. During the three and six months ended SeptemberJune 30, 20182019 the negative gross margin decreased by 25.7% and increased by 0.5%11.3%, respectively, as compared to the same periods in 2018. The improvement in our T&D Solutions gross margin of 25.7% for the three months ended June 30, 2019 as compared to the same period in 2017. Included2018 resulted primarily from higher revenues. The decrease in our T&D Solutions gross margin of 11.3% for the threesix months ended SeptemberJune 30, 2017 is the write off of raw material inventory not relocated from Canada. During the nine months ended September 30, 2018 the gross margin decreased by 0.8%2019 as compared to the same period in 20172018 resulted primarily from an unfavorable product mix in our “dry type” transformers.higher costs.
Critical Power.During the three and ninesix months ended SeptemberJune 30, 2018,2019, the gross margin decreasedincreased by 1.1%10.7% and 3.5%2.6%, respectively, whenas compared to the same periodsperiod in 2017,2018, primarily due to lower sales while the fixed costs remained comparable.costs.
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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, | |||||||||||||||||||||||||||||||
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 | ) |
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||
2019 | 2018 | Variance | % | 2019 | 2018 | Variance | % | |||||||||||||||||||||||||
T&D Solutions | ||||||||||||||||||||||||||||||||
Selling, general and administrative expense | $ | 348 | $ | 363 | $ | (15 | ) | (4.1 | ) | $ | 727 | $ | 922 | $ | (195 | ) | (21.1 | ) | ||||||||||||||
Depreciation and amortization expense | 17 | 72 | (55 | ) | (76.4 | ) | 33 | 143 | (110 | ) | (76.9 | ) | ||||||||||||||||||||
Segment operating expense | $ | 365 | $ | 435 | $ | (70 | ) | (16.1 | ) | $ | 760 | $ | 1,065 | $ | (305 | ) | (28.6 | ) | ||||||||||||||
Critical Power Solutions | ||||||||||||||||||||||||||||||||
Selling, general and administrative expense | $ | 413 | $ | 403 | $ | 10 | 2.5 | $ | 876 | $ | 873 | $ | 3 | 0.3 | ||||||||||||||||||
Depreciation and amortization expense | 33 | 308 | (275 | ) | (89.3 | ) | 65 | 619 | (554 | ) | (89.5 | ) | ||||||||||||||||||||
Segment operating expense | $ | 446 | $ | 711 | $ | (265 | ) | (37.3 | ) | $ | 941 | $ | 1,492 | $ | (551 | ) | (36.9 | ) | ||||||||||||||
Unallocated Corporate Overhead Expenses | ||||||||||||||||||||||||||||||||
Selling, general and administrative expense | $ | 1,260 | $ | 589 | $ | 671 | 113.9 | $ | 2,042 | $ | 1,427 | $ | 615 | 43.1 | ||||||||||||||||||
Depreciation expense | — | 16 | (16 | ) | (100.0 | ) | 28 | 32 | (4 | ) | (12.5 | ) | ||||||||||||||||||||
Segment operating expense | $ | 1,260 | $ | 605 | $ | 655 | 108.3 | $ | 2,070 | $ | 1,459 | $ | 611 | 41.9 | ||||||||||||||||||
Consolidated | ||||||||||||||||||||||||||||||||
Selling, general and administrative expense | $ | 2,021 | $ | 1,355 | $ | 666 | 49.2 | $ | 3,645 | $ | 3,222 | $ | 423 | 13.1 | ||||||||||||||||||
Depreciation and amortization expense | 50 | 396 | (346 | ) | (87.4 | ) | 126 | 794 | (668 | ) | (84.1 | ) | ||||||||||||||||||||
Consolidated operating expense | $ | 2,071 | $ | 1,751 | $ | 320 | 18.3 | $ | 3,771 | $ | 4,016 | $ | (245 | ) | (6.1 | ) |
Selling, General and Administrative Expense. For the three months ended SeptemberJune 30, 2018,2019, consolidated selling, general and administrative expense, before depreciation and amortization, increased by $170,$666, or 4.8%49.2%, to $3,703,$2.0 million, as compared to $3,533$1.4 million during the three months ended SeptemberJune 30, 2017.2018. As a percentage of our consolidated revenue, selling, general and administrative expense before depreciation and amortization increased to 14.3%37.7% in the 2018 period,three months ended June 30, 2019, as compared to 13.9%34.9% in 2017.the three months ended June 30, 2018.
