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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(Address of principal executive offices) |
(I.R.S. Employer Identification No.)
(Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of November 14, 2022 was .
PIONEER POWER SOLUTIONS, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 2022
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PIONEER POWER SOLUTIONS, INC.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expense, net | ( | ) | ( | ) | ||||||||||||
| Loss before taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense (benefit) | ( | ) | ||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
PIONEER POWER SOLUTIONS, INC.
Consolidated Balance Sheets
(In thousands, except share data)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Notes receivable and accrued interest | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $ par value, shares authorized; issued | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding on September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
PIONEER POWER SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Depreciation | ||||||||
| Amortization of right-of-use finance leases | ||||||||
| Amortization of imputed interest | ( | ) | ( | ) | ||||
| Interest expense from PPP Loan | ||||||||
| Gain on forgiveness of PPP Loan | ( | ) | ||||||
| Amortization of right-of-use operating leases | ||||||||
| Change in receivable reserves | ( | ) | ||||||
| Proceeds from insurance receivable | ||||||||
| Stock-based compensation | ||||||||
| Changes in current operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ||||||||
| Income taxes | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Deferred revenue | ||||||||
| Principal repayments of operating leases | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities | ||||||||
| Additions to property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Net proceeds from the exercise of options for common stock | ||||||||
| Dividend paid to shareholders | ( | ) | ||||||
| Principal repayments of financing leases | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Decrease in cash and restricted cash | ( | ) | ( | ) | ||||
| Cash, and restricted cash, beginning of year | ||||||||
| Cash, and restricted cash, end of period | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Acquisition of right-of-use assets and lease liabilities | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
PIONEER POWER SOLUTIONS, INC.
Consolidated Statement of Stockholders' Equity
(In thousands, except per share data)
(Unaudited)
| Accumulated | ||||||||||||||||||||||||
| Additional | other | Total | ||||||||||||||||||||||
| Common Stock | paid-in | comprehensive | Accumulated | stockholders' | ||||||||||||||||||||
| Shares | Amount | capital | income | deficit | equity | |||||||||||||||||||
| Balance - June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Balance - September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance - June 30, 2022 (Revised) | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Balance - September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | other | Total | ||||||||||||||||||||||
| Common Stock | paid-in | comprehensive | Accumulated | stockholders' | ||||||||||||||||||||
| Shares | Amount | capital | income | deficit | equity | |||||||||||||||||||
| Balance - January 1, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Dividend to shareholders | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance - September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance - January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Balance - September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
PIONEER POWER SOLUTIONS, INC.
Notes to Consolidated Financial Statements
September 30, 2022 (Unaudited)
1. BASIS OF PRESENTATION
Overview
Pioneer
Power Solutions, Inc. and its wholly owned subsidiaries (referred to herein as the “Company,” “Pioneer,”
“Pioneer Power,” “we,” “our” and “us”) design, manufacture, integrate, refurbish,
service, distribute and sell electric power systems, distributed energy resources, power generation equipment and mobile electric
vehicle (“EV”) charging solutions. Our products and services are sold to a broad range of customers in the utility,
industrial and commercial markets. Our customers include, but are not limited to, electric, gas and water utilities, data center
developers and owners, EV charging infrastructure developers and owners, and distributed energy developers. The Company is headquartered
in Fort Lee, New Jersey and operates from three (
We have two reportable segments as defined in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022: Transmission and Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).
Presentation
The accompanying unaudited interim consolidated financial statements of the Company have been prepared pursuant to the rules of the SEC and reflect the accounts of the Company as of September 30, 2022. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information presented not misleading to the reader. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim consolidated financial statements have been included. The results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP for a year-end balance sheet.
All
dollar amounts (except share and per share data) presented in the notes to our unaudited interim consolidated financial statements
are stated in thousands of dollars, unless otherwise noted. Amounts may not foot due to rounding. ASC 740-270 requires the use
of an estimated annual effective tax rate to compute the tax provision during an interim period unless certain exceptions are
met. We have used a discrete-period computation method to calculate taxes for the fiscal three and nine-month periods ended September
30, 2022. Due to projected operating losses for the year, the Company anticipates that its annual effective tax rate will be
These unaudited interim consolidated financial statements include the accounts of Pioneer and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
These unaudited interim consolidated financial statements should be read in conjunction with the risk factors under the heading “Part II - Item 1A. Risk Factors” and the risk factors and the audited consolidated financial statements and notes thereto of the Company and its subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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 September 30, 2022, the
Company had $
We have met our cash needs through a combination of cash flows from operating activities and bank borrowings, the completion of the Equity Transaction (as defined herein), proceeds from the sale of the CleanSpark Common Stock and warrants to purchase CleanSpark Common Stock, proceeds from insurance and the sale of common stock under the At The Market Sale Agreement and funding from the Payroll Protection Program. Our cash requirements historically were generally for operating activities, debt repayment, capital improvements and acquisitions. 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, product development and capital improvements. The Company expects that its current cash balance is sufficient to fund operations for the next twelve months.
5
On
During
the year ended December 31, 2021, the Company executed a cash collateral security agreement with a commercial bank, which agreement
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 $
The Company accounts for restricted cash under the guidance of ASU No. 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230), which requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and restricted cash and that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the unaudited interim consolidated statement of cash flows:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash as shown in the statement of cash flows | $ | $ | ||||||
COVID-19
The full impact of the COVID-19 pandemic and its ongoing effects continues to evolve as the date of this report. As such, it continues to be uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. The Company was able to operate substantially at capacity during the COVID-19 pandemic. 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, its ongoing effects, and the global responses to the continuing crisis, the Company is not able to estimate the full effects of the COVID-19 pandemic and its ongoing effects at this time, however, if the ongoing effects of the COVID-19 pandemic continue or worsen, it may have an adverse effect on the Company’s results of operations, financial condition, or liquidity.
On
March 27, 2020, then 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 $
Under
the terms of the PPP Loan, the Company was eligible for full or partial loan forgiveness. During the first quarter of 2021, the
Company received full forgiveness of the PPP Loan and recognized a $
Reclassification
The following items have been reclassified in the 2021 financial statements:
The unaudited consolidated statements of cash flows contain a reclassification of the gain on the extinguishment and forgiveness of the PPP Loan from financing activities to operating activities for the nine months ended September 30, 2021. Additionally, principal repayments of financing leases and the reduction in operating leases have been reclassified and presented in the applicable cash flow activity for the nine months ended September 30, 2021. The inventories footnote contains a reclassification of the provision for excess and obsolete inventory and reductions to net realizable value to the applicable inventory classification at December 31, 2021.
6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in the Company’s accounting policies during the third quarter of 2022.
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.
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.
3. REVENUES
Nature of our products and services
Our principal products and services include electric power systems, distributed energy resources, power generation equipment and mobile EV charging solutions.
