PPSI · Read the filing

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

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

Overview

We manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. We are headquartered in Fort Lee, New Jersey and operate from three (3) additional locations in the U.S. for manufacturing, service and maintenance, engineering, sales and administration.

Our operations are divided into two reportable segments: T&D Solutions segment and Critical Power segment. Our T&D Solutions business provides equipment solutions that help customers effectively and efficiently manage their electrical power distribution systems to desired specifications. These solutions are marketed principally through our PCEP brand name. Our Critical Power business performs service and maintenance on our customers’ sophisticated power generation equipment and also provides customers with new and used power generation equipment intended to ensure smooth uninterrupted power to operations during times of emergency. These solutions are marketed by our operations headquartered in Minnesota, currently doing business under the Titan brand name.

Discontinued Operations

Operating results for our liquid-filled transformer and dry-type transformer manufacturing businesses, which have been previously included in the T&D Solutions segment, have now been reclassified as discontinued operations for all periods presented. See Note 8 - Discontinued Operations.

Recent Developments

In October 2020, we filed a registration statement on Form S-3 including a base prospectus which covers the offering, issuance and sale of up to $25 million of common stock including any common stock sold under the sales agreement (as defined below), preferred stock, warrants and/or units; and a sales agreement prospectus covering the offering, issuance and sale of up to a maximum aggregate offering price of $9 million of common stock that may be issued and sold under the At The Market Offering Agreement (the “sales agreement”) with H.C. Wainwright & Co., LLC (“Wainwright”), from time to time in an at-the-market offering. Wainwright will offer our common stock at prevailing market prices subject to the terms and conditions of the sales agreement as agreed upon by us and Wainwright. Under the sales agreement we will designate the number of shares which we desire to sell, the time period during which sales are requested to be made, any limitation on the number of shares that may be sold in one day and any minimum price below which sales may not be made. Subject to the terms and conditions of the sales agreement, Wainwright will use its commercially reasonable efforts consistent with its normal trading and sales practices to sell on our behalf all of the shares of common stock requested to be sold by us. We have not sold any shares of common stock under the sales agreement. There is no assurance that the Company will be able to sell shares from the sales agreement.

Critical Accounting Policies

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

Revenue Recognition. Revenue is recognized when (1) a contract with a customer exists, (2) performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer, (3) the transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer, (4) the transaction price is allocated to the performance obligations in the contract and (5)the Company satisfies performance obligations. Substantially all of our product 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.

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

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

Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

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.

Measurement of Credit Losses on Financial Instrument. In June 2016, the FASB issued amended guidance to ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. This amended guidance for small reporting companies is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company does not expect that the amended guidance will have a material effect on our consolidated financial statements and related disclosures.

Income Taxes. We account for income taxes under the asset and liability method, based on the income tax laws and rates in the countries in which operations are conducted and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using expected rates in effect for the tax year in which the differences are expected to reverse. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. A valuation allowance was recorded to reduce our deferred tax assets to zero at December 31, 2020. If we were to subsequently determine that we would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made. We will continue to assess the adequacy of the valuation allowance on a quarterly basis. Our judgments and tax strategies are subject to audit by various taxing authorities.

Rounding

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

RESULTS OF OPERATIONS

Overview of 2020 Operating Results

Selected financial and operating data for our reportable business segments for the most recent two years is summarized below. This information, as well as the selected financial data provided in Note 17 and our Consolidated Financial Statements and related notes included in this Annual Report on Form 10-K, should be referred to when reading our discussion and analysis of results of operations below. Our summary of operating results during the years ended 2020 and 2019 are as follows:

For the Year Ended December 31,

Revenues

Cost of goods sold

Selling, general and administrative expenses 5,028 12,681

Depreciation and amortization expense 137 237

Operating loss from continuing operations (4,284 ) (11,753 )

Interest (income) expense (334 ) 396

Gain on sale of subsidiaries — 4,207

Income tax expense 5 1,278

Net loss from continuing operations (2,986 ) (12,037 )

Discontinued operations

Loss from operations of discontinued business units — (2,351 )

Gain on sale of discontinued business units — 13,686

Income tax expense — 330

Income from discontinued operations, net of income taxes — 11,005

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, in the case of certain custom engineered equipment solutions, and up to one year or more under our service contracts.

The full impact of the COVID-19 pandemic continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s order backlog. During 2020, the Company experienced a decline in customer orders for its products and services due to delays caused by the pandemic. Management is actively monitoring the global situation on its overall financial condition and order backlog. While there has been some return to normal operations throughout 2020, the Company continues to experience some disruption to its business as a result of the pandemic.

Our order backlog at December 31, 2020 was $12.7 million, as compared to $15.9 million at December 31, 2019 for continuing operations. Our backlog is based on orders expected to be delivered in the future, most of which is expected to occur during 2020. The following table represents the progression of our backlog, by reporting segment, for the periods ended as indicated:

December 31,

Revenue

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

For the Year Ended

December 31,

T&D Solutions

Critical Power Solutions

For the year ended December 31, 2020, our consolidated revenue decreased by $1.1 million, or 5.3% to $19.5 million, down from $20.6 million during the year ended December 31, 2019.

T&D Solutions. During the year ended December 31, 2020, revenue from our switchgear product lines increased by $1.3 million, or 14.2%, as compared to the year ended December 31, 2019, as a result of increased sales of our transfer switches offset by decreased sales of our low and medium voltage switchgear.

Critical Power. For the year ended December 31, 2020, revenue for our equipment sales increased by $158, or 11.2%, as compared to the prior year, mainly due to increased sales of our refurbished pre-owned equipment and an increase in residential equipment sales.

For the year ended December 31, 2020, our service revenue decreased by $2.5 million, or 24.8%, as compared to the same period in the prior year, primarily due to the loss of the Verizon preventative maintenance business.

Gross (Loss) Profit and Gross Margin

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

For the Year Ended

December 31,

T&D Solutions

Gross margin% (3.6 ) (6.0 ) 2.4

Critical Power Solutions

Consolidated gross margin% 4.5 5.7 (1.2 )

For the year ended December 31, 2020, our gross margin percentage was 4.5% of revenues, compared to 5.7% during the year ended December 31, 2019.

T&D Solutions. For the year ended December 31, 2020, our gross margin increased by 2.4%, primarily due to increased sales of our transfer switches which generate higher gross margins as compared to the year ended December 31, 2019. This increase was partially offset by the $546 write down of inventory recognized during the second quarter of the year ended December 31, 2020 as a result of management’s strategic decisions to rationalize its traditional product offerings.