During the ninesix months ended SeptemberJune 30, 2018,2019, consolidated selling, general and administrative expense, before depreciation and amortization, increased by $102$423, or 0.9%13.1%, to $11.2$3.6 million, as compared to $11.1$3.2 million during the ninesix months ended SeptemberJune 30, 2017.2018. As a percentage of our consolidated revenue, selling, general and administrative expense before depreciation and amortization increased to 15.2%43.5% in the 2018 period,six months ended June 30, 2019, as compared to 14.3%31.8% in 2017.the six months ended June 30, 2018.
Depreciation and Amortization Expenses. Depreciation and amortization expense consists primarily of depreciation of fixed assets and amortization of definite-lived intangible assets and right-of-use assets related to our finance leases and excludes amounts included in cost of sales. For the three and six months ended SeptemberJune 30, 2018,2019, depreciation and amortization expense decreased by $240$346, or 38.8% when87.4%, and $668, or 84.1%, respectively, as compared to the same periodperiods in 2017. For the nine months ended September 30, 2018,2018. Included in depreciation and amortization expense decreased by $352 or 22.8% when compared to the same period in 2017.
Restructuring and Integration Expenses. There was no restructuring and integration expense for the three and six months ended SeptemberJune 30, 20172018 was amortization of customer relationship intangible assets of $270 and 2018 and nine months ended September 30, 2018. For the nine months ended September 30, 2017, restructuring and integration expense was $156$540, respectively, related to relocationacquisition of the medium voltage transformer production facility from Canada to a lower cost facility.Titan. The Titan customer relationship intangible asset was fully amortized by December 31, 2018.
Foreign Exchange Loss/Gain. During the three and nine months ended September 30, 2018, approximately 46% and 45%, respectively, of our consolidated operating revenues were denominated in Canadian 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, 2018 and 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, 2018 and 2017, we recorded a gain of $889 and $194, respectively, due to currency fluctuations. For the nine months ended September 30, 2018 and 2017, we recorded a gain of $617 and $465, respectively, due to currency fluctuations.
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Operating Income (Loss)
The following table represents our operating income excluding discontinued operations,(loss) by reportable segment for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2018 | 2017 | Variance | % | 2018 | 2017 | Variance | % | |||||||||||||||||||||||||
T&D Solutions | $ | 2,449 | $ | 1,777 | $ | 672 | 37.8 | $ | 5,594 | $ | 6,715 | $ | (1,121 | ) | (16.7 | ) | ||||||||||||||||
Critical Power Solutions | 141 | 83 | 58 | (69.9 | ) | (533 | ) | (252 | ) | (281 | ) | (111.5 | ) | |||||||||||||||||||
Unallocated Corporate Overhead Expenses | (641 | ) | (805 | ) | 164 | 20.4 | (2,099 | ) | (2,427 | ) | 328 | 13.5 | ||||||||||||||||||||
Total operating income | $ | 1,949 | $ | 1,055 | $ | 894 | 84.7 | $ | 2,962 | $ | 4,036 | $ | (1,074 | ) | (26.6 | ) |
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||
2019 | 2018 | Variance | % | 2019 | 2018 | Variance | % | |||||||||||||||||||||||||
T&D Solutions | $ | (542 | ) | $ | (719 | ) | $ | 177 | (24.6 | ) | $ | (775 | ) | $ | (565 | ) | $ | (210 | ) | 37.2 | ||||||||||||
Critical Power Solutions | 252 | (234 | ) | 486 | 207.7 | (148 | ) | (673 | ) | 525 | 78.0 | |||||||||||||||||||||
Unallocated Corporate Overhead Expenses | (1,260 | ) | (605 | ) | (655 | ) | (108.3 | ) | (2,070 | ) | (1,459 | ) | (611 | ) | (41.9 | ) | ||||||||||||||||
Total operating loss | $ | (1,550 | ) | $ | (1,558 | ) | $ | 8 | (0.5 | ) | $ | (2,993 | ) | $ | (2,697 | ) | $ | (296 | ) | 11.0 |
T&D Solutions. During the three and six months ended SeptemberJune 30, 2018,2019, T&D segment operating incomeloss was $2,449$542 and $775, respectively, as compared to $1,777$719 and $565, respectively, for the same periodrespective periods in 2017. Included in the three months ended September 30, 2017 is the write off of raw material inventory not relocated from Canada. During the nine months ended September 30, 2018, T&D segment operating income was $5,594 as compared to $6,715 during the same period of 2017.2018. The decrease in the operating incomeloss for the three months ended June 30, 2019, as compared to the same period in 2018, is primarily due to an unfavorable product mixhigher revenues. The increase in our “dry type” transformers.the operating loss for the six months ended June 30, 2019, as compared to the same period in 2018, is primarily due to lower revenues and higher manufacturing costs.