Products
Our T&D Solutions business provides electric power systems and distributed energy resources that help customers effectively and efficiently protect, control, transfer, monitor and manage their electric energy requirements.
Our Critical Power business provides customers with our suite of mobile e-Boost electric vehicle charging solutions and power generation equipment.
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.
7
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.
Revenue from the sale of our electric power systems is recognized either over time or at a point in time and substantially all of our revenue from the sale of power generation equipment is recognized at a point in 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. Certain sales of highly customized electrical power systems are recognized over time when such equipment has no alternative use and the Company has an enforceable right to payment for performance completed to date. Revenue for such agreements is recognized under the input method based on either cost or direct labor hours incurred relative to the estimated cost or direct labor hours expected to be consumed to complete the project. Under the cost-to-cost method of revenue recognition, a single estimated profit margin is used to recognize profit for each performance obligation over its period of performance. Recognition of profit on a contract requires estimates of the total cost at completion and transaction price and the measurement of progress towards completion. Due to the nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires judgment. Factors that must be considered in estimating the cost of the work to be completed include the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance. When adjustments in estimated total costs at completion or in estimated total transaction price are determined, the related impact on income is recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.
During
the three months ended September 30, 2022 and 2021, the Company recognized $
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 Company recognized $
8
During
the three months ended September 30, 2022 and 2021, the Company recognized $
During
the three months ended September 30, 2022, the Company recognized approximately $
During
the nine months ended September 30, 2022, the Company recognized approximately $
There was no revenue recognized during the three and nine months ended September 30, 2022 and 2021 from performance obligations satisfied in prior periods.
The Company manages its accounts receivable credit risk by performing credit evaluations and monitoring amounts due from the Company’s customers. The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable.
At
September 30, 2022, three customers represented approximately
For
the nine months ended September 30, 2022, two customers represented approximately
Return of a product requires that the buyer obtain permission in writing from the Company. When the buyer requests authorization to return material for reasons of their own, the buyer will be charged for placing the returned goods in saleable condition, restocking charges and for any outgoing and incoming transportation paid by the Company. The Company warrants title to the products, and also warrants the products on date of shipment to the buyer, to be of the kind and quality described in the contract, merchantable, and free of defects in workmanship and material. Returns and warranties during three and nine months ended September 30, 2022 and 2021 were insignificant.
The following table presents our revenues disaggregated by revenue discipline:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Products | $ | $ | $ | $ | ||||||||||||
| Services | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
See “Note 12 - Business Segment and Geographic Information in Notes to Consolidated Financial Statements” in Part I of this Quarterly Report on Form 10-Q.
9
4. REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS
In
connection with the preparation of our consolidated interim financial statements for the quarter ended September 30, 2022, we
completed an analysis of one of our customer contracts under ASC 606 and, as a result, we determined that the performance obligations
are satisfied over time. See “Note 3 – Revenues in Notes to Consolidated Financial Statements” in Part I of
this Quarterly Report on Form 10-Q. As a result of the analysis, we identified additional revenues to be recognized of $
The following tables reconcile the balances as previously reported in the Quarterly Reports on Form 10-Q as of and for the three months ended March 31, 2022 and as of and for the three and six months ended June 30, 2022 to the as revised balances:
| For The Three Months Ended | ||||||||||||
| March 31, 2022 | ||||||||||||
| Condensed Consolidated Statements of Operations (Unaudited) | As Reported | Adjustment | As Revised | |||||||||
| Revenues | $ | $ | $ | |||||||||
| Cost of goods sold | $ | $ | $ | |||||||||
| Gross profit | $ | $ | $ | |||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | |||||
| Loss per share - basic and diluted | $ | ) | — | $ | ) | |||||||
| Weighted average common shares outstanding - basic and diluted | — | |||||||||||
| For The Three Months Ended | ||||||||||||
| June 30, 2022 | ||||||||||||
| Condensed Consolidated Statements of Operations (Unaudited) | As Reported | Adjustment | As Revised | |||||||||
| Revenues | $ | $ | $ | |||||||||
| Cost of goods sold | $ | $ | $ | |||||||||
| Gross profit | $ | $ | ( | ) | $ | |||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Loss per share - basic and diluted | $ | ) | — | $ | ) | |||||||
| Weighted average common shares outstanding - basic and diluted | — | |||||||||||
| For The Six Months Ended | ||||||||||||
| June 30, 2022 | ||||||||||||
| Condensed Consolidated Statements of Operations (Unaudited) | As Reported | Adjustment | As Revised | |||||||||
| Revenues | $ | $ | $ | |||||||||
| Cost of goods sold | $ | $ | $ | |||||||||
| Gross profit | $ | $ | $ | |||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | |||||
| Loss per share - basic and diluted | $ | ) | — | $ | ) | |||||||
| Weighted average common shares outstanding - basic and diluted | — | |||||||||||
10
| March 31, 2022 | ||||||||||||
| Condensed Consolidated Balance Sheet (Unaudited) | As Reported | Adjustment | As Revised | |||||||||
| Total current assets | $ | $ | ( | ) | $ | |||||||
| Total assets | ( | ) | ||||||||||
| Total current liabilities | ( | ) | ||||||||||
| Total liabilities | ( | ) | ||||||||||
| Total stockholders’ equity | ||||||||||||
| June 30, 2022 | ||||||||||||
| Condensed Consolidated Balance Sheet (Unaudited) | As Reported | Adjustment | As Revised | |||||||||
| Total current assets | $ | $ | ( | ) | $ | |||||||
| Total assets | ( | ) | ||||||||||
| Total current liabilities | ( | ) | ||||||||||
| Total liabilities | ( | ) | ||||||||||
| Total stockholders’ equity | ||||||||||||
| For The Three Months Ended | ||||||||||||
| March 31, 2022 | ||||||||||||
| Cash Flows From Operating Activities (Unaudited) | As Reported | Adjustment | As Revised | |||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | |||||
| Changes in current operating assets and liabilities: | ||||||||||||
| Inventories | ( | ) | ( | ) | ||||||||
| Deferred revenue | ( | ) | ||||||||||
| Net cash provided by operating activities | ||||||||||||
| For The Six Months Ended | ||||||||||||
| June 30, 2022 | ||||||||||||
| Cash Flows From Operating Activities (Unaudited) | As Reported | Adjustment | As Revised | |||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | |||||
| Changes in current operating assets and liabilities: | ||||||||||||
| Inventories | ( | ) | ( | ) | ||||||||
| Deferred revenue | ( | ) | ||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||||||
| For The Three Months Ended | ||||||||||||
| March 31, 2022 | ||||||||||||
| Consolidated Statement of Stockholders’ Equity (Unaudited) | As Reported | Adjustment | As Revised | |||||||||
| Accumulated deficit | $ | ( | ) | $ | $ | ( | ) | |||||
| Total stockholders’ equity | ||||||||||||
| For The Six Months Ended | ||||||||||||
| June 30, 2022 | ||||||||||||
| Consolidated Statement of Stockholders’ Equity (Unaudited) | As Reported | Adjustment | As Revised | |||||||||
| Accumulated deficit | $ | ( | ) | $ | $ | ( | ) | |||||
| Total stockholders’ equity | ||||||||||||
In accordance with SEC Staff Accounting Bulletin No. 108, we evaluated this revision based on an analysis of quantitative and qualitative factors as to whether it was material to the consolidated statements of operations for the three months ended March 31, 2022 and June 30, 2022 and if amendments of previously filed financial statements with the SEC are required. We determined that the adjustment is neither quantitatively nor qualitatively material and, therefore, the revision does not have a material impact to the consolidated statements of operations for the three months ended March 31, 2022, the three and six months ended June 30, 2022 or other prior periods.