Critical Power. For the year ended December 31, 2020, our gross margin decreased by 1.1%, to 13.6%, from 14.7% for the prior year, predominately due to the loss of the Verizon preventative maintenance business which historically has resulted in higher gross margins.

Operating Expenses

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

For the Year Ended

December 31,

T&D Solutions

Selling, general and administrative expense $ 1,516 $ 2,539 $ (1,023 ) (40.3 )

Depreciation and amortization expense 45 67 (22 ) (32.8 )

Critical Power Solutions

Selling, general and administrative expense $ 1,624 $ 5,161 $ (3,537 ) (68.5 )

Depreciation and amortization expense 60 122 (62 ) (50.8 )

Unallocated Corporate Overhead Expenses

Selling, general and administrative expense $ 1,888 $ 4,981 $ (3,093 ) (62.1 )

Depreciation and amortization expense 32 48 (16 ) (33.3 )

Consolidated

Selling, General and Administrative Expense. For the year ended December 31, 2020, consolidated selling, general and administrative expense, before depreciation and amortization, decreased by approximately $7.7 million, or 60.4%, to $5.0 million, as compared to $12.7 million during the year ended December 31, 2019. As a percentage of our consolidated revenue, selling, general and administrative expense decreased to 25.8% in 2020, as compared to 61.6% in the year ended December 31, 2019.

The selling, general and administrative expense in our T&D Solutions segment decreased by $1.0 million, or 40.3%, during the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily due to a reduction in professional fees related to the Myers Power Case, which was settled on November 20, 2020.

The selling, general and administrative expense in our Critical Power segment decreased by $3.5 million, or 68.5% as compared to 2019, primarily due to a reduction in professional fees and $3.1 million of intangible impairment write-offs that were recognized during the year ended December 31, 2019 and no intangible impairment write-offs being recognized in the year ended December 31, 2020.

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 year ended December 31, 2020, consolidated depreciation and amortization expense decreased by $100, or 42.2%, as compared to the year ended December 31, 2019 primarily due to a reduction in amortization expense as a result of intangible impairment write-offs that were recognized in the year ended December 31, 2019.

Operating Loss

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

For the Year Ended

December 31,

T&D Solutions. Operating loss from our T&D Solutions segment decreased by $1.2 million, or 38.5%, in the year ended December 31, 2020 as compared to the year ended December 31, 2019, due to increased sales of our transfer switches, which generate high margins, and a decrease in professional fees.

Critical Power. Operating loss from our Critical Power segment decreased by $3.2 million, or 88.0%, during the year ended December 31, 2020, primarily due to intangible impairment write-offs that were recognized during the year ended December 31, 2019 and no intangible impairment write-offs being recognized in the year ended December 31, 2020.

General Corporate Expense. Our general 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 year ended December 31, 2020, our unallocated corporate overhead expense decreased by $3.1 million, or 61.8%, as compared to the year ended December 31, 2019, primarily due to $1.4 million of one-time executive bonuses that were recorded during the year ended December 31, 2019, as well as a reduction in bad debt expense of approximately $1 million during the year ended December 31, 2020 as compared to December 31, 2019 (pertaining to certain notes receivable deemed uncollectible).

Non-Operating (Income) Expense

Interest (Income) Expense. For the year ended December 31, 2020, we had interest income of approximately $334, as compared to interest expense of $396 during the year ended December 31, 2019. The decrease in our interest expense was due to the retirement of our bank indebtedness with the proceeds from the sale of the transformer business units in August 2019.

Other (Income) Expense. Other (income) expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the year ended December 31, 2020, other non-operating income was $969, as compared to other non-operating expense of $2.8 million during the year ended December 31, 2019. For the year ended December 31, 2020, included in other income was a gain of $968 related to the sale and mark to market adjustment on the fair value of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock it received in connection with the Merger Agreement, as compared to a loss of $2.8 million for the year ended December 31, 2019, related to the mark to market adjustment on the fair value of those securities.

Provision for Income Taxes. Our provision reflects an effective tax rate on loss before taxes of (0.2)% for the year ended December 31, 2020, as compared to (11.9)% for the year ended December 31, 2019, as set forth below:

For the Year Ended

December 31,

Effective income tax rate % (0.2 ) (11.9 ) 11.7

The (11.9)% effective tax rate for the year ended December 31, 2019 is primarily due to establishment of additional valuation allowances.

Net Loss per Share from Continuing Operations

We generated a net loss from continuing operations of $3.0 million for the year ended December 31, 2020, as compared to a net loss from continuing operations of $12.0 million during the year ended December 31, 2019.

Our net loss from continuing operations per basic and diluted share for the year ended December 31, 2020 was $0.34 compared to $1.38 for the year ended December 31, 2019.

LIQUIDITY AND CAPITAL RESOURCES

General. As of December 31, 2020, we had $7.6 million 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. Our cash requirements have been generally applied toward operating activities, debt repayment, capital improvements and acquisitions.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic (the “COVID-19 pandemic”), based on the rapid increase in exposure globally.

The full impact of the COVID-19 pandemic continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. During the year ended December 31, 2020, the Company experienced a decline in customer orders for its products and services due to delays caused by the pandemic. Additionally, the Company experienced an impact to productivity as a result of implementing social distancing guidelines and personal protective measures. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 pandemic and the global responses to contain its spread, the Company is not able to estimate the full effects of the COVID-19 pandemic at this time, however, if the pandemic continues, it may continue to have an adverse effect on the Company’s results of operations, financial condition, or liquidity.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act” (the “CARES Act”) The CARES Act, among other things, appropriates funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment. On April 13, 2020, after having determined that it met the qualifications for this loan program due to the impact that COVID-19 would have on our financial condition, results of operations, and/or liquidity and applying for relief, the Company received a loan under the SBA Paycheck Protection Program (the “PPP Loan”) in the amount of $1.4 million.

The Company has accounted for the PPP Loan as a debt instrument in accordance with Financial Accounting Standards Board Accounting Standards Codification 470, Debt. At December 31, 2020, $633 of principal payments due has been recorded as long-term debt and $780 as current debt in accordance with the enactment of the Paycheck Protection Program Flexibility Act of 2020. The Company does not expect to incur any material interest expense under the PPP Loan. Under the terms of the PPP Loan, the Company believes it is eligible for full or partial loan forgiveness. We have applied for full loan forgiveness during the fourth quarter of 2020, however no assurance can be provided that any portion of the PPP Loan will ultimately be forgiven.