Critical Power. During the three and six months ended SeptemberJune 30, 2018,2019, our Critical Power segment generated an operating income of $141 as compared to $83 during the same period of 2017. During the nine months ended September 30, 2018, our Critical Power segment generated$252 and an operating loss of $533$148, respectively, as compared to $252an operating loss of $234 and $673, respectively, during the same periodsthree and six months ended June 30, 2018. The decrease in the operating loss for the three and six months ended June 30, 2019 is primarily due to lower amortization expense as a result of 2017.the full amortization of the Titan customer relationship intangible asset by December 31, 2018.
Unallocated Corporate Overhead Expenses.Our corporate expenses consist primarily of executive management, corporate accounting and human resources personnel, office expenses, financing and corporate development activities, payroll and benefits administration, treasury, tax compliance, legal, stock-based compensation and public reporting costs, and costs not specifically allocated to reportable business segments. During the three and ninesix months period ended SeptemberJune 30, 2018,2019, our Unallocated Corporate Overhead Expenses decreasedincreased by $164$655, or 20.4%108.3%, and $328by $611, or 13.5%41.9%, respectively, as compared to the same periods in 20172018, primarily due to adjustment of prior year insurance premiums.higher professional fees.
Non-Operating Expense
Interest Expense. For the three and ninesix months ended SeptemberJune 30, 2018,2019, interest expense was approximately $727$240 and $2,126,$463, respectively, as compared to $632$229 and $1,792,$448, respectively, during the three and ninesix months ended SeptemberJune 30, 2017.2018. The increase in our interest expense was due to higher average borrowings outstanding underutilization of our credit facilities and the increased utilization of short term borrowings with increased rates during the 2018 period as compared to 2017.facilities.
Other Expense.For the three and nine months ended SeptemberJune 30, 2018,2019, other non-operating expense was $19 and $158, respectively,$3.8 million, as compared to $112 and $165,$212 during the same periodsthree months ended June 30, 2018. For the three months ended June 30, 2019, included in other non-operating expense was a loss of 2017.$3.7 million related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the Merger of PCPI, CleanSpark and the Merger Sub. See Note 3 - Divestitures.
For the six months ended June 30, 2019, other non-operating expense was $465 as compared to $349 during the six months ended June 30, 2018. For the six months ended June 30, 2019, included in other non-operating expense was a loss of $325 related to the mark to market adjustment on the fair value of common stock and warrants received in connection with the Merger of PCPI, CleanSpark and the Merger Sub. See Note 3 - Divestitures.
Income Tax Expense (Benefit). Our effective income tax expensebenefit rate was 34.5%25.8% for the three months ended SeptemberJune 30, 2018,2019, compared to 170.4%17.1% during the same period in 2017.2018. For the ninesix months ended SeptemberJune 30, 2018,2019, our effective income tax expense rate was 81.1%36.4%, as compared to 19.0%a benefit of 15.2% during the same period in 2017,2018, as set forth below (dollars in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
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 | 415 | 530 | (115 | ) | 550 | 396 | 154 | |||||||||||||||||
Effective income tax rate % | 34.5 | 170.4 | (135.9 | ) | 81.1 | 19.0 | 62.1 |
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2019 | 2018 | Variance | 2019 | 2018 | Variance | |||||||||||||||||||
(Loss) income before income taxes | $ | (5,597 | ) | $ | (1,999 | ) | $ | (3,598 | ) | $ | 286 | $ | (3,494 | ) | $ | 3,780 | ||||||||
Income tax (benefit) expense | (1,442 | ) | (341 | ) | (1,101 | ) | 104 | (530 | ) | 634 | ||||||||||||||
Effective income tax rate % | 25.8 | 17.1 | 8.7 | 36.4 | 15.2 | 21.2 |
Our effective income tax rate decreased by 135.9% and increased by 62.1%8.7% and 21.2% during the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, as compared to the same period of the prior year, primarily due to changes made to taxationtax effect of foreign earned income pursuant to the U.S. tax code changes enabledgain on the Merger of PCPI, CleanSpark and the Merger Sub. See Note 3 – Divestitures in December 2017.our unaudited Consolidated Financial Statements and related notes included in this Quarterly Report on Form 10-Q.
