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PIONEER POWER SOLUTIONS, INC. - Quarter Report: 2019 March (Form 10-Q)

 

 

 

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 March 31, 2019

 

OR

 

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

 

Commission file number: 001-35212

     

 

PIONEER POWER SOLUTIONS, INC.

 (Exact name of registrant as specified in its charter) 

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

 

400 Kelby Street, 12th Floor

Fort Lee, New Jersey 07024

(Address of principal executive offices)

 

(212) 867-0700

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act: 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

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

 

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

 

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

 

 The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of May 15, 2019 was 8,726,045.

 

 

 

 

 

 

PIONEER POWER SOLUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2019

 

TABLE OF CONTENTS

 

 PART I. FINANCIAL INFORMATION

 

   
  Page
Item 1. Financial Statements 1
Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018  1
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018  2
Consolidated Balance Sheets at March 31, 2019 (unaudited) and December 31, 2018  3
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018  4
Unaudited Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 5
Notes to Unaudited Consolidated Financial Statements  6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures  32

 

PART II. OTHER INFORMATION  

   
Item 1. Legal Proceedings 32
Item 1A. Risk Factors  33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Mine Safety Disclosures 33
Item 5. Other Information 33
Item 6.  Exhibits  33

 

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

   Three Months Ended 
   March 31, 
   2019   2018 
Revenues  $24,699   $27,177 
Cost of goods sold   20,600    21,994 
Gross profit   4,099    5,183 
Operating expenses          
Selling, general and administrative   4,139    4,828 
Foreign exchange (gain) loss   (632)   74 
Total operating expenses   3,507    4,902 
Operating income   592    281 
Interest expense   499    649 
Other (income) expense   (3,295)   234 
Gain on sale of subsidiary   (4,207)    
Income (loss) before taxes   7,595    (602)
  Income tax expense (benefit)   1,948    (28)
Net income (loss)  $5,647   $(574)
           
Net income (loss) per common share:          
  Basic  $0.65   $(0.07)
  Diluted  $0.65   $(0.07)
           
Weighted average common shares outstanding:          
  Basic   8,726    8,726 
  Diluted   8,730    8,726 

 

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

 

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PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

   Three Months Ended 
   March 31, 
   2019   2018 
Net income (loss)  $5,647   $(574)
Other comprehensive income (loss)          
  Foreign currency translation adjustments   (312)   (166)
  Amortization of net prior service costs and net actuarial losses, net of tax   90    (15)
Other comprehensive loss   (222)   (181)
  Comprehensive income (loss)  $5,425   $(755)

 

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

 

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PIONEER POWER SOLUTIONS, INC.

Consolidated Balance Sheets

(In thousands, except share data)

 

   March 31,   December 31, 
   2019   2018 
    (Unaudited)      
ASSETS          
Current assets          
Cash and cash equivalents  $175   $211 
Short term investments   7,548     
Accounts receivable, net   17,383    16,327 
Inventories, net   27,694    27,310 
Income taxes receivable   578    566 
Prepaid expenses and other current assets   2,630    2,510 
Total current assets   56,008    46,924 
Property, plant and equipment, net   5,168    5,284 
Deferred income taxes   3,670    2,971 
Other assets   4,974    5,222 
Intangible assets, net   3,531    3,584 
Goodwill   8,527    8,527 
Total assets  $81,878   $72,512 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Bank overdrafts  $518   $1,769 
Revolving credit facilities   19,915    20,755 
Short term borrowings   1,785     
Accounts payable and accrued liabilities   29,946    27,845 
Current maturities of long-term debt   1,175    1,174 
Income taxes payable   1,262    873 
Total current liabilities   54,601    52,416 
Long-term debt, net of current maturities   2,324    2,619 
Pension deficit   32    148 
Other long-term liabilities   3,648    3,786 
Deferred income taxes   3,892    1,592 
Total liabilities   64,497    60,561 
Stockholders’ equity          
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued        
Common stock, $0.001 par value, 30,000,000 shares authorized;
8,726,045 shares issued and outstanding on March 31, 2019 and December 31, 2018
   9    9 
Additional paid-in capital   23,971    23,966 
Accumulated other comprehensive loss   (6,119)   (5,897)
Accumulated deficit   (480)   (6,127)
Total stockholders’ equity   17,381    11,951 
Total liabilities and stockholders’ equity  $81,878   $72,512 

 

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

 

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PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   Three Months Ended 
   March 31, 
   2019   2018 
Operating activities          
Net income (loss)  $5,647   $(574)
Depreciation   205    310 
Amortization of intangible assets   54    383 
Amortization of right-of-use assets   213    136 
Amortization of debt issuance cost   8    21 
Deferred income tax expense  (benefit)   1,577    (193)
Change in receivable reserves   (74)   (156)
Change in inventory reserves   32    17 
Gain on sale of subsidiary   (4,207)    
Unrealized gain on short term investments   (3,341)    
Accrued pension   (30)   8 
Stock-based compensation   5    148 
Other       12 
Foreign currency remeasurement loss       36 
Changes in current operating assets and liabilities:          
Accounts receivable   (885)   210 
Inventories   (238)   (1,297)
Prepaid expenses and other assets   (120)   (906)
Income taxes   12    1 
Accounts payable and accrued liabilities   2,013    2,900 
Net cash provided by operating activities   871    1,056 
           