Cash Used in Operating Activities. Cash used in our operating activities was $3.6 million during the year ended December 31, 2020, as compared to $5.6 million during the year ended December 31, 2019. The decrease in cash used in our operating activities is primarily due to the recognition of insurance proceeds of $1.8 million as well as working capital fluctuations, partially offset by a settlement payment that was made during the year ended December 31, 2020 (see Note 13 - Commitments and Contingencies).

Cash Provided by Investing Activities. Cash provided by investing activities during the year ended December 31, 2020 was $2.6 million, as compared to $39.8 million during the year ended December 31, 2019. The decrease in cash provided by investing activities is due to realizing $39.9 million of proceeds from the sale of the transformer business units during the year ended December 31, 2019, and there were no comparable proceeds from a business unit sale during the year ended December 31, 2020. The primary source of cash in investing activities for the year ended December 31, 2020 were proceeds from the sale of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock in the amount of $2.4 million.

Cash Provided by (Used in) Financing Activities. Cash provided by our financing activities was $337 during the year ended December 31, 2020, as compared to cash used in our financing activities of $26.2 million during the year ended December 31, 2019. The primary source of cash in financing activities for the year ended December 31, 2020 was funding from the Payroll Protection Program. The change in cash provided by (used in) financing activities is primarily due to the repayment of our debt in the prior year period as a result of the sale of the transformer business units.

Working Capital. As of December 31, 2020, we had working capital of $8.4 million, including $7.6 million of cash and cash equivalents, compared to working capital of $10.5 million, including $8.2 million of cash and cash equivalents at December 31, 2019. At December 31, 2020 and December 31, 2019, we no longer had a revolving credit facility, as it was paid in full and terminated in August 2019 with the proceeds from the sale of the transformer business units.

Assessment of Liquidity. At December 31, 2020, we had $7.6 million of cash and cash equivalents on hand generated primarily from the sale of the transfer business units during the year ended December 31, 2019, sale of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock, proceeds from insurance and the funding from the Payroll Protection Program. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings. Our cash requirements historically were generally for operating activities, debt repayment, capital improvements and acquisitions. As all outstanding amounts under our credit facilities have been paid in full with the proceeds from the sale of the transformer business units during the year ended December 31, 2019, and the credit facilities terminated, we expect to meet our cash needs with our working capital and cash flows from our operating activities. We expect our cash requirements to be generally for operating activities and capital improvements. We expect that our cash balance is sufficient to fund operations for the next twelve months.

On October 20, 2020, we entered into the sales agreement, pursuant to which we may offer and sell shares of common stock having an aggregate price of up to $9 million from time to time through Wainwright, acting as agent or principal. As the date of this report, we have not sold any shares of common stock under the sales agreement. There can be no assurance that the Company will be able to sell shares from the sales agreement.

Capital Expenditures

We had no additions to property, plant and equipment during the year ended December 31, 2020, as compared to additions of $153 during the year ended December 31, 2019.

Factors That May Affect Future Operations

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

Off Balance Sheet Transactions and Related Matters

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

New Accounting Pronouncements

The information required by this Item is provided in “Note 2 - Summary of Significant Accounting Policies” to our audited financial statements for the year ended December 31, 2020 included in this Annual Report on Form 10-K.

Recent Accounting Pronouncements

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

Income Taxes. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The ASU is effective for all annual and interim periods beginning December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact but does not anticipate there will be a material impact to the consolidated financial statements once implemented.

Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements for fair value measurements. The Company adopted this guidance on January 1, 2020. The adoption of this ASU did not have a material impact on the consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Consolidated Financial Statements for the Years Ended December 31, 2020 and 2019

Report of Independent Registered Public Accounting Firm 29

Consolidated Statements of Operations 31

Consolidated Statements of Comprehensive (Loss) Income 32

Consolidated Balance Sheets 33

Consolidated Statements of Cash Flows 34

Consolidated Statements of Stockholders’ Equity 35

Notes to the Consolidated Financial Statements 36

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

Pioneer Power Solutions, Inc.

Fort Lee, New Jersey

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Pioneer Power Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

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

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Provision for Excess and Obsolete Inventory

As described in Note 9 to the consolidated financial statements, as of December 31, 2020, the Company recorded a provision for excess and obsolete inventory of $736,000 on gross inventories of $3,139,000. The provision for excess and obsolete inventory is comprised of an obsolescence reserve and any net realizable value reserve, as necessary. A substantial portion of the Company’s inventory includes raw materials and parts utilized to support the manufacturing process at Pioneer Custom Electrical Products Corp (PCEP) and equipment sales and service offerings at Titan Energy Systems, Inc. (Titan) to which the provision for excess and obsolete inventory relates. The remaining inventories relate to items that have been purchased and labor capitalized to fulfill commitments to existing customer orders, or customer orders that are work-in-process at PCEP. Management analyzes work-in-process inventory to identify circumstances whereby the capitalized inventory cost exceeds its net realizable value. If management determines that the cost of the work-in-process inventory will not be recoverable, a reserve to adjust the inventory to net realizable value is required to be recognized.

We identified the provision for excess and obsolete inventory at PCEP as a critical audit matter. Management’s determination of the obsolescence reserve includes an assessment of the current and forecasted production requirements based on customer demand and the Company’s strategic plans to determine if the cost is recoverable from future sales of the Company’s products upon fair market value. In determining the net realizable value reserve over PCEP work-in-process inventory, critical estimates for estimated costs to complete projects are applied to open work orders. The evaluation over the need for a reserve requires management to develop and utilize assumptions in its determination of estimates to complete the open work orders based upon an assessment of project status and efforts required to complete the assembly of the finished product. Auditing the critical assumptions used by management in determining the provision for excess and obsolete inventory involved especially challenging auditor judgment due to the nature and extent of audit effort needed to evaluate the reasonableness of the assumptions and judgments made by management.