Net Income/ (Loss) Income
We generated a net loss of $4.0 million and net income of $58 and net loss of $1,312$1.6 million during the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, as compared to net loss of $795$796 and net income of $599 for$1.4 million during the three and ninesix months ended September 30, 2017. Our net income per basic and diluted share for the three months ended SeptemberJune 30, 2018, was $0.01. Our net loss per basic and diluted share for the nine months ended September 30, 2018 was $0.16.respectively. Our net loss per basic and diluted share for the three months ended SeptemberJune 30, 20172019, and June 30, 2018, was $0.09.$0.46 and $0.09, respectively. Our net incomeearnings per basic and diluted share for the ninesix months ended SeptemberJune 30, 20172019 was $0.08.$0.19 as compared to a loss per basic and diluted share of $0.16 for the six months ended June 30, 2018.
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Our incomeloss per share from continuing operations basic and diluted for the three and nine months ended SeptemberJune 30, 2019 and 2018 was $0.09$0.48 and $0.01, respectively,$0.19, respectively. Our earning per share from continuing operations basic and diluted for the six months ended June 30, 2019 was $0.02, as compared to loss per share from continuing operations basic and diluted of $0.03 and income of $0.19$0.34 for the three and ninesix months ended SeptemberJune 30, 2017, respectively.2018.
Our lossearnings per share from discontinued operations basic and diluted for the three and nine months ended SeptemberJune 30, 20182019 was $0.08 and $0.17, respectively.$0.02, as compared to $0.10 for the three months ended June 30, 2018. Our lossearning per share from discontinued operations basic and diluted for the three and ninesix months ended SeptemberJune 30, 2017 was $0.062019 and $0.11,2018 were $0.17 and $0.18, respectively.
LIQUIDITY AND CAPITAL RESOURCES
General. At SeptemberAs of June 30, 2018,2019, we had $659$490 of cash and cash equivalents on hand and total debt outstanding of $33.6$19.1 million, when including bank overdrafts and liabilities of discontinued operations.overdrafts. We have historically met our cash needs through a combination of cash flows from operating activities, bank borrowings under our revolving credit facilities and distributions between our U.S. and foreign subsidiaries. Our cash requirements are generally for operating activities, debt repayment, capital improvements and acquisitions. We believe that working capital, borrowing capacity available under our credit facilities, funds generated from operations and cash available on hand 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 from the date of filing.
Cash Provided by/ Used inby Operating Activities. Cash provided by our operating activities was $567$1.4 million during the ninesix months ended SeptemberJune 30, 20182019, as compared to $164 of cash used in operating activitiesof $1.6 million during the ninesix months ended SeptemberJune 30, 2017. The principal elements2018. Change in accounts payable and accrued liabilities was the primary sources of cash provided by operating activities during the ninesix months ended SeptemberJune 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.2019.
Cash Used in Investing Activities. Cash used in investing activities during the ninesix months ended SeptemberJune 30, 20182019 was $369,$122, as compared to $1,225$188 during the ninesix months ended SeptemberJune 30, 2017.2018. During the ninesix months ended SeptemberJune 30, 2018,2019, additions to our property, plant and equipment were $369.$122.
Cash Provided byUsed in Financing Activities. Cash provided byused in our financing activities was $167$772 during ninethe six months ended SeptemberJune 30, 2018,2019, as compared to $2,635$1.7 million of cash provided by financing activities during the ninesix months ended SeptemberJune 30, 2017.2018. The primary use of cash in financing activities for the six months ending June 30, 2019 was repayment of debt.