Investing activities          
Additions to property, plant and equipment   (56)   (152)
Net cash used in investing activities   (56)   (152)
           
Financing activities          
Bank overdrafts   (1,294)   (160)
Short term borrowings   1,785    (2,045)
Borrowing under debt agreement   5,259    11,347 
Repayment of debt   (6,403)   (9,881)
Payment of debt issuance cost       6 
Principal repayments of financing leases   (128)   (124)
Net cash used in financing activities   (781)   (857)
           
Increase in cash and cash equivalents   34    47 
Effect of foreign exchange on cash and cash equivalents   (70)   3 
           
Cash and cash equivalents          
Beginning of period   211    218 
End of period  $175   $268 

 

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

 

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PIONEER POWER SOLUTIONS, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

 

               Accumulated         
           Additional   other compre-       Total 
   Common Stock   paid-in   hensive   Retained   stockholders’ 
   Shares   Amount   capital   income (loss)   earnings   equity 
Balance - December 31, 2017   8,726,045   $9   $23,801   $(5,798)  $(463)  $17,549 
Net income                   (574)   (574)
Stock-based compensation           148            148 
Foreign currency translation adjustment               (166)       (166)
Pension adjustment, net of taxes               (15)       (15)
Balance - March 31, 2018   8,726,045   $9   $23,949   $(5,979)  $(1,037)  $16,942 
                               
Balance - December 31, 2018   8,726,045    9    23,966    (5,897)   (6,127)   11,951 
Net income                   5,647    5,647 
Stock-based compensation           5            5 
Foreign currency translation adjustment               (312)       (312)
Pension adjustment, net of taxes               90        90 
Balance - March 31, 2019   8,726,045   $9   $23,971   $(6,119)  $(480)  $17,381 

 

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

 

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PIONEER POWER SOLUTIONS, INC.

Notes to Consolidated Financial Statements

March 31, 2019 (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 eleven (11) 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, 2018, as filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2019: Transmission and Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).

 

Presentation

 

The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of March 31, 2019. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim consolidated financial statements have been included. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP for a year-end balance sheet.

 

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

 

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

 

These unaudited consolidated financial statements should be read in conjunction with the risk factors and the audited consolidated financial statements and notes thereto of the Company and its subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 three months ended March 31, 2019, the Company has an accumulated deficit of $480, and has a working capital of $1.4 million. At March 31, 2019, we had total debt of $25.7 million and $175 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 10 - 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.

 

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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. While the Company intends to renew this agreement to continue to facilitate the credit facilities and has a history of renewals with BMO, the Company’s ability to renew this arrangement under similar economic terms, if at all, is uncertain. 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, 2018. There have been no significant changes in the Company’s accounting policies during the first quarter of 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. We adopted ASU 2017-07 in our first quarter of 2018 and concluded that there was no material impact to our financial statements.

 

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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 adopted this guidance on January 1, 2019. The adoption of this ASU did not have a material impact on the consolidated financial statements.

 

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

 

3. 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.

 

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

 

In connection with entry into the Merger Agreement, the Company and CleanSpark entered into a Contract Manufacturing Agreement (the “Contract Manufacturing Agreement”), dated as of January 22, 2019, pursuant to which the Company will manufacture paralleling switchgear, automatic transfer switches and related control and circuit protective equipment (collectively, “Products”) exclusively for purchase by CleanSpark. CleanSpark will purchase the Products via purchase orders issued to the Company at any time and from time to time. The price for the Products payable by CleanSpark to the Company will be negotiated on a case by case basis, but all purchases of Products will have a target price of 91% of the CleanSpark customer’s purchase order price and will not be more than 109% of the Company’s cost. The Contract Manufacturing Agreement has a term of 18 months and may be extended by mutual agreement of the Company and CleanSpark.

 

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 the quarter ended March 31, 2019, the estimated fair value of the warrants and common stock increased to $7.5 million and an unrealized mark to market gain of $3.3 million was recognized within other income.

 

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 using the modified retrospective method. There was no adjustment to opening retained earnings due to the impact of adopting Topic 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 transformers and switchgear that help customers effectively and efficiently manage their electrical power distribution systems to desired specifications.

 

We provide customers with an advanced data collection and monitoring platform for power generation equipment which is used to ensure smooth, uninterrupted power to operations during times of emergency.

 

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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 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.

 

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The following table presents our revenues disaggregated by revenue discipline:

 

   Three Months Ended 
   March 31, 
   2019   2018 
Products  $22,928   $25,016 
Services   1,771    2,161 
Total Revenue  $24,699   $27,177 

 

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

 

5. OTHER (INCOME) EXPENSE

 

Other (income) expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the three months ended March 31, 2019, other non-operating income was $3.3 million, as compared to an expense of $234 during the three months ended March 31, 2018. For the three months ended March 31, 2019, included in other non-operating income was a gain of $3.3 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.