The primary procedures we performed to address this critical audit matter included:

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

/s/ BDO USA, LLP

New York, New York

March 30, 2021

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Operations

(In thousands, except per share data)

For the Year Ended December 31,

(Revised See Note #6)

Cost of goods sold

Write down of inventory 546 —

Operating expenses

Selling, general and administrative 5,165 12,918

Loss from continuing operations (4,284 ) (11,753 )

Interest (income) expense (334 ) 396

Gain on sale of subsidiaries — 4,207

Income tax expense 5 1,278

Net loss from continuing operations (2,986 ) (12,037 )

Discontinued operations (Note 8)

Loss from operations of discontinued business units — (2,351 )

Gain on sale of discontinued subsidiaries — 13,686

Income tax expense — 330

Income from discontinued operations, net of income taxes — 11,005

(Loss) earnings per share:

Basic

Loss from continuing operations $ (0.34 ) $ (1.38 )

Income from discontinued operations — 1.26

Diluted

Loss from continuing operations $ (0.34 ) $ (1.38 )

Income from discontinued operations — 1.26

Weighted average common shares outstanding:

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

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

For the Year Ended December 31,

Other comprehensive income

Foreign currency translation adjustments — 4,766

Other comprehensive income — 5,911

Comprehensive (loss) income $ (2,986 ) $ 4,879

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

PIONEER POWER SOLUTIONS, INC.

Consolidated Balance Sheets

(In thousands)

December 31,

(Revised See Note #6)

ASSETS

Current assets

Cash and cash equivalents $ 7,567 $ 8,213

Short term investments — 936

Income taxes receivable 407 360

Prepaid expenses and other current assets 897 795

Property, plant and equipment, net 433 640

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Bank overdrafts $ — $ 374

Accounts payable and accrued liabilities 4,027 7,533

Current maturities of long-term debt 780 —

Income taxes payable 17 496

Long-term debt 633 —

Stockholders’ equity

Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued — —

Accumulated other comprehensive income 14 14

Total liabilities and stockholders’ equity $ 21,287 $ 28,479

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

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Cash Flows

(In thousands)

For the Year Ended December 31,

Operating activities

Amortization of intangible assets — 150

Amortization of right-of-use assets 261 354

Amortization of debt issuance cost — 43

Amortization of imputed interest (448 ) (166 )

Interest expense from PPP Loan 9 —

Deferred income tax expense — 1,245

Non-cash cost of operating leases 622 619

Change in receivable reserves (57 ) 3,093

Change in inventory reserves (535 ) 361

Write down of inventory 546 —

Inventory write-off from flood damage — 2,688

Gain on sale of subsidiary — (17,893 )

Change in long term payables 4 —

Change in insurance receivable 1,705 (1,800 )

(Gain) loss on investments (968 ) 2,750

Accrued pension — 114

Stock-based compensation 3 12

Other 3 —

Intangible asset impairment — 83

Goodwill impairment — 2,969

Foreign currency remeasurement gain — (100 )

Changes in current operating assets and liabilities:

Prepaid expenses and other assets (692 ) (543 )

Accounts payable and accrued liabilities (3,352 ) (3 )

Net cash used in operating activities (3,613 ) (5,573 )

Investing activities

Additions to property, plant and equipment — (153 )

Proceeds from sale of subsidiaries, net — 39,923

Proceeds from sale of investments 2,436 —

Change in note receivable 194 —

Net cash provided by investing activities 2,630 39,770

Financing activities

Borrowing under debt agreement — 15,329

Funding from PPP Loan 1,404 —

Repayment of debt — (40,070 )

Payment of debt issuance cost — (15 )

Payment of deferred purchase price (397 ) —

Write-off of notes receivable — 600

Principal repayments of financing leases (296 ) (635 )

Net cash provided by/(used in) financing activities 337 (26,230 )

(Decrease) increase in cash and cash equivalents (646 ) 7,967

Effect of foreign exchange on cash and cash equivalents — 35

Cash and cash equivalents

Supplemental cash flow information:

Income taxes paid, net of refunds 507 477

Non-cash investing and financing activities:

Securities received for sale of subsidiary — 4,207

Notes receivable recognized upon Equity Transaction — 4,929

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

PIONEER POWER SOLUTIONS, INC.

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

Shares Amount

Stock-based compensation — — 12 — — 12

Foreign currency translation adjustment — — — 4,766 — 4,766

Pension adjustment, net of taxes — — — 1,145 — 1,145

Stock-based compensation — — 3 — — 3

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

PIONEER POWER SOLUTIONS, INC.

Notes to Consolidated Financial Statements

1. BASIS OF PRESENTATION

Pioneer Power Solutions, Inc. and its wholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,” “Pioneer Power,” “we,” “our” and “us”) manufacture, sell and service a broad range of specialty electrical transmission, distribution and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. The Company is headquartered in Fort Lee, New Jersey and operates from three (3) additional locations in the U.S. for manufacturing, service and maintenance, engineering, sales and administration.

NASDAQ Listing

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

Segments

In determining operating and reportable segments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting (“ASC 280”), the Company concluded that it has two reportable segments, which are also our operating segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”). Financial information about the Company’s segments is presented in Note 17 - Business Segment, Geographic and Customer Information.

Sale of Transformer Business Units

On June 28, 2019, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”), by and among the Company, Electrogroup Canada, Inc., a wholly owned subsidiary of the Company (“Electrogroup”), Jefferson Electric, Inc., a wholly owned subsidiary of the Company (“Jefferson”), JE Mexican Holdings, Inc., a wholly owned subsidiary of the Company (“JE Mexico,” and together with Electrogroup and Jefferson, the “Disposed Companies”), Nathan Mazurek (Chief Executive Officer of the Company), Pioneer Transformers L.P. (the “US Buyer”) and Pioneer Acquireco ULC (the “Canadian Buyer,” and together with the US Buyer, the “Buyer”). Pursuant to the terms of the Stock Purchase Agreement, the Company agreed to sell (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer (the “Equity Transaction”), for a purchase price of $68.0 million. Included in the purchase price, the Company received two subordinated promissory notes, issued by the Buyer, in the aggregate principal amount of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million (the “Seller Notes”)

. During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.8 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.2 million. During the second quarter of 2020, the Company recognized an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the Company. Including the reduction to the principal amount for the valid claim, the Company has revalued the Seller Notes for an appropriate imputed interest rate, resulting in a change to the value of the Seller Notes at December 31, 2020 of $254, for a carrying value of $5.3 million, which is included within other long term assets (see Note 11 - Other Assets).

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

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

Presentation

The accompanying audited consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of December 31, 2020. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the audited consolidated financial statements have been included.