Working Capital. As of SeptemberJune 30, 2018,2019, we had negative working capital of $1.4$7.3 million, including $659$490 of cash and equivalents, compared to working capitaldeficit of $709,$5.5 million, including $218$200 of cash and equivalents at December 31, 2017. Our current assets were approximately 1.00 times our current liabilities at September2018. At June 30, 2018 and at December 31, 2017. At September 30, 20182019 and December 31, 2017,2018, we had $0.9 million$115 and $3.3 million,$388, respectively, of available and unused borrowing capacity from our revolving credit facilities, without taking into account cash and equivalents on hand. However, the availability of this capacity under our revolving credit facilities is subject to restrictions on the use of proceeds and is dependent upon our ability to satisfy certain financial and operating covenants, including financial ratios. Management believes that the existing credit facility is available as of the filing date to support operations as needed. As previously noted
Assessment of Liquidity. At June 30, 2019, we had total debt of $25.1 million and $490 of cash and cash equivalents on hand. We have historically met our total order backlog has increased approximately $6 million during the three months ended September 30, 2018 which has required us to increasecash needs through a combination of cash flows from operating activities and bank borrowings under our inventory levelsrevolving credit facilities. Our cash requirements are generally for operating activities, debt repayment, capital improvements and related commitments to meet this future demand. We expect thatacquisitions. In addition, as we work off this backlog and when we complete the sale of PCEP thatfurther discussed below, our working capital position will improve including a reduction in our overall debt levels.credit facilities maturity dates have been extended until April 1, 2020.
The financial statements included in this quarterly report have been prepared assuming that we will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Significant assumptions underlie this belief, including, among other things, that there will be no material adverse developments in our business, liquidity, capital requirements and that our credit facilities with our lender will remain available to us and will not need to be replaced.
Management believes that its capital resources are adequate to fund operations through the first quarter of 2020, but the availability of the Company’s capital resources is dependent on the Company’s ability to meet the working capital obligations pursuant to the credit agreements with BMO, its lender. The Company has certain credit arrangements with BMO that contain subjective acceleration clauses and the Company has had several instances of non-compliance with certain of the covenants included in such credit agreements. Management has historically been able to obtain from BMO waivers of any non-compliance and management expects to be able to continue to obtain necessary waivers in the event of future non-compliance, however there can be no assurance that the Company will be able to obtain such waivers, and should BMO refuse to provide a waiver in the future, the outstanding debt under the credit facilities could become due immediately. The term of the Company’s agreement with BMO ends in April 2020.Concurrently with the closing of the Equity Transaction, all existing credit facilities granted by Bank of Montreal (BMO) under the Canadian Facilities (as defined below) and the U.S. Facilities (as defined below) will be repaid in full. The operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of commercial manufacturing at acceptable margins, marketing or sales acceptance, and dependence on key personnel.
Credit Facilities and Long-Term Debt
Canadian Credit Facilities
In April 2016, our wholly owned subsidiary, Pioneer Electrogroup Canada Inc. (“PECI”), entered into an Amended and Restated Credit Agreement (“CAD ARCA”) with Bank 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 BMO existing as of December 31, 2015 were waived by BMO. The CAD ARCA was further amended (the “2017 CAD ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 CAD ARCA Amendment”). The 2018 CAD ARCA Amendment extended the term of our Canadian Facilities to April 1, 2020. On August 8, 2019, BMO agreed to a Temporary Borrowing Base Increase, until the earlier of the (i) closing of the Equity Transaction and repayment in full of all amounts owned under the Canadian Facilities and the U.S. Facilities, and (ii) August 31, 2019.
Our Canadian Facilities provided for up to $8.2 million Canadian dollars (“CAD”) (approximately $6.3 million expressed in U.S. dollars) consisting of a revolving $7.0 million CAD revolving credit facility (“Facility A”) to finance ongoing operations, a $471 CAD term credit facility (“Facility B”) that financed a plant expansion, and a $712 USD Facility 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 $9.2 million CAD.
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Facility A, as amended by the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment, is subject to margin criteria. 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 BMO’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 was 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 by 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 was 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 by the 2017 CAD ARCA, bore interest at BMO’s prime rate plus 1.50% per annum on amounts borrowed in Canadian dollars, or BMO’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 were 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 were 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 willwere to 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. In December 2018 we repaid the outstanding principal balance under Facility C of $316 CAD with proceeds received from the sale of the Farnham, Quebec, Canada building.