11
5. OTHER (INCOME) EXPENSE
Other
(income) expense in the unaudited interim consolidated statements of operations reports certain gains and losses associated with
activities not directly related to our core operations. For the three months ended September 30, 2022, other income was $
For
the nine months ended September 30, 2022, other expense was $
6. INVENTORIES
The components of inventories are summarized below:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Total inventories | $ | $ | ||||||
Inventories are stated at the lower of cost or a net realizable value determined on a weighted average method.
7. PROPERTY AND EQUIPMENT
Property and equipment are summarized below:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Machinery, vehicles and equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Computer hardware and software | ||||||||
| Leasehold improvements | ||||||||
| Construction in progress | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation
expense was $
Depreciation
expense was $
8. NOTES RECEIVABLE
In
connection with the sale of the transformer business units in August 2019 (the “Equity Transaction”), amongst other
consideration, we received two subordinated promissory notes in the aggregate principal amount of $
12
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities are summarized below:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Current portion of lease liabilities | ||||||||
| Total accounts payable and accrued liabilities | $ | $ | ||||||
Accrued
liabilities primarily consist of accrued sales commissions, accrued compensation and benefits, accrued professional fees and accrued
insurance. At September 30, 2022 and December 31, 2021, accrued sales commissions were $
10. STOCKHOLDERS’ EQUITY
Common Stock
The Company had and shares of common stock, $ par value per share, outstanding as of September 30, 2022 and December 31, 2021, respectively.
Stock-Based Compensation
| Stock Options | Weighted average exercise price | Weighted average remaining contractual term | Aggregate intrinsic value | |||||||||||||
| Outstanding as of January 1, 2022 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Outstanding as of September 30, 2022 | $ | $ | ||||||||||||||
| Exercisable as of September 30, 2022 | $ | $ | ||||||||||||||
On April 25, 2022, the Company awarded shares of restricted stock units (“RSU”) to an employee with the following vesting terms: (i) units on May 1, 2022, which are included in the calculation of basic EPS as of the vesting date, (ii) an additional units on May 1, 2023, and (iii) the remaining units on May 1, 2024, provided that the employee is employed by the Company or a subsidiary of the Company on each such vesting date. The vested RSUs will be converted into shares of the Company's common stock no later than March 15 of the calendar year following the calendar year in which such RSUs vested. The fair value of the RSU award at the date of grant was $ million.
| Weighted-average | ||||||||
| grant-date | ||||||||
| Number of units | fair value | |||||||
| Unvested restricted stock units as of January 1, 2022 | $ | |||||||
| Units granted | ||||||||
| Units vested | ( | ) | ( | ) | ||||
| Units forfeited | ||||||||
| Unvested restricted stock units as of September 30, 2022 | $ | |||||||
13
As of September 30, 2022, there were shares available for future grants under the Company’s 2021 Long-Term Incentive Plan.
Stock-based compensation expense recorded for the three and nine months ended September 30, 2022 was approximately $ and $, respectively. Stock-based compensation expense recorded for the three and nine months ended September 30, 2021 was approximately $ and $, respectively. All of the stock-based compensation expense is included in selling, general and administrative expenses in the accompanying interim consolidated statements of operations. At September 30, 2022, there was $ of stock-based compensation expense remaining to be recognized in the interim consolidated statements of operations over a weighted average remaining period of years.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average basic shares outstanding | ||||||||||||||||
| Effect of dilutive securities - equity based compensation plans | ||||||||||||||||
| Denominator for diluted net loss per common share | ||||||||||||||||
| Net loss per common share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
As of September 30, 2022 and 2021, diluted loss per share excludes and potentially dilutive common shares related to equity awards, as their effect was anti-dilutive.
14
12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The
Company follows ASC 280 Segment Reporting in determining its reportable segments. The Company considered the way its management
team, most notably its chief operating decision maker, makes operating decisions and assesses performance and considered which
components of the Company’s enterprise have discrete financial information available. As the Company makes decisions using
a manufactured products vs. distributed products and services group focus, its analysis resulted in
The T&D Solutions segment is involved in the design, manufacture and distribution of switchgear used primarily by large industrial and commercial operations to manage their electrical power distribution needs. The Critical Power segment provides power generation equipment and aftermarket field-services primarily to help customers ensure smooth, uninterrupted power to operations during times of emergency.
The following tables present information about segment income (loss):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | ||||||||||||||||
| T&D Solutions | ||||||||||||||||
| Power Systems | $ | $ | $ | $ | ||||||||||||
| Service | ||||||||||||||||
| Critical Power Solutions | ||||||||||||||||
| Equipment | ||||||||||||||||
| Service | ||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Depreciation and amortization | ||||||||||||||||
| T&D Solutions | $ | $ | $ | $ | ||||||||||||
| Critical Power Solutions | ||||||||||||||||
| Unallocated corporate overhead expenses | ||||||||||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating income (loss) | ||||||||||||||||
| T&D Solutions | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Critical Power Solutions | ( | ) | ( | ) | ||||||||||||
| Unallocated corporate overhead expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Consolidated | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Revenues are attributable to countries based on the location of the Company's customers:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
15
13. LEASES
The
Company leases certain offices, facilities and equipment under operating and financing leases. Our leases have remaining terms
ranging from less than
As
of September 30, 2022 and December 31, 2021, assets recorded under operating leases were $
The components of the lease expense were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Finance lease cost | ||||||||||||||||
| Amortization of right-of-use asset | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Total finance lease cost | $ | $ | $ | $ | ||||||||||||
Other information related to leases was as follows:
Supplemental Cash Flows Information
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flow payments for operating leases | $ | $ | ||||||
| Operating cash flow payments for finance leases | ||||||||
| Financing cash flow payments for finance leases | ||||||||
| Right-of-use assets obtained in exchange for lease obligations | ||||||||
| Operating lease liabilities arising from obtaining right of use assets | ||||||||
Weighted Average Remaining Lease Term
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
Weighted Average Discount Rate
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
16
Future minimum lease payments under non-cancellable leases as of September 30, 2022 were as follows:
| Operating | Finance | |||||||
| Leases | Leases | |||||||
| 2022 | $ | $ | ||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total future minmum lease payments | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Total future minmum lease payments | $ | $ | ||||||
Reported as of September 30, 2022:
| Operating | Finance | |||||||
| Leases | Leases | |||||||
| Right-of-use assets | $ | $ | ||||||
| Operating | Finance | |||||||
| Leases | Leases | |||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Other long-term liabilities | ||||||||
| Total | $ | $ | ||||||
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated interim financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission on March 31, 2022.