 

6. INVENTORIES

 

The components of inventories are summarized below:

 

   March 31,   December 31, 
   2019   2018 
   (Unaudited)     
Raw materials  $16,428   $14,952 
Work in process   5,978    5,547 
Finished goods   5,840    7,323 
Provision for excess and obsolete inventory   (552)   (512)
Total inventories  $27,694   $27,310 

 

Inventories are stated at the lower of cost or a net realizable value determined on a FIFO method. Included in raw materials and finished goods at March 31, 2019 and December 31, 2018 are goods in transit of approximately $8.4 million and $7.7 million, respectively.

 

At March 31, 2019, raw materials in the amount of $8.1 million 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 $1.8 million as of March 31, 2019. There were no aggregate borrowings under this agreement as of December 31, 2018.

 

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7. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized below:

 

   March 31,   December 31, 
   2019   2018 
   (Unaudited)     
Land  $6   $5 
Buildings   1,607    1,574 
Machinery and equipment   10,645    10,578 
Furniture and fixtures   449    447 
Computer hardware and software   1,283    1,261 
Leasehold improvements   677    677 
Construction in progress   392    348 
    15,059    14,890 
Less: Accumulated depreciation   (9,891)   (9,606)
Total property, plant and equipment, net  $5,168   $5,284 

 

In December 2018, the Company sold the Farnham, Quebec, Canada building for approximately $762.

 

Depreciation expense was $205 and $310 for the period ended March 31, 2019 and 2018, respectively.

 

8. OTHER ASSETS

 

Included in other assets at March 31, 2019 and December 31, 2018 are right-of-use asset, net, of $4.1 and $4.3 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, 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 March 31, 2019 and December 31, 2018. The Company expects to fully recover these amounts. At March 31, 2019 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. GOODWILL AND OTHER INTANGIBLE ASSETS

 

There were no changes in the carrying values of goodwill for the three months ended March 31, 2019.

 

   T&D   Critical Power     
   Solutions   Solutions   Total 
   Segment   Segment   Goodwill 
Gross Goodwill:               
Balance as of January 1, 2019  $7,978   $2,970   $10,948 
No activity            
Balance as of March 31, 2019  $7,978   $2,970   $10,948 
Accumulated impairment losses:               
Balance as of January 1, 2019  $(2,421)  $   $(2,421)
No activity            
Balance as of March 31, 2019  $(2,421)  $   $(2,421)
                
Net Goodwill as of March 31, 2019  $5,557   $2,970   $8,527 

 

Changes in the carrying values of intangible assets for the three months ended March 31, 2019, were as follows:

 

   T&D   Critical Power   Total 
   Solutions   Solutions   Intangible 
   Segment   Segment   Assets 
Balance as of January 1, 2019, net  $3,460   $124   $3,584 
Amortization   (44)   (10)   (54)
Foreign currency translation   1        1 
Balance as of March 31, 2019, net  $3,417   $114   $3,531 

 

The components of intangible assets as of March 31, 2019 are summarized below:

 

   Weighted Average Amortization Years   Gross Carrying Amount   Accumulated Amortization   Foreign Currency Translation   Net Book Value 
Customer relationships   7   $6,833   $(6,211)  $   $622 
Non-compete agreements   4    619    (608)       11 
Trademarks   Indefinite    1,816            1,816 
Internally developed software   7    289    (175)       114 
Developed technology   10    492    (209)       283 
Technology-related industry accreditations   Indefinite    706        (22)   684 
Total intangible assets       $10,756   $(7,203)  $(22)  $3,531 

 

The amortization of intangible assets expense was $54 for the three months ended March 31, 2019.

 

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10. 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. 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.

 

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 were 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.

 

As of March 31, 2019, we had approximately $5.3 million in U.S. dollar equivalents outstanding under our Canadian Facilities. Our borrowings consisted of approximately $5.3 million outstanding under Facility A. As of March 31, 2019, the Company was not in compliance with a financial covenant and on May 6, 2019, the Company received a waiver from BMO on the financial covenant breach existing as of March 31, 2019.

 

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 A. As of December 31, 2018, the Company was not in compliance with its financial covenants and on March 25, 2019, the Company received a waiver from BMO on all financial covenant breaches existing as of 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. facilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank (the “U.S. Facilities”).The US ARCA was further amended (the “2017 US ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 US ARCA Amendment”). The 2018 US ARCA Amendment extended the term of our US Facilities to April 1, 2020.

 

Our U.S. Facilities, as amended and restated, provided for up to $19.1 million USD consisting of a $14.0 million USD demand revolving credit facility (“USD Facility 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 $4.4 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 $2.3 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 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 March 31, 2019, we had approximately $18.2 million outstanding under our U.S. Facilities. Our borrowings consisted of approximately $14.7 million outstanding under USD Facility A, and $3.5 million outstanding under USD Facility B. As of March 31, 2019, the Company was not in compliance with a financial covenant and on May 6, 2019, the Company received a waiver from BMO on the financial covenant breach existing as of March 31, 2019.

 

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 Company received a waiver from BMO on all financial covenant breaches existing as of December 31, 2018.

 

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The Company’s debt consists of the following:

 

   March 31,   December 31, 
   2019   2018 
   (Unaudited)     
Term credit facilities, net (a)  $3,499   $3,793 
Less current portion   (1,175)   (1,174)
Total long-term debt  $2,324   $2,619 

 

(a) The balances as of March 31, 2019 and December 31, 2018 are net of debt issuance costs of $39 and $45, respectively.