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

Liquidity

The accompanying financial statements have been prepared on a basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements as of the year ended December 31, 2020, the Company had $7.6 million of cash and cash equivalents on hand, and working capital of $8.4 million. The cash on hand was generated primarily from the completion of the Equity Transaction during the year ended December 31, 2019, proceeds from the sale of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock, proceeds from insurance and the funding from the Payroll Protection Program recognized during the year ended December 31, 2020. We have historically met our cash needs through a combination of cash flows from operating activities and bank borrowings. Our cash requirements historically were for operating activities, debt repayment and capital improvements. As all outstanding amounts under our credit facilities have been paid in full with the proceeds from the Equity Transaction during the year ended December 31, 2019, and the credit facilities terminated, we expect to meet our cash needs with our working capital and cash flows from our operating activities. We expect our cash requirements to be generally for operating activities and capital improvements. The Company expects that its current cash balance is sufficient to fund operations for the next twelve months.

In March 2021, the Company executed a cash collateral security agreement with a commercial bank which required us to pledge cash collateral as security for all unpaid reimbursement obligations owing to the commercial bank for an irrevocable standby letter of credit in the amount of $1.8 million.

The full impact of the COVID-19 pandemic continues to evolve as the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. During the year ended December 31, 2020, the Company experienced a decline in customer orders for its products and services due to delays caused by the pandemic. Additionally, the Company experienced an impact to productivity as a result of implementing social distancing guidelines and personal protective measures. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 pandemic and the global responses to contain its spread, the Company is not able to estimate the full effects of the COVID-19 pandemic at this time, however, if the pandemic continues, it may continue to have an adverse effect on the Company’s results of operations, financial condition, or liquidity.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act” (the “Cares Act”). The CARES Act, among other things, appropriates funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment. On April 13, 2020, after having determined that it met the qualifications for this loan program due to the impact that COVID-19 would have on our financial condition, results of operations, and/or liquidity and applying for relief the Company received funding in the amount of $1.4 million from the SBA Paycheck Protection Program. While the full magnitude of the pandemic’s effect on the Company’s future results of operations is uncertain, the Company has experienced certain declines in service sales and commitments to purchase equipment. The Company made this assertion in good faith based upon all available guidance. The Company used the proceeds from the PPP Loan to retain employees, maintain payroll and make lease, rent and utility payments. Under the terms of the PPP Loan, the Company believes it is eligible for full or partial loan forgiveness and applied for full loan forgiveness during the fourth quarter of 2020. There can be no assurance however that the loan will be forgiven in full or in part.

The Company has accounted for the PPP Loan as a debt instrument in accordance with FASB ASC 470, Debt. At December 31, 2020, $633 of principal payments due have been recorded as long-term debt and $780 as current debt in accordance with the enactment of the Paycheck Protection Program Flexibility Act of 2020. The Company does not expect to incur any material interest expense under the PPP Loan.

Rounding

All dollar amounts (except share and per share data, and with respect to Item 11, Agreements with Executive Officers) presented are stated in thousands of dollars, unless otherwise noted. Amounts may not foot due to rounding.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

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

Principles of Consolidation

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

Reclassifications

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

Use of Estimates

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

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

Revenue Recognition

Revenue is recognized when (1) a contract with a customer exists, (2) performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer, (3) the transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer, (4) the transaction price is allocated to the performance obligations in the contract and (5)the Company satisfies performance obligations. 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.

Cost of Goods Sold

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

Financial Instruments

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

At December 31, 2019, the carrying amount reported in the consolidated balance sheet for shares held in CleanSpark, Inc., which are accounted for in accordance with the adoption of ASU 2016-01, of $936 included within short term investment approximates fair value as the asset had a readily determinable market value and as such was considered a Level 1 asset. The estimated fair value of the warrants held in CleanSpark, Inc. of approximately $531 was considered a Level 3 asset due to unobservable inputs. The Company sold all of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock during the year ended December 31, 2020.

Cash and Cash Equivalents

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

Accounts Receivable

The Company accounts for trade receivables at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. The Company writes off trade receivables when they are deemed uncollectible. The Company records recoveries of trade receivables previously written off when it receives them. Management considers the Company’s allowance for doubtful accounts, which was $69 and $77 as of December 31, 2020 and 2019, respectively, to appropriately measure the uncertainty in certain accounts receivable.

Long-Lived Assets

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

Historically, finite life intangible assets have consisted primarily of customer relationships in multiple categories that are specific to the businesses acquired and for which estimated useful lives were determined based on actual historical customer attrition rates. These finite life intangible assets were amortized by the Company over periods ranging from four to ten years.

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

Income Taxes

The Company accounts for income taxes under the asset and liability method, based on the income tax laws and rates in the countries in which operations are conducted and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company believes that the deferred tax asset recorded as of December 31, 2020 and 2019 is realizable through future reversals of existing taxable temporary differences. If the Company was to subsequently determine that it would be able to realize deferred tax assets in the future in excess of its net recorded amount, an adjustment to deferred tax assets would increase net income for the period in which such determination was made. The Company will continue to assess the adequacy of the valuation allowance on a quarterly basis. The Company’s tax filings are subject to audit by various taxing authorities.

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

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

Unrecognized Tax Benefits

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

Additionally, ASC 740 requires the Company to accrue interest and related penalties, if applicable, on all tax positions for which reserves have been established consistent with jurisdictional tax laws. The Company’s policy is to recognize interest and penalties related to income tax matters as interest expense. See Note 16 - Income Taxes.

Share-Based Payments

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

Inventories

Inventories are stated at the lower of cost or net realizable value using weighted average method and include the cost of materials, labor and manufacturing overhead. The Company uses estimates in determining the level of reserves required to state inventory at the lower of cost or market. The Company estimates are based on market activity levels, production requirements, the physical condition of products and technological innovation. Changes in any of these factors may result in adjustments to the carrying value of inventory. See Note 9 - Inventories.

Income (Loss) Per Share

Basic income (loss) per share is computed by dividing the income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed by dividing the income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. (See Note 18 - Basic and Diluted Net Loss Per Share).

Fair Value Measurements

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

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

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

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

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

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

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

At December 31, 2019, the carrying amount reported in the consolidated balance sheet for shares held in CleanSpark, Inc. of $936 included within short term investment approximates fair value as the asset had a readily determinable market value and as such was considered a Level 1 asset. The estimated fair value of the warrants held in CleanSpark, Inc. of approximately $531 were considered a Level 3 asset due to unobservable inputs. The Company sold all of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock during the year ended December 31, 2020.

Recent Accounting Pronouncements

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

Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, amends, and adds certain disclosure requirements for fair value measurements. The Company adopted this guidance on January 1, 2020. The adoption of this ASU did not have a material impact on the consolidated financial statements.