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “Pioneer,” “we,” “our” and “us” refer to Pioneer Power Solutions, Inc. and its subsidiaries.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future events, future financial performance, financial projections, strategies, expectations, competitive environment and regulation. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
| ● | General economic conditions and their effect on demand for electrical equipment, particularly in the commercial construction market, but also in the power generation, industrial production, data center, oil and gas, marine and infrastructure industries. |
| ● | The effects of fluctuations in sales on our business, revenues, expenses, net income (loss), income (loss) per share, margins and profitability. |
| ● | Many of our competitors are better established and have significantly greater resources and may subsidize their competitive offerings with other products and services, which may make it difficult for us to attract and retain customers. |
| ● | The potential loss or departure of key personnel, including Nathan J. Mazurek, our chairman, president and chief executive officer. |
| ● | Our ability to generate internal growth, maintain market acceptance of our existing products and gain acceptance for our new products. |
| ● | Unanticipated increases in raw material prices or disruptions in supply could increase production costs and adversely affect our profitability. |
| ● | Our ability to realize revenue reported in our backlog. |
| ● | Operating margin risk due to competitive pricing and operating efficiencies, supply chain risk, material, labor or overhead cost increases, interest rate risk and commodity risk. |
| ● | Strikes or labor disputes with our employees may adversely affect our ability to conduct our business. |
| ● | The impact of geopolitical activity on the economy, changes in government regulations such as income taxes, climate control initiatives, the timing or strength of an economic recovery in our markets and our ability to access capital markets. |
| ● | Material weaknesses in internal controls. |
| ● | Future sales of large blocks of our common stock may adversely impact our stock price. |
| ● | The liquidity and trading volume of our common stock. |
| ● | Our business could be adversely affected by an outbreak of disease, epidemic or pandemic, such as the global coronavirus pandemic, or similar public threat, or fear of such an event. |
The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Moreover, new risks regularly emerge, and it is not possible for us to predict or articulate all risks we face, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should review carefully the risks and uncertainties described under the heading “Part II - Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of the foregoing and other risks that relate to our business and investing in shares of our common stock.
18
Business Overview
We design, manufacture, integrate, refurbish, service, distribute and sell electric power systems, distributed energy resources, power generation equipment and mobile electric vehicle (“EV”) charging solutions. Our products and services are sold to a broad range of customers in the utility, industrial and commercial markets. Our customers include, but are not limited to, electric, gas and water utilities, data center developers and owners, EV charging infrastructure developers and owners, and distributed energy developers. 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, and sales and administration.
Description of Business Segments
We have two reportable segments: Transmission & Distribution Solutions (“T&D Solutions”) and Critical Power Solutions (“Critical Power”).
| ● | Our T&D Solutions business provides equipment solutions that help customers effectively and efficiently protect, control, transfer, monitor and manage their electric energy requirements. These solutions are marketed principally through our Pioneer Custom Electrical Products Corp. (“PCEP”) brand name. |
| ● | Our Critical Power business provides customers with our suite of mobile e-Boost© EV charging solutions, power generation equipment and all forms of service and maintenance on our customers’ power generation equipment. These products and services are marketed by our operations headquartered in Minnesota, currently doing business under both the Titan Energy Systems Inc. (“Titan”) and Pioneer Critical Power brand names. |
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with U.S. GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Our estimates are based on our historical experience, knowledge of current events and actions we may undertake in the future, and on various other factors that we believe are reasonable under the circumstances. Our critical accounting policies and estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our Annual Report on Form 10-K filed with the SEC on March 31, 2022. There were no material changes to our accounting policies during the nine months ended September 30, 2022.
19
RESULTS OF OPERATIONS
Overview of the Three and Nine Months Results
Selected financial and operating data for our reportable business segments for the most recent reporting period is summarized below. This information, as well as the selected financial data provided in “Note 12 - Business Segment and Geographic Information” and in our unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, should be referred to when reading our discussion and analysis of results of operations below.
Our summary of operating results during the three and nine months ended September 30, 2022 and 2021 are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | ||||||||||||||||
| T&D Solutions | $ | 3,773 | $ | 2,996 | $ | 10,039 | $ | 7,980 | ||||||||
| Critical Power Solutions | 2,478 | 2,689 | 7,437 | 6,833 | ||||||||||||
| Consolidated | 6,251 | 5,685 | 17,476 | 14,813 | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| T&D Solutions | 3,291 | 2,810 | 9,312 | 7,807 | ||||||||||||
| Critical Power Solutions | 2,099 | 2,162 | 6,317 | 5,638 | ||||||||||||
| Consolidated | 5,390 | 4,972 | 15,629 | 13,445 | ||||||||||||
| Gross profit | 861 | 713 | 1,847 | 1,368 | ||||||||||||
| Selling, general and administrative expenses | 2,273 | 1,207 | 6,550 | 3,664 | ||||||||||||
| Depreciation and amortization expense | 32 | 24 | 86 | 74 | ||||||||||||
| Total operating expenses | 2,305 | 1,231 | 6,636 | 3,738 | ||||||||||||
| Operating loss from continuing operations | (1,444 | ) | (518 | ) | (4,789 | ) | (2,370 | ) | ||||||||
| Interest income | (116 | ) | (99 | ) | (322 | ) | (288 | ) | ||||||||
| Other (income) expense | (17 | ) | 13 | 112 | (1,294 | ) | ||||||||||
| Loss income before taxes | (1,311 | ) | (432 | ) | (4,579 | ) | (788 | ) | ||||||||
| Income tax expense (benefit) | — | 2 | 7 | (19 | ) | |||||||||||
| Net loss | $ | (1,311 | ) | $ | (434 | ) | $ | (4,586 | ) | $ | (769 | ) | ||||
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. Backlog reflects the amount of revenue we expect to realize upon the shipment of customer orders for our products that are not yet complete or for which work has not yet begun. At September 30, 2022, backlog from our E-Bloc power systems solutions was approximately $13.8 million, or 49% of the total backlog.