 

11. PENSION PLAN

 

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

 

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

 

   Three Months Ended   Affected Line Item
   March 31,   in the Statements of
   2019   2018   Consolidated Operations
Current service cost, net of employee contributions  $15   $17   Selling, general and administrative
Interest cost on accrued benefit obligation   26    25   Other expense
Expected return on plan assets   (40)   (43)  Other expense
Amortization of transitional obligation   3    3   Other expense
Amortization of past service costs   2    2   Other expense
Amortization of net actuarial gain   13    14   Other expense
Total cost of benefit  $19   $18    

 

The Company’s policy is to fund the pension plan at or above the minimum level required by law. The Company made $15 of contributions to its defined benefit pension plan during the three months ended March 31, 2019 and 2018. 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. STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company had 8,726,045 shares of common stock, $0.001 par value per share, outstanding as of March 31, 2019 and December 31, 2018.

 

Stock-Based Compensation

 

A summary of stock option activity under the 2011 Long-Term Incentive Plan as of March 31, 2019, and changes during the three months ended March 31, 2019, are presented below:

 

    Stock
Options
   Weighted average
exercise price
   Weighted
average remaining
contractual term
   Aggregate
intrinsic value
 
Outstanding as of January 1, 2019    424,800   $8.30    6.5   $22 
Granted                   
Exercised                   
Forfeited                   
Outstanding as of March 31, 2019    424,800   $8.30    6.20   $16 
Exercisable as of March 31, 2019    414,467   $8.35    6.20   $16 

 

As of March 31, 2019, there were 248,867 shares available for future grants under the Company’s 2011 Long-Term Incentive Plan.

 

Stock-based compensation expense recorded for the three months ended March 31, 2019 and 2018 was approximately $5 and $148, respectively. At March 31, 2019, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of operations of approximately $8.

 

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 loss of $312 and $166 for the three months ended March 31, 2019 and 2018, respectively.

 

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

 

Basic and diluted income (loss) per common share is calculated based on the weighted average number of shares outstanding during the period. The Company’s employee and director stock option awards, as well as incremental shares issuable upon exercise of warrants, are not considered in the calculations if the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):

 

   Three Months Ended 
   March 31, 
   2019   2018 
Numerator:        
Net income (loss)  $5,647   $(574)
           
Denominator:          
Weighted average basic shares outstanding   8,726    8,726 
Effect of dilutive securities - equity based compensation plans   4     
Net dilutive effect of warrants outstanding        
Denominator for diluted net income per common share  $8,730   $8,726 
           
Net income (loss) per common share:          
Basic  $0.65   $(0.07)
Diluted  $0.65   $(0.07)
           
Anti-dilutive securities (excluded from per share calculation):          
Equity based compensation plans  $401   $383 
Warrants  $   $51 

 

14. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

 

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

 

The T&D Solutions segment is involved in the design, manufacture and distribution of electrical transformers and switchgear used primarily by utilities, large industrial and commercial operations to manage their electrical power distribution needs. The Critical Power segment provides power generation equipment, and aftermarket field-services primarily to help customers ensure smooth, uninterrupted power to operations during times of emergency.

 

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The following tables present information about segment income and loss:

 

   Three Months Ended 
   March 31, 
   2019   2018 
Revenues        
T&D Solutions          
Transformers  $21,682   $20,932 
Switchgear   1,073    3,702 
   $22,755   $24,634 
Critical Power Solutions          
Equipment   173    382 
Service   1,771    2,161 
    1,944    2,543 
Consolidated  $24,699   $27,177 

 

   Three Months Ended 
   March 31, 
   2019   2018 
Depreciation and Amortization          
T&D Solutions  $422   $434 
Critical Power Solutions   36    378 
Unallocated Corporate Overhead Expenses   14    16 
Consolidated  $472   $828 

 

   Three Months Ended 
   March 31, 
   2019   2018 
Operating Income          
T&D Solutions  $1,804   $1,573 
Critical Power Solutions   (402)   (438)
Unallocated Corporate Overhead Expenses   (810)   (854)
Consolidated  $592   $281 

 

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

 

   Three Months Ended 
   March 31, 
   2019   2018 
Revenues        
United States  $15,511   $18,496 
Canada   9,188    8,681 
Total  $24,699   $27,177 

 

19 

 

 

15. LEASES

 

The company leases certain offices, facilities and equipment under operating and financing leases. Our leases have remaining terms of 1 year to 7 years some of which contain options to extend up to 10 years. As of March 31, 2019 and 2018, assets recorded under finance leases were $3.3 million and $3.1 million, respectively, and accumulated amortization associated with finance leases were $1.0 million and $412, respectively. As of March 31, 2019 and 2018, assets recorded under operating leases were $2.5 and $1.9 million, respectively and accumulated amortization associated with operating leases were $716 and $511, respectively. Such amounts are included within other assets.