3. DIVESTITURES

Pioneer Critical Power, Inc.

On January 22, 2019, Pioneer Critical Power, Inc., a Delaware corporation (“PCPI”), a wholly-owned subsidiary of the Company within the T&D Solutions segment, CleanSpark and CleanSpark Acquisition, Inc., a Delaware corporation (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, among other things, Merger Sub merged with and into PCPI, with PCPI becoming a wholly-owned subsidiary of the CleanSpark and the surviving company of the merger (the “Merger”).

At the effective date of the Merger, all of the issued and outstanding shares of common stock of PCPI, par value $0.01 per share, were converted into the right to receive (i) 175,000 shares of common stock, par value $0.001 per share (“CleanSpark Common Stock”), of CleanSpark, (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split completed by CleanSpark in December 2019.

During the year ended December 31, 2020, the Company sold all of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock it received in connection with the Merger Agreement and recorded proceeds of $2.4 million. The gain from the sale was partially offset by a mark to market adjustment of $1.4 million resulting in a net gain of $968 to other (income) expense in the accompanying statements of operations. Warrants at fair value were previously recorded at inception as long term within other assets.

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 then-pending 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 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. The Contract Manufacturing Agreement had a term of 18 months and expired during the third quarter of 2020.

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 CleanSpark Common Stock was determined using quoted market prices, and the fair value of the investment in the warrants was established using a Black Scholes model.

The PCPI entity was a dormant business unit at the time of this sale; therefore this sale has no impact to the discontinued operations presented within the financial statements.

4. FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:

On January 22, 2019, we entered into an Agreement and Plan of Merger with Merger Sub, which resulted in the Company receiving financial instruments that included the right to receive (i) 175,000 shares of CleanSpark Common Stock, (ii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $16.00 per share, and (iii) a five-year warrant to purchase 50,000 shares of CleanSpark Common Stock at an exercise price of $20.00 per share. The share quantities and exercise prices of warrants reflect the 10:1 reverse stock split which was completed by CleanSpark in December 2019.

No other changes in valuation techniques or inputs occurred during the year ended December 31, 2020. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the year ended December 31, 2020.

5. REVENUES

Nature of our products and services

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

Products

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

Additionally, we provide our customers with new and used sophisticated power generation equipment intended to ensure smooth, uninterrupted power to operations during times of emergency.

Services

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

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

1) Identify the contract with a customer

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products or services to be transferred and identifies the payment terms related to these products or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for products or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

2) Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products or services, the Company must apply judgment to determine whether promised products or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised products or services are accounted for as a combined performance obligation.

3) Determine the transaction price

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

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

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

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

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

Substantially all of our revenue from the sale of switchgear and power generation equipment is recognized at a point of time. Revenues are recognized at the point in time that the customer obtains control of the good which is when it has taken title to the products and has assumed the risks and rewards of ownership specified in the purchase order or sales agreement. Service revenues include maintenance contracts that are recognized over time based on the contract term and repair services which are recognized as services are delivered.

The following table presents our revenues disaggregated by revenue discipline:

For the Year Ended

December 31,

See Note 17 - Business Segment, Geographic and Customer Information.

6. REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS

In connection with the preparation of our consolidated interim financial statements for the quarter ended June 30, 2020, we identified a revision as of December 31, 2019 in the calculation of the tax expense related to the Equity Transaction. The revision resulted in a net loss for tax purposes and created additional deferred tax assets related to these tax losses, as well as a reduction in the income tax expense, all recorded as part of discontinued operations. The recognition of additional deferred tax assets requires an increase to the valuation allowance as at December 31, 2019, consistent with the Company’s position on the future realization of these assets.

In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the revision and determined that the related impact was not material to our results of operations or financial position for any prior annual or interim period, but that correcting the $407 cumulative impact of the revision would be material to our results of operations for the three months ended June 30, 2020. Accordingly, we have corrected the consolidated balance sheets and consolidated statement of operations as of December 31, 2019.

The impact to the consolidated balance sheets and consolidated statements of operations as of December 31, 2019 is as follows:

Consolidated Balance Sheets As Reported Adjustment As Revised

Income taxes receivable $ — $ 360 $ 360

Consolidated Statements of Operations

Income tax expense from discontinued operations $ 737 $ (407 ) $ 330

Income from discontinued operations, net of income taxes 10,598 407 11,005

Basic and diluted loss from continuing operations (1.38 ) — (1.38 )

Basic and diluted income from discontinued operations 1.21 0.05 1.26

Basic and diluted net loss (0.17 ) 0.05 (0.12 )

Subsequent to the December 31, 2019 revision described above, the March 31, 2020 consolidated balance sheet was also revised to reflect an increase in other currents assets of $360 to $16,533, a decrease in other current liabilities of $47 to $8,698, and an increase to stockholders’ equity of $407 to $13,923.

The identified adjustment does not impact any other prior periods.

7. OTHER (INCOME) EXPENSE

Other (income) expense in the consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. For the year ended December 31, 2020, other income was $969, as compared to other expense of $2.8 million during the year ended December 31, 2019. For the year ended December 31, 2020, included in other income was a gain of $968 related to the sale and mark to market adjustment on the fair value of CleanSpark Common Stock and warrants, as compared to a loss of $2.8 million for the year ended December 31, 2019, related to the mark to market adjustment on the fair value of the common stock and warrants.

8. DISCONTINUED OPERATIONS

A discontinued operation is a component of the Company’s business that represents a separate major line of business that had been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative Consolidated Statement of Operations, Consolidated Statement of Comprehensive Income (Loss), Consolidated Statement of Cash Flows, Consolidated Statement of Stockholders’ Equity and Consolidated Balance Sheets are presented as if the operation had been discontinued from the start of the comparative year. Based upon the authoritative guidance, the Company concluded that the operations of the liquid-filled and dry-type transformer business should be presented as discontinued operations as of December 31, 2019.

Overview

On August 16, 2019, the Company completed the Equity Transaction pursuant to the Stock Purchase Agreement, by and among the Company, the Disposed Companies, Nathan Mazurek, and the Buyer. Pursuant to the terms of the Stock Purchase Agreement, the Company sold (i) all of the issued and outstanding equity interests of Electrogroup to the Canadian Buyer and (ii) all of the issued and outstanding equity interests of Jefferson and JE Mexico to the US Buyer.