The following table represents the progression of our backlog, by reporting segment, as of the end of the last five quarters:
| September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
| 2022 | 2022 (Revised) | 2022 (Revised) | 2021 | 2021 | ||||||||||||||||
| T&D Solutions | $ | 22,689 | $ | 19,118 | $ | 18,406 | $ | 17,499 | $ | 5,032 | ||||||||||
| Critical Power Solutions | 5,207 | 5,141 | 5,222 | 5,349 | 5,823 | |||||||||||||||
| Total order backlog | $ | 27,896 | $ | 24,259 | $ | 23,628 | $ | 22,848 | $ | 10,855 | ||||||||||
20
Revenue
The following table represents our revenues by reporting segment and major product category for the periods indicated (in thousands, except percentages):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | Variance | % | 2022 | 2021 | Variance | % | |||||||||||||||||||||||||
| T&D Solutions | ||||||||||||||||||||||||||||||||
| Power Systems | $ | 3,773 | $ | 2,996 | $ | 777 | 25.9 | $ | 10,029 | $ | 7,980 | $ | 2,049 | 25.7 | ||||||||||||||||||
| Service | — | — | — | — | 10 | — | 10 | — | ||||||||||||||||||||||||
| 3,773 | 2,996 | 777 | 25.9 | 10,039 | 7,980 | 2,059 | 25.8 | |||||||||||||||||||||||||
| Critical Power Solutions | ||||||||||||||||||||||||||||||||
| Equipment | 425 | 694 | (269 | ) | (38.8 | ) | 2,003 | 1,379 | 624 | 45.3 | ||||||||||||||||||||||
| Service | 2,053 | 1,995 | 58 | 2.9 | 5,434 | 5,454 | (20 | ) | (0.4 | ) | ||||||||||||||||||||||
| 2,478 | 2,689 | (211 | ) | (7.9 | ) | 7,437 | 6,833 | 604 | 8.8 | |||||||||||||||||||||||
| Total revenue | $ | 6,251 | $ | 5,685 | $ | 566 | 9.9 | $ | 17,476 | $ | 14,813 | $ | 2,663 | 18.0 | ||||||||||||||||||
For the three months ended September 30, 2022, our consolidated revenue increased by $566, or 9.9%, to $6.3 million, up from $5.7 million during the three months ended September 30, 2021, primarily due to an increase in sales of our power systems from our T&D Solutions segment and a reduction in equipment sales from our Critical Power segment.
For the nine months ended September 30, 2022, our consolidated revenue increased by $2.7 million, or 18.0%, to $17.5 million, up from $14.8 million during the nine months ended September 30, 2021, primarily due to an increase in sales of power systems and equipment from our T&D Solutions and Critical Power segments, respectively.
T&D Solutions. During the three months ended September 30, 2022, revenue for our power systems product lines increased by $777, or 25.9%, as compared to the three months ended September 30, 2021, primarily due to increased sales of our E-Bloc power systems and automatic transfer switches and a decrease in sales of our medium and low voltage power systems.
During the nine months ended September 30, 2022, revenue for our power systems product lines increased by $2.0 million, or 25.7%, as compared to the nine months ended September 30, 2021, primarily due to increased sales of our E-Bloc power systems, automatic transfer switches and low voltage power systems and a decrease in sales of our medium voltage power systems.
Critical Power Solutions. For the three months ended September 30, 2022, revenue from our Critical Power segment decreased by $211, or 7.9%, as compared to the three months ended September 30, 2021, primarily due to decreased sales of our new and refurbished generation equipment.
For the nine months ended September 30, 2022, revenue from our Critical Power segment increased by $604, or 8.8%, as compared to the nine months ended September 30, 2021, primarily due to the recognition of revenue from shipments of our e-Boost products during the nine months ended September 30, 2022 and no recognition of revenue from e-Boost shipments during the nine months ended September 30, 2021.
21
Gross Profit and Margin
The following table represents our gross profit by reporting segment for the periods indicated (in thousands, except percentages):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | Variance | % | 2022 | 2021 | Variance | % | |||||||||||||||||||||||||
| T&D Solutions | ||||||||||||||||||||||||||||||||
| Gross profit | $ | 482 | $ | 186 | $ | 296 | 159.1 | $ | 727 | $ | 173 | $ | 554 | 320.2 | ||||||||||||||||||
| Gross margin % | 12.8 | 6.2 | 6.6 | 7.2 | 2.2 | 5.0 | ||||||||||||||||||||||||||
| Critical Power Solutions | ||||||||||||||||||||||||||||||||
| Gross profit | 379 | 527 | (148 | ) | (28.1 | ) | 1,120 | 1,195 | (75 | ) | (6.3 | ) | ||||||||||||||||||||
| Gross margin % | 15.3 | 19.6 | (4.3 | ) | 15.1 | 17.5 | (2.4 | ) | ||||||||||||||||||||||||
| Consolidated gross profit | $ | 861 | $ | 713 | $ | 148 | 20.8 | $ | 1,847 | $ | 1,368 | $ | 479 | 35.0 | ||||||||||||||||||
| Consolidated gross margin % | 13.8 | 12.5 | 1.3 | 10.6 | 9.2 | 1.4 | ||||||||||||||||||||||||||
For the three months ended September 30, 2022, our consolidated gross margin increased to 13.8% of revenues, as compared to 12.5% during the three months ended September 30, 2021.
For the nine months ended September 30, 2022, our consolidated gross margin increased to 10.6% of revenues, as compared to 9.2% during the nine months ended September 30, 2021.
T&D Solutions. For the three months ended September 30, 2022, our gross margin percentage increased by 6.6%, from 6.2% to 12.8%, as compared to the three months ended September 30, 2021. The increase was primarily due to increased sales our E-Bloc power systems and automatic transfer switches which generated higher gross profits and margins.
For the nine months ended September 30, 2022, our gross margin percentage increased by 5.0%, from 2.2% to 7.2%, as compared to the nine months ended September 30, 2021. The increase in our gross margin percentage was primarily due to increased sales of our E-Bloc power systems and automatic transfer switches, a favorable sales mix and improved productivity from our manufacturing facility.
Critical Power Solutions. For the three months ended September 30, 2022, our gross margin decreased by 4.3%, to 15.3%, from 19.6% for the three months ended September 30, 2021, primarily due to increases in material and overhead costs.
For the nine months ended September 30, 2022, our gross margin decreased by 2.4%, to 15.1%, from 17.5% for the nine months ended September 30, 2021, primarily due to increases in material and overhead costs.