 

The components of the lease expense were as follows:

 

   Three Months Ended 
   March 31, 
   2019   2018 
Operating lease cost  $206   $182 
           
Finance lease cost          
   Amortization of right-of-use asset  $213   $136 
   Interest on lease liabilities   40    40 
Total finance lease cost  $253   $176 

 

Other information related to leases was as follows:

 

Supplemental Cash Flows Information

 

   March 31, 
   2019   2018 
Cash paid for amounts included in the measurement of lease liabilities        
   Operating cash flows from operating leases  $210   $189 
   Operating cash flows from finance leases   41    39 
   Financing cash flows from finance leases   128    124 
Right-of-use assets obtained in exchange for lease obligations:          
   Operating leases   184    161 
   Finance leases   213    132 

 

Weighted Average Remaining Lease Term

 

   March 31, 
   2019   2018 
Operating leases   2 years    3 years 
Finance leases   6 years    7 years 

 

Weighted Average Discount Rate

 

   March 31, 
   2019   2018 
Operating leases   5.54%   5.50%
Finance leases   6.29%   5.50%

 

20

 

Future minimum lease payments under non-cancellable leases as of March 31, 2019 were as follows:

 

   Operating   Finance 
   Leases   Leases 
2019  $616   $489 
2020   801    558 
2021   410    593 
2022   91    391 
2023       326 
Thereafter       853 
   Total future minmum lease payments   1,918    3,210 
Less imputed interest   (130)   (515)
   Total future minmum lease payments  $1,788   $2,695 

 

Reported as of March 31, 2019:

 

   Operating   Finance 
   Leases   Leases 
Accounts payable and accrued liabilities  $745   $492 
Other long-term liabilities   1,043    2,203 
Total  $1,788   $2,695 

 

21

 

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, 2018, which was filed with the Securities and Exchange Commission on 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.

We depend on Siemens Industry, Inc. (“Siemens”) and Hydro-Quebec for a large portion of our business, and any change in the level of orders from Siemens and Hydro-Quebec could have a significant impact on our results of operations.

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

Our ability to generate internal growth, maintain market acceptance of our existing products and gain acceptance for our new products.

Unanticipated increases in raw material prices or disruptions in supply could increase production costs and adversely affect our profitability.

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

Our ability to realize revenue reported in our backlog.

Operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material, labor or overhead cost increases, interest rate risk and commodity risk.

Strikes or labor disputes with our employees may adversely affect our ability to conduct our business.

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

The impact of geopolitical activity on the economy, changes in government regulations such as income taxes, duties and tariffs on the importation of products we sell into the United States, climate control initiatives, the timing or strength of an economic recovery in our markets and our ability to access capital markets.

Our chairman controls a majority of our voting power, and may have, or may develop in the future, interests that may diverge from yours.

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

The liquidity and trading volume of our common stock.

 

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, 2018 for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.

 

22

 

Business Overview

 

We manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. Our principal products and services include custom-engineered electrical transformers, switchgear, and engine-generator 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 11 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 electrical transformers and switchgear. These solutions are marketed principally through our Pioneer Transformers Ltd. (“PTL”), Jefferson Electric, Inc. (“Jefferson”), Bemag Transformers, Inc. (“Bemag”), and Pioneer Custom Electric Products, Inc (“PCEP”) brand names.

 

Our Critical Power business provides customers with an advanced data collection and monitoring platform, which is used to ensure smooth, uninterrupted power to operations during times of emergency and service of on-site power generation equipment. These solutions are marketed by our operations headquartered in Minnesota, currently doing business under the Titan Energy Systems Inc. (“Titan”), as well as the Pioneer Critical Power brand names.

 

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.

 

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):

 

    2019   2018
          Statements of Operations and         Statements of Operations and
    Balance Sheet   Comprehensive Income   Balance Sheet   Comprehensive Income
                       
Quarter Ended   End of Period   Period Average   End of Period   Period Average
March 31   $ 0.7483   $ 0.7523   $ 0.7756   $ 0.7906

 

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, 2018.

 

23

  

RESULTS OF OPERATIONS

 

Overview of the Three 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 14 – 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 months ended March 31, 2019 and 2018 are as follows:

 

   Three Months Ended 
   March 31, 
   2019   2018 
Revenues        
T&D Solutions  $22,755   $24,634 
Critical Power Solutions   1,944    2,543 
Consolidated   24,699    27,177 
Cost of goods sold          
T&D Solutions   18,749    19,794 
Critical Power Solutions   1,851    2,200 
Consolidated   20,600    21,994 
Gross profit   4,099    5,183 
Selling, general and administrative expenses   4,027    4,339 
Depreciation and amortization expense   112    489 
Restructuring and integration        
Foreign exchange (gain) loss   (632)   74 
Total operating expenses   3,507    4,902 
Operating income   592    281 
Interest expense   499    649 
Other (income) expense   (3,295)   234 
Gain on sale of subsidiary   (4,207)    
Income (loss) before taxes   7,595    (602)
Income tax expense (benefit)   1,948    (28)
Net income (loss)  $5,647   $(574)

 

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:

 

   March 31,   December 31,   September 30,   June 30,   March 31, 
   2019   2018   2018   2018   2018 
T&D Solutions  $44,342   $41,320   $39,075   $33,763   $27,124 
Critical Power Solutions   4,274    6,171    11,522    10,850    8,623 
Total order backlog  $48,616   $47,491   $50,597   $44,613   $35,747 