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

Consideration

The consideration paid by the Buyer in the Equity Transaction is a base cash purchase price of $60.5 million, as well as the issuance by the Buyer of two subordinated promissory notes to Pioneer Power in the principal amounts of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million, in each case subject to adjustment pursuant to the terms of the Stock Purchase Agreement. Pursuant to the terms of the Stock Purchase Agreement, the Seller Notes will bear interest at an annualized rate of 4.0%, to be paid-in-kind annually, and will have a maturity date of December 31, 2022. In addition, pursuant to the terms of the Stock Purchase Agreement, as amended, the Buyer may set-off on a dollar-for-dollar basis any indemnifiable losses the Buyer suffers as a result of certain actions or omissions by Pioneer Power or the Disposed Companies against the first Seller Note in the aggregate principal amount of $5.0 million, and such right of set-off is the Buyer’s sole source of recovery with respect to losses resulting from inaccuracies or breaches of the Company’s representations and warranties, except for breaches of certain fundamental warranties, claims of fraud and breaches of representations, warranties or covenants relating to taxes, and claims for certain specific indemnities.

During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.8 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.2 million. During the second quarter of 2020, the Company recognized an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the Company. Including the reduction to the principal amount for the valid claim, the Company has revalued the Seller Notes for an appropriate imputed interest rate, resulting in a change to the value of the Seller Notes at December 31, 2020 of $254, for a carrying value of $5.3 million, which is included within other long term assets (see Note 11 - Other Assets).

Covenants

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

Indemnification

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

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

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

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

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

Other Provisions

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

Operating results of the liquid-filled and dry-type transformer manufacturing businesses previously included in the T&D Solutions segment have now been reclassified as discontinued operations for all periods presented.

The following table presents the discontinued operations of the liquid-filled and dry-type transformer manufacturing businesses in the Consolidated Statement of Operations:

Year Ended December 31,

Costs and expenses

Cost of goods sold — 39,915

Selling, general and administrative — 9,207

Foreign exchange gain — (834 )

Interest expense — 653

Other expense — 41

Total costs and expenses — 48,982

Gain on sale of discontinued subsidiaries — 13,686

Income before provision for income taxes — 11,335

Income tax expense — 330

Income from discontinued operations, net of income taxes $ — $ 11,005

During the second quarter of 2019, the Company’s Reynosa Facility was damaged by a flood resulting in damages to inventory. This loss has been partially offset by $2.4 million of insurance proceeds that the Company received. The Company received $600 of these insurance proceeds during the year ended December 31, 2019 and $1.8 million of these insurance proceeds were received during the year ended December 31, 2020. While the net loss on inventory damaged amounting to approximately $782 has been reflected within the cost of goods sold in discontinued operations during the year ended December 31, 2019, the corresponding insurance receivable amounting to $1.8 million and $95 has been recognized as an asset from continuing operations as of December 31, 2019 and December 31, 2020, respectively. The Company received approximately $1.7 million of proceeds from the insurance receivable during the year ended December 31, 2020.

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

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

Year Ended December 31,

Depreciation and amortization $ — $ 756

Capital expenditures — 117

Write-off of receivables — 2,876

9. INVENTORIES

The components of inventories are summarized below:

December 31,

Finished goods — 46

Provision for excess and obsolete inventory (736 ) (429 )

Inventories are stated at the lower of cost or a net realizable value determined on a weighted average method. Included in work in process at December 31, 2020 and December 31, 2019 is a net realizable value reserve of approximately $0 and $418, respectively. The reduction in the net realizable value reserve is attributable to the related project being completed and sold during the year ended December 31, 2020. The Company recognized a $546 write down of inventory through cost of goods sold of the T&D Solutions segment during the year ended December 31, 2020 as a result of management’s strategic decisions to rationalize its traditional product offerings and focus on higher margin equipment sales.

10. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized below:

December 31,

Computer hardware and software 669 682

Less: Accumulated depreciation (1,988 ) (1,809 )

Total property, plant and equipment, net $ 433 $ 640

Depreciation expense was $203 and $269 for the period ended December 31, 2020 and 2019, respectively.

11. OTHER ASSETS

Included in other assets at December 31, 2020 and December 31, 2019 are right-of-use assets, net, of $1.5 million and $1.8 million, respectively, related to our lease obligations.

As a result of the Company entering into the Stock Purchase Agreement on June 28, 2019, we received two subordinated promissory notes in the aggregate principal amount of $5.0 million and $2.5 million, for a total aggregate principal amount of $7.5 million (the “Seller Notes”), subject to certain adjustments. The Seller Notes accrue interest at a rate of 4.0% per annum, with a final payment of all unpaid principal and interest becoming fully due and payable at December 31, 2022. The Company determined the fair value of the Seller Notes based on market conditions and prevailing interest rates. During the fourth quarter of 2019, the Company and the Buyer, pursuant to the Stock Purchase Agreement, completed the net working capital adjustment, which resulted in the Company paying the Buyer $1.8 million in cash and reducing the principal amount of the $5.0 million Seller Note to $3.2 million. During the second quarter of 2020, the Company recognized an additional reduction to the principal amount of the Seller Note of $194 for a valid claim paid by the Buyer on behalf of the Company. Inclusive of the reduction to the principal amount for the valid claim, the Company has revalued the Seller Notes for an appropriate imputed interest rate, resulting in a net change to the value of the Seller Notes at December 31, 2020 of $254 for a carrying value of $5.3 million.

Other assets are summarized below:

December 31,

CleanSpark warrants — 531

Other long-term receivables 28 —

12. DEBT

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, appropriates funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment. On April 13, 2020 after having determined that it met the qualifications for this loan program due to the impact that COVID-19 would have on our financial condition, results of operations, and/or liquidity and applying for relief, the Company received a loan under the SBA Paycheck Protection Program in the amount of $1.4 million. While it is uncertain as to the full magnitude that the pandemic will have on the Company’s future results of operations, the Company experienced a decline in customer orders for its products and services during the year ended December 31, 2020. Additionally, we have experienced an impact to productivity as a result of implementing social distancing guidelines and employing personal protective measures. The Company made this assertion in good faith based upon all available guidance. The Company used the proceeds from the PPP Loan to retain employees, maintain payroll and make lease, rent and utility payments. We have applied for full loan forgiveness during the fourth quarter of 2020, however no assurance can be provided that any portion of the PPP Loan will ultimately be forgiven.