22
Operating Expenses
The following table represents our operating expenses by reportable segment for the periods indicated (in thousands, except percentages):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | Variance | % | 2022 | 2021 | Variance | % | |||||||||||||||||||||||||
| T&D Solutions | ||||||||||||||||||||||||||||||||
| Selling, general and administrative expense | $ | 306 | $ | 283 | $ | 23 | 8.1 | $ | 902 | $ | 823 | $ | 79 | 9.6 | ||||||||||||||||||
| Depreciation and amortization expense | 5 | 3 | 2 | 66.7 | 8 | 14 | (6 | ) | (42.9 | ) | ||||||||||||||||||||||
| Segment operating expense | $ | 311 | $ | 286 | $ | 25 | 8.7 | $ | 910 | $ | 837 | $ | 73 | 8.7 | ||||||||||||||||||
| Critical Power Solutions | ||||||||||||||||||||||||||||||||
| Selling, general and administrative expense | $ | 1,124 | $ | 353 | $ | 771 | 218.4 | $ | 2,739 | $ | 1,122 | $ | 1,617 | 144.1 | ||||||||||||||||||
| Depreciation and amortization expense | 20 | 14 | 6 | 42.9 | 57 | 39 | 18 | 46.2 | ||||||||||||||||||||||||
| Segment operating expense | $ | 1,144 | $ | 367 | $ | 777 | 211.7 | $ | 2,796 | $ | 1,161 | $ | 1,635 | 140.8 | ||||||||||||||||||
| Unallocated Corporate Overhead Expenses | ||||||||||||||||||||||||||||||||
| Selling, general and administrative expense | $ | 843 | $ | 571 | $ | 272 | 47.6 | $ | 2,909 | $ | 1,719 | $ | 1,190 | 69.2 | ||||||||||||||||||
| Depreciation and amortization expense | 7 | 7 | — | — | 21 | 21 | — | — | ||||||||||||||||||||||||
| Segment operating expense | $ | 850 | $ | 578 | $ | 272 | 47.1 | $ | 2,930 | $ | 1,740 | $ | 1,190 | 68.4 | ||||||||||||||||||
| Consolidated | ||||||||||||||||||||||||||||||||
| Selling, general and administrative expense | $ | 2,273 | $ | 1,207 | $ | 1,066 | 88.3 | $ | 6,550 | $ | 3,664 | $ | 2,886 | 78.8 | ||||||||||||||||||
| Depreciation and amortization expense | 32 | 24 | 8 | 33.3 | 86 | 74 | 12 | 16.2 | ||||||||||||||||||||||||
| Consolidated operating expense | $ | 2,305 | $ | 1,231 | $ | 1,074 | 87.2 | $ | 6,636 | $ | 3,738 | $ | 2,898 | 77.5 | ||||||||||||||||||
Selling, General and Administrative Expense. For the three months ended September 30, 2022, consolidated selling, general and administrative expense, before depreciation and amortization, increased by approximately $1.1 million, or 88.3%, to $2.3 million, due to an increase in payroll related costs, including stock-based compensation, professional fees and product development costs related to our e-Boost and E-Bloc initiatives, as compared to $1.2 million during the three months ended September 30, 2021. As a percentage of our consolidated revenue, selling, general and administrative expense, before depreciation and amortization, increased to 36.4% during the three months ended September 30, 2022, as compared to 21.2% in the three months ended September 30, 2021.
For the nine months ended September 30, 2022, consolidated selling, general and administrative expense, before depreciation and amortization, increased by approximately $2.9 million, or 78.8%, to $6.6 million, as compared to $3.7 million during the nine months ended September 30, 2021, primarily due to an increase in payroll related costs, including stock-based compensation, professional fees and product development costs related to our e-Boost and E-Bloc initiatives. As a percentage of our consolidated revenue, selling, general and administrative expense, before depreciation and amortization, increased to 37.5% during the nine months ended September 30, 2022, as compared to 24.7% during the nine months ended September 30, 2021.
Depreciation and Amortization Expense. Depreciation and amortization expense consists primarily of depreciation of fixed assets and amortization of right-of-use assets related to our finance leases and excludes amounts included in cost of sales. For the three months ended September 30, 2022, consolidated depreciation and amortization expense increased by $8, or 33.3%, as compared to the three months ended September 30, 2021.
For the nine months ended September 30, 2022, consolidated depreciation and amortization expense increased by $12, or 16.2%, as compared to the nine months ended September 30, 2021.
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Operating Income (Loss)
The following table represents our operating income (loss) by reportable segment for the periods indicated (in thousands, except percentages):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | Variance | % | 2022 | 2021 | Variance | % | |||||||||||||||||||||||||
| T&D Solutions | $ | 171 | $ | (100 | ) | $ | 271 | 271.0 | $ | (183 | ) | $ | (664 | ) | $ | 481 | 72.4 | |||||||||||||||
| Critical Power Solutions | (765 | ) | 160 | (925 | ) | 578.1 | (1,676 | ) | 34 | (1,710 | ) | 5,029.4 | ||||||||||||||||||||
| Unallocated corporate overhead expenses | (850 | ) | (578 | ) | (272 | ) | (47.1 | ) | (2,930 | ) | (1,740 | ) | (1,190 | ) | (68.4 | ) | ||||||||||||||||
| Total operating loss | $ | (1,444 | ) | $ | (518 | ) | $ | (926 | ) | 178.8 | $ | (4,789 | ) | $ | (2,370 | ) | $ | (2,419 | ) | (102.1 | ) | |||||||||||
T&D Solutions. Operating income from our T&D Solutions segment increased by $271, or 271.0%, during the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, primarily due an increase in sales of our power systems, a favorable sales mix and improved productivity from our manufacturing facility during the three months ended September 30, 2022.
For the nine months ended September 30, 2022, operating loss from our T&D Solutions segment decreased by $481, or 72.4%, as compared to an operating loss of $664 during the nine months ended September 30, 2021, primarily due to an increase in sales of our power systems, a favorable sales mix and improved productivity from our manufacturing facility.
Critical Power Solutions. Operating loss for the Critical Power segment increased by $925, or 578.1% during the three months ended September 30, 2022, primarily due to an increase in material and overhead costs and recognizing product development and promotion fees related to our e-Boost initiative during the three months ended September 30, 2022, as compared to lower material and overhead costs and no product development or promotion fees recognized during the three months ended September 30, 2021.
For the nine months ended September 30, 2022, operating loss from our Critical Power segment increased by $1,710, primarily due to a decrease in gross margin and an increase in consulting, marketing and promotion fees related to our e-Boost initiative, as compared to lower material and overhead costs and no recognition of product development or promotion fees related to our e-Boost initiative during the nine months ended September 30, 2021.
General Corporate Expense. Our general corporate expenses consist primarily of executive management, corporate accounting and human resources personnel, corporate office expenses, financing and corporate development activities, payroll and benefits administration, treasury, tax compliance, legal, stock-based compensation, public reporting costs and costs not specifically allocated to reportable business segments.
During the three months ended September 30, 2022, our unallocated corporate overhead expense increased by $272, or 47.1%, as compared to the three months ended September 30, 2021, primarily due to an increase in payroll related expenses, including stock-based compensation, professional fees and business travel related costs.
During the nine months ended September 30, 2022, our unallocated corporate overhead expense increased by $1.2 million, or 68.4%, as compared to the nine months ended September 30, 2021, primarily due to an increase in payroll related expenses, including stock-based compensation, professional fees and business travel related costs.