 

24

 

Revenue

 

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

 

   Three Months Ended 
   March 31, 
   2019   2018   Variance   % 
T&D Solutions                    
Transformers  $21,682   $20,932   $750    3.6 
Switchgear   1,073    3,702    (2,629)   (71.0)
    22,755    24,634    (1,879)   (7.6)
Critical Power Solutions                    
Equipment   173    382    (209)   (54.7)
Service   1,771    2,161    (390)   (18.0)
    1,944    2,543    (599)   (23.6)
Total revenue  $24,699   $27,177   $(2,478)   (9.1)

 

For the three months ended March 31, 2019, our consolidated revenue decreased by $2.5 million, or 9.1%, to $24.7 million, down from $27.2 million during the three months ended March 31, 2018.

 

T&D Solutions. For the three months ended March 31, 2019, revenue from our transformer product lines increased by $750, or 3.6%, as compared to the three months ended March 31, 2018 due to higher sales of “liquid type” transformers. During the three months ended March 31, 2019, revenue from switchgear decreased by $2.6 million, or 71.0%, compared to the three months ended March 31, 2018 due to customers delaying shipments of finished products.

 

Critical Power. Titan is the only business unit in the Critical Power segment. For the three months ended March 31, 2019, equipment sales decreased by $209, or 54.7%, as compared to the same period in the prior year, resulting from a reduced focus on equipment sales included in the Titan revenue stream.

 

For the three months ended March 31, 2019, service revenue decreased by $390, or 18.0%, as compared to the same period in the prior year as a result of lower volume of service orders due to severe winter weather.

 

25

 

Gross Profit and Gross Margin

 

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

 

   Three Months Ended 
   March 31, 
   2019   2018   Variance   % 
T&D Solutions                    
Gross profit  $4,006   $4,840   $(834)   (17.2)
Gross margin %   17.6    19.6    (2.0)     
                     
Critical Power Solutions                    
Gross profit   93    343    (250)   (72.9)
Gross margin %   4.8    13.5    (8.7)     
                     
Consolidated gross profit  $4,099   $5,183   $(1,084)   (20.9)
Consolidated gross margin %   16.6    19.1    (2.5)     

 

For the three months ended March 31, 2019, our consolidated gross margin was 16.6% of revenues, compared to 19.1% during the three months ended March 31, 2018. The decrease in our consolidated gross margin percentage is further explained below.

 

T&D Solutions. During the three months ended March 31, 2019 the gross margin decreased by 2.0% as compared to the same period in 2018 primarily due to lower gross margins in our switchgear business as a result of lower revenues.

 

Critical Power. During the three months ended March 31, 2019, the gross margin decreased by 8.7% when compared to the same period in 2018, primarily due to lower sales while the fixed costs remained comparable.

 

26

 

Operating Expenses

 

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

 

   Three Months Ended 
   March 31, 
   2019   2018   Variance   % 
T&D Solutions                    
Selling, general and administrative expense  $2,769   $3,031   $(262)   (8.6)
Depreciation and amortization expense   65    162    (97)   (59.9)
Foreign exchange (gain) loss   (632)   74    (706)   (954.1)
Segment operating expense  $2,202   $3,267   $(1,065)   (32.6)
                     
Critical Power Solutions                    
Selling, general and administrative expense  $462   $470   $(8)   (1.7)
Depreciation and amortization expense   33    311    (278)   (89.4)
Segment operating expense  $495   $781   $(286)   (36.6)
                     
Unallocated Corporate Overhead Expenses                    
Selling, general and administrative expense  $796   $838   $(42)   (5.0)
Depreciation expense   14    16    (2)   (12.5)
Segment operating expense  $810   $854   $(44)   (5.2)
                     
Consolidated                    
Selling, general and administrative expense  $4,027   $4,339   $(312)   (7.2)
Depreciation and amortization expense   112    489    (377)   (77.1)
Foreign exchange (gain) loss   (632)   74    (706)   (954.1)
Consolidated operating expense  $3,507   $4,902   $(1,395)   (28.5)

 

Selling, General and Administrative Expense. For the three months ended March 31, 2019, consolidated selling, general and administrative expense, before depreciation and amortization, decreased by $312, or 7.2%, to $4.0 million, as compared to $4.3 million during the three months ended March 31, 2018. As a percentage of our consolidated revenue, selling, general and administrative expense before depreciation and amortization increased to 16.3% in the 2019 period, as compared to 16.0% in 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 months ended March 31, 2019, depreciation and amortization expense decreased by $377, or 77.1%, when compared to the same period in 2018. Included in depreciation and amortization expense for the three months ended March 31, 2018 was amortization of customer relationships intangible assets of $270 related to acquisition of Titan. The Titan customer relationship intangible asset was fully amortized by December 31, 2018.

 

Foreign Exchange Loss/Gain. During the three months ended March 31, 2019 and 2018, approximately 50% and 38%, respectively, of our consolidated operating revenues were denominated in Canadian dollars. Most of our expenses were denominated and disbursed in U.S. dollars during the three months ended March 31, 2019 and 2018. 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 March 31, 2019 and 2018, we recorded a gain of $632 and a loss of $74, respectively, due to currency fluctuations.