Pursuant to the CAD ARCA, as amended by the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment, financial covenant testing is performed on our consolidated financial statements. We are required to meet certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, as set forth in the 2017 CAD ARCA Amendment and the 2018 CAD ARCA Amendment. Pursuant to the 2018 CAD ARCA Amendment, BMO waived defaults on all financial covenants existing as of December 31, 2017, for which we were not in compliance.
As of SeptemberJune 30, 2018,2019, we had approximately $6.0 million in U.S. dollar equivalents outstanding under our Canadian Facilities. Our borrowings consisted of approximately $5.6$6.0 million outstanding under Facility AA. As of June 30, 2019, the Company was not in compliance with a financial covenant and $352on August 8, 2019, the Company received a waiver from BMO on the financial covenant breach existing as of June 30, 2019.
Concurrently with the closing of the Equity Transaction, all existing credit facilities granted by BMO under the Canadian Facilities and the U.S. Facilities will be repaid in full.
As of December 31, 2018, we had approximately $5.8 million in U.S. dollar equivalents outstanding under our Canadian Facilities. Our borrowings consisted of approximately $5.8 million outstanding under Facility C.A. As of September 30,December 31, 2018, the Company was not in compliance with its financial covenants and on March 25, 2019, the financial covenant requirements of the Canadian Facilities and hasCompany received a waiver from BMO on all financial covenant breaches existing as of November 7, 2018 for the period ending September 30,December 31, 2018.
United States Credit Facilities
In April 2016, we entered into an Amended and Restated Credit Agreement (“US ARCA”) with BMO with respect to our existing U.S. Facilitiesfacilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank (as amended and restated, the(the “U.S. Facilities”). Additionally, defaults relating to the breach of certain financial covenants under the prior financing arrangements with BMO existing as of December 31, 2015 were waived by BMO. The.The US ARCA was further amended (the “2017 US ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 US ARCA Amendment”). The 2018 US ARCA Amendment extended the term of our US Facilities to April 1, 2020.
Our U.S. Facilities, as amended and restated, provided for up to $19.1 million USD consisting of a $14.0 million USD demand revolving credit facility (“USD Facility A”) to finance ongoing operations, a $5.0 million USD term loan facility (“USD Facility B”) that financed the acquisition of Titan, and a new $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, as amended and restated per 2017 US ARCA, bore interest, at our option, at BMO’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$4.4 million 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$2.3 million due on April 1, 2020. The 2018 US ARCA Amendment did not change the USD Facility B interest rate.
Pursuant to the US ARCA, as amended by the 2017 US ARCA Amendment and the 2018 US ARCA Amendment, financial covenant testing is performed on our consolidated financial statements. We are required to meet certain minimum working capital ratios, minimum EBITDA levels and effective tangible net worth levels for each fiscal quarter, as 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 certain financial covenants existing as of December 31, 2016. On March 28, 2018, pursuant to the 2018 US ARCA Amendment, BMO waived defaults on all financial covenants existing as of December 31, 2017 for which we were not 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 SeptemberJune 30, 2018,2019, we had approximately $18.1$18.2 million outstanding under our U.S. Facilities. Our borrowings consisted of approximately $14.0$15.0 million outstanding under USD Facility A, and $4.1$3.2 million outstanding under USD Facility B. As of SeptemberJune 30, 2019, the Company was not in compliance with a financial covenant and on August 8, 2019, the Company received a waiver from BMO on the financial covenant breach existing as of June 30, 2019.
Concurrently with the closing of the Equity Transaction, all existing credit facilities granted by BMO under the Canadian and the U.S. Facilities will be repaid in full. In the event that the Stock Purchase Agreement is terminated prior to closing of the Equity Transaction and if we receive the reverse termination fee as set forth therein, we are required to remit to BMO 50% of such reverse termination fee, which will be applied to permanently reduce the amounts outstanding under our USD Facility B.
As of December 31, 2018, we had approximately $18.8 million outstanding under our U.S. Facilities. Our borrowings consisted of approximately $15.0 million outstanding under USD Facility A, and $3.8 million outstanding under USD Facility B. As of December 31, 2018, the Company was not in compliance with its financial covenants and on March 25, 2019, the financial covenant requirements of the U.S. Facilities and hasCompany received a waiver from BMO on all financial covenant breaches existing as of November 7, 2018 for the period ending September 30,December 31, 2018.