Non-Operating (Income) Expense
Interest Income. For the three and nine months ended September 30, 2022, the Company had interest income of approximately $116 and $322, respectively, as compared to interest income of approximately $99 and $288 during the three and nine months ended September 30, 2021, respectively. We generate the majority of our interest income from the Seller Notes we received from the sale of the transformer business units in August 2019 and our cash on hand.
Other (Income) Expense. Other (income) expense in the unaudited consolidated statements of operations reports certain gains and losses associated with activities not directly related to our core operations. During the three months ended September 30, 2022, other income was $17, as compared to other expense of $13 during the three months ended September 30, 2021.
During the nine months ended September 30, 2022, other expense was $112, as compared to other income of $1.3 million during the nine months ended September 30, 2021. For the nine months ended September 30, 2021, included in other income was a gain of $1.4 million for the extinguishment and forgiveness of the PPP Loan.
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On March 27, 2020, then 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. The Company made this assertion in good faith based upon all available guidance and accounted for the PPP Loan as a debt instrument in accordance with FASB ASC 470, Debt. 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 was eligible for full or partial loan forgiveness. The Company received full forgiveness of the PPP Loan during the nine months ended September 30, 2021 and recognized a $1.4 million gain on extinguishment and forgiveness of debt in other income.
Income Tax Expense (Benefit). Our effective income tax rate for the three months ended September 30, 2022 and 2021 was 0.0% and (0.5)%, respectively.
For the nine months ended September 30, 2022, our effective income tax rate was (0.2)%, as compared to an income tax rate of 2.4% during the nine months ended September 30, 2021, as set forth below:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||
| 2022 | 2021 | Variance | 2022 | 2021 | Variance | |||||||||||||||||||
| Loss before income taxes | $ | (1,311 | ) | $ | (432 | ) | $ | (879 | ) | $ | (4,579 | ) | $ | (788 | ) | $ | (3,791 | ) | ||||||
| Income tax expense (benefit) | — | 2 | (2 | ) | 7 | (19 | ) | 26 | ||||||||||||||||
| Effective income tax rate % | — | (0.5 | ) | 0.5 | (0.2 | ) | 2.4 | (2.6 | ) | |||||||||||||||
Net Loss per Share
We generated a net loss of $1.3 million during the three months ended September 30, 2022, as compared to net loss of $434 during the three months ended September 30, 2021.
Our net loss per basic and diluted share for the three months ended September 30, 2022 was $0.13, as compared to net loss per basic and diluted share of $0.05 for the three months ended September 30, 2021.
We generated a net loss of $4.6 million during the nine months ended September 30, 2022, as compared to net loss of $769 during the nine months ended September 30, 2021.
Our net loss per basic and diluted share for the nine months ended September 30, 2022 was $0.47, as compared to net loss per basic and diluted share of $0.09 for the nine months ended September 30, 2021.
LIQUIDITY AND CAPITAL RESOURCES
General. At September 30, 2022, we had $7.2 million of cash on hand generated primarily from the sale of common stock under the At The Market Sale Agreement (the “ATM Program”) during the year ended December 31, 2021. We have met our cash needs through a combination of cash flows from operating activities and bank borrowings, the completion of the sale of transformer business units in August 2019, proceeds from the sale of the CleanSpark common stock and warrants to purchase CleanSpark common stock, proceeds from insurance, proceeds from the sale of common stock under the ATM Program and funding from the Payroll Protection Program. Our cash requirements historically were generally for operating activities, debt repayment, capital improvements and acquisitions.
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The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the unaudited interim consolidated statement of cash flows:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Cash | $ | 7,210 | $ | 9,924 | ||||
| Restricted cash | — | 1,775 | ||||||
| Total cash and restricted cash as shown in the statement of cash flows | $ | 7,210 | $ | 11,699 | ||||
The full impact of the COVID-19 pandemic and its ongoing effects continues to evolve as the date of this report. As such, it continues to be uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. We were able to operate substantially at capacity during the COVID-19 pandemic. 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, its ongoing effects, and the global responses to the continuing crisis, we are not able to estimate the full effects of the COVID-19 pandemic and its ongoing effects at this time, however, if the ongoing effects of the COVID-19 pandemic continue or worsen, it may have an adverse effect on our results of operations, financial condition, or liquidity.
On March 27, 2020, then 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 accounted for the PPP Loan as a debt instrument in accordance with FASB ASC 470, Debt.
Under the terms of the PPP Loan, the Company was eligible for full or partial loan forgiveness. During the nine months ended September 30, 2021, the Company received full forgiveness of the PPP Loan and recognized a $1.4 million gain on extinguishment and forgiveness of debt as other income in the audited consolidated statements of operations.
Cash Used in Operating Activities. Cash used in our operating activities was $3.9 million during the nine months ended September 30, 2022, as compared to cash used in our operating activities of $991 during the nine months ended September 30, 2021. The increase in cash used in operating activities is primarily due to working capital fluctuations.
Cash Used in Investing Activities. Cash used in investing activities during the nine months ended September 30, 2022 was $391, as compared to $156 of cash used in investing activities during the nine months ended September 30, 2021. Additions to property and equipment during the nine months ended September 30, 2022 were $391, as compared to $156 additions to property and equipment during the nine months ended September 30, 2021.
Cash Used in Financing Activities. Cash used in our financing activities was $162 during the nine months ended September 30, 2022, as compared to $1.3 million during the nine months ended September 30, 2021. The primary use of cash in financing activities for the nine months ended September 30, 2022 and 2021 was repayments of financing leases and a dividend paid to shareholders, respectively.
Working Capital. As of September 30, 2022, we had working capital of $14.2 million, including $7.2 million of cash, compared to working capital of $18.6 million, including $9.9 million of cash and $1.8 million of restricted cash at December 31, 2021.
Assessment of Liquidity. At September 30, 2022, we had $7.2 million of cash on hand generated primarily from the sale of common stock under the ATM Program during the year ended December 31, 2021. We have met our cash needs through a combination of cash flows from operating activities and bank borrowings, the completion of the sale of transformer business units in August 2019, proceeds from the sale of the CleanSpark common stock and warrants to purchase CleanSpark common stock, proceeds from insurance, proceeds from the sale of common stock under the ATM Program and funding from the Payroll Protection Program. Our cash requirements historically were generally for operating activities, debt repayment, capital improvements and acquisitions.
On June 1, 2021, our board of directors declared a special cash dividend of $0.12 per common share, payable to shareholders of record as of June 22, 2021, to be paid on July 7, 2021. The cash dividends were paid in July of 2021 and equaled $0.12 per share on the $0.001 par value common stock resulting in an aggregate distribution of approximately $1.0 million representing a capital repayment paid from APIC.