 

27

 

Operating Income (Loss)

 

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

 

   Three Months Ended 
   March 31, 
   2019   2018   Variance   % 
T&D Solutions  $1,804   $1,573   $231    14.7 
Critical Power Solutions   (402)   (438)   36    8.2 
Unallocated Corporate Overhead Expenses   (810)   (854)   44    5.2 
Total operating income  $592   $281   $311    110.7 

 

T&D Solutions. During the three months ended March 31, 2019, T&D segment operating income was $1.8 million as compared to $1.6 million for the same period in 2017. The increase in the operating income is primarily due to higher sales in our “liquid type” transformers resulting from higher demand from the utility customers.

 

Critical Power. During the three months ended March 31, 2019, our Critical Power segment generated an operating loss of $402 as compared to $438 during the same period of 2018. The decrease in the operating loss is primarily due to lower amortization expense as a result of fully amortizing the 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 months ended March 31, 2019, our Unallocated Corporate Overhead Expenses decreased by $44 or 5.2% as compared to the same period in 2018 primarily due to lower professional fees.

 

Non-Operating Expense

 

Interest Expense. For the three months ended March 31, 2019 and 2018, interest expense was approximately $499 and $649, respectively. The decrease in our interest expense was due to lower borrowings outstanding under our product financing agreement.

 

Other Expense. For the three months ended March 31, 2019, other non-operating income was $3.3 million, as compared to an expense of $234 during the same period in 2018. For the three months ended March 31, 2019, included in other non-operating income was a mark to market unrealized gain of $3.3 million on the warrants and common stock of CleanSpark received in the Merger. See Note 3 – Divestitures in our unaudited Consolidated Financial Statements and related notes included in this Quarterly Report on Form 10-Q.

 

Income Tax Expense. Our effective income tax expense rate was 25.6% for the three months ended March 31, 2019, compared to 4.7% during the same period in 2018, as set forth below (dollars in thousands):

  

  Three Months Ended
  March 31,
  2019   2018   Variance
Income (loss) before income taxes  $     7,595    $           (602)    $     8,197
Income tax expense (benefit)      1,948                (28)        1,976
Effective income tax rate %        25.6                4.7          20.9

  

Our effective income tax rate increased by 20.9% during the three months ended March 31, 2019 as compared to the same period of the prior year, primarily due to tax effect of the gain on the Merger of PCPI, CleanSpark and the Merger Sub. See Note 3 – Divestitures in our unaudited Consolidated Financial Statements and related notes included in this Quarterly Report on Form 10-Q.

 

Net Income (Loss)

 

We generated a net income of $5.6 million and a net loss of $574 during the three months ended March 31, 2019 and 2018, respectively. Our net income per basic and diluted share for the three months ended March 31, 2019 was $0.65. Our net loss per basic and diluted share for the three months ended March 31, 2018 was $0.07.

 

28

 

LIQUIDITY AND CAPITAL RESOURCES

 

General. At March 31, 2019, we had $175 of cash and cash equivalents on hand and total debt outstanding of $25.7 million, when including bank 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.

 

Cash Provided by Operating Activities. Cash provided by our operating activities was $871 during the three months ended March 31, 2019 as compared to $1.1 million during the three months ended March 31, 2018. Change in accounts payable and accrued liabilities was the primary sources of cash provided by operating activities during the three months ended March 31, 2019.

 

Cash Used in Investing Activities. Cash used in investing activities during the three months ended March 31, 2019 was $56, as compared to $152 during the three months ended March 31, 2018. During the three months ended March 31, 2019, additions to our property, plant and equipment were $56.

 

Cash Used in Financing Activities. Cash used in our financing activities was $781 during the three months ended March 31, 2019, as compared to $857 during the three months ended March 31, 2018. The primary use of cash in financing activities for the three months ending March 31, 2019 and 2018 were repayments of debt.

 

Working Capital. As of March 31, 2019, we had working capital of $1.4 million, including $175 of cash and equivalents, compared to working capital deficit of $5.5 million, including $211 of cash and equivalents at December 31, 2018. At March 31, 2019 and December 31, 2018, we had $1.1 million and $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 our total order backlog has increased to $48.6 million as of March 31, 2019 which has required us to increase our inventory levels and related commitments to meet this future demand. We expect that as we work off this backlog our working capital position will improve including a reduction in our overall debt levels.

 

Assessment of Liquidity. At March 31, 2019, we had total debt of $25.7 million and $175 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. In addition, as further discussed below, 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. While the Company intends to renew this agreement to continue to facilitate its operations and has a history of renewals with its lender, the Company’s ability to renew this arrangement under similar economic terms, if at all, is uncertain. 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.

 

29

  

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. 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.

 

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 were 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.

 

As of March 31, 2019, we had approximately $5.3 million in U.S. dollar equivalents outstanding under our Canadian Facilities. Our borrowings consisted of approximately $5.3 million outstanding under Facility A. As of March 31, 2019, the Company was not in compliance with a financial covenant and on May 6, 2019, the Company received a waiver from BMO on the financial covenant breach existing as of March 31, 2019.