Capital Lease Obligations
As of September 30, 2018 and December 31, 2017, we had an immaterial amount of capital lease obligations outstanding that were assumed in connection with the acquisition of Titan.
Capital Expenditures
Our additions to property, plant and equipment were $369$122 during the ninesix months ended SeptemberJune 30, 2018,2019, as compared to $1,245$188 during the ninesix months ended SeptemberJune 30, 2017.2018. We have no major future capital projects planned, or significant replacement spending anticipated during 2018.2019. Additions were a result of supporting the day to day needs of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.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, 2017, filed on April 2, 2018, continued to exist and were still considered material weaknesses in our internal control over financial reporting at September 30, 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 SeptemberJune 30, 2018,2019, the end of the period covered by this Quarterly Report on Form 10-Q. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. As of SeptemberJune 30, 2018,2019, based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls over financial reporting, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were not effective.effective at the reasonable assurance level.
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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, 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.
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.
Changes in Internal Control over Financial Reporting
Other than the changes discussed above in the Remediation Plan, thereThere has been no change in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20182019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 employeesPCEP will prevail on any claims made against us PCEP and our employeesPCEP in any such lawsuit. As of the filing of this report, this action is scheduled for trial in the first quarter of 2020. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results. We cannot execute the divestiture of PCEP until the lawsuit has been resolved.
As of the date hereof, we are not aware of or a party to any legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, nor are we aware of any such threatened or pending litigation or any such proceedings known to be contemplated by governmental authorities other than the forgoing suit filed by Myers Power Products, Inc. that we believe could have a material adverse effect on our business, financial condition or operating results. See Note 11 – Commitments and ContingenciesDebt 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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During the fiscal quarter ended September 30, 2018Except as set forth below, there werehave been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Pioneer Power cannot be sure if or when the Equity Transaction will be completed.
The closing of the Equity Transaction is subject to the satisfaction or waiver of various conditions. Pioneer Power cannot guarantee that the closing conditions set forth in the Stock Purchase Agreement will be satisfied. If Pioneer Power is unable to satisfy the closing conditions in the Buyer’s favor or if other mutual closing conditions are not satisfied, the Buyer will not be obligated to complete the Equity Transaction. In the event that the Equity Transaction is not completed, the announcement of the termination of the Stock Purchase Agreement may adversely affect the trading price of Pioneer Power’s common stock, its business and operations or its relationships with customers, suppliers and employees.
In addition, without the proceeds from the Equity Transaction, Pioneer Power may not have sufficient liquidity to repay its outstanding indebtedness upon maturity in the first quarter of 2020. Pioneer Power may also be unable to comply with the restrictive covenants in the instruments governing its outstanding indebtedness prior to such maturity date or obtain waivers from any such breach. If Pioneer Power breaches its obligations under its outstanding indebtedness, or Pioneer Power fails to timely make payments on its indebtedness when due, the lender may declare an event of default and may seek to foreclose on all or a portion of the assets securing such indebtedness, which could force Pioneer Power into bankruptcy or liquidation.
If the Equity Transaction is not completed, Pioneer Power’s board of directors, in discharging its fiduciary obligations to Pioneer Power’s stockholders, may evaluate other strategic alternatives that may be available, which such alternatives may not be as favorable to Pioneer Power as the Equity Transaction.
The Stock Purchase Agreement limits Pioneer Power’s ability to pursue alternatives to the Equity Transaction.
The Stock Purchase Agreement contains provisions that make it more difficult for Pioneer Power to sell its assets or engage in another type of acquisition transaction with a party other than the Buyer. These provisions include a non-solicitation provision and a provision obligating Pioneer Power to pay the Buyer a termination fee of $4.0 million under certain circumstances. These provisions could discourage a third party that might have an interest in acquiring all of, or substantially all of, Pioneer Power’s assets or its common stock from considering or proposing such an acquisition, even if that party were prepared to pay consideration with a higher value than the consideration to be paid by the Buyer.
Pioneer Power will incur significant expenses in connection with the Equity Transaction, regardless of whether the Equity Transaction is completed and, in certain circumstances, may be required to pay a termination fee to the Buyer.