On November 8, 2021, we sold 888,500 shares of common stock under the ATM Program, for total gross proceeds of approximately $9.0 million, at an average price of $10.1288 per share. We incurred approximately $273 of costs related to the common shares issued (including a placement fee of 3.0%, or approximately $270, to H.C. Wainwright & Co., LLC), resulting in net proceeds of approximately $8.7 million. On December 13, 2021, we filed a new sales agreement prospectus supplement, which forms a part of our registration statement on Form S-3 (File No. 333-249569), which covers the offering, issuance and sale of up to a maximum aggregate offering price of $8.6 million of common stock that may be issued and sold under the ATM Program. We did not sell any shares of common stock under the new sales agreement prospectus supplement during the nine months ended September 30, 2022. As of September 30, 2022, $8.6 million of common stock remained available for issuance under the ATM Program.
26
During the year ended December 31, 2021, we executed a cash collateral security agreement with a commercial bank, which agreement 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. During the first quarter of 2022, we amended our agreement with the commercial bank to decrease the required amount of cash collateral by $1.3 million. On May 6, 2022, we received notice that the cash collateral security agreement we had executed with the commercial bank was cancelled. Upon cancellation of the cash collateral security agreement, any unpaid reimbursement obligations owing to the commercial bank were also cancelled. On May 11, 2022, the commercial bank released and transferred the remaining cash collateral of $505 to us. We had no restricted cash on the consolidated balance sheets at September 30, 2022.
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, capital improvements and product development. We expect that product development and promotional activities related to our new initiatives will continue in the near future and expect to continue to incur costs related to such activities. We expect that our cash balance is sufficient to fund operations for the next twelve months.
As of September 30, 2022, we had no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that had, or that 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.
Capital Expenditures
The Company had $391 of additions to property and equipment during the nine months ended September 30, 2022, as compared to $156 of additions to property and equipment during the nine months ended September 30, 2021.
Known Trends, Events, Uncertainties and 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. The impact of the COVID-19 pandemic, including the Omicron variant of COVID-19 and the subvariant, BA.5, and the ongoing effects of COVID-19, are currently indeterminable and rapidly evolving, and has affected and may continue to affect our operations and the global economy. In addition, the consequences of the ongoing conflict between Russia and Ukraine, including related sanctions and countermeasures, and the effects of rising global inflation, are difficult to predict, and could adversely impact geopolitical and macroeconomic conditions, the global economy, and contribute to increased market volatility, which may in turn adversely affect our business and operations. 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 “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2022. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, and as a result of the material weakness described below, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of September 30, 2022. In light of this determination, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weakness in our internal control over financial reporting, the unaudited interim condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard AS 2201, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The deficiency listed below, combined with inadequate compensating controls, created a reasonable possibility that a material misstatement to the consolidated financial statements might not be prevented or detected on a timely basis.
As of September 30, 2022, we had a material weakness in our internal control over financial reporting due to not having the appropriate controls in place over our revenue recognition process for nonroutine and complex revenue transactions in accordance with ASC 606, “Revenue from Contracts with Customers”. This control deficiency resulted in a misstatement of revenue-related accounts during the three months ended March 31, 2022 and June 30, 2022, which management corrected via revision as part of this Quarterly Report on Form 10-Q for the three months ended September 30, 2022.
In order to remediate this material weakness, management has expanded and improved our process for reviewing customer contracts, including through the engagement of third-party accounting professionals with expertise in evaluating customer contracts to obtain guidance on large and/or unique contracts in order to ensure that ASC 606 is accurately applied and documented.
Although we have begun implementing the enhancements described above, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
Except as described above, there were no changes in our internal control over financial reporting during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
28
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in lawsuits, investigations and claims that arise in the ordinary course of business.
As of the date hereof, we are not aware of or a party to any legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject, nor are we aware of any such threatened or pending litigation or any such proceedings known to be contemplated by governmental authorities that we believe could have a material adverse effect on our business, financial condition or operating results.
We can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity or operating results.
We are not aware of any material proceedings in which any of our directors, officers or affiliates or any registered or beneficial shareholder of more than 5% of our common stock is an adverse party or has a material interest adverse to our interest.
ITEM 1A. RISK FACTORS
A description of the risks associated with our business, financial condition and results of operations is set forth in “Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 31, 2022, and are supplemented with the following additional and revised risk factors:
We currently derive a significant portion of our revenues from a few customers. Material or significant loss of business from these customers could have an adverse effect on our business, financial condition and operating results.
We currently derive a large portion of our revenues from a few customers, and material or significant loss of business from these customers could have a significant impact on our results of operations. As of September 30, 2022, three customers accounted for approximately 51% of our sales: CleanSpark accounted for approximately 8%, which were revenues recorded prior to the termination of the Distribution Agreement on June 3, 2022; Enchanted Rock, LLC became one of our largest customers following the termination of the Distribution Agreement and accounted for approximately 31%; and a utility company based in California accounted for approximately 12%. Enchanted Rock, LLC constitutes a large portion of our business, and material or significant loss of business from this customer could have an adverse effect on our business, financial condition and operating results.
We have identified a material weakness in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting or effective disclosure controls, this could have a material adverse effect on our business.
As discussed in Item 4 “Controls and Procedures”, we concluded there is a material weakness of our internal control over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
We cannot assure you that we will be able to remediate our existing material weakness in a timely manner, if at all, or that in the future additional material weaknesses will not exist, reoccur or otherwise be discovered, a risk that is significantly increased in light of the complexity of our business. If our efforts to remediate these material weaknesses, as described in Item 4 “Controls and Procedures”, are not successful or if other deficiencies occur, our ability to accurately and timely report our financial position, results of operations, cash flows or key operating metrics could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements or other corrective disclosures. Additional impacts could include a decline in our stock price, suspension of trading or delisting of our common stock by the Nasdaq Capital Market, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity. Furthermore, if we continue to have this existing material weakness, other material weaknesses or significant deficiencies in the future, it could create a perception that our financial results do not fairly state our financial condition or results of operations. Any of the foregoing could have an adverse effect on the value of our stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See
the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished
with this report, which Exhibit Index is incorporated herein by reference.
30
EXHIBIT INDEX
Exhibit No. |
Description | |
| 3.1* | Amended and Restated Bylaws of Pioneer Power Solutions, Inc. | |
| 31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1* | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2* | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
104
|
Inline XBRL Instance Document.
Inline XBRL Taxonomy Extension Schema Document.
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
Inline XBRL Taxonomy Extension Definition Linkbase Document.
Inline XBRL Taxonomy Extension Labels Linkbase Document.
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
_______________
* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PIONEER POWER SOLUTIONS, INC. | ||
| Date: November 14, 2022 | By: | /s/ Nathan J. Mazurek |
| Name: Nathan J. Mazurek | ||
| Title: Chief Executive Officer |
| Date: November 14, 2022 | /s/ Walter Michalec |
| Name: Walter Michalec | |
Title: Chief Financial Officer (Principal Financial Officer duly authorized to sign on behalf of Registrant) |