December 31,

Less: current portion 780 —

Total long-term obligations $ 633 $ —

13. COMMITMENTS AND CONTINGENCIES

Leases

The company leases certain offices, facilities and equipment under operating and financing leases. Our leases have remaining terms ranging from less than 1 year to up to 6 years, some of which contain options to extend up to 5 years. As of December 31, 2020 and 2019, assets recorded under finance leases were $1.4 million and $1.3 million, respectively, and accumulated amortization associated with finance leases was $776 and $571, respectively. As of December 31, 2020 and 2019, assets recorded under operating leases were $2.5 million and $2.1 million, respectively, and accumulated amortization associated with operating leases were $1.7 million and $1.1 million, respectively. Such amounts are included within other assets.

Litigation and Claims

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

On January 11, 2016, Myers Power Products, Inc., a specialty electrical products manufacturer, filed suit with the Superior Court of the State of California, County of Los Angeles, against us, PCEP and two PCEP 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. sought injunctive relief enjoining us, PCEP and our employees from using its confidential business information and compensatory damages of an unspecified unlimited amount; however, the Company recognized approximately $1.2 million for expected costs related to this litigation in the prior two fiscal years.

On October 4, 2019, the dividend that was payable by the Company was enjoined by court order of the Superior Court of California related to the foregoing case. On October 16, 2019, Myers Power Products, Inc. filed an ex parte application arguing the Company had violated, or intended to violate the modified preliminary injunction and sought an order from the court for the Company to post a bond in an amount of $30,000 or more (which was not granted). The Company cancelled the dividend as the result of this court order.

There were also two related appeals in the California Court of Appeal for the Second Appellate District (“Court of Appeal”). Case no. B301494 was an appeal of the October 4, 2019 order modifying a previously issued preliminary injunction. Case no. B302943 was an appeal of the November 26, 2019 order requiring Pioneer Power Solutions, Inc. and Pioneer Custom Electrical Products Corp. to obtain and post a $12 million bond. On April 10, 2020, the Court of Appeal granted our motion to combine the two appeals.

On November 20, 2020, the Company entered into a settlement and release agreement with Myers Power Products, Inc. As part of the settlement, all injunctions were dissolved, and all litigation and appeals related to the action were dismissed with prejudice. The parties executed full releases of all known and unknown claims, thereby eliminating all such restrictions on the Company. The Company agreed to pay Myers Power Products, Inc. an amount that did not differ significantly from the $1.2 million of expected costs the Company recognized as a legal contingency during the year ended December 31, 2018. The amount was paid in full during the fourth quarter of 2020.

The components of the lease expense were as follows:

For the Year Ended

December 31,

Operating lease cost $ 669 $ 677

Finance lease cost

Amortization of right-of-use asset $ 261 $ 284

Interest on lease liabilities 53 53

Total finance lease cost $ 314 $ 337

Other information related to leases was as follows:

Supplemental Cash Flows Information

December 31,

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flow payments for operating leases $ 677 $ 664

Operating cash flow payments for finance leases 53 53

Financing cash flow payments for finance leases 235 281

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

Operating lease liabilities arising from obtaining right to use assets 390 —

Capitalized lease obligations 295 293

Weighted Average Remaining Lease Term

December 31,

Operating leases 3 years 2 years

Finance leases 2 years 2 years

Weighted Average Discount Rate

December 31,

Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows:

Operating Finance

Leases Leases

Thereafter 24 —

Total future minmum lease payments 949 797

Less imputed interest (82 ) (71 )

Total future minmum lease payments $ 867 $ 726

Reported as of December 31, 2020:

Operating Finance

Leases Leases

Accounts payable and accrued liabilities $ 431 $ 284

Other long-term liabilities 436 442

14. STOCKHOLDERS’ EQUITY

Common Stock

The Company had 8,726,045 shares of common stock, $0.001 par value per share, outstanding as of December 31, 2020 and December 31, 2019.

Preferred Stock

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

15. STOCK-BASED COMPENSATION

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

On May 11, 2011, the board of directors of the Company adopted the Pioneer Power Solutions, Inc. 2011 Long-Term Incentive Plan (the “2011 Plan”) which was subsequently approved by stockholders of the Company on May 31, 2011. The 2011 Plan replaces and supersedes the 2009 Plan. The Company’s outside directors and employees, including the Company’s principal executive officer, principal financial officer and other named executive officers, and certain contractors are all eligible to participate in the 2011 Plan. The 2011 Plan allows for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards, which may be granted singly, in combination, or in tandem, and upon such terms as are determined by the Board or a committee of the Board that is designated to administer the Plan. Subject to certain adjustments, the maximum number of shares of the Company’s common stock that may be delivered pursuant to awards under the 2011 Plan is 700,000 shares. As of December 31, 2020, 440,400 stock options had been granted and are considered outstanding, consisting of 21,000 incentive stock options and 419,400 non-qualified stock options.

Expense for stock-based compensation recorded for the years ended December 31, 2020 and 2019 was approximately $3 and $12, respectively. All of the stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. As of December 31, 2020, the Company had total stock-based compensation expense remaining to be recognized in the consolidated statements of operations that was insignificant.

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

Year Ended December 31,

Expected volatility 31.1 % —

Expected life in years 5.5 —

Risk-free interest rate 0.5 % —

A summary of stock option activity for the years ended December 31, 2020 and 2019, and changes during the years then ended is presented below:

Granted — — — —

Exercised — —

The total number of shares reserved for the plan is 700,000, leaving a balance of 233,267 available for future grants.

Intrinsic value is the difference between the market value of the stock at December 31, 2020 and the exercise price which is aggregated for all options outstanding and exercisable. A summary of the weighted-average grant-date fair value of options, total intrinsic value of options exercised, and cash receipts from options exercised is shown below:

Year Ended December 31,

Weighted-average fair value of options granted (per share) $ 0.49 $ —

Intrinsic value gain of options exercised — —

Cash receipts from exercise of options — —

16. INCOME TAXES

The components of loss before income taxes are summarized below:

Year Ended December 31,

Loss before income taxes

Loss before income taxes $ (2,981 ) $ (10,759 )

The components of the income tax provision were as follows:

Year Ended December 31,

Current

Total income tax provision $ 5 $ 1,278

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

Year Ended December 31,

Federal Income tax at statutory rate $ (626 ) $ (2,259 )

State and local income tax, net (120 ) (452 )

Other permanent items 5 60

Other (2 ) —

Pioneer Power Solutions, Inc. PPSI US Equity

PPSI · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Pioneer Power Solutions, Inc. PPSI US Equity☆

PPSI · 10-K · period ended 2020-12-31

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Pioneer Power Solutions, Inc. PPSI US Equity