 

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 A. As of December 31, 2018, the Company was not in compliance with its financial covenants and on March 25, 2019, the Company received a waiver from BMO on all financial covenant breaches existing as of 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. facilities that replaced and superseded all of our businesses’ prior financing arrangements with the bank (the “U.S. Facilities”).The US ARCA was further amended (the “2017 US ARCA Amendment”) on March 15, 2017, and again on March 28, 2018 (the “2018 US ARCA Amendment”). The 2018 US ARCA Amendment extended the term of our US Facilities to April 1, 2020.

 

Our U.S. Facilities, as amended and restated, provided for up to $19.1 million USD consisting of a $14.0 million USD demand revolving credit facility (“USD Facility 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 $4.4 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 $2.3 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 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 March 31, 2019, we had approximately $18.2 million outstanding under our U.S. Facilities. Our borrowings consisted of approximately $14.7 million outstanding under USD Facility A, and $3.5 million outstanding under USD Facility B. As of March 31, 2019, the Company was not in compliance with a financial covenant and on May 6, 2019, the Company received a waiver from BMO on the financial covenant breach existing as of March 31, 2019.

 

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 Company received a waiver from BMO on all financial covenant breaches existing as of December 31, 2018.

 

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Capital Expenditures 

 

Our additions to property, plant and equipment were $56 during the three months ended March 31, 2019, as compared to $152 during the three months ended March 31, 2018. We have no major future capital projects planned, or significant replacement spending anticipated during 2019. Additions were a result of supporting the day to day needs of the Company.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable

 

ITEM 4. CONTROLS AND PROCEDURES

 

Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

 

We conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 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 March 31, 2019, based on the evaluation of these disclosure controls and procedures, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

 

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

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2019 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

On January 11, 2016, Myers Power Products, Inc., a specialty electrical products manufacturer, filed suit with the Superior Court of the State of California, County of Los Angeles, against us, PCEP and two PCEP’s employees who are former employees of Myers Power Products, Inc., Geo Murickan, the president of PCEP (“Murickan”), and Brett DeChellis (“DeChellis”), alleging, among other things, that Murickan wrongly used and retained confidential business information of Myers Power Products, Inc. for the benefit of us and PCEP, in breach of their confidentiality agreement and/or employment agreement entered into with Myers Power Products, Inc., and that we and PCEP knowingly received and used such confidential business information. Myers Power Products, Inc. is seeking injunctive relief enjoining us, PCEP and our employees from using its confidential business information and compensatory damages of an unspecified unlimited (exceeding $25,000) amount. On March 18, 2016, we filed an answer to the complaint, denying generally each and every allegation and relief sought by Myers Power Products, Inc. and seeking dismissal based on, among other things, failure to state facts sufficient to constitute a cause of action. We intend to contest the matter vigorously. Due to the uncertainties of litigation, however, we can give no assurance that we and PCEP will prevail on any claims made against us and PCEP in any such lawsuit. As of the filing of this report, this action is scheduled for trial in the fourth quarter of 2019. 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 Contingencies included in the notes to our consolidated financial statements included in the Annual Report on Form 10-K.

 

We are not aware of any material proceedings in which any of our directors, officers or affiliates or any registered or beneficial shareholder of more than 5% of our common stock is an adverse party or has a material interest adverse to our interest.

 

32

  

ITEM 1A. RISK FACTORS

 

During the fiscal quarter ended March 31, 2019 there were no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

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

 

33

 

EXHIBIT INDEX

     

Exhibit

No.

  Description

2.1

 

Agreement and Plan of Merger Agreement, dated January 22, 2019, between Pioneer Critical Power Inc. and CleanSpark. (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on January 28, 2019).

     
3.1   Composite Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Registration Statement on Form S-1 of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on June 21, 2011).
     
3.2   Bylaws (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on December 2, 2009).
     
10.1   Indemnity Agreement, dated January 22, 2019, between the Company, CleanSpark and PCPI. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on January 28, 2019).
     
10.2   Contract Manufacturing Agreement, dated January 22, 2019, between the Company and CleanSpark. (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on January 28, 2019).
     
10.3   Non-Competition and Non-Solicitation Agreement, dated January 22, 2019, between the Company and CleanSpark. (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on January 28, 2019).
     
10.4   Termination of Asset Purchase Agreement, dated January 22, 2019, between PCEP and CleanSpark. (Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on January 28, 2019).
     
10.5+  

Third Amendment to Employment Agreement, dated February 15, 2019, by and between Jefferson Electric, Inc. and Thomas Klink. (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on February 20, 2019).

     
10.6   Waiver Letter, dated March 25, 2019, from Bank of Montreal, Montreal Branch, as lender (Incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K of Pioneer Power Solutions, Inc. filed with the Securities and Exchange Commission on March 29, 2019).
     
10.7*   Waiver Letter dated May 6, 2019, from Bank of Montreal, Montreal Branch, as lender.
     
31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*   The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language), (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Financial Statements.

 

 

+ 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: May 15, 2019 By: /s/ Nathan J. Mazurek
    Name: Nathan J. Mazurek
    Title: Chief Executive Officer

 

Date: May 15, 2019 /s/ Thomas Klink
  Name: Thomas Klink
 

Title: Chief Financial Officer

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