Pioneer Power expects to incur significant expenses related to the Equity Transaction. These expenses include, but are not limited to, financial advisory and opinion fees and expenses, legal fees, accounting fees and expenses, certain employee expenses, filing fees, printing expenses and other related fees and expenses. Many of these expenses will be payable by Pioneer Power regardless of whether the Equity Transaction is completed. In addition, if the Stock Purchase Agreement is terminated in certain circumstances, Pioneer Power will be required to pay the Buyer a $4.0 million termination fee. However, if the Stock Agreement is terminated in certain other circumstances, Pioneer Power may be entitled to a $4.0 million reverse termination fee from the Buyer. See Note 6 – Discontinued Operations in Notes to Consolidated Financial Statements in Part I of this Form 10-Q.
Pioneer Power may be delisted from NASDAQ following the consummation of the Equity Transaction.
Pioneer Power’s SEC reporting obligations as a public company will not be impacted as a result of the closing of the Equity Transaction and, following the completion of the Equity Transaction, Pioneer Power expects that its common stock will continue to be traded on NASDAQ. However, it is not possible to predict the trading price of Pioneer Power’s common stock following the closing of the Equity Transaction or the impact that the Equity Transaction may have on Pioneer Power’s remaining business.
In order to maintain the listing of Pioneer Power’s common stock on NASDAQ, Pioneer Power’s common stock must comply with certain continued listing requirements, including having:
● | at least two registered and active market makers, one of which may be a market maker entering a stabilizing bid; |
● | a minimum bid price of at least $1.00 per share; |
● | at least 300 total holders (including both beneficial holders and holders of record, but excluding any holder who is directly or indirectly an executive officer, director or the beneficial holder of more than 10% of the total shares outstanding); and |
● | at least 500,000 publicly held shares with a market value of at least $1.0 million (excluding any shares held directly or indirectly by officers, directors or any person who is the beneficial owner of more than 10% of the total shares outstanding). |
Pioneer Power must also meet at least one of the following continued listing standards:
● | stockholders’ equity of at least $2.5 million; |
● | market value of Pioneer Power’s common stock of at least $35 million; or |
● | net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years. |
Pioneer Power believes that it will continue to meet NASDAQ’s continued listing requirements following the completion of the Equity Transaction. No assurances, however, can be given that Pioneer Power will continue to satisfy these requirements as some of these requirements are outside of Pioneer Power’s direct control, such as the bid price of its common stock, the number of holders of its common stock and the value of its publicly held shares. If Pioneer Power is unable to meet these requirements, NASDAQ may take action to delist Pioneer Power’s common stock. In such a case, Pioneer Power may appeal NASDAQ’s determination to delist its common stock, but such appeal may not be successful.
If Pioneer Power’s common stock is delisted from NASDAQ, Pioneer Power expects that its common stock would begin trading on the over-the-counter markets. The delisting of Pioneer Power’s common stock could result in a reduction in its trading price and would substantially limit the liquidity of Pioneer Power’s common stock. In addition, delisting could materially adversely impact Pioneer Power’s ability to raise capital or pursue strategic restructuring, refinancing or other transactions. Delisting from NASDAQ could also have other negative results, including the potential loss of confidence by institutional investors.
ITEM 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.
None.
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.
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EXHIBIT INDEX
Exhibit No. | Description | |
Stock Purchase Agreement, dated as of June 28, 2019, by and among Pioneer Power Solutions, Inc., Electrogroup Canada, Inc., Jefferson Electric, Inc., JE Mexican Holdings, Inc., Nathan Mazurek, Pioneer Transformers L.P. and Pioneer Acquireco ULC. (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on July 1, 2019). | ||
| ||
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). | |
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). | ||
10.1 | Waiver Letter | |
Temporary Amendment to Borrowing Base in the PPSI Credit Agreement, dated | ||
10.3* | Waiver Letter dated | |
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 |
+ Management contract or compensatory plan or arrangement.
* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PIONEER POWER SOLUTIONS, INC. | ||
Date: | By: | /s/ Nathan J. Mazurek |
Name: Nathan J. Mazurek | ||
Title: Chief Executive Officer |
Date: | /s/ Thomas Klink |
Name: Thomas Klink | |
Title: Chief Financial Officer (Principal Financial Officer duly authorized to sign on behalf of Registrant